PSU disinvestment: Credible process needed, no hurry

Story by  Sushma Ramachandran | Posted by  Aasha Khosa • 11 Months ago
Air India was sold to TATAs
Air India was sold to TATAs


Sushma Ramachandran

The news that the government is inviting expressions of interest for the strategic sale of the Rashtriya Ispat Nigam Limited (RINL) has sparked hopes that the privatization process may get a fillip in the current fiscal. Till recently it was expected that the public sector disinvestment target of Rs. 65000 crores set in the budget was not likely to be achieved this year. Reports indicate that the government is now thinking of setting lower annual targets for receipts from this process given the fact that these have not been met for the past few years. The next fiscal - 2023-24 - could thus see the target set at a more modest Rs. 35,000 crores.

But with the RINL divestment process likely to begin at the end of January 2023. Possibly, the current fiscal could end with a larger inflow of funds under this heading. RINL, or Vizag Steel, as it is also called, already appears to have about seven interested buyers. These include Tata Steel, Adani group and JSW Steel.

The new development also indicates the government is making a bid to revive the disinvestment process which seemed to have come to a halt after the dramatic sale of Air India. It was then expected that the sale of oil refiner, BPCL would swiftly follow on its heels. This did not happen largely due to the change in the oil market scenario. With global oil markets showing extreme volatility after the Ukraine war began, there was less appetite for making investments in the fossil fuels sector.

The process of divesting the government’s equity stake has also begun in several other companies like the Container Corporation of India, Shipping Corporation of India, and IDBI. But these will only be finalized in the next fiscal. It is possible, however, that receipts from divesting the entire government equity share in Hindustan Zinc Limited may come in during the current year. This could potentially boost the divestment kitty by about Rs. 38000 crore.

It must also be recalled that the government had announced plans to privatize two public sector banks and an insurance company. Finance Minister Nirmala Sitharaman recently noted that strategic disinvestment of the Life Insurance Corporation had taken place through its initial public offer (IPO). The next step, she indicated, was to go ahead with bank privatization.

Despite these reassuring statements, there seems to be an inordinate delay in carrying out the process as far as banks are concerned. There has been speculation that this may have something to do with the central bank’s suggestions in a research paper that bank privatization should be carried out gradually. In sharp contrast, another study by the National Council for Applied Economic Research says that all public sector banks should be privatized barring the State Bank of India. Apart from these conflicting suggestions, it is also felt that the possible political fallout of privatized banks may be a factor as these are viewed as vehicles for the financial inclusion of those at the bottom of the pyramid.

Despite all these issues weighing in favour of slowing down rather than going ahead full steam with the disinvestment process, the government has given clear indications that it is determined to implement plans announced earlier. This determination was signalled by the earlier sale of Air India which had faced many obstacles in being sold off. Initially, there were political objections to selling off what was considered a national carrier and close to the country’s heart. Then there were economic reasons cited for not going ahead with it because the airline would have to be sold at a huge loss to the exchequer given the weight of its enormous debt. And finally, there were concerns over the large workforce that would have to be trimmed if any owner were to take on this entity.

At the end of the day, all these hurdles were overcome and the sale to the Tatas finally took place. Similarly, it is unlikely that the policy is going to be derailed either by suggestions made by think tanks and the central bank or by political considerations. Besides, in the larger scheme of things, the issue of public sector disinvestment is not as politically sensitive as has been thought of in previous years. It must be recalled that the NDA government under Atal Behari Vajpayee had carried out a series of strategic sales of public enterprises. These included a raft of hotels under the ITDC,  Balco, and Modern Foods. While the NDA may not have been voted back to power at the end of its tenure, this had nothing to do with the public sector disinvestment process.

The delay in the disinvestment process this year has been largely due to the dramatic geopolitical events that have altered the economic outlook for most countries. The Ukraine war as well as the zero Covid policy in China has had implications for economies all over the world. The Indian stock markets have also been roiled by the impact of these developments. In such a volatile market, it is wiser to be more cautious about going ahead with disinvestment rather than rushing to make changes immediately.

Even in the case of Air India, the entire process went through several phases before a final sale could be carried through. Similarly, in the case of smaller enterprises, the correct approach is to carry out due diligence in a measured and careful manner. There have already been some complaints about irregularities in the sale process of some public enterprises like Central Electronics Limited and the Department of Investment and Public Asset Management (DIPAM) has rightly cancelled the plans.

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The entire public sector disinvestment process thus needs to be implemented without any hurry and without trying to rapidly meet budgetary targets. Strategic sale and divestment of government equity stakes in public enterprises is a sensitive process and needs to be carried out credibly and transparently.