The story so far: Finance Minister Nirmala Sitharaman, in her Budget speech for 2021-22, announced a new policy for central public sector enterprises (CPSEs), which she said will serve as a clear roadmap for disinvestment of government-owned firms across sectors. “We have kept four areas that are strategic where bare minimum CPSEs will be maintained and rest privatised. In the remaining sectors, all CPSEs will be privatised,” the Minister said.
What goes outside government control?
The government had revealed the broad contours of the policy in May 2020 as part of the Atmanirbhar Bharat package unveiled in the initial stages of the COVID-19 pandemic. The strategic sectors identified at the time for retaining certain public sector entities within the government’s control remain the same in the final policy approved by the Cabinet. These are atomic energy, space and defence, transport and telecommunications, power, petroleum, coal and other minerals, and lastly, banking, insurance and financial services. While the initial plan was to retain one to four public sector firms in these sectors, this has now been replaced by the phrase “bare minimum presence”.
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Once the government decides what is the bare minimum number of firms it wants to retain, the rest of the firms will be privatised, merged or subsidiarised with other CPSEs, or closed. For all firms in sectors considered non-strategic, privatisation or closure are the only two options being considered. The policy’s objective is to minimise the public sector’s role and create new investment space for the private sector, in the hope that the infusion of private capital, technology and management practices will contribute to growth and new jobs. The proceeds from the sale of these firms would finance various government-run social sector and developmental programmes.
Why is this significant?
A bold push for disinvestment of the public sector was expected soon after Prime Minister Narendra Modi assumed office in May 2014 and announced that the government had “no business to be in business”. This was seen as a clear intent to privatise a huge chunk of India’s large public sector, a legacy from post-Independence policies that placed government firms at the ‘commanding heights’ of the economy.
However, the first term saw little activity by the government on this front, barring an aborted attempt to sell 76% of its stake in the loss-ridden national carrier Air India. A few public sector enterprises were merged with other PSEs and the proceeds from the transactions counted as disinvestment proceeds in the government’s accounts.
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In its second innings, however, there has been some enthusiasm to privatise, with a fresh push to sell Air India (lock stock and barrel, with 100% stake sale), followed by Maharatna oil PSU Bharat Petroleum Corporation Ltd. (BPCL), and the likes of Shipping Corporation of India, Container Corporation of India and Pawan Hans. The process for those sales is under way, although timelines and investor interest were affected by the pandemic. However, the process indicated a piecemeal approach to privatisation and created uncertainty.
The new policy is significant as it goes beyond such an approach and lays down a rationale for deciding the future ownership pattern of 439 CPSEs, including their subsidiaries. For instance, it is now clear that 151 public sector firms in non-strategic sectors (including 83 holding companies and 68 subsidiaries) will either be closed or sold. The policy also brings public sector banks and insurance entities into the disinvestment ambit for the first time.
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How is this different from policies in the past?
This is the first time since 2004 that India is working on a slew of privatisation deals. Earlier, the Atal Bihari Vajpayee government between 1999 and 2004 had managed to sell off majority stakes in a dozen-odd public sector enterprises, including Modern Foods, Balco, Hindustan Zinc, VSNL and a few hotels. A separate Ministry had been formed just for disinvestment, led initially by the late Arun Jaitley and then by Arun Shourie, who drove the process.
An attempt to sell Air India at the time had, however, got stalled in the face of a political outcry. Prior to that, the early 1990s saw the stock market listing of minority stakes in a bunch of public sector firms, a policy that was replayed when the UPA government was in office from 2004 to 2014. The new policy goes beyond the Vajpayee-era privatisation drive, which was limited to a ‘case-by-case’ sale of entities in non-strategic sectors, by stressing that even strategic sectors will have a ‘bare minimum’ presence of government-owned firms.
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What is likely to be sold?
The government hopes to conclude the sale of Air India, BPCL and some other entities, where some progress has already been made over the past year. Ms. Sitharaman also promised the sale of two more public sector banks and a general insurance player in her Budget speech, along with plans to list the Life Insurance Corporation (LIC) of India on the stock markets.
The Union Budget has estimated ₹1.75 lakh crore as receipts from PSU stake sales in the year, compared to its target of ₹2.10 lakh crore for 2020-21, of which just about ₹20,000 crore has been raised so far. However, the Finance Ministry mandarins are confident of achieving next year’s target.
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What is the proposed process for selecting the CPSEs to be sold or retained?
The NITI Aayog has been entrusted with suggesting which public sector firms in strategic sectors should be retained, considered for privatisation or merger or ‘subsidiarisation’ with another public sector firm, or simply closed. A core group of secretaries on disinvestment will consider the NITI Aayog’s suggestions and forward its views to a ministerial group. Apart from the Finance Minister, the group will include Road Transport and Highways Minister Nitin Gadkari and the minister in charge of the administrative ministry of the public sector enterprise concerned. After the ministerial group’s nod, the Department of Investment and Public Asset Management in the Finance Ministry will move a proposal to the Cabinet Committee on Economic Affairs for an ‘in-principle’ nod to sell specific CPSEs. The NITI Aayog is expected to soon formalise its recommendations on which of the 77 public sector companies in strategic sectors should remain with the government.
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Public sector firms and corporations engaged in activities allied to the farm sector, such as providing seeds to farmers, or the procurement and distribution of food for public distribution, will not be privatised. Similarly, the policy excludes departments with commercial operations like Railways and Posts, firms making appliances for the physically challenged, and those providing support to vulnerable groups through financing of SCs, STs, minorities and backward classes. CPSES “maintaining critical data having a bearing on national security”, security printing and minting companies, will also be retained in the public sector.
What are the risk factors?
The turmoil in the global economy could impact the valuations of firms being privatised, as many potential investors may not have the appetite for bidding in these times. The prospect of post-deal scrutiny by audit and investigating agencies, like the CAG (Comptroller and Auditor General of India) and the CBI, will be a source of worry for officials, with similar cases pertaining to the Vajpayee-era transactions still cropping up in courts.
Lastly, as economist Pronab Sen has warned, privatisation is a good idea, but doing it during a recession may dampen economic recovery as investors will end up buying existing capacities instead of embarking on fresh investments.
