Prime Minister Narendra Modi’s statement that “the government has no business to remain in business” is the clearest articulation of the reason why India must privatize the hundreds of public-sector enterprises that its Union and state governments run. In doing so, he departs from earlier prime ministers, who preferred incremental dilution of government shareholding, or a cautious one-by-one approach in the sale of public enterprises. The invention of the term ‘disinvestment’, which for two decades has been used to describe the privatization of public sector enterprises in India, showed both a lack of clarity of purpose on the part of previous governments and also their need to apologetically cloak the policy against criticism from ideologues across the political spectrum. It is to Modi’s credit that he has decided to use his political capital to declare that privatization of public sector enterprises is in the national interest and thus ought to be carried out whole-heartedly. This is a welcome break from the past.
To realize the ambition of raising over ₹2.5 trillion from the monetization and sale of state-owned businesses and assets, the Modi government will have to get two crucial things right.
The first is well known: Process. After Niti Aayog recommends what to do with each of the 300-odd public enterprises, it will be examined by a committee of secretaries, then by a committee of ministers, before the Department of Investment and Public Asset Management (DIPAM) puts it to the Cabinet Committee on Economic Affairs (CCEA) for ‘in-principle’ approval. Instead of this long route, either Niti Aayog or DIPAM should directly take it to the CCEA.
The Union government currently does not have an administrative setup and sufficient talent with the professional skills needed to carry out what is at its core a corporate mergers and acquisitions role. What is more, good civil servants will hesitate from taking up the job for fear of a career- or retirement-ruining scandal. Outsourcing the job to private investment banks could bring greater efficiency to the process if done right, but opens up a host of conflict-of-interest issues that would be difficult to manage in the Indian context. The ideal setup is a special purpose department that has political sponsorship, administrative clout, professional talent, incentives for transparency, rewards for performance, and insulation from scandal. So it will have to be a new hybrid species of the genus Governmenta, incorporating many genes, functions and adaptations from the genus Privata. For if we continue with the current administrative machinery and processes, the gap between the country’s disinvestment targets and actual proceeds will yawn even more widely.
The second issue is perhaps more important but gets a lot less attention: Equity. Not equity as in shares, but equity as in fairness. The Prime Minister mentioned stakeholder mapping in the context of transparency and competition in implementation. For privatization to be successful, widely accepted and in the public interest, stakeholder mapping should be vastly expanded to cover all sections of society that will be affected by the reforms.
The government has done well to announce that the proceeds from the sale of public-sector enterprises will be routed “to public welfare schemes in areas like water and sanitation, education and healthcare.” Finance minister Nirmala Sitharaman noted that the money is “not being raised to fill acertain hole in the Consolidated Fund of India. The money being raised from disinvestment will go towards infrastructure.” The promise that the sale of public assets will be used for long-term investments in human and physical infrastructure addresses the baseline equity issue. It will be a good idea to put legislative safeguards on this promise, to prevent governments from violating the compact in the future. Let’s recall that the National Investment Fund (NIF), set up in 2005 with similar intent, saw a withdrawal in 2009 “in view of the difficult economic situation caused by the global slowdown of 2008-09 and a severe drought in 2009-10″.
Next, there are misgivings that privatization will lead to job losses and that candidates entitled to job reservations will be worse off. The former can partly be addressed as part of the privatization agreement. The latter requires political engagement and policy solutions. One way is for the government to upgrade its investment in promoting Dalit entrepreneurship in particular. Equity considerations thus demand that public policy creates better upfront pathways for people to attain a higher socio-economic status than they stand to lose once public sector enterprises are privatized.
Many public sector businesses were created by governments at a time when India was poorer, incomes were smaller, the tax base narrower and tax rates higher. They were financed using large parts of our parents’ and grandparents’ incomes. Is it not fair that the original investors should benefit from the sale of assets that the government created with their money? There is an argument for putting part of the proceeds in the retirement accounts and pensions of our oldest taxpayers, as a way to compensate them for the sacrifices they made to finance the socialist state. Their voice is not politically strong, their demands not strident, but recognizing their contribution is the right thing to do.