Privatization vs. Disinvestment

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By: Kamal Baruah

State-owned firms i.e., Public Sector Undertakings (PSUs) were founded during 1960-70 when India’s needs and national priorities were different in her economy. Also, 14 banks were nationalized in 1969 followed by 6 in 1980 that contributed to the success story of India’s self-sufficiency in food grains products and promoted Financial Inclusion since 2005 by RBI. Those policies were perhaps right 50-60 years back. Does it need improvement in today’s changed circumstances? Many opined that the focus is to reform public money to put it’s the best use. But there are Public Sector Enterprises (PSEs) that are loss-making and survive only on support by taxpayers’ money. The money which is the right of the poor, right of youth is spent on these PSEs carrying burdensome on the economy.

With the trend of privatization across the world, India had to introduce privatization amid hue and cry from political and social groups as the public demands more for qualitative and fast service for which PSUs are unable to provide as India’s infrastructure is simply not enough to facilitate. While Jio went with their 5G trials, BSNL is still planning to launch 4G network services now. Following Economic Liberation and Infrastructure-based Development, India is facing a fiscal deficit and the rising cost of expenditure to the Government. To help raise the necessary capital, the government started privatizing PSUs for accelerating technological progress.

However, major disinvestment of 12 PSUs took place during NDA by Vajpayee Government between 1999 and 2004 such as Modern Foods, Maruti Udyog, BALCO, CMC, Hindustan Teleprinter, Hindustan Zinc, IPCL, Jessop and Co, Lagan Jute Machinery, Paradeep Phosphates, and VSNL. Govt’s stake sold out one after another. The UPA led by Manmohan Singh had not done any privatization in its 10-year rule. But PM Modi is looking forward to carrying the legacy of Vajpayee. ONGC-HPCL deal was done in 2014. But Covid-19 crisis threw the entire economy into disarray. To waste administrative costs with the impact of health expenditure, the government started privatizing, merging, or consolidating PSUs.

The Government now has plans to privatize 40+PSUs, where they will retain a bare minimum presence for strategic sectors. FM has made the strongest pitch for disinvestment of loss-making PSUs to modernize and monetize in the Union Budget saying several loss-making PSUs are supported by taxpayers who otherwise should have gone into welfare schemes in areas like water, sanitation, education, and healthcare. The government justified it by saying huge losses from Air India, BSNL, and MTNL for the cost of taxpayers’ money.

Should government own and run enterprises when the private sector brings in investment, global best practices, top-quality managers, changes in management, and modernization? The largest disinvestment drive ever by the NDA is set to sell its entire stake from BPCL, Shipping Corporation of India, Container Corporation of India, HLL Lifecare in the coming days. Also 6 still plants including Neelachal Ispat Nigam, Durgapur Steel Plant, Salem Steel Plant, and Rashtriya Ispat Nigam are listed. The government sector has a lot of under-utilized and unutilized assets in oil and gas and power that needed huge investment.

The government now wants its banks to be scaled up or bigger like SBI to meet the aspirational needs of the country by reducing the number of Public Sector Banks (PSBs). NITI Aayog recommends names of 2 PSU banks such as IOB and Central Bank to be privatized along with United India Insurance Company Limited in the current fiscal as part of the disinvestment process. Also, they are eying IDBI and LIC to seek reforms for ensuring public funds efficiently. 111 lakh crore national infrastructure pipelines are planned to pull the economy out of the pandemic-induced slump to meet its commitments. The easiest path it has chosen for disinvestment of PSUs. Air India’s successful deal with TATA for 18,000 Crore has signalled Modi Government to go ahead further.

9 lakhs of bank employees have been protesting against the incoming Banking Amendments Bill 2021 that enabled Government to privatize PSBs. This move will bring down the minimum government holding in the PSBs from 51% to 26%. Privatization of PSBs is going to be a part of the disinvestment drive to earn Rs. 1.75 lakh crore for the government. The privatization process will lead to many other nationalized banks in the future, rather than just 2 banks now. Privatization may create a monopoly while the interests of workers and welfare are raised by unions. The bottom line is different from what the government is saying about PSBs. Banks have to be privatized to ensure better efficiency whereas PSBs are doing well and earning substantial profit despite NPAs.

The reasons for the rise in NPAs are laid with macroeconomic factors. When the economy was booming, business confidence was buoyant. The growth stagnated after the global financial crisis in 2008 and the repayment capacity of borrowers declined, where banking sectors and the corporates are reeling under financial stress. Also, crony capitalism has caused high NPAs in India. Further high-profile fraudsters managed high magnitude frauds in the recent past. After all the issues of huge NPAs lied for big corporate borrowers only that dragged banks into crisis. Government policies of waiving agriculture loans in cases of floods, droughts, and natural calamities burden of NPAs of all PSBs. Interestingly marginal farmers and small entrepreneurs pay their loans in due time but corporates are defaulters.

RBI has asked banks to do provisioning, buffers, and raise capital. Under provisioning, banks have to set aside funds to a prescribed percentage of their bad assets. They have written off massive loans amount double than the capital infused by the government. Bank recapitalization bonds are issued to increase the capital infusion into banks to maintain the capital adequacy ratio. SARFAESI Act is another avenue of NPA resolution to empower banks to sell off the pledged collateral while facing difficult and time-consuming civil courts. Now bad loans have been resolved through Insolvency and Bankruptcy codes with DRTs and NCLT at an enormous loss to the banks. Now gross NPA of PSBs have declined as a result of government strategy of recognition, resolution, recapitalization, and reforms at the cost of operating profit thereby drowning bank’s net profits after provisioning.

Government implements various Yojnas for the underprivileged section of the society through PSBs only. PSBs are the lifeline of the Indian economy and the government should nourish them for their sustainability. PSBs provide equality of opportunities to access financial services including banking, loan, equity, and insurance products. China began to reform state-owned enterprises a decade ago before India, but most of their banks are state-owned and top4 commercial banks are among the largest banks in the world. India has only one i.e., SBI (55) entry in the top 100. Mergers of banks or privatization are not the only tool for economic growth. The government should recapitalize weak banks for survival or government continue its shareholding of more than 50% through disinvestment instead of privatization (less than 50% or nil stake) initiative of week PSBs. Time will tell whether the government made the right decision on banking sectors.

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