From Business World of 17 May.
Privatization,
disinvestment or nationalization?
Ever since the Congress and its allies
ended all prospects of National Democratic Alliance to power, we have seen some
violent dramatics on the issue of privatization. It is no surprise that the
communists are against the sale of shares in state-owned companies to private
investors. They are against the existence of private investors altogether, so
they can hardly be expected to favour additions to such investors’ ranks or
wealth. And this is what Comrade Bardhan said to the press when it suddenly
turned its attention to him after a lifetime of neglect. And promptly the stock
market went into a spin, and thereby grabbed the headlines.
So eyes turned
to the Congress, which after all was going to become the majority partner in
the government. Congressmen refused to face the camera on this issue, but
television channels fished out an old take in which Manmohan Singh had said: if
a public enterprise is running well and making profits, you have to give me a
reason why it must be privatized. Which meant that only loss-making enterprises
may – not would – be sold off. And there were allegations from sundry less
careful or scrupulous Congress spokesmen that there had been dishonesty in Arun
Shourie’s disinvestments.
Let me say at
this point that none of what has happened has made me change my views. I
believe in privatization; I need to be given a reason why any productive
enterprise has to be in government ownership. I think the government will make
a costly mistake if it does not sell off BSNL and MTNL; neither has the kind of
management required to cope with the competition from big, rich, nimble
business houses, and cannot get it while they are under government ownership.
If it does not sell them off, they will become millstones around its neck – and
loss-makers which would qualify them for sell-off according to the Congress
criterion. This is what happened to Maruti: Maran, that quintessential
Congressman, refused to sell it off while it was doing well; then, when it got
into trouble on account of private competition, it was sold off at half the
price. The Congress policy seems to me to be one of privatization without any
gain.
But I was struck
by a couple of points. The communists see a conspiracy between privatizers and
global bankers. Without getting that paranoid, one really has to recognize that
there are no investment houses with deep pockets in India. Those that are there are
in government ownership, and in pretty poor shape. And the personal investor class
is simply not large or rich enough to absorb the volume of shares that would
come into the market if all – or even the major – profitable government
enterprises were sold off. So one of two things would have to be done. Either
they would have to be sold to international investors – and we did see
considerable foreign investment in the recent disinvestments – or they would
have to be sold at considerable discount to their intrinsic value, thereby
passing on potential capital gains to the buyers. This is what Mrs Margaret
Thatcher did in Britain: it gave large chunks of shares to small investors at a
discount, and thus made them equity investors and made them a bit richer. This
is how enterprises were privatized in Russia. But it is difficult to see how this
can be equitably done in a country where most people do not even have a bank
account. So without any conspiracy, the structure of financial markets ensures
that substantial privatization requires substantial sales to foreign investors.
I see that as an argument to reform and expand our capital market, not as an
argument against privatization. It is a remarkable fact that after all 12 years
of Sebi rule, our capital market cannot raise capital for anyone except
government companies.
The other point,
made by Jyotiraditya Scindia, is that public enterprises, to be able to
function in competitive markets, need to be able to raise capital as well as alter
their debt:equity composition at times of their choice. The government has
never given them the freedom to borrow and issue equity when they need it;
instead it has spoilt the market for their equity by selling its own holdings
at times of its choice. Instead, government enterprises should be allowed to go
to the capital market when they need it. And the government should manage its
portfolio of investments like a rational portfolio manager: watching the
performance of the companies as well as the market, and selling whenever it
feels it is getting the right price.
