As disinvestment returns to the agenda, an economic history of a contested issue

The government, through both Prime Minister Narendra Modi’s announcements and the Union Budget 2021-22, has laid out an ambitious agenda for privatisation of public sector undertakings (PSUs), while restricting the government to only strategic sectors.

PM Modi, in a speech in Parliament, outlined the rationale of the move by suggesting that the country needed to have faith in the private sector and that it was not tenable to have Indian Administrative Service officers (“babus”) run enterprises of all kinds. During the run-up to the 2014 election, PM Modi repeatedly emphasised that the government has no business to be in business. And while the pace of disinvestment and privatisation has been slow, there seems to be a clear policy push based on this worldview.

The pandemic has also provided the government a reason, and an opportunity, to push ahead — the government needs additional resources, which it hopes this process can generate, and privatisation also fits in with a larger attempt to push through second-generation structural reforms across areas, from agriculture to labour.

But the privatisation announcement has also led to a backlash — with Opposition parties and trade unions, in particular, raising issues of crony capitalism, undermining of worker rights, and employment prospects.

This is not a new debate. HT goes back to the evolution of the debate on privatisation.

The shift in narrative

The balance of payment (BoP) crisis in early 1990s changed the official narrative about PSUs — from “temples of modern India” to “the government has no business to be in business”. In order to bring the economy back on track, the PV Narasimha Rao government (June 21, 1991- May 16, 1996) launched economic reforms by ending the era of license-quota raj and encouraging privatisation.

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The government, which mopped up a sum of ₹2,500 crore in 1991-92 through disinvestment of equity holdings in PSUs, made it clear that it would pursue the process of gradual disinvestment of government’s stake from public sector enterprises. “The disinvestment in public sector equity undertaken in the current year [1991-92] has been successfully completed. There is scope for continuing this process in 1992-93 with a view to raising non-inflationary resources for development,” the then finance minister Manmohan Singh said in his budget speech on February 29, 1992.

While the immediate aim of the partial disinvestment of government’s stake in PSUs to institutional investors was to raise non-inflationary resources, the long-term purpose of disinvestment was to bring in efficiency, accountability and professionalism in these state-run enterprises.

The industrial policy announced on July 24, 1991 had already paved the way for privatisation: “Government will endeavour to abolish the monopoly of any sector or any individual enterprise in any field of manufacture, except on strategic or military considerations and open all manufacturing activity to competition.” The message of the industrial policy to PSUs was clear — perform or perish.

Finance minister Singh walked the talk and the disinvestment target in 1992-93 was increased by ₹1,000 crore in the revised estimate (RE) to ₹3,500 crore. Equity varying between 5% and 20% in selected PSUs was disinvested in two phases -- December 1991 and February 1992. The government had selected a mix of them — eight PSUs were very good, 12 of them were good and 11 were not so good, Singh told the Parliament on February 27, 1993. The process continued and the target increased to ₹7,000 crore for 1995-96.

In the three financial years ending March 31, 1995, the government divested its equity stake ranging between 0.26% (in Indian Railways Construction Co. Ltd.) and 31.46% (in Bharat Heavy Electricals Ltd.) in 39 PSUs to mop up over ₹9,793 crore. By then the disinvestment was an integral part of economic policies of successive governments.

The Disinvestment Commission

After assuming the charge in June 1996, the HD Deve Gowda government set up a Disinvestment Commission under GV Ramakrishna and 40 PSUs were referred to it for advice, which submitted its first report on February 21, 1997.

The then finance minister, P Chidambaram said in his budget speech on February 28, 1997 said: “The Commission has submitted its first report. It has made specific recommendations in respect of three companies. We intend to proceed with the disinvestment in these companies along the lines suggested by the Commission.”

The disinvestment policy saw a policy shift along with the Commission’s observation: “The essence of a long-term disinvestment strategy should be not only to enhance budgetary receipts, but also minimise budgetary support towards unprofitable units while ensuring their long-term viability and sustainable levels of employment in them.” The commission submitted over a dozen reports involving about five dozens PSUs.

Reserve Bank of India (RBI) governor C Rangarajan summarised the purpose of disinvestment at the Conference on Disinvestment: Strategies & Issues organised by the Commission on February 5, 1997: “Eventually, public sector enterprises are now spread over from coal, steel and oil at one end to hotel and breadmaking at another. The time has come to critically assess the sectors in which public enterprises must function.”

He added that disinvestments need not and should not be regarded as a case of selling family silver. “The original investments were made by the government out of its receipts. If some part of this investment has to be sold and realised for the purpose of expanding the activities of the state in certain other areas which are considered to be urgent now, it should not be regarded as something undesirable. Disinvestments even where it does not lead to transfer of ownership can have a salutary effect on management.”

The Commission was in favour of exiting from non-core ventures. Releasing the IX report of the Commission, Ramakrishna said about State Trading Corporation of India (STC) that it no longer served the purpose for which it was formed in 1956. Classifying STC as non-core sector, the Commission said that no public purpose would be served by STC being under the government ownership and control.

From Department to Ministry

The Atal Bihari Vajpayee government classified PSUs into two categories — strategic and non-strategic — and decided to gradually to offload its stake in non-strategic firms.

Presenting the first budget of the Vajpayee government on June 1, 1998, the then finance minister Yashwant Sinha said: “Government have also decided that in the generality of cases, the government shareholding in public sector enterprises will be brought down to 26%. In cases of public sector enterprises involving strategic considerations, government will continue to retain majority holding.”

To have a focused approach, a Department of Disinvestment was set up on December 10, 1999, which was later renamed as the Ministry of Disinvestment form September 6, 2001. From May 27, 2004, it was again called the Department of Disinvestment and put under the finance ministry.

The Vajpayee government pursued the disinvestment strategy spelt out by Sinha in the 1998-99 Budget while considering recommendations of the Disinvestment Commission. On May 5, 2000, the then minister of state for disinvestment Arun Jaitley said: “Government has decided to disinvest its shareholding in non-strategic public sector undertakings only, as per its declared policy on disinvestment. The percentage of shares to be disinvested and the modalities of sale are decided, keeping in view various factors including the market conditions, financial performance of the company and the views of the concern ministries/departments at appropriate time.”

Finance minister Sinha kept a disinvestment target of ₹10,000 crore in 1999-2000. “This will help the government to fund the requirements of social and infrastructure sectors. Equally important, it will lead to improvements in productivity and profitability of these enterprises and also to the further development of domestic capital markets,” he said on February 27, 1999.

The next budget (2000-01), for the first time, used the word privatisation along with disinvestment. “Government have recently established a new Department for Disinvestment to establish a systematic policy approach to disinvestment and privatisation and to give a fresh impetus to this programme, which will emphasise increasingly on strategic sales of identified PSUs,” Sinha said in his Budget speech on February 29, 2000.

The privatisation policy got bolder in the next financial year 2001-02. “The procedure for privatisation of public sector enterprises has now been considerably streamlined... To maximise returns to government, our approach has shifted from the disinvestment of small lots of shares to strategic sales of blocks of shares to strategic investors,” Sinha said while delivering his budget speech on February 28, 2001. By then, the government approved privatisation of 27 companies. These companies include among others VSNL, Air India, and Maruti Udyog Ltd.

By February 2002, the government completed strategic sales in seven public sector companies and some hotel properties of the Hotel Corporation of India (HCI) and the India Tourism Development Corporation (ITDC).

Between 2001 and 2004, India saw disinvestments of government’s stake in several companies, including strategic sale of Bharat Aluminium Co Ltd, CMC Ltd, Hindustan Zinc Ltd, three properties of HCI, 18 properties of ITDC, Indian Petrochemicals Corp Ltd (IPCL) and Paradeep Phosphates Ltd. But total collection was less than ₹21,200 crore against an aggregate target of ₹38,500 crore.

While presenting the interim budget for 2004-2005 on February 3, 2004, the then finance minister Jaswant Singh informed the house that the government’s disinvestment receipts had surpassed the target of ₹13,200 crore by about ₹1,300 crore. The government was, however, silent on its disinvestment programme for future as it was seeking a fresh mandate.

Reconstruction of PSEs

The Manmohan Singh-led United Progressive Alliance (UPA), which had significant presence of the Left parties, assumed power in mid-2004. The then finance minister P Chidambaram had to strike a balance between disinvestment of PSUs and re-investment in public sector enterprises (PSEs) as enshrined in the National Common Minimum Programme (NCMP). Thus came the era of disinvestment with human face.

“Disinvestment and privatisation are useful economic tools. We will selectively employ these tools, consistent with the declared policy. As a first step, I propose to establish a Board for Reconstruction of Public Sector Enterprises (BRPSE). The Board will advise the Government on the measures to be taken to restructure PSEs, including cases where disinvestment or closure or sale is justified,” he said in the first budget of the Manmohan Singh government on July 8, 2004.

He announced selling a minority stake (5%) in navaratna company NTPC Ltd to raise about ₹4,000 crore. “As long as Government retains control over the PSE, and its public sector character is not affected, Government may dilute its equity and raise resources to meet the social needs of the people.”

In November 2007, the government constituted the National Investment Fund (NIF) into which the proceeds from disinvestment of government equity in central public sector enterprises (CPSEs) were deposited. It was said that three-quarters of annual income of the fund would be used to finance select social sector schemes that promote education, health and employment. However, the big picture was that disinvestment took a backseat in the first term of the Manmohan Singh government due to overwhelming presence of the Left parties.

Public sector banks in the negative list

The word disinvestment came back again in the interim budget speech of then finance minister Pranab Mukherjee on February 16, 2009. He informed the House that a corpus of ₹1,815 crore could be collected in the NIF as on December 31, 2008.

The second-term of Manmohan Singh government introduced the idea of people’s ownership of PSUs. “The Public Sector Undertakings (PSUs) are the wealth of the nation, and part of this wealth should rest in the hands of the people. While retaining at least 51 per cent Government equity in our enterprises, I propose to encourage people’s participation in our disinvestment programme,” Mukherjee said while presenting full budget for 2009-10 on July 6, 2009.

The UPA-2 made it clear that key PSUs were off the sale off list. “Here, I must state clearly that public sector enterprises such as banks and insurance companies will remain in the public sector and will be given all support, including capital infusion, to grow and remain competitive,” Mukherjee said. Based on the policy, he raised the investment target for 2011-12 to ₹40,000 crore, but could not manage even half of it, putting pressure on the fiscal deficit.

“The combined effect of lower tax and disinvestment receipts and higher expenditure, mainly on account of subsidies, has pushed the fiscal deficit to 5.9 per cent of GDP in the Revised Estimates for 2011-12,” Mukherjee said in his budget speech on March 16, 2012. The government, however, reaffirmed that it was committed to retain at least 51% ownership and management control in CPSEs.

DIPAM and sale of assets

The Narendra Modi government, which came to power in mid-2014 with a massive mandate, took a comprehensive policy for disinvestment by rechristening the administrative arm as the Department of Investment and Public Asset Management (DIPAM).

In his budget speech on February 29, 2016, finance minister Arun Jaitley said: “We will adopt a comprehensive approach for efficient management of government investment in CPSEs by addressing issues such as capital restructuring, dividend, bonus shares, etc. The Department of Disinvestment is being renamed as the ‘Department of Investment and Public Asset Management (DIPAM)’.” The department formally started functioning from April 14 that year.

Jaitley also laid the basic contours of the government’s disinvestment policy. It was no longer limited to strategic sale or dilution of government’s minority stake in the company. It also included monetisation of assets owned by CPSEs. “We have to leverage the assets of CPSEs for generation of resources for investment in new projects. We will encourage CPSEs to divest individual assets like land, manufacturing units, etc. to release their asset value for making investment in new projects,” Jaitley said on Feb 29, 2016.

There was another structural change, the NITI Aayog took place of erstwhile Disinvestment Commission in identify the CPSEs for strategic sale. Besides, the disinvestment targets became increasingly ambitious. The budget target for 2020-21 was ₹2.10 lakh crore, but it was revised to ₹32,000 crore mainly due adverse market condition because of Covid-19 pandemic. Although, the target has been brought down for the next financial year, the budget estimate for 2021-22 is also ambitious at ₹1.75 lakh crore.

Finance minister Nirmala Sitharaman, on February 1, 2021, announced an elaborate roadmap for disinvestment in the coming fiscal year. “In spite of Covid-19, we have kept working towards strategic disinvestment. A number of transactions namely BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam limited among others would be completed in 2021-22,” she said in her budget speech.

She said besides IDBI Bank the government would take up the privatisation of two public sector banks and one general insurance company in 2021-22. Apart from that, the government plans to bring the initial public offering (IPO) of state-run insurance behemoth Life Insurance Corporation of India (LIC).

Sitharaman announced a clear roadmap for disinvestment of all non-strategic and strategic firms. “We have kept four areas that are strategic where bare minimum CPSEs will be maintained and rest privatised. In the remaining sectors all CPSEs will be privatised,” she said.