S. Sethuraman*

    Disinvestment of a percentage of shares owned by the Government in public undertakings emerged as a policy option in the wake of economic liberalisation and structural reforms launched in 1991. Initially, it was not conceived as privatisation of existing undertakings but as limited sales of equity with the objective of raising some resources to reduce budgetary gaps and providing market discipline to the performance of public enterprises in general.

    A comprehensive policy on public sector was set out in the Industrial Policy Statement of July 24, 1991 - the year when the country had to tide over an unprecedented economic crisis reflected in its internal and external finances. The steps adumbrated included a review of public sector investments to focus on strategic and essential infrastructure enterprises and new procedures to tackle chronically sick and loss-making units.

    The ambit of disinvestment was gradually widened in the latter half of 1990s by the subsequent coalition governments to make a clear distinction between strategic and non-strategic enterprises so as to bring down Government share holding to 26 per cent in non-core undertakings through gradual disinvestment or strategic sale while retaining majority holding (51 per cent) in strategic undertakings.

    A Disinvestment Commission was set up in 1996 to carefully examine withdrawal of public sector from non-core, non-strategic areas with assurance to workers of job security or of opportunities for retraining and re-employment. The Commission, in its three-year term, gave its recommendations on 58 enterprises referred to it and proposed, instead of public offerings as in the past, strategic trade sales involving change in ownership/ management for 29 and 8 undertakings respectively. In other cases, there was to be offer of shares or closure and deferment of disinvestment.

    By strategic sale, privatisation was envisaged though confined to non-strategic areas. The classification was redefined by Government in 1999 to include only defence-related, atomic energy undertakings and railway transport among strategic enterprises and treat all other undertakings as non-strategic. This major decision of the Government also stipulated that reduction of its stake going down to less than 51 per cent or to 26 per cent would not be automatic but would be governed by consideration as to whether continued presence of the public sector in an enterprise was required to prevent concentration of power in private hands. A Department of Disinvestment was established early in 2000 to give an impetus to the programme of disinvestment and privatisation.

    In a policy statement while presenting the Union Budget for 2000-01 last year, the Finance Minister, Shri Yashwant Sinha, said the main elements were restructuring and reviving potentially viable PSUs; Closing down PSUs which cannot be revived ; bringing down Government equity in all non-strategic PSUs to 26 per cent or lower, if necessary; and fully protecting the interests of workers. Over the last three years, the Finance Minister had listed in his budget speeches some major public undertakings for sizeable disinvestment or restructuring in the oil, telecom and aviation sectors. These are yet to take off. The utilisation of receipts from disinvestment/privatisation was to be for meeting expenditure in social sectors, restructuring of PSUs or retiring public debt.

Balance-Sheet of the Decade (1991-2000)

    Disinvestment was conceived in the context not only of the acute financial stringency of the Government of India, which had to continually provide budgetary support to loss-making units, but also of the failure of public sector as a whole to provide a reasonable rate of return on the total investments in 240 undertakings.

    At the end of March 2000, the investments totalled Rs. 2,52,554 crore. Of this the Central Government’s share, through equity and loans was Rs. 1,11,058 crore. The profit-making enterprises averaged between 125 to 130 over the years while over 100 undertakings were loss-making, chronic in a large number of cases.

    The progress of disinvestment in India has been very slow, considering the strides in privatisation that developing countries in the East and South East Asia, Latin America and Central and Eastern Europe have made by transfer of productive assets to private investors, especially in infrastructure (power, telecommunications, oil and minerals) and financial services.

    According to the World Bank (Global Development Finance) 2000, earnings from privatisation in all developing countries totalled 272 billion dollars in the 1990s till 1998. Of this India’s share was seven billion dollars. Except for three years (1991-92, 1994-95 and 1998-99), the budget targets for disinvestment were not met. Between 1991-92 and 1999-2000, the total realisation was Rs. 18,368 crore against the targeted Rs. 44,300 crore.

    The Government had divested a part of Central PSUs ranging from about 2 per cent to 49 per cent in forty undertakings till March 1999. The largest chunk of over 40 per cent of government equity had been disinvested in Hindustan Petroleum Corporation, Videsh Sanchar Nigam, Mahanagar Telephone Nigam, Indian Petrochemicals Corporation and Hindustan Organic Chemicals.

    The Prime Minister’s Economic Advisory Council in a report on Economic Reforms early this year suggested that where PSUs cannot function as commercial organisations, able to compete with other private sector units and with imports, they should be sold to the public or financial institutions or to a strategic private investor. The resources realised from the sale of equity could be more profitably deployed in building essential infrastructure or in retiring public debt, it said.

    The Economic Survey of the Union Government (2000-01) has also emphasised the need to "get the Government out of the business of production and enhance its presence and performance in the provision of public goods" )basic infrastructure, education, health etc). Funds from privatisation would also help to reduce public debt and bring down the debt-GDP ratio while competitive public enterprises would be enabled to function effectively.

    Beginning in the 1950s, with basic industries like steel, the public sector helped build strong economic foundations and a diversified industrial base. In the first four decades of Independence, there was rapid expansion of public sector into almost every area of economic activity and became in time a heterogeneous conglomerate of both basic and consumer goods production units and service enterprises including trading and marketing services. Many of them would have rendered a better account of themselves had they been invested with maximum autonomy, freed from bureaucratic controls, and made accountable. Their net profit to turnover has been pitifully low in spite of the outstanding performance of a select group of undertakings, such as the oil majors.

    Although the Government has over the years de-reserved some of the areas reserved exclusively for the public sector, investments in public enterprises had not declined. There was nearly 150 per cent increase in investments in the 1990s. The Government has also had to bear the losses of several enterprises by providing support to them to sustain themselves. Between 1998 and 2000, financial restructuring support to enterprises like the Steel Authority of India (SAIL) and Hindustan Machine Tools (HMT) and other potentially viable units amounted to more than Rs. 13,000 crore.

    The Budget for 2001-02 has assumed disinvestment receipts at Rs. 12,000 crore although the Government could not realise the target of Rs. 10,000 crore in each of the two earlier years. The Finance Minister, Shri Yashwant Sinha reiterated that Government is determined to go ahead with large-scale privatisation and achieve the target in the new fiscal year Rs.7000 crore of the targeted receipts would be for restructuring assistance to PSUs, safety net to workers and debt reduction while Rs. 5000 crore would be additional budgetary support for the plan provision, mainly in social and infrastructure sectors. Shri Sinha is hopeful that the gamble this time would pay off.

* Senior Freelance Journalist