Divestment this time will be for good

Modi 2.0 intends to reshape the Indian economy as well as spending habits of people. Its concept of a ‘nanny state’ is different. The government will continue to hold the hand of the vulnerable, but through direct tax transfers rather than sustaining a public sector edifice to meet its societal and economic development targets

Sandeep Dikshit in New Delhi

THE tide against public sector undertakings began turning from the first year of reforms with Manmohan Singh as Finance Minister. But the current drive to disinvest is one component of the Narendra Modi government’s overall economic philosophy, which is being put into real earnest.

Few would remember that in the first year of disinvestment (1991-92), the government got more than what it bargained for. As against the target of Rs2,500 crore, which might seem modest now, the government sold off PSU shares worth Rs3,038 crore. Thereafter the process faltered, and in the five years of Manmohan Singh’s stewardship of the finance ministry, nearly Rs10,000 crore of PSU shares were sold as against the target of Rs13,500 crore.

But the intention of the government of that time was never to outright sell all its public sector jewels. Some PSUs, which the government had calculated were chronically sick, were to be shuttered or sold off. But the giants of oil, insurance, stocks and shares, telecom, railways and mining that had grown largely because of near-monopolistic conditions were coaxed to remain profitable. Governments of the day, too, were never shy of wringing more than the PSUs could afford by way of dividend in order to cheaply fund part of their expenditure. The Modi government has made an extra dividend from all the Navratnas a matter of habit.

Paradigm shift

This government, however, is unencumbered by the ideological baggage of PSUs playing a critical role in nation-building. It has set free market operating conditions as its goal in the second term. By the time the Modi government is up for the 2024 election, income taxes would be reduced to just three to four slabs with the highest rate probably at 25 per cent with no exemptions. Filing a personal income tax would perhaps become one of the easiest paperworks of its time. The intention is to coax income-tax payers into spending all their earnings as in the consumers’ paradise, the USA, instead of being conditioned to save via exemptions.

It is not as if the Modi government is not aware of the pitfalls. The domestic savings rate was down to 17 per cent in 2018 from 23 per cent six years back, dragging down the overall savings rate as well. The high risk option that the government is going to take by turning its back on domestic savings is borrowing from a variety of commercial sources: Gulf sovereign funds, European pension trusts, global finance companies and multilateral banks. The sale of PSUs will not just be additional income for the government. The PSUs are being presented as an attractive option to enter India’s many sectors.

The money will finance ports, rail and road infrastructure projects — all with healthy private sector participation — to improve India’s goods handling, transport and storage benchmarks to international standards. Coupled with last year’s tax breaks for corporates, the reduction of approval processes, a population encouraged to splurge and easier labour and land laws, the Modi government would propel India as the world’s foremost investment and manufacturing destination.

The Modi government, despite its reservations about the capability of its predecessor governments, ought to be thankful to them for clearing the field considerably. More than 100 PSUs have been closed down and an equal number are now listed on the stock markets. Few would remember that once there were two PSUs that made bicycles and one that dabbled in two-wheelers. One PSU, also shut down, made weighbridges. Many of them have disappeared from memory.

Staggering numbers

The range of PSUs that have come under the Modi government’s hammer is staggering. The holy grail of public sector oil giants is around only because of their brand trustiness to undertake giant projects, such as the $44 billion refinery with Aramco. Otherwise, most would have met the fate of the BPCL, which is on the block and its other PSU oil siblings will follow once their utility in attracting global oil majors is exhausted.

Air India is just two months away from being assessed by suitors. Telecom has entered into a downturn or BSNL would have joined Air India. The ground has already been prepared with BSNL absorbing MTNL, which was once the lifeline of Delhi and Mumbai along with the DTC and BEST. As a first step to a sell-off, the organisational chaos has been sorted out by merging public sector banks. General Insurance Corporation from the financial sector, still dominated by PSU behemoths, too, is now listed on the stock market and more muscular peer LIC will soon follow. In defence, Hindustan Aeronautics Limited (HAL) has offloaded equity to improve corporate governance and accountability.

It is well known in the corridors of North Block that the Modi government does not have an iota of the fondness for the public sector felt by previous dispensations. It has never subscribed to the view that the perpetually bleeding PSUs or the monopolistic giants must not be touched because they undertake social and political obligations such as employment, core sector development and balanced growth. There is hardly any opposition because previous governments too have strengthened the argument for weakening the public sector.

The disinvestment by Modi 2.0 is shaping out to be far more ambitious in its sweep. The planned disinvestment of Rs2 lakh crore to ensure 6 per cent GDP growth may not be met. Both Air India and LIC are complex arrangements, their books weighed down by a legacy of helping governments meet their social and public service objectives.

When the government repeatedly emphasised its “solid majority” in policy documents and speeches such as the Economic Survey and the Budget, it was hinting at a longer time-frame to implement its disinvestment plans. Given the magnitude of the task, the Modi government began the process of dismantling six years back with the demolition of the separate fiefdom maintained by the railways; one of its symbols was a separate annual budget. The Railway Board has already been slimmed down and its cadres merged as precursor to its corporatisation. The process is now at the midway stage with the private sector beginning to run trains. Once the dedicated freight corridors open, private sector goods trains will be thundering down to the east and west coasts.

Modi 2.0 intends to reshape the Indian economy as well as the spending habits of the people by the end of its term. Its concept of a ‘nanny state’ is different. Governments will continue to hold the hand of the vulnerable, but through direct tax transfers rather than sustaining a public sector edifice to meet its societal and economic development targets. If the disinvestment programme remains on course, the country is set to lose many brands and signs that had defined its emergence as an independent nation.