Financial Daily from THE HINDU group of publications
Friday, Nov 08, 2002
Systemic approach to privatisation
N. A. Mujumdar
THE floundering disinvestment programme has brought to the centrestage a whole range of issues relating to privatisation and management of the economy.
For all the talk of going ahead with divestment, uncertainty surrounds the government's getting out of shipping, aluminium and fertiliser majors. The anti-disinvestment faction has become so vocal that the Prime Minister himself was compelled to reaffirm that this postponement does not indicate a u-turn on the sell-offs, and that the Government stands by its earlier commitment. But the Nalco episode seems to be turning this on its head.
Two related developments also need to be discussed in this context. On September 19, Standard & Poor's downgraded rupee-denominated government debt from BBB+ to BB+. The rating agency cited the government's "growing rupee debt burden" and "its inability to staunch the financial weakening of the public sector". Second, this loss of investment grade status was reinforced by the fact that India has dropped out of A. T. Kearney's list of the top 10 foreign direct investment destinations. It now stands at a dismal 15th position.
These two developments added fuel to the disinvestment lobby, which in any case was arguing that if privatisation is postponed indefinitely, India would not be able to attract foreign investment. What about China, which does not have even the basic civil laws relating to property, etc., but which has been a resounding success in attracting huge foreign investments? Nor has China carried out financial sector reforms on the Western models, as India has done.
Some Indian management experts argue that the fiscal deficit in 2002-03 may rise to 6 per cent of GDP and, hence, the need to disinvest in many public sector enterprises, so that the proceeds could be used to reduce the fiscal deficit. This only demonstrates how poorly equipped they are to deal with macro-management of the economy.
Fiscal profligacy per se needs to be condemned, of course. But the suggestion that such profligacy be balanced using the proceeds of privatisation needs to be condemned severely. This is like selling the family silver to buy groceries. Thus, some mythology is woven around the imperatives of privatisation as if the latter is an end-objective of development in itself.
Would privatisation in a particular segment lead to greater efficiency in the use of resources and promote faster GDP growth? This is the question we ought to pose and not to what extent the fiscal deficit would fall by selling some public sector undertakings (PSUs). What you do with the proceeds of privatisation is as important as why you need to privatise a particular unit or segment of the public sector. The real economic issues are obfuscated because of the emotional and political undertones the debate has acquired. What we need is a systemic approach to privatisation.
Private sector, per se, particularly the private corporate sector, is no paragon of virtue, as some Indian advocates of privatisation seem to be arguing. The current crisis in American capitalism is ample proof of this statement. The recent revelations of corporate and accounting scandals have shaken the very foundations of the American capitalist model, which the present-day policy-makers appear keen to replicate in India.
Corporate American's fall from grace has been sudden and complete. The Enron, WorldCom and Xerox exposures, coupled with the collapse of Andersen, one of the world's big five accounting firms, have unveiled the darker side of American-style capitalism. A doctrinaire approach to privatisation, which seems to be the current fashion, is no more justifiable than a doctrinaire approach to state enterprises.
Many public sector enterprises in India may be inefficient and loss-making, but that does not automatically establish the superiority of private sector. We have had our own Enrons and WorldComs, though on a smaller scale.
All this goes to show that a rational and systemic approach to privatisation is warranted. Three dimensions of such an approach could be briefly spelt out:
All the proceeds of sell-offs of public sector units must be pooled and put into a "consolidated sinking fund", as proposed by the Reserve Bank of India (RBI) in 1995-96. This fund should be earmarked for redemption of government debt. While everyone seems concerned about the mounting public debt, precious little is being done to reduce it.
Using these funds to reduce the fiscal deficit is counterproductive. As mentioned above, you cannot sell the family silver to buy groceries.
This is tantamount to camouflaging the real size of the fiscal deficit. Reducing the fiscal deficit is a formidable problem that needs to be tackled head on and transparently. Not undertaking any privatisation is preferable to using its proceeds for reducing fiscal deficit. Moreover, some broad ground rules should be formulated on the choice of public sector undertakings for privatisation, rather than proceeding in an ad hoc manner.
PSUs that are chronically loss-making must be sold first. This criteria is analogous to settlement of non-performing assets (NPAs) of commercial banks, on a once-for-all settlement basis. In any case, such loss-making PSUs are some sort of fiscal termites, and getting rid of them would stem the fiscal rot. Again, there is another genre of fiscal termites, namely, enterprises that are prevented from functioning efficiently because of social and political compulsions. Power is one such segment. In Maharashtra, as the Godbole Committee brought out, one-third of the power generated and distributed is not "billed" the so-called leakage. This is the case with many State electricity boards. This segment is an ideal candidate for privatisation.
Finally, reform of the PSUs should be undertaken simultaneously with privatisation. Economic reforms should not be equated with privatisation alone.
If some PSUs have become sick it may be because of political and bureaucratic meddling.
For instance, IDBI was at one point of time an ideal institution competent viable and vibrant. Why has it become sick today, requiring blood transfusion from the Government? Would autonomy and professional management help restore vibrancy in all such cases?
Basically, efficiency is ownership-neutral. Hence if there are some PSUs which are profit-making and offering excellent services, there is no reason why these should be privatised. Not, surely, on the grounds that America does not have such PSUs.
Then, again, there are other macroeconomic factors that affect the flow of foreign investment.
For instance, A.T. Kearney advances the following reason for downgrading India as a foreign direct investment destination. "The simmering conflict with Pakistan over Jammu and Kashmir undoubtedly deters foreign investors, while Budget deficits and poor infrastructure have imposed further constraints."
In any case, foreign investment flows have stagnated at around $5,000 million for the last three years.
Aggregate foreign investment, including direct investment and portfolio investment, rose to $5,925 million in 2001-02, from $5,099 million the previous year. In 1999-00 the figure was $5,181 million. In fact, the RBI patted itself on the back by stating that the level of foreign investment in 2001-02 is "demonstrative of growing global investors" confidence in the Indian economy."
Interestingly, there was actually a reduction in portfolio investment flows from $2,760 million in 2000-01 to $2,021 million in 2001-02.
Both foreign institutional investment (FII) inflows and amounts raised through the GDR/ADR route were lower than in the previous year.
It is thus obvious whether India is moving faster towards privatisation or slowing down its pace has not much to do foreign investment inflows. This myth needs to be exploded.
This brings us to the policy-makers' obsessive concern with developing the capital market. With all the rhetoric about the promotion of capital market, resources raised through the primary market have stagnated at a dismal Rs 7,000 crore during the last two years.
This is not surprising because it seems to part of the global phenomenon.
The Economist of London calls the recent depression in the American capital market "the bursting of the biggest financial bubble in American history.
During the bubble years, decisions across the whole economy about investment borrowing and saving were distorted by unrealistic expectations about future profits and share prices and a belief that the business cycle was dead."
Against this broader background, some Indian experts' plea for faster privatisation with the ostensible objectives of attracting larger foreign investment flows and of developing the Indian capital market sounds hollow.
Let us proceed with privatisation, by all means, but unclouded by all the myth built around it by vested interests and by adopting a systemic approach based on rational grounds.
Larger public investments in infrastructure, reviving development banks such as the IDBI and reform of PSUs all these appear to be more sensible policies than propitiation of foreign investment.
(The author is a former Principal Adviser to the RBI.)
Stories in this Section
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | Home |
Copyright © 2002, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line