Anticipating the Unintended #82: What Does it Mean to be Free?

This newsletter is really a weekly public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

PS: If you enjoy listening instead of reading, we have this edition available as an audio narration courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

India Policy Watch: Disinvestment — Aakhir Kyun?

Insights on burning policy issues in India
— Pranay Kotasthane

On October 30th came the news that the government has modified bidding parameters to make the Air India disinvestment lucrative for buyers. Essentially, the government first made the sale difficult by inserting way too many conditions. Unsurprisingly, it found no buyers. Then hit COVID-19 and now the government is so desperate to raise resources that it is willing to finally remove the self-placed hurdles.

This got me thinking: what are the different narratives regarding the purpose of disinvestment? What stories do they tell and what policy actions do they imply?

I could think of three such narratives.

Narrative #1: Governments Should Sell Businesses it Can’t Run Well

The underlying story is simple: some PSUs incur consistent losses. Losses indicate that the government cannot run them well. Hence, these PSUs must be sold. The focus in this narrative is on numbers such as falling market caps to decide on companies to be sold. For example, the argument that Air India Makes a Loss of Over ₹ 20 Crore Per Day has repeatedly (and successfully) been used to rationalise Air India’s sale. The policy position implied (and unsaid) in this narrative is that it is okay for governments to run businesses as long as they are profitable. What’s also implicitly implied is that the sale of a government-run company first requires running it down into an incorrigible loss-making entity.

Narrative #2: Governments Can Raise Revenue by Selling Some Assets

The underlying story is one of urgency. Governments need money. One way they can make money is by selling the assets they own. Hence, divestment. Governments find this narrative quite useful. Every budget, the government sets a disinvestment target for itself with the aim of reducing its fiscal deficit.

The focus on a revenue target from disinvestment can lead to perverse incentives: when it can’t find genuine buyers, government coaxes government-run companies like LIC to purchase government-run companies on sale. This ‘sale’ shows up as revenue in the government accounts even though the government’s stake has not reduced in reality.

Narrative #3: Governments Should Sell What’s not-Strategic

In some sectors, markets might underproduce even though that sector is non-substitutable and vitally important to the nation-state. In such sectors, the government should continue to run businesses, regardless of the revenue a sale can generate or the losses made in running that business. Examples could be oil, rare-earth exploration or extremely critical defence equipment. Outside this reduced set, the government should sell all businesses. The focus in this narrative is on the reduction of overall government equity in non-strategic sectors, and not as much on the revenues raised by the sale of government assets.

A Battle of Narratives

Narratives 1 and 2 have enjoyed dominance in Indian policy discourse at various times. When the economy was chugging along, narrative #1 dominated: many PSUs were to be first put in a state of coma to enable an eventual sale in the distant future. Now, with almost a decade of poor economic growth, the revenue maximisation narrative has become more salient.

The third narrative is still on a weak footing. What’s strategic and what’s not? What’s the marginal cost of public funds used for running a PSU? These questions rarely feature prominently in disinvestment discussions.

Read the full edition here.

Disclaimer: Views expressed on Anticipating the Unintended are those of the authors’ and do not represent Takshashila Institution’s recommendations.