People's Democracy

Politics And The Disinvestment Controversy

C P Chandrasekhar

PRIME MINISTER Vajpayee has made one more effort at putting to rest the embarrassing controversy within the NDA government and the Sangh Parivar over the privatisation of oil majors HPCL and BPCL. In his address at the launch of the Tenth Five Year Plan document, which provides for an 8 per cent rate of growth, he made the case that economic reform would have to be persisted with if the rate of growth has to be increased. And the principal plank of the current phase of reform is, in his view and that of many others, the accelerated privatisation of profitable public sector assets. In fact, in an almost orchestrated move, representatives of domestic and foreign capital, of the IMF and the World Bank and of international finance (like Standard and Poor) have been arguing that: (1) the setback to the Shourie-style strategic “disinvestment” of the last two years that the oil privatisation controversy implies, is a setback to the process of economic reform; and (2) the slowing of economic reform is responsible for the sluggishness in growth in recent months. After the size of the fiscal deficit, the slow pace of public sector sell-off has emerged as India’s second most important economic problem. Unemployment and poverty do not seem to feature in this list at all.

INNER POWER STRUGGLE

The controversy over whether HPCL and BPCL should be put on the block as part of the process of strategic sale, involving the hand over of management control to a private buyer of as little as 26 per cent of equity in a PSU, has found the disinvestment minister Arun Shourie arraigned on one side with support from the prime minister, standing up to a motley combination consisting of petroleum minsiter Ram Naik, defence minister George Fernandes and human resource development minister Murali Manohar Joshi, who as a group seem to have the tacit even if not wholehearted support of the deputy prime minsiter L.K. Advani.

Among those opposed to proceeding further with privatisation based on a sale of key oil sector PSUs, the concerns of petroleum minister Ram Naik, who is informed by opinion within his own ministry and by the loss of turf that the sale of HPCL and BPCL would involve, are the easiest to understand. The motivation of George Fernandes, on the other hand, who has been the most vocal advocate for caution, is still unclear. He had earlier argued that experience indicates that privatisation is not yielding the promised benefits and political returns for the NDA government. That it is in fact imposing unexpected costs, and could generate strategic risks in some areas. On these grounds he had in fact called for a mid-course review and a possible “course correction”. Now, it appears, he has rescinded, as has been his wont on many an issue. He has reportedly declared that he has not been against privatisation and had only called for a review, which may (or may not) necessitate a correction. Not being known for being particularly consistent in his formulations, this opportunistic dilution of his position by Mr. Fernandes was in all probability expected. The problem is that principal role it would serve is to help discredit the strong and already well-articulated case against the disinvestment of profitable public sector enterprises .

Finally, Murali Manohar Joshi, who has joined the group of dissenters, appears to be articulating the RSS-Swadeshi Jagran Manch line that all is not well with the NDA’s economic policy, which is seen as excessively market and foreign capital oriented. This is in keeping with the BJP’s earlier nationalist rhetoric that the NDA has completely given up in practice This foray by Mr. Joshi into the economic realm, while surprising given his past relative silence on such matters, is possibly indicative of a new struggle for power within the increasingly complex Sangh Parivar combination.

Given all this it is clear that the “disinvestment controversy” is more a battle for political space within the Sangh Parivar and the NDA rather than an ideological effort at mid-course correction. This feature of the controversy has two adverse consequences. First, the actual merits of the case against disinvestment are being ignored, because the correctness of the policy is not being assessed conceptually, but in terms of whether its implementation in practice has belied expectations. Second, it allows those who claim to be technocratic defenders of the efficient market mechanism to claim that a correct marketist, pro-disinvestment position is being challenged by “vested interests” and subverted by politics.

WHY NO TO DISINVESTMENT

The case against disinvestment of profit-making public sector enterprises like HPCL and BPCL has been made often enough. These enterprises are capable of earning returns that are well above the rate of interest on government bonds. In fact it is because they are capable of earning such returns that private agents see them as attractive purchases. For these private sector players, public sector bonds are a risk-free source of return, making the yields on such bonds the floor to the expected rate of return on investment. Unless purchases of public sector equity are expected to more than cover this floor as well as provide for an additional margin to cover the risk associated with investment in such equity, disinvestment offers are unlikely to find any takers. In the circumstances, it is unclear why the government itself should not retain this return and cover the costs of whatever expenditure is going to be met with disinvestment proceeds by issuing debt at an interest rate that is more than covered by the yield on equity. Further, the fact that the yield on equity needs to be higher than the interest rate on government bonds makes nonsense of the argument that disinvestment proceeds should be used to retire public debt and reduce the interest outgo on the government’s budget.

Despite this very obvious and direct reason why disinvestment of profitable public sector units should not occur, the government has been desperate to go in for partial privatisation through the strategic sale route. The facts that this route involves only partial sale of say 26 per cent of equity to a single buyer, and that such sale is strategic or is accompanied by the handover of managerial control to the buyer are both indicative of the massive concessions that the government has to provide to make disinvestment a successful initiative. Clearly, private buyers are not willing to risk too much of their own capital in a single enterprise making it difficult for the government to find buyers for outright purchase of its equity stake in full. In addition, private players are obviously not keen to hold a minority stake in the equity of a unit that the government manages. Faced with these two behavioural responses of the private sector  to its privatisation effort, the government in a desperate bid to make its disinvestment programme a success, has had to offer the private sector substantial control over profitable productive assets with a relatively small investment. Since past experience with government investment and lending to the private sector through the financial institutions suggests that the government would in all probability play the role of a silent and non-interfering partner, the economic advantages and power that accrue to the private player as a result of strategic acquisition are substantial. Such advantages would be all the greater if acquisition of control through the strategic sale route provides the buyer with a monopolistic position as has happened in the case of the Reliance acquisition of IPCL. And the manner in which such power can be misused has come in early, as evidenced by the effort of the Tata group to use the cash surpluses of VSNL to finance their own private expansion plans.

ALTERNATIVES

The point is that despite providing these huge concessions, the evidence from instances varying from Modern Foods to Balco and more recently the ITDC properties suggests that disinvestments occurs at prices that are extremely low, given the worth of or the income earning capacity of the assets that are being sold. Rather than bend so far as to give the private sector a cheap route to profit and lose resources of its own in the process, the government could have adopted other alternatives to find funds for crucial investments. It could, for example, be argued that if the government wanted to release resources for investment in the infrastructural sector it could have focused attention on two areas: First, it could have sold the stake which the financial institutions hold in a number of private companies in which they have little or no role in actual management. Rather than have those resources tied up in units which have now been supported with State funds for long, it makes sense to divest those shares either to the private promoters or to the market and use the proceeds for other expenditures. Second, the government can intensify the now virtually non-existent effort to recover the large volume of resources, estimated at more than Rs.65000 crore, locked up as non-performing bank assets primarily in large and medium private sector units.

Unfortunately the disinvestments controversy does not draw attention to these important questions, but seeks to stall the process with talk of the need for mid-course review and correction. This makes the dissenters susceptible to the charge that they are playing into the hands of particular interests, who want to guard against the acquisition of these assets by their current or potential competitors. This also lends credence to those who argue that the “progressive” policy of disinvestment and reform is being sought to be derailed by those who have nothing to argue against the policy, but would like to maintain the status quo in support of traditional vested interests. Those who have led the campaign against mindless privatisation must expose the controversy within the NDA on this issue as a charade that diverts attention from and tends to discredit the real battle against a fraudulent set of policies aimed at enriching a segment of the private sector at the expense of the State exchequer.