Government of India is focused towards privatization of Public Sector Enterprises ( PSE’s) for their revival, instead of strengthening policy improvement or dis-investment. Has the government had no better solution for revival of these prestigious organizations.
In the flush, heady early years of Independence, as India committed itself to an import substitution industrialization (ISI) strategy, planning and public sector enterprises were seen as the prime mechanisms to realize this vision. The public sector would occupy the “commanding heights” of the economy, and not only catalyze India’s industrialization but also serve a host of broader national goals from employment to regional development to national security.
These enterprises were set up both by the central and state governments, but the former have been the dominant players, especially in so-called strategic sectors, such as capital goods, minerals, metals, energy and telecommunications. These Central Public Sector Enterprises (CPSEs) are firms in which at least 51 per cent of the paid-up share capital is held by the central government, either fully or together with one or more state governments.
In the 1950s and 1960s, most CPSEs were greenfield enterprises, set up in the first flush after Independence when the private sector had limited capacity to set up large capital-intensive enterprises. There were only five CPSEs with a total investment of Rs 29 crore in 1951. The number of CPSEs grew to 84 in 1969. The subsequent expansion in the next two decades – where the numbers increased to 179 in 1980 and 244 in 1990 – was dominated by the nationalization of private enterprises, many of which should have been declared bankrupt and liquidated or sold to other private bidders.
The limitations of the earlier development model led to a significant course change after 1991. Now markets and the private sector, instead of planning and the public sector, were seen to be the engines of growth and broader development. The post-liberalization shift to the private sector as the engine of growth saw the number of CPSE numbers stagnate with only a modest increase to 260 in 2012 – before again jumping to 320 in 2016 (see figure below).
An interesting facet of CPSEs is that even while they continue to have a considerable presence in the Indian economy, their role in employment generation has declined markedly.
Employment in CPSEs grew massively in the 1970s – from 0.7 million in 1971-72 to 1.94 million in 1981-82 – driven by nationalizations and political patronage. It further increased in the 1980s, peaking at 2.24 million in 1989-90. Since then it has halved to 1.13 million in 2016-17 (see figure below). Much of this came through voluntary retirement schemes in bloated employers like Coal India, which saw its numbers decline from about 0.65 million in the mid-1980s to just above 0.3 million end-2017. Another large employer, the National Textile Corporation, the repository of scores of erstwhile private textile mills that had gone “sick”, closed nearly 80 mills over the past two decades and employment declined by 90 per cent in this period. Furthermore, many jobs that were not considered core to the CPSEs objectives – drivers, janitorial staff, and security personnel – were gradually subcontracted to private companies, a trend observable in large private enterprises as well. However, even as employment declined within CPSEs (and contract labour grew pari passu), relative emoluments of CPSE personnel has doubled (as a multiple of per capita incomes) over the last four decades.
Where do CPSEs stand today?
There were 331 CPSEs with a total investment of Rs 12,50,373 crore as on 31 March, 2017. Of these, 5 were agriculture-related and 24 were in the mining sector. The bulk are in manufacturing and generation (96), services (119) and construction (76). While 174 CPSEs made profits (Rs 1,52,647 crore during 2016-17), just 10 – largely in the energy sector – accounted for nearly two-thirds of all profits. Eighty-two CPSEs made losses amounting to Rs 25,045 crore in 2016-17, with just 10 loss-making companies accounting for 83.8 per cent of the total losses, with Bharat Sanchar Nigam Ltd., Air India Ltd. and Mahanagar Telephone Nigam Ltd. being the worst performers. The number of loss-making CPEs has grown from 54 in 2007-08 to 82 in 2016-17. CPSEs in agriculture are the worst performing, with negative return to equity.
Currently, there are eight Maharatna CPSEs, 16 Navratnas and 74 Miniratnas, the designations referring to the degree of delegated powers that the management of these firms can make on capital expenditure, investments in joint ventures/subsidiaries, mergers & acquisitions and human resources management. There are other CPSEs, which in reality should be named Maha-mess, Mess and Mini-mess, primarily in sectors with robust private sector competition such as airlines and telecommunications, and where there is no alternative to full privatization, if only to stop the hemorrhaging of scarce public resources.
India has not gone for large-scale privatization (or “strategic disinvestment” in official parlance), in contrast to many other countries in East Europe and Latin America. The last strategic sale – involving divestment of major shareholding of the government along with transfer of management – was done in 2003-04. While the process has been resuscitated in the last couple of years, with 24 cases of CPSEs and their subsidiaries (including Air India) having been approved ‘in principle’ for strategic divestment, even the current government has had little political appetite on this front. The failed cases of Air India and IDBI under the present government – even when an unimpeachable and excellent offer had been negotiated in the case of the latter – shows that both politicians and bureaucrats have become exceedingly risk-averse with regard to fully privatizing CPSEs.
It’s ironic that governments have held on to Air India and its roughly Rs 50,000 crores of accumulated losses, a service used by the well-off, even as the poor pay for many essential public services that have been privatized, especially education and healthcare.
Instead, successive governments have diluted public ownership while retaining majority control. After a burst of activity under the first NDA government, just over a dozen CPSEs were listed between 2003-04 and 2011-12. In the subsequent five years, there was no listing of even a single CPSE on the stock exchanges before the current government-approved listing of 14 CPSEs (including two insurance companies). A recent innovation has been the launching of an exchange traded fund (ETF) comprising a basket of stocks of CPSEs as an asset class that offers the benefits of liquidity and diversification of risk with similar tax benefits as applicable for equity.
CPSEs constitute just under a tenth of the total market capitalisation of companies listed at BSE and NSE. Total disinvestment proceeds since 1991 have been a sizeable Rs 3,62,687 crores. The state-owned insurance company, LIC, has backstopped all CPSE IPOs, ensuring greater effective public control even after divestment. While listing has brought greater public scrutiny and a modicum of market discipline, in reality, all governments have used disinvestment proceeds principally to meet fiscal targets. Earlier this year one CPSE (Oil and Natural Gas Corporation) acquired a 51 per cent stake in another CPSE (Hindustan Petroleum Corporation Ltd.) for Rs 36,915 crore. At least a dozen public sector companies have been sold to other state-run peers. Under the UPA government, ONGC and Oil India Ltd. acquired 10 per cent of Indian Oil Corporation Ltd. for Rs 5,340 crore. These are not dis-investments, where the government sells a stake in the primary or secondary markets, but a sleight-of-hand to manage the optics of maintaining fiscal deficit targets.
CPSEs will continue to be an important part of the Indian economic landscape. Even if privatization is politically infeasible, at least the state can exit by shutting down those CPSEs with a negative net worth.
Many CPSEs sit on excessive amounts of land, acquired in decades past when the state could acquire large amounts of land at a pittance. Given the high financial and transactional costs of acquiring land today, using some fraction of this land for broader public purposes as part of “smart cities” that are more inclusive, whether as public hospitals or parks, or housing for public employees, would be one way to ensure that the CPSEs serve the larger public good that was originally envisaged of them.