Explainer: Modi Government's PSU Divestment Spree Justified?

One of the widely-criticised aspects of the Modi government's commercial policy is the divestment of the Public Sector Undertakings (PSUs).

Finance Minister Nirmala Sitharaman, last year, set a disinvestment target of ₹1,05,000 crores. The government has already tapped ₹17,364.26 crores from its disinvestment course.

Since divestment is going to be significant in Budget 2020, it is important to understand several facets regarding this exercise.

PSUs are the corporations in which 51% or more of the paid-up share capital is government-owned. A PSU can be completely or partially owned by the central or the state government. The government, because of its stake, not only enjoys the ownership but also controls the functioning of these enterprises.

Central Public Sector Undertaking

The central government mainly owns and runs more than 300 public sector enterprises. In 1951, there were just five public sector enterprises, as the years passed, several business entities were added.

In the financial year 2009, the total capital employed in 213 government companies was ₹7.92 lakh crores that jumped to ₹22.73 lakh crores in the financial year 2018.

The government added 44 new companies in this ten-year period.

According to the Public Enterprises Survey 2017-18, there are 257 operating Central Public Sector Undertakings (CPSUs) out of which 184 CPSUs are profit-making, and 71 CPSUs are loss-making. The total loss amount accrued to ₹31,261 crores. Two CPSUs neither earned profit nor made any loss.

CPSUs from six different sectors were in net losses for three straight years between FY 2015-16 and FY 2017-18.

Divestment

Divestment means the dilution of the government's stake in public enterprises. In simpler terms, the government sells or liquidates its stake in an asset or a subsidiary. This dilution can be done in several ways.

When the government sells a part of its equity which is less than 50 per cent of its total stock, it is called minority disinvestment and in this case-control and management of the business enterprise remains in the government's hands. While, if disinvestment or sale of its stake by the government exceeds 50 per cent, the management of the enterprise is transferred to private enterprise, it is termed as majority disinvestment.

In an interesting note, the earlier disinvestment programmes of the union government have been unsuccessful on account of the percentage stake that was offered for sale coupled with heavy debt and government's decision to retain the management control in the enterprises.

Divestment: A necessity?

The top 10 loss-making companies comprise the bulk of the losses of the loss-making public-sector enterprises. The losses of the top 3 loss-making companies —BSNL, MTNL and Air India make up for 52% of the losses.

With a net worth of ₹24,893 crores in negative and a loss of ₹53,914 crores, Air India Ltd. has topped the list of loss-making PSUs in 2017-18, according to a Rajya Sabha statement.

The number of loss-making CPSUs have increased over the three years beginning from 2015-16. In 2015-16, 2016-17 and 2017-18, there were 48, 54 and 56 sick CPSEs, as per the information available in the Public Enterprises Survey.

This list of 52 loss-making companies does not include 21 public sector banks, which have become liabilities rather than government assets. The total losses of public sector banks in 2017-2018 stood at ₹85,371 crores.

The national gross domestic product (GDP) and gross national savings are also getting adversely affected by low returns from the PSUs. In relation to the capital employed, the percentage of the returns from these enterprises are too low.

With a substantial part of the divestment target still unfulfilled, the government has already identified nearly three dozen firms for disinvestment this year.

Disinvestment is done if the resources available with the government are scarce. Capital can also be raised to bridge the fiscal deficit, to finance large-scale development programmes, repaying the public debt, and for social programs like health and education.

It can be debated that while government presence may be necessary for strategic sectors such as defence or oil exploration, however, its presence in sectors like biofuel, airlines, telecom, paper, steel, hotels, and several others is irrelevant which can distort competition for private players ultimately resulting in consumers and taxpayers bearing the brunt of inefficient PSU operations.

Since a number of existing public enterprises are working inefficiently and incurring huge losses, the functioning of these enterprises in the competitive environment by the private players will lead to better efficiency and productivity. Privatisation in these sectors will also lead to the closing down of sick public sector enterprises.

Obsolete plants and machinery, heavy interest burden, resource crunch, low capacity utilization, low productivity, high input cost are some common issues faced by loss-making CPSUs.

It is important to note that disinvestment can improve the efficiency of these enterprises. When the government divests a substantial part of its stake to a private enterprise, it increases accountability of the management of an enterprise. Dilution can also lead to the ending of state monopolies in certain industries.

Public sector disinvestment can further allow the enterprises to attract private foreign investment. It is also important to understand that capital inflow through private direct foreign investment is better than the capital influx through foreign aid or commercial borrowing from abroad.

Modi Government's Action Plan

The Cabinet, last year, gave in-principle approval for strategic divestment of the government's stake in Bharat Petroleum Corporation Limited (BPCL) along with transfer of certain management control. This is excluding BPCL's equity in Numaligarh Refinery.

Apart from BPCL, the government has also approved disinvestment in Shipping Corporation of India, Container Corporation of India, THDC Ltd and North Eastern Electric Power Corporation Limited to NTPC.

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