On Disinvestment in India


The process of disinvestment means selling off partially or wholly the assets of state owned undertakings to private sector. Obviously, private sector comes to influence or fully control the management and production decisions of the firms concerned. It was first witnessed in Japan in the nineteenth century. After the Meiji Restoration, the state set up industrial undertakings because the private sector there was in no position to bear risks and mobilize necessary capital and technology. The state, thus, played a pioneering role in industrialization by setting up new undertakings and mobilizing financial resources and technology for them. It helped create, operate and strengthen new infrastructure facilities. This direct entrepreneurship role of the state more or less ceased by 1882 because the revenue receipts from state-owned and managed undertakings were not encouraging. Consequently, it sold off most of its industrial possessions at throw away prices to private buyers. To quote economic historian W. W. Lockwood: “They went mainly to certain big capitalists enjoying official favor and capable of financing and operating them.”

In recent times, this phenomenon first came to be seen in Britain after Margaret Thatcher became prime minister. A number of undertakings were denationalized or sold off. The slogan was: ‘the government has no business to be in business.’ In India, however, disinvestment came to form part of the government policy in the beginning of the 1990s when a self-proclaimed socialist Chandrasekhar happened to head a short-lived government at the centre. His finance minister Yashwant Sinha, while introducing the budget for 1991-92, proposed to dispose of 20 per cent shares of selected state undertaking to the private sector in order to raise resources to tide over ongoing financial crisis. Before this proposal could be implemented, the Chandrasekhar government fell and his finance minister migrated to BJP, a professed enemy of socialism.

By this time, the United States and international financial institutions like the World Bank, the International Monetary Fund, etc., under its influence adopted ‘Washington Consensus’ as the panacea for all the economic problems of developing countries, disregarding their historical background and existing socio-economic conditions. The developing countries were not consulted about the prescription. The Washington Consensus, among other things, stressed the need of curtailing state’s economic role. Developing countries were firmly told that state should not normally set up undertakings for production of goods and services nor should it expand or strengthen the capital base of existing ones. In fact, the state was required to begin immediately the process of privatizing the existing undertakings through disinvestment.

The Washington Consensus came to inform the economic reforms and policies of the Narasimha Rao government that ruled from mid-1991 to mid-1996 and Dr. Manmohan Singh who became finance minister became the kingpin of the new initiative. He was hailed as the great liberator of the Indian economy and entrepreneurial initiative from the shackles of Nehruvian thinking. It is a different matter that the electorate of posh South Delhi constituency preferred intellectually insignificant V. K. Malhotra of the BJP to him in 1996 and failed to recognize him as a great economic liberator.

As finance minister of the Rao government, Dr. Manmohan Singh repeated in his first budget speech the proposal to disinvest 20 per cent shares of certain selected state undertakings. With this, began the uninterrupted process of selling off fully or partially the assets of state undertakings. For various reasons it could not pick up momentum and its progress remained uneven. One of the reasons was the opposition from trade unions, the Left parties and a section of the ruling Congress. Consequently, only during two out of five years of the Rao government the target of disinvestments could be achieved or exceeded. In 1993-94, as against the target of Rs 35000 million, the achievement was zero while in 1995-96 disinvestment yielded only Rs 3630 million as against the target of Rs 70000 million. During the United Front Government, it almost came to a halt in spite of P. Chidambaram being the finance minister. This was due to the pressure from the Left.

During the National Democratic Alliance (NDA) government led by the BJP too the progress of disinvestment remained slow because of several legal wrangles. Only in two (1998-99 and 2003-04) out of six years, its yield exceeded the target. It is a common belief that in the last year of its rule, the NDA, perhaps seeing the writing on the wall, went ahead with disinvestment without caring for the established norms and legal procedures. It gathered Rs155470 million as against the target of Rs 145000 million. Some of the deals are currently being probed by government investigation agencies. 

Now, let us peep into history before coming to disinvestment policy of the present UPA (United Progressive Alliance) government. From Karachi resolution to the deliberations of the National Planning Committee, the Congress was of the firm opinion that a vibrant and expanding state sector was a must for overcoming regional economic disparities bequeathed by British imperialism (whose beneficial contributions have been praised recently by our learned prime minister) and growing socio-economic inequalities. Besides, the Congress under Gandhi-Nehru leadership had firmly rejected “trickle-down strategy” touted for many years forcefully by Montek Singh Ahluwalia, the chief of the Planning Commission. The Gandhi-Nehru approach is still valid if one is concerned with territorial integrity and unity of the country. This approach did not reflect Cold War mindset, as some people in high positions think.

At the commencement of the First Plan India had only 4 public sector enterprises (PSEs) with an asset of Rs 290 million and by 1990 when the Seventh Plan ended the number had gone to 244 with assets worth Rs 993290 million. In spite of disinvestment, the PSEs had in 2000-01 assets worth Rs 2741140 million. They have over the years made significant contributions in lignite, coal, crude oil, zinc, aluminum, finished steel, heavy electricals, etc. It is not true that all PSEs have been incurring losses. In 2000-01 as many as 122 enterprises made a profit with top ten accounting for 70 per cent or Rs 196040 million. PSEs in petroleum, power and communications contributed 60 per cent of the total profit. Even after we adjust for the losses, the post-tax profit of all the PSEs comes to 5 per cent, which is certainly very low and ways and methods can be found to bring improvement after a thorough investigation into the factors responsible for the losses.
The proposition that the private sector whether Indian or foreign is much better managed, more honest and more profitable than the public sector undertakings is not beyond dispute. Had the Indian private sector been more efficient, sickness could not have gripped sugar, textiles, jute, coal, engineering and other sectors. It is a matter of common knowledge that the phenomenon of non-performing assets of banks is due to the fact that the private sector has over the years taken huge loans and eaten them up. Several reports are there to testify to dishonesty, mismanagement and tax evasion by big private sector companies. As far as the MNCs are concerned, one should look up the fate of Enron, WorldCom and so on as to how accounts were falsified to dupe shareholders and the government.

When the present government came to power, it pledged itself to NCMP (National Common Minimum Programme) agreed upon by the parties supporting it. According to the NCMP, “The Government is committed to a strong and effective Public Sector whose social objectives are met by its commercial functioning. But for this, there is need for selectivity and a strategic focus. It is pledged to devolve full management and commercial autonomy to successful, profit-making Companies operating in a competitive environment. Generally, profit-making companies will not be privatized.”  Further, it was underlined that navratna (nine gems of the PSEs) will remain in the state sector.
Violating this promising, the present government wants to sell of 10 per cent of the shares of the BHEL (Bharat Heavy Electricals) one of the navratna. The previous government sold off 33 per cent of its shares and, if the present government has its way, 43 per cent of its shares will be in private hands. In future if an additional 8 per cent of its shares is sold, the BHEL will pass into the private sector.

If the finance minister of the UPA government has his way 49 per cent of the shares of the profit making PSEs will be sold to the private sector and, ultimately, the control and management will be ceded after disposing of another 2 per cent of their shares.

What is needed is a thorough public debate on the policy of disinvestment pursued since 1990s by various governments whose approach has been more or less the same no matter what their professed ideological orientation has been. One thing has been obvious: Washington Consensus overrides everything else.

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