FROM BUSINESS WORLD OF 19 OCTOBER 2005
Why this rigmarole?
Even when the Congress professed to abandon socialism and
embrace the market in the early 1990s, it never moved to privatization. It did
give up its earlier penchant for sporadic, whimsical nationalization; since the
early 1990s it has neither nationalized anything other than Dabhol, nor
advocated public ownership of any industry that the private sector could run.
But in its view, what was the government’s was for it to keep; to sell it to
the private sector would have been a political sin, even if it was just a
prefabricated hut factory. The ideological justification of this preference has
never been explained. But we just have to take it: if the Congress is in power,
it will keep control of whatever companies the government owns. It may make big
companies take over small ones, or solvent companies insolvent ones. But the
private sector shall not get an inch of public property, even for a fair price.
Now that the Communists are its indispensable allies, they will stiffen its
back just in case it falls short of ideological perfection.
It is, then, difficult to
understand why the Congress refuses to invest into government companies that
need risk capital to expand. There was a time when they could borrow from banks
and government finance companies. But it made them excessively leveraged, and
many of them could no longer service their loans. Volatile profits at times
fell short of the fixed debt service liabilities, and the companies stopped
servicing their debt.
Besides, the development finance
institutions that gave them liberal loans no longer exist; they have all been
turned into banks. And although banks continue to be predominantly owned by the
government, they are no longer prepared to give unlimited credits to government
companies. The government is keen to keep the banking system solvent; if it is
to remain, it has to limit its exposure to particular sectors and companies –
even if they are government companies.
So the latter are forced to look
at the equity capital market. As they do so, they see two types of
difficulties. If the government’s share of their equity is already 51 per cent,
they cannot raise private capital if they are to maintain public equity at that
level. To put it slightly differently, they cannot expand their equity unless
the government buys more of it as well: they cannot raise private capital
unless it is accompanied by public capital.
But there are still some
companies left in which public equity exceeds 51 per cent; they can raise
private equity without the government losing its majority of equity. BHEL is
one instance. But 51 per cent is not enough for the Communists. They would not
allow government companies to raise any private capital at all. And for now,
their view has prevailed. This view is as mysterious as the Congress’s
preference for majority ownership; but rulers’ preferences cannot be
questioned, however arbitrary.
The implications of these
political preconceptions should be clear to everyone. If a government company
cannot touch private risk capital, and if it is to expand in the normal way, it
must receive more equity from the government. And this is where the finance
ministry is obdurate: it is simply not willing to invest further in government
enterprises. This is irrational. The political prejudices of the Congess and
the Communists may not be questioned. But at least they must obey the logical
implications of their beliefs. They cannot prevent government companies from
taking private equity and at the same time refuse to let the government invest
in their equity. One or the other must be permitted.
Nowhere does this irrationality
have more serious implications than in the case of banks. Money supply
increases at about 15 per cent a year, and so automatically does the business
of banks. The Reserve Bank of India wants them to meet Basle norms, which means
that they must get 8 per cent of the increase in their assets in the form of
equity from their owners. The government refuses to invest this 8 per cent;
instead it has been seeking an escape in the form of preference shares to be
issued to private investors.
That would be a fiddle, and if
private investors fall for it, they would be suckers. As long as the government
owns banks, it will make them give commercially unwise loans. No private
investor can afford to take on the risk of political loans. So the government
should. It should put its own cash into its own banks, as pure risk capital.
