Some home truths about privatisation

Between 1991 and 1995, the P.V. Narasimha Rao government sold minority equity stakes up to 20 per cent in 39 firms, and between 1999 and 2003, the NDA privatised 17 firms (some of which were already listed by the Congress) by selling majority stakes with management control to strategic investors. The Indian Express series, ‘Public Sector Unbound’, examined the current status of PSUs sold by the strategic sale route and found that all stakeholders, including workers, have gained by and large.

“Economic theory tells us state-owned firms can be very inefficient and one key reason is political interference. PSUs offer tangible and intangible benefits to the netas — from friendly appointments and price controls to election funding. . . So it’s expected that taking the government out of a business would spur its growth,” reasons Gupta, who has been studying the political economy considerations of privatisation and reforms for a few years now.

But India’s privatisation experience stands out, found Gupta in a rare single country-focused paper published in The Journal of Finance recently. “I found that companies’ sales and operating profits went up by 10 per cent with even a one per cent change in ownership. This was astonishing. Listing firms in the market means that managers find the veil of opacity around their operations lifting — before they go about their merry ways with their ministers, they have to read the stock price everyday,” she says.

Gupta and Sinc studied electoral patterns in the last five general elections and 107 state assembly polls since 1991 in India and delved into why some firms were privatised and others weren’t, from the political angle. The findings: “A PSU’s main plant’s location matters. Governments are afraid to privatise where they are in a close race with the opposition, but are happy to do so where they are far ahead of the others or have little or no hope of gaining political ground,” Gupta says.

The privatisation rate for firms located in states where the governing party alliance wins 100 per cent of Lok Sabha seats is more than two times higher than firms located in states where the ruling and opposition alliances win half of the seats each. That location matters is significant in the Indian PSUs’ context — of the 259 PSUs for whom financial data is available, 80 per cent or 207 PSUs have their main operations in only one state. In an era of coalition governments where regional parties are playing a greater role, this is ominous.

While Congress, with its left-of-Centre philosophy, and the right-wing BJP differed in their privatisation strategies, their ideologies seem to matter little when they are in the opposition seats. The BJP routinely attacked Congress’ moves in the early nineties to list PSUs and even joined hands with the Communists when over 2.5 lakh steel PSU workers struck work in 1993.

And when the NDA began strategic sales in 2000, the Congress accused them of selling ‘the family jewels’. National politics aside, individual politicians also play a key role.

While local politicians oppose the sale of PSUs in their region citing fears of job losses and electoral backlash as well as losing private benefits that may flow to them, the ministers in charge of PSUs, especially in their own home state are more protective. For the record, 32 central ministries control PSUs in different sectors — the highest number being under the ministry of heavy industries — 51.

To examine the role of political patronage in the privatisation decision, the study examined how many of the PSUs privatised happened to be in the home state of the Cabinet minister in charge of the PSU. In Rao’s regime, though 30-odd firms were partially privatised, 17 firms under his ministers’ control that were located in their home states were totally untouched.

And in NDA’s rule? “The Atal Bihari Vajpayee government had more than a dozen cabinet reshuffles so it was difficult for us to keep track of ministers and their portfolios. But political considerations may explain why so few privatisations were undertaken by the BJP despite them being so gung-ho over it,” Gupta points out.

That may explain for instance, why Hindustan Zinc Limited (HZL) was one of the first companies that the Rao government could list on the stock exchanges with a minority stake sale — his Minister of Mines was Congressman Balram Singh Yadav (later defected to the Samajwadi Party) from Uttar Pradesh, while HZL is based in Rajasthan.

Again, Balco’s privatisation in 2000 despite stiff resistance was possible because the ministry of mines had no problems with the sale — the minister Sunder Lal Patwa was from Madhya Pradesh’s Hoshangabad constituency and Balco was based in Congress-run Chhattisgarh.

Today, though HZL’s and Balco new owners are seeking to buy out the government’s residual stake according to the call option in the share purchase agreement they signed with the NDA, a UPA nod for the remaining stakes’ sale has been stalled not just because of its Communist allies. UPA’s mines minister Sis Ram Ola hails from Rajasthan’s Jhunjhunu district and Chhattisgarh is now in BJP hands — both politically unacceptable situations for privatisation.

As for the Left, who are the loudest opponents of privatisation and prevented the United Front government from doing any privatisation except some global depository receipt issues for oil and telecom PSUs that were already listed, the study’s take is interesting. “Their current influence in national policy ensures that overall progress is held back. But state by state, they don’t have any impact as they are only in power in two-three states.”

The fact that BJP had little hope of gaining in West Bengal meant they could easily privatise two West Bengal-based PSUs — Jessop and Lagan Jute Machinery. But attempts to privatise Air India were opposed by the NDA’s Civil Aviation Minister Sharad Yadav for fear of losing cushy turf and by its employees — which eventually meant it was a no-go.

Gupta avers that privatisation is not just about improving the performance of a firm, but the general environment in which they operate. “Thanks to PSUs’ inefficiencies, costs and prices remain high, while losses are made up by subsidies and handouts which limit the Centre’s ability to spend on essentials like education,” Gupta argues.

“PSUs employ 2 million people, but if the fear of job losses is an argument against privatisation, it would be better to pay all the workers off with hefty compensation packages. A billion people can’t go on supporting a fraction of the population forever at the majority’s expense,” sums up Gupta.

vikas.dhoot@expressindia.com