July 05, 2020
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Divest Of Direction

Unmet targets and dithering on sell-offs put a question mark on go vernment's intent on disinvestment

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Divest Of Direction
When disinvestment minister Arun Shourie announced that the process of disinvestment was being put under parliamentary scrutiny, he was just following the trail blazed by his predecessors. Over the past decade, confused policy-makers have ensured that public sector disinvestment remains a great concept on paper but seldom workable.

When the nda government started its second innings with a decision to set up a separate department of disinvestment (DoD) in December 1999, for once it seemed that the rusty gates would finally creak open. A month later, the government kept up the good work by selling Modern Foods India (75 per cent) for what it considered a handsome price of Rs 105 crore to Hindustan Lever, despite severe Opposition headbanging. But there the process seemed to fizzle out. And now, within a year of its existence, the government has ordered that the DoD's working be supervised by a parliamentary standing committee attached to the finance ministry. At the same time, the Comptroller and Auditor General of India would prepare a social and economic report on all cases lined up for sell-off. It's only logical to expect a further slowdown of the process.

Disinvestment has crawled ahead post-1996, when the United Front government took the first decisive step in this direction by setting up the Disinvestment Commission. The commission, a toothless tiger which had powers only to examine and recommend, went through 43 psus and submitted 12 detailed reports making specific recommendations on the hows and whys. The reports' main achievement was to gather generous dust.

Strictly for the record, disinvestment has been carried out in 40 psus, in bits and pieces, divesting a total government equity worth Rs 18,393 crore. Or about 23 per cent of the total equity in 10 years. That's less than half the target governments had set themselves. In fact, the average target achievement rate every year has been a poor 10 per cent barring 1998-99, when the target of Rs 5,000 crore was met largely due to the creation of cross-holdings among various psus. Buoyed, the government earmarked Rs 10,000 crore for last fiscal, only to finally manage a quarter of it.

This success ratio may be repeated in the current year too. In June 2000, the cabinet committee on disinvestment gave initial clearance to divestment in 33 psus. Out of these, 23 psus have been cleared for the current fiscal to achieve the target of Rs 10,000 crore. The potential yield from 33 companies is Rs 25,000 crore to Rs 30,000 crore. More alarming, say experts, is the fact that for the government, the disinvestment exercise has yet to go beyond a book-building one; till 1997, when it was delinked from the budget process, disinvestment has been used to fill revenue gaps. It's as if the government is either ignorant of how to go about it or not serious about using it as a process to strengthen the psus and build value—according to a study by noted economist T.N. Srinivasan of Yale University, leaving out oil and power companies where the government enjoys a monopoly, psus give a negative rate of return of over 4 per cent. In fact, according to a study, sale of government equity in the power sector alone could net double the total target in disinvestment.

That the government is yet to be convinced about the immense benefits of privatisation is apparent from the conflicting soundbites emanating from its various organs over disinvestment in three companies—last month, it agreed on privatisation of Indian Airlines (IA), Air-India (A-I) and Maruti Udyog Ltd (mul). In the cases of IA and A-I, the response was tremendous with six big parties queuing up. They are the Tata-Singapore Airline combine, the Indian Pilot's Guild, the Skyteam Alliance—which has the support of Delta Airlines and Air France— the Hindujas with Lufthansa, UK-based L.N. Mittal with British Airways, Qantas and Kotak Mahindra as partners and the Dhoots of Videocon who are pitching in with Boston Bank and two Asian airlines.

As for mul, the government is toying with three strategies, ranging from the sound—a total sell-off (of its 50 per cent stake) to Suzuki Motor Corporation or selling stakes to a third company and the public—to the downright quirky—buying out Suzuki's stake in the company! A special committee is working out the modalities and will submit its report next week.

In the case of IA and A-I, Shourie announced his resolve to complete the process by the end of the current fiscal, while aviation ministry officials are confident it can't be completed before August 2001 because, among other reasons, of the sheer size of the two companies. In mul's case, Manohar Joshi, the minister of heavy industries (administrative ministry for mul and several other disinvestment candidates) has put his foot down on Shourie's proposal favouring a complete sale. Though in public he has said that no "in-principle" decision had been taken, he's known to be favouring the ridiculous—buying out Suzuki's stake.

As if the opposition from the communist parties and the rss-swadeshi brigade to selling "family silver" was not enough, it's no solace to the nda government that Joshi belongs to one of its biggest and prickliest allies, the Shiv Sena, with whom the nda's brief honeymoon may be already souring. Piqued at Vajpayee's passing over Joshi and handing over the disinvestment portfolio to a junior, Shourie, Sena supremo Bal Thackeray is now looking to appease industrialists in his prosperous state. Especially Bajaj Auto which, he believes, would be a better suitor for mul than Suzuki. Rahul Bajaj, after all, is an original member of the Bombay Club. And the Sena has been returning an mla for three consecutive terms from Pimpri-Chinchwad, Pune's industrial belt, which houses the Bajaj Auto complex.

However, the more obvious reason for the Sena to block all disinvestment moves is linked to its own survival. The labour sector was a major area of growth for the Sena, which was supported in its Kamgar Sena Union activities by a large number of local industrialists sick with the domination of the communist unions in Mumbai. Thackeray keeps underscoring the fact that with his 16 Lok Sabha MPs, he calls the shots at the Centre, after Chandrababu Naidu. Nonetheless, he is wary of taking an openly obstructive stand and has taken a gamble by demanding the government call a halt to its disinvestment in mul until he has despatched a delegation comprising three of his ministers and three Lok Sabha MPs to "discuss" the issue threadbare.

Meanwhile, the rest of the world silently watches the drama. The capital markets, tired of the interminable wait for some big-ticket privatisation, have gone into deep slumber. Economy-watchers are not too happy either. Duff & Phelps Credit Rating, for example, feels that the Indian government's decision to put on hold disinvestment of blue-chip companies has put a question mark on the economic reforms process in India and may further slow down the inflow of foreign direct investment.

Experts also say that disinvestment may entail more outflow of funds than the potential earning.There are about 20 lakh employees working in the central psus; even if 30 per cent of these employees are surplus, at Rs 10 lakh a head, the total average compensation for six lakh government employees rendered surplus by privatisation could work out to a minimum of Rs 60,000 crore. A fact that couldn't have escaped the hawk eyes of the ministers concerned while they dithered and thought about "fully protecting the interests of the workers".
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