After a pause for few years, now, privatisation is being pursued with vigour in India.
In the backdrop of an economic contraction, it is prudent to revisit the aggressive privatisation of public enterprises.
How advisable is privatisation now?
India is right now going through its worst economic crisis.
The highest-ever contraction in the economy took place in 2020.
Unemployment has risen, and incomes for growing numbers are falling.
Banks’ non-performing assets (NPAs) may be increasing, and fiscal deficit is also rising.
In these circumstances, it would be prudent to think through the pros and cons of the aggressive privatisation of public enterprises.
There are three categories of public sector enterprises, with each needing its own analysis.
What about the enterprises that have been sick for a long time?
Their technology, plants and machinery are obsolete.Their managerial and human resources have been lost.
Such enterprises are beyond redemption. They should be closed, and assets sold.
But this has been difficult with successive governments.
Because, the labour in these enterprises have had a political constituency which has prevented their closure.
The Government should take efforts to close these in a time-bound manner.
After selling machinery as scrap, there would be valuable land left.
Prudent disposal of these plots of lands in small amounts would yield large incomes in the coming years.
These enterprises may be taken away from their parent line Ministries and brought under one holding company.
This should have the sole mandate of speedy liquidation and asset sale.
What is the second category of enterprises?
These are the enterprises that have been financially sick but can be turned around.
Wherever possible, private management through privatisation or induction of a strategic partner is the best way to restore value of these enterprises.
Air India and the India Tourism Development Corporation (ITDC) hotels are good examples.
Air India should ideally be made debt free.
And a new management should have freedom permitted under the law in personnel management to get investor interest.
Once debt free, management control with a 26% stake may be given.
As valuation rises, the Government could reduce its stake further and get more money.
If well handled, significant revenues would flow to the Government.
What about the profitable enterprises?
With profitable public enterprises, the government can continue to reduce its shareholding.
It can offload its shares and even reduce its stake to less than 51% while remaining the promoter and being in control.
In parallel, managements may be given longer and stabler tenures, greater flexibility and more confidence to take well-considered commercial risks.
They can also be asked to invest patient capital in strategic areas where risk is high and where risk averse private investment may not be easily forthcoming.
The Chinese have done this well.
The Chinese chose to nurture their good state-owned enterprises as well as their private ones.
This helped it succeed in the domestic and global markets, by increasing their competitiveness in cost, quality, and technology.
What is the way forward?
The number of Indian private firms which can buy out public sector firms are very few.
Their limited financial and managerial resources would be better utilised in taking over the large number of private firms up for sale through the bankruptcy process.
Then, these successful large corporates need to be encouraged to invest and grow.
This is much better than using the scarce resources for taking over government enterprises with no real value addition to the economy in the near term.
Another consideration is that public enterprises provide for reservations in recruitment.
With privatisation, this would end and unnecessarily generate social unrest.
India has a strategic interest in the ownership of public enterprises including financial ones. It cannot afford to lose this.
