ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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At a Standstill

At a Standstill

ECONOMIC AND POLITICAL WEEKLY At a Standstill Following the opposition to disinvestment in Neyveli Lignite Corporation (NLC) and NALCO, prime minister Manmohan Singh announced that all disinvestment decisions are on hold. The announcement is not the unmitigated disaster that it has been made out to be in the mainstream media. After all, disinvestment has been pretty much on hold for the two years that the United Progressive Alliance (UPA) government has been in office. The absence of disinvestment has not kept the economy from growing at 8 per cent. It has not come in the way of the Sensex more than doubling in the last two years. It has not adversely impacted the performance of public sector undertakings (PSUs), many of which are already listed. Yet, the government

July 29, 2006 ECONOMIC AND POLITICAL WEEKLY
At a Standstill Following the opposition to disinvestment in Neyveli Lignite Corporation (NLC) and NALCO, prime minister Manmohan Singh announced that all disinvestment decisions are on hold. The announcement is not the unmitigated disaster that it has been made out to be in the mainstream media. After all, disinvestment has been pretty much on hold for the two years that the United Progressive Alliance (UPA) government has been in office. The absence of disinvestment has not kept the economy from growing at 8 per cent. It has not come in the way of the Sensex more than doubling in the last two years. It has not adversely impacted the performance of public sector undertakings (PSUs), many of which are already listed. Yet, the government’s inability to proceed with disinvestment is a disappointment because disinvestment has much to commend it. By exposing PSUs to stock market discipline, it gets management to focus on financial performance. It helps limit the scope for political interference in commercial decisions of PSUs. It can augment budgetary spending on social infrastructure even if the proceeds are to go to a dedicated fund and not into the budget. It affords scope for employee ownership of shares of PSUs. These are not theoretical benefits. There is enough evidence to show that disinvestment, combined with deregulation and competition, has resulted in a qualitative improvement in the performance of PSUs. The value of the government’s holdings has risen sharply. A mere 10 per cent disinvestment in 51 listed PSUs can fetch the government Rs 54,300 crore at today’s prices. The government’s shareholding exceeds 60 per cent in 33 of these PSUs. NLC was a good choice for further disinvestment because the government holds 94 per cent of its equity. Disinvestment of anything up to 30-40 per cent in any PSU is desirable because it renders management accountable to a diverse ownership base rather than to one dominant owner, the government. The common minimum programme of the UPA government says that “generally, profit-making companies will not be privatised”. Presumably, this implies that there will be no transfer of control from government to private owners. It certainly leaves open the possibility for further disinvestment. If the government is, nevertheless, not able to proceed with disinvestment, it has only itself to blame. It has not been able to carry conviction either with the Left or trade unions that a decline in the government’s shareholding through disinvestment will not create conditions in which privatisation can be easily effected by some future government. A white paper on disinvestment was promised. It has not materialised. A committee under former bureaucrat, P K Basu, was constituted to identify which PSUs had the potential to be competitive and would not need to be privatised. We have not heard further. In short, the government has failed miserably to articulate a vision for the public sector. Its interest seems to be limited to using PSUs as an instrument for resource mobilisation. Small wonder that the government’s attempts at disinvestment have met fierce resistance. The government – as also members of the “reforms” brigade – must recognise that there is no consensus on privatisation and that attachment to the public sector and the ethos it represents is still strong in the Indian polity. Disinvestment will receive support only when it is perceived to be part of a larger plan to strengthen the public sector, not a prelude to dismantling it. If the government wishes to proceed with disinvestment, it must come out with a clear blueprint for the public sector. First, it must identify PSUs that have the potential to be competitive. It must then enact legislation that requires parliamentary approval for any decline in the government’s shareholding in such PSUs below 51 per cent so that these companies cannot be easily privatised. Alternatively, these PSUs must be covered by the equivalent of the statute for public sector banks whereby the “public sector character” of these entities

remains even where government shareholding falls below 51 per cent.

Secondly, it must spell out what it proposes to do with the proceeds of disinvestment – which PSUs need injection of funds and how much, what amounts will be spent on the social sector, etc. It has been suggested that the National Investment Fund that will garner the proceeds of disinvestment will invest only the returns on the fund, not the principal. If that is the case, the amounts available for investment will be quite small and the claim that disinvestment will augment resources for social sector spending is weakened.

Unless the government makes clear that disinvestment will not spell privatisation and that the proceeds will go towards agreed objectives, disinvestment will remain stalled. EPW

Economic and Political Weekly July 29, 2006

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