Waiting Game; The scary P-word

One of the mysteries of the speech finance minister Arun Jaitley read out while presenting the Budget on July 10 was his refusal to mention the disinvestment target for 2014-15. Initially this led to confusion. Some pundits offered a speculative guess that disinvestment had been dropped as a policy. This would have been strange from a finance minister who presided over the first case of privatisation in Indian history: Modern Food Industries, 2000.

Even more puzzling was that Mr Jaitley committed himself to a fiscal deficit of only 4.1 per cent of gross domestic product in 2014-15. He also spoke of tight fiscal consolidation, and bringing down the fiscal deficit to three per cent of GDP over the next two years. How was all this possible without an aggressive disinvestment plan?
The detailed Budget papers produced a different story. Not only was there a disinvestment plan, it was a very ambitious disinvestment plan. The government hopes to make Rs58,425 crore from disinvestment in the coming eight months, till March 31, 2015. Of this Rs 43,425 crore will come from selling small portions of equity in government-owned companies. The rest will come from selling government stake in private companies.

The public sector unit (PSU) disinvestment target set by Mr Jaitley is about Rs 7,000 crore more than what P. Chidambaram, his predecessor, had recommended in his Interim Budget of February 2014. It represents a huge gamble. For 2013-14, the United Progressive Alliance government had hoped to garner Rs 40,000 crore from disinvestment; it received only Rs 16,000 crore. Given this, Mr Jaitley has taken a risk. He has calculated buoyancy in the stock market and general investor confidence following the election of the Narendra Modi government can be sustained.

Seen in this light, Mr Jaitley’s apparently cautious and careful Budget would appear to be a terrific dare. If his disinvestment programme fails — as happened with Mr Chidambaram in 2013-14 — not only will the fiscal deficit target of 4.1 per cent not be reached, his credibility will be in jeopardy. As such, for the coming eight months at least, the disinvestment narrative is very important for the government. That is why it is surprising Mr Jaitley did not so much as mention it on July 10.

The perception in political circles is Mr Jaitley was being politically correct and did not want to create a controversy by talking of disinvestment. If true, this defies reason. After all, disinvestment — as opposed to privatisation — is a fairly settled matter. The Congress backs it. That aside, only a month ago, the Securities and Exchange Board of India (Sebi) asked the government to ensure 25 per cent public shareholding of PSUs that were listed on stock markets. This is the norm for private companies.

If there are 100 shares of company X and if company X is listed on the stock market, Sebi rules say a minimum of 25 of those 100 shares should be available to public shareholders. Sebi wants PSUs to follow the same norms. As such, disinvestment is here to stay; the genie is out of the bottle.

Separately in his Budget speech, Mr Jaitley announced an innovative manner of recapitalising public sector banks. Without threatening the government’s majority ownership, he said, the banks would need to issue fresh equity and raise money from the market, from institutional and individual investors. The government would not simply hand over taxpayer money to bail out banks. Also, a slice of the fresh equity issued would be reserved for small investors, perhaps at a discounted price. This would give a stake to individual investors and ordinary citizens and to that extent empower and enrich them.

As a corollary, the allocation of a slice of equity to small investors and the use of a discounted price as an allurement to draw them into participating in a public offer should be part of Mr Jaitley’s larger PSU disinvestment programme — the one he hopes will fetch him Rs 43,425 crore this year. Deftly communicated and politically sold, this could create a wider constituency for disinvestment and bring the small investor back to participating in public offers.

While disinvestment would seem to be on track, what about privatisation? The Bharatiya Janata Party has been wary of that “p” word since it lost the 2004 general election, convinced the hostility of public sector employees cost it.

On his part, Mr Modi is a believer in empowering managements of public sector companies, sequestering them from political and bureaucratic interference, and turning them around. He has done this successfully as Chief Minister of Gujarat. It is not as if he is ideologically opposed to privatisation per se, but it does not appear to be an immediate priority.

Nevertheless, at some point in the coming year or two, the Modi government will have to grasp the nettle. True, there is no need to instantly privatise let’s say Coal India, though an amendment to the law that forbids private companies from merchant mining of coal is an absolutely necessity.

This will ensure a competitive coal mining environment and provide commercial challengers to Coal India. On the other hand, there are many Central PSUs that have become a drain on the exchequer and serve little strategic purpose.

Air India is a standout example of a company that has been asset-stripped and haemorrhaged by rapacious bureaucrats and ministers. In turn, it survives by sucking money from the taxpayer. It would be a pity if Messrs Modi and Jaitley, and aviation minister P. Ashok Gajapathi Raju, does not sell off Air India by at least 2016.

As a retired civil servant remarked wryly the other day, “Governments come and go, but some things never change. Every Prime Minister seems to believe he can make peace with Pakistan and he can ensure autonomy and efficiency in the public sector.”
Mr Modi is nothing if not a realist on Pakistan; in time he needs to show the same realism on PSUs. In time, he needs to make that quantum leap from disinvestment to privatisation.

The writer can be contacted at malikashok@gmail.com