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By
Aravind Sitaraman
Early
this year, the Government announced its decision to disinvest
10% stake in Bharat Heavy Electricals Ltd (BHEL) and 18.24%
stake in Maruti Udyog Ltd (MUL). A recent Finance Ministry
paper talked about a slew of disinvestment in ONGC, NALCO,
Power Finance Corporation, and PowerGrid. Last year, the
Government had disinvested around 25% of its stake in MUL
through a Initial Public Offering (IPO). The hope is that the
sale of these stakes will help bridge the fiscal deficit or
finance social projects in education or healthcare. The credit
for disinvestment clearly goes to this Government. The idea of
disinvestment came from Mr. G. V. Ramakrishnan when he was the
head of the Disinvestment Commission seven years ago.
This
is also a significant decision for a Government that needs
support from Communists, self-serving individuals running
political parties, and state-level parties with narrow
agendas. This coalition, called the United Progressive
Alliance (UPA), came up with a Common Minimum Program (CMP)--
a platform that they could all agree with. Communists want the
Government to borrow funds to finance social causes that
benefit blue collared workers-- nobody else matters.
Ultra self-serving within the UPA, seemingly espousing the
"oppressed" cause, are always looking for
investments that would benefit them and their clan.
Dravida Munnetra Kazhagam (DMK) and the Marumalarchi Dravida
Munnetra Kazhagam (MDMK) want investments that focus more on
Tamil Nadu so they can claim success to wrest the State
Government away from the All India Anna Dravida Munnetra
Kazhagam (AIADMK).
However,
soon thereafter, the Government also stated that it will be
deferring this disinvestment plan to the next fiscal year.
Many believed that this was due to internal pressure from its
coalition partners and that the Government needed time to
build consensus around the issue. Then came the quota regime
that has become a signature statement of the Indian polity.
The employees of BHEL will get a chance to own portion of the
disinvestment while Indian public and Indian financial
institutions will be given preference. It was also stated that
a National Investment Fund will be setup with corpus raised
from disinvestment of Public Sector Units (PSU) and a majority
of this corpus will fund social sector projects and a portion
used for capital expenses in profitable PSUs. While the
Finance Minister took all the credit for creating the process
of disinvestment, he failed to appropriate due credit to his
predecessor in the National Democratic Alliance (NDA) for
creating a Disinvestment Proceeds Fund and for channeling
funds from such disinvestment to bridge the budget gap. The
NDA had mobilized about USD 3.6 billion against a target of
USD 3 billion during fiscal years 2003-2004. Six minority
stakes in large PSUs -- ONGC, GAIL, IPCL, IBP, CMC, and
Dredging Corporation of India, were sold to raise this money.
With
the onset of the new fiscal year, the Finance Minister has
restarted the topic of disinvestment in these PSUs with
increased percentages. This time, apart from the traditional
opposition from the three props of this Government, there are
dissenting voices from within the Congress Party itself.
Notably, Mr. Mani Shankar Iyer, the federal Petroleum
Minister, has opposed this move by comparing the sale of PSU
stakes by the Government to selling the "family silver to
pay the butler." This argument is strangely similar to
the one made by BJP leader and former petroleum minister Ram
Naik who opposed Arun Shourie’s bid to sell strategic stake
in Hindustan Petroleum Corporation Ltd (HPCL) and Bharat
Petroleum Corporation Ltd (BPCL). However, the Prime Minister
has firmly reiterated the Government's desire to disinvest in
these PSU holdings.
Significant
Decision
Regardless
of the name, politics, and opposition, the decision is
significant in many different ways:
Firstly,
it signifies a new and bold approach with which Prime Minister
Dr. Manmohan Singh seems to exert his influence on economic
principles. While he takes in the opinion of the three props
to his Government, he definitely does not seem to be weighed
down by their narrow agendas. One reason perhaps is because
the government’s disinvestment revenue had fallen from USD
3.6 billion in 2003-04 to USD 951 million in 2004-05. This
fall is due to the UPA government's decision not to follow the
NDA’s aggressive divestment policy when it came to power in
May 2004. One year is already over and his government must
expedite the much-needed economic reforms if the reformist
credentials of his government are to be protected. Hence,
although there is no budgetary target for revenues from
disinvestment, the Finance Ministry is hoping to raise USD 2.3
billion this fiscal year half of them from BHEL, Maruti, and
NALCO.
Secondly,
while economic reforms have been slower than anticipated under
the UPA, the Prime Minister has managed to get many
contentious reforms underway. The Foreign Direct Investment
liberalization in Banking, Printed Media, Airlines, Retail,
Telecommunication, and Real Estate, despite strong opposition
is a clear indication that the economist in the Prime Minister
is more at play that the politician.
Thirdly,
the Prime Minister seems to be standing up to hard-line
ideological Communist agenda most opposed to the disinvestment
process. Soon after forming the Government in 2004, CPI (M)
general secretary, Mr Harkishen Singh Surjeet said "All
the mistakes of the NDA Government have to be rectified. We
cannot afford the disinvestment program followed by the NDA."
The CMP "vision" of using "practical" and
not "ideological" consideration to disinvestment is
being used very well to stave off ideological opposition to
disinvestment. Hence, the refusal to even review the
disinvestment proposal of BHEL. The Communists disagrees
and calls it a breech of CMP. Some of the more hardened
Communists call it "privatization through the back
door."
Fourthly,
the Prime Minister argues that "privatization"
should not be equated with "disinvestment." This
means that the Government may sell its stake in PSU so long as
it does not lose majority stake. This should help Government
fund social projects.
Fifthly,
the opponents of the BHEL disinvestment say that the
valuations are too low to sell. However, analysts and
proponents of disinvestments have pointed out the valuations
would continue to be the low 21 times 2004-05 Price to
Earnings (PE) and a strategic sale of BHEL stake will raise
the valuation to a more realistic 50 times 2004-05 PE. The
Prime Minister seems to agree to this assessment.
Benefits
of Disinvestment
The
opponents of disinvestment miss the big picture.
Firstly,
disinvestment is not about shedding Government investment in
these enterprises. It is about spreading wealth. It provides
the ordinary salaried people an opportunity to take part in a
successful Government enterprise and earn wealth for their
future. The employees of BHEL and general investors will also
benefit from the disinvestment process as 15% of the proposed
dilution is reserved for them. Since the government plans to
split the stock, retail investors will be able to buy BHEL
shares, which currently are beyond the reach of many due to
the high price. It
will allow retail investors, who now own less than 1 percent
of BHEL equity, to increase their stake in a company that was
funded by taxpayers' money. That will be true democratization
of capital. The upshot will be greater corporate
accountability and more professional management.
Secondly,
disinvestment is about raising money to bridge increasing
social expenses and fiscal deficit. The Government simply
cannot afford deficit financing social projects lest it
devalues the currency still further. With the absence of
clear, equitable, and reliable tax collection methods,
Government has to raise revenue elsewhere. Disinvestment is
not about selling the family silver but an investment in the
society. Last year, 24 loss-making PSUs were allocated Rs 517
crores in a package so that they would pay the statutory dues
of their employees. It is quite a statement that a government
which rewards private-sector companies for corporate
governance should delay payments. This year, the budget has
allocated Rs 14,040 crores (including railways) as equity
support in addition to loans worth Rs 3,554 crores.
Thirdly,
disinvestment is an option to raising money. While the
Government can borrow funds from the public, the cost of
borrowing will usually be too high to justify the financial
move. The conventional wisdom is that public-sector
enterprises create and sustain employment. The truth is that
Central PSUs account for only six million of the 27 million
jobs in the organized sector and a fraction of the total
workforce of over 400 million people. Also it comes at a huge
cost. The Economic Survey of 2004 lists that the average
annual emoluments of a public-sector employee are Rs 2.24 lakh.
Worse, on an equity of Rs 2,46,106 crores, the government
earned a dividend of Rs 12,907 crores in 2002-3, or roughly
5.2 per cent. In other words, the government is earning less
per year on its investment than it pays for its borrowings.
Fourthly,
disinvestment is a clear path to getting the Government out of
areas where it has no competence. There is a reason why a
majority of Government enterprises are sick, unprofitable, and
non-optimal while private enterprises are expanding their
operations, making huge profits, expanding markets, and
contributing to the economy. Of the 186 PSUs surveyed, nearly
40 per cent (73 out of 186) have a negative net worth. In
terms of operations, 89 (or 47 per cent) show losses and 113,
or 60 per cent of the companies have not paid a dividend in
the year 2002-3. The erosion of net worth in the 73
enterprises is an astounding Rs 48,199 crores, or four times
what the government budgets for primary education in a year,
and the total losses of the 89 enterprises is Rs 9,881 crore,
which is more than what has been budgeted for healthcare. Just
the accumulated losses of the worst five PSUs totes up to Rs
30,966 crores or six times what has been allocated for
drinking water supply. Hence, instead of trying to do
something that it is bad at, the Government should spend its
time where it is good at and that is sorely missed. These are
defense, foreign relations, infrastructure investment, and
social projects. The Prime Minister aptly summed up these
points saying “The biggest challenge is to survive and
flourish in the increasingly integrated and globalised world
we are living in. The role of the state is being redefined in
many sectors. The government is moving from being a provider
of goods and services to being a regulator and facilitator
ensuring fair play."
Fifthly,
paralyzing a minority Government constantly by its allies who
are not part of the Government has unintended consequences.
For one, it paralyzes the country into inaction and affects
Indian national interests in economic, defense, and
international issues. For another, it casts the Government and
its allies in very bad light. Come next election, the voters
are sure to punish an ineffective Government more than a
partially effective one. Perhaps, this is what the Communists
hope for. By neutralizing the Congress and canceling out the
NDA, they perhaps hope to form a "third front" in
alliance with other ultra-left partners of the UPA to form a
Government. While this may be a clever strategy, it would
backfire on them. No political party in India or any other
country for that matter, can afford to be isolationistic in
their approach to economy, defense, and international
relations. The failure and effects of such policy is evident
when one sees the state of North Korea, Myanmar, Cuba, and
Libya.
Sixthly,
it is not that there has been an absence or lack of received
wisdom. Since 1991, six different committees and initiatives,
belonging to Congress, so-called Third Front, NDA, have
attempted to address the problem. In fact, there is enough
data in the international domain that proves beyond doubt that
PSUs (outside of utilities and railways) perform better,
create employment, and generate wealth for the people when
passed on to the public or sold in strategic initiatives. They
have all come to the same conclusion as this Government. In a
Harvard University paper, Jeffrey Sachs along with Nirupam
Bajpai say, "Privatization of public enterprises could
raise significant funds as a per cent of GDP, which could be
used to buy down the public debt. Not only would the stock of
debt itself be reduced, but also the interest costs of
servicing the debt would surely decline as the debt stock
itself is brought under control. The cash value of these
enterprises vastly exceeds the present value of profit flows
that the state now collects on these assets."
Becoming
an Economic Superpower
It
is no longer enough to look at disinvestment in terms of
narrow political, social, or even economic agendas. For
sustained and increased growth, India has to scale to the next
level of performance. This is not an option but a necessity
and disinvestment is but a tool to get there. Increased
population, unemployment, and poverty levels are prime reasons
as to why India needs to scale. The cost of not scaling to the
next level will see India eclipsed by China and other South
East Asian aspirants leaving India to its internal chaos and
implosion.
What
is even more compelling is that India is on the verge of being
an economic superpower with extra-regional influences. Its
influence is already acknowledged in Asia and Africa. India's
potential is recognized by the US, European Union, Russia, and
Japan as is evident by the desire by these nations to set up a
strategic alliance. This is precisely that even China wants a
strategic partnership with India. While Japan and
Germany face grave obstacles in their bid for a permanent seat
to the United Nations, there appears to be widespread lack of
opposition for India, if not active support. For India to
actualize its potential, it has to embark on a serious set of
reforms in its economy, polity, judiciary, legal, and
administration. It needs a 10% rate of growth in its GDP to
continue to be competitive with China and potential emergent
nations in South East Asia. Resting on praise and
success of Information Technology industry will soon see
others taking over this crucial growth area.
The
sooner India brings about change the faster it will empower
its companies to compete globally even more efficiently than
now. The Communists traditionally advocated foreign and
national security policies designed to make India a surrogate
or protectorate of one or another external power. Throughout
the years of the Cold War, the CPI took its directions from
Moscow and wanted India to follow a policy of strident
criticism of the US and the western world. They learnt
xenophobia from the Chinese but continued with such fear even
after the Chinese followed active capitalism. Some of their
fears were:
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The
Communists were worried about globalization and its
adverse effects on Indian businesses and its labor. The
growing expansion of the Indian industry has rubbished
such fears. They continue to seek new markets abroad,
acquire talent and production capacity globally, compete
successfully against incumbents, and challenge every
conventional unimaginative fear of the Indian communist.
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The
Communists feared large-scale unemployment of Indians.
Now, any employable Indian laborer at home, white or blue
collared, now has opportunities to work in many private
companies and businesses and less by Government owned
enterprises.
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The
Communists spread fear that globalization will bring about
a brain-drain. Some even experimented with medieval ideas
such as prohibiting education in English. Today, with
unprecedented opportunities at home, there is a reverse
migration of tens of thousands of workers from the US,
Europe, Gulf, and Singapore.
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The
Communists were paranoid that technologies and
globalization would rob what little the agriculturists and
small businesses have. Today, farmers, planters, traders,
and merchants exploit technology such as cell phones to
further their businesses.
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The
Communists said that medicines and drugs would be priced
beyond the reach of the common man. Today, Indian
pharmaceutical companies are buying foreign counterparts
in search of markets and production capacity. Indian
generic and name-brand drugs and inventions are being
patented abroad and certified in numerous nations.
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The
Communists were worried that Indian education will suffer
as Government reduces its social spending. Today, Indian
Universities attract students from other developing
nations.
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The
Communists said that the only reason why foreign companies
wanted business in India is to exploit the low cost labor
and to expatriate profits. Today, expatriate workers from
the US, EU, Japan, Korea, China, Russia, and other leading
nations throng Indian cities and rural areas in not just
Information Technology but old-economy industries such as
mining, oil exploration and production, manufacturing,
food products, agriculture, automobile, civil aviation,
business process outsourcing, and hospitality industries.
They are here doing high value projects including advanced
technologies like avionics, aircraft design, networking,
banking, vertical software systems, industrial design,
biomedical applications, space collaboration, defense
outsourcing, etc.
With
internal squabbling and unrest created by the leftists, India
is being left behind. At the best of times, the Communists
have had minimal support of Indian electorate. However, they
have a great propensity for chaos creation and widespread
disruption. For example, the current communist armed movement
in India is called the naxal movement. This communist movement
has now spread from Karnataka to Uttar Pradesh, developed
strong ties with Pakistan's Inter Services Intelligence (ISI),
Nepal's Maoist terrorists, and Sri Lanka's Liberation Tigers
of Tamil Eelam (LTTE). Because of the Central Government's
reliance on the leftists, several State Governments started
dialogues with these internal terrorists. They initiated
ceasefires, transferred experienced officers and policemen
from terrorist affected areas, allowed them to move about with
their weapons, and even hold public rallies. The end result
was that the terrorists used this space to regroup, recruit,
buy more arms, train new recruits, set up camps, reorganize
across state borders, and develop new weapons. Andhra Pradesh,
whose Chief Minister probably is one of the worst in the
history of this state, started this unwise move of negotiating
without requiring a cessation of hostilities. By surrendering
the initiative unilaterally, Andhra is essentially bankrupt
and is also creating collateral damage to Karnataka,
Maharashtra, Madya Pradesh, and Orissa.
Such
capitulation to disruptive and economically retarding forces
at the national level will take the country down to depths of
political, economic, and social chaos unheard of in history.
The United States has publicly announced that it will help
India become an economic superpower. Leaving behind failed
socialist ideology, India must take this offer seriously and
undertake steps that will guarantee this evolution.
China:
A Major Threat
Compared
to India which has strong socialist tendencies rooted in
democracy, China with strong communist tendencies with
oligarchic structure and has moved away from communism. While
democratic apologists may argue that China's growth is due to
its lead time and non-accountable nature of Government, they
must remember that while Indian universities and media
continue to hold on to unworkable Nehruvian principles and
socialistic ideology, China has essentially abandoned
communism and has moved into being an active capitalistic
state.
With
years of single-minded and focused liberalization China has
continued to grow its GDP at 8%. It attracts more than USD 50
billion Foreign Direct Investment (FDI) a year. Its
manufacturing capacity and processes are superb and can
compete globally. It continues to attract more investment
every day. Many businesses though willing to operate from
India are sometimes vexed with our clumsy, outdated, and
restrictive labor laws. Chinese investments in higher
education is superior to India's investment in science, social
sciences, and premier educational institutions. China's
capacity to control prices, currency rates, and economic
pressures from growth-- which is ironically
anti-globalization, has kept inflation and salaries low. This
in turn has kept the cost to companies artificially lower than
it should be and more competitive than the Indian scenario.
This
is not to say that China does not have deficiencies. Even the
most ardent Chinese proponent will accept that its growth is
geographically lumpy and independently unverifiable. While
India has established a functioning democracy with
free-speech, plurality of opinion in decision making, an
independent judiciary, and a vibrant press, China is still to
prove itself on being able to handle itself as a democracy.
Its currency is protected and its opinion and decision making
process opaque. Its rural areas are virtually shielded from
any oversight, investigation, or external influences. Already,
there is disquiet about the lack of investments in the rural
areas. While China is king of manufacturing in an
industrialized world, it is unknown how they will function in
a knowledge economy. Its bellicose foreign policy vis-a-vis
its neighbors like Japan and India and partners like the US
and European Union has initiated a serious rethink in Western
think-tanks about the reliability of China as a globally
responsible nation. China's environmental policies, its
water-management techniques, its aggression to smaller
neighbors, its too-clever foreign relations tactics raises a
degree a suspicion in transparent societies.
In
fact, some analysts say that because India does not fully
adhere to the World Bank recognized form of reporting, India
continues to under-report its FDI. If some structural
changes are made to include remittances by NRIs and other
sources, Indian FDI will match China's numbers. In terms of
software and business process outsourcing (BPO), India is way
ahead of China controlling nearly 45% of the global market.
We
have the capacity to take this to the next level. What we need
is imagination, political will, and determination not just to
succeed but to exceed our expectations of ourselves. For
centuries before the European powers, prominent Indian
kingdoms dominated trade with other erstwhile world powers
such as China, Rome, Egypt, and Somalia in textiles, stee |
