Ways to carry out the heavy disinvestment target of Rs 1.75 trillion announced in Budget 2021

It doesn’t take a genius to realise how the ruling government is baffling to meet ends meet with the crippling economy and has thus turned towards the sale of public sector units in the face of privatization to generate revenue in the current run, to push in direct money into the economy for its revival. However, experts have been a little critical of the move since the aggressive approach of the government’s disinvestment target hints at prioritizing short term revenue raising spree by sale of public sector units, in place of focussing on maximising long-term value.

The budget 2021 announced by the Finance Minister earlier this February represented the government’s intent to heavy disinvestment of about Rs 1.75 trillion, even though the detailing of this large amount’s process is not yet made available to the public. One of the most important hurdles, however, in this targeted disinvestment and privatisation process of the government is the country’s current legislatures and bureaucratic environment which, if left unchanged, would pose as the biggest challenge to the completion of the process.

Privatisation has always been considered a pivotal process for a country’s economic growth given the increased efficiency and healthy competition amongst the private sector. However, partial privatisation or revenue privatisation is the process when the government of a country sell stakes or disinvests in a public asset to raise short term revenue, which, to be fair, has been undertaken by India for a considerably long time now. But the government, by now, has been keenly interested in selling non-controlling stakes in the public sector units, keeping the decision-making control of these companies completely at their end. It can’t be denied that India is not the only country that has been relying on partial privatisation to generate revenue, as explained by various sources and surveys time and again, and most companies engage themselves in selling less than half of their equity stake, even less of them being fully privatised. Experts claim that these strategies suffer from steeply diminishing returns.

However, there’s an urgent need for the government to give a new outlook to their privatisation strategy because of some constraints that the current strategy faces. One of the major drawbacks of these strategies, as expressed by diminishing returns, is because of the fact that even though some stake is sold, detention of the complete decision-making authority with the government leaves up space for political interference and managerial inefficiency. As a result, they fail to survive in the competitive private market because of the efficiency lag and their long-term growth gets hampered, along with the loss of livelihood of many employees and thus, further disrupted labour market and therefore worsens economic conditions because of inability to monetise its shares at fair value. Not just that, the government’s unwillingness to sell more than 50% stake in the company’s value with respect to the partial privatisation strategy also puts an upper bound to the monetisation of these assets.

If I can quote an example to establish my point of the above-mentioned constraints in a more vivid sense, I would like you to have a look at the public banks and their monetising values as compared to their private peers. Most public sector banks as observed at their current market capitalisation, trade at a very steep discount as compared to the private sector banks, with most of them having met their shareholding threshold.

But even though this approach has its drawbacks, we cannot fairly claim that it would be easy for the government to sell controlling stakes in these assets, especially because of India’s current political instability. Not just that, the outright sale of India’s public sector enterprises would be difficult because of legal challenges, political brinkmanship and likely opposition from labour organisations because of the large number of people depending on them for their livelihood. A recent example of this can be seen with the current labour strike organised by unions opposing the government’s announcement to sell four midsized public sector banks, with a collective employment level of more than 1 lakh. The consequences don’t stop only at the political environment but go rippling down to the economic environment causing disruptions in long term macroeconomic phenomena. So, to go ahead with this approach in a better sense would be to remove some of the concessions and benefits associated with being a public sector unit, even though they play a crucial role in its valuation and profitability.

Another model of privatisation of public sector units could be through the route of financial engineering. Or rather, let’s call the model a way to monetise these public sector units rather than privatising them, the reason to which you’ll discover in the next few lines. The financial engineering model suggests that the physical assets and status as government-backed organisations of these units can be used to raise debt, which can then be transferred to the government either as dividends for their stake in the company or via share buybacks. Either way, revenue would be generated for the government and the end result for these companies would leave them as they were. Another way to monetise public sector units can be if liquidity rich PSUs could invest in or buy other PSUs, allowing the government to monetise its stake without giving up control. Now, these tactics can sure be a way to monetise public units but it doesn’t really serve the primary economic purpose of privatisation which initially involves increased efficiency and exposure to the market for these companies, besides generating revenue.

So, to actually walk on the path of primary privatisation objectives, it can turn towards strategies like consolidating the company in a newly constituted holding company to ensure riddance from bureaucracy and bring in efficiency and profit-generating potential. Another one could be to separate rights of control, management and cash flow at public sector units. Either way, the government needs to ensure that the long-term value of the units is not hampered in an attempt to generate revenue in the short run.