India was undergoing a serious economic crisis in 1991 when Dr. Manmohan Singh, then Finance Minister, introduced the new policies of Liberalization, Privatization, and Globalization (LPG). Immediate privatization was considered to be the need of the hour and the country grandly initiated the program with two major objectives: improving the efficiency of the Public Sector Enterprises (PSEs) and consolidating the fiscal position. India’s experience with privatization over the last three decades can be analyzed from political and economic angles. This article attempts to present a summary of India’s overall, diverse experience with privatization.
1947 - 1991
Post-independence, the country adopted a mixed economic development model. The Government of India (GOI) not only invested in large Public Sector Enterprises (PSEs) like SAIL and BHEL but also nationalized some private enterprises like Air India and several banks. However, all PSEs were not success stories and since their very inception, many faced multiple issues: inefficient operations, unionism, lack of technological support and innovation, fraud and mismanagement, delay in decision-making, and lack of motivation and capital. The huge accrued losses of these PSEs exerted severe pressure on the fiscal position of the Government and were one of the reasons for the financial reforms of 1991.
Privatization, one of these three main branches, can be broadly defined as a transfer of ownership, management, and control from public sector enterprises to private companies. It is carried out for improving productivity, capital infusion, quick decision-making, and implementation of new technology. Privatization in India occurred in different formats: delegation, divestment, displacement, and disinvestment.
1991 - 2021
In 1991, an auction of minority stakes in companies began and was done in tranches. However, during the period between 1991 and 1999, disinvestment was done with heavy restraint. In 1999, the Government took up the strategic sale of shareholdings in certain identified PSEs like Modern Foods. The NDA Government under Vajpayee established a separate ministry and executed major disinvestments, like of the companies Videsh Sanchar Nigam Limited (VSNL) and Hindustan Zinc Limited (HZL). This timeframe (1999- 2004) is assessed as being a golden period for disinvestment in India.
In 2004, during the UPA I regime, the disinvestment issue became contentious and the Government shifted its policy to a wait-and-watch approach. The disinvestments during this period were negligible. However, during the UPA II regime 2009-2013, they picked up through the sale of minority stakes in select PSEs. This again slowed down from 2014. The strategic sales approach was then reintroduced strongly in 2014. In May 2016, the Department of Investment and Public Asset Management (DIPAM) laid down a framework for the disinvestment and capital restructuring of PSEs. This included, but was not limited to, buyback of shares, issue of bonus shares, and payment of dividends. The recently published DIPAM data shows that NDA Governments divested more than twice that of UPA Governments.
The year-wise privatization receipts are shown in the figure below:
Source: DIPAM data, 2020
The Macroeconomic Perspective
With respect to fiscal consolidation, the proceeds of privatization have been helping the Government only in recent years. The major factors for these increased collections are the GOI’s experience of privatization in the first two decades, increased global liquidity position, and the resultant buoyant equity markets. The GOI’s hesitancy towards privatization and subsequent delay due to various reasons like court cases resulted in bigger losses to the exchequer. A prominent example of this is Air India’s striking loss of Rs. 7,017 crores in the 2020-2021 financial year alone.
India’s privatization has led to growth in revenue, profitability, and net worth across industries. The Economic Survey of India 2019-2020 presented a performance comparison of 11 select PSEs that were privatized vis-à-vis other privatized firms in the same industry. This analysis shows that the privatized PSEs created more value as compared to their counterparts. However, the experiences of individual firms across industries are not the same.
The Microeconomic Perspective
Case studies of two companies that were privatized in consecutive years but performed in drastically different ways later are illustrated here. Videsh Sanchar Nigam Limited (VSNL) in the telecom sector was privatized in 2001. Hindustan Zinc Limited (HZL), in the Metal Non-Ferrous sector, was privatized in 2002. Some of the key performance parameters before and after privatization for both companies are summarized below:
Source: Economic Survey of India 2019-20
The major reasons for the significant difference in the performance of these two companies are the nature of their business, domestic competition, and technological advancements.
VSNL, though a monopoly, was just an intermediary that charged international calls made to and from India. HZL was a monopoly in metal mining. Technological advancements and competition led to a steep fall in international call tariffs resulting in a huge drop in revenue and profitability for VSNL. The technological investments made by HZL led to an increase in efficiency and a reduction in mining costs. International demand for metals led by Chinese growth boosted revenue and profits for them. Both the GOI and the investors knew the potential of the respective companies and disinvestment was handled accordingly.
The government identified VSNL as a ‘cash cow’ and sold the minority shares only after stripping the cash surplus and real estate assets of VSNL. It garnered more than Rs. 4,000 crores from the disinvestment sale of VSNL including Rs. 1,439 crores on the sale of minority stake, 770 acres of real estate assets, and Rs. 2,250 crores on cash surplus. The GOI still holds a 26.12% stake which may fetch another Rs. 9,700 crores, if divested.
Though the original objectives of disinvestment were mostly met with these two companies, the external factors of industry developments and technological changes impacted both companies in opposite ways and hence, the varied effect on revenue and profits. This dissimilarity has been the case with other companies too. It is safe to infer that wherever external factors were favourable, disinvestment benefited the companies.
Thus, India’s privatization experience has been dynamic. Different governments have handled it in varied ways. The data portrays the intent of respective Governments as well as the equity market performance during specific periods. Notably, privatization has seen a significant flip in the last ten years, providing the Government with much-required funds. The exchequer could have benefited more had the GOI followed a more consistent and proactive privatization policy over the years. However, overall, it is reasonable to conclude that disinvestment benefited the economy.
Air India going back to the Tatas in a full circle is ample proof that the government has not lost sight of the original goals of privatization.
(Written by Madhumitha GI and Edited by Siya Kohli)