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India’s economy in the years after independence was organised in such a way that the State would be at the centre of things. The government had a hand in producing just about anything, from vehicles to soft drinks and from hotels to cement. The problem is that it still owns a number of these companies, with many being loss-making enterprises or simply inoperational. The Modi government seems to be the first to be properly committed to privatisation since the gradual disinvestment policy of the 90s first came into effect. Yet it is having a hard time finding buyers.

Privatisation generally tends to occur due to serious economic issues faced by a government. India was facing a balance of payments crisis in the early 90s that forced the implementation of a number of reforms that fundamentally changed the economy of this country. Disinvestment was one such policy. The government at the time began by only offering between 5% and 20% stake in the companies that it chose to disinvest in. It faced opposition not only in parliament but also from rent-seeking bureaucrats. As a result, India had to go about its privatization in a very gradual manner.

Gradual disinvestment to complete privatization

Over the next decade or so, the government went from offering 20% stake to 49% (maintaining ownership), and from 49% to 74% (giving up ownership but still having control), and from 74% to full and complete privatization. It also initially only disinvested in those sectors which it deemed to be non-strategic. At first, this list was quite long, but over the years the definition of strategic contracted to include only defence, railroads, and nuclear power. Even amongst these, the government has begun to let the private sector in to some extent with respect to the former two.

The gradual privatisation that has occurred seems to be the norm around the world. For there to be quick and immediate privatization, two main conditions generally have to be met – serious economic troubles and a powerful executive. India had neither during the 90s. We were facing a crisis, but we weren’t actually in one yet. The government at the time certainly did not enjoy the kind of mandate today’s BJP government does either. In fact, even in situations where both a powerful executive and serious economic issues exist, many governments have opted against rapid privatization.

The reasons could be many. There will be a certain amount of resistance to giving up state control over assets. It is also a difficult platform to campaign on, as the public may not necessarily be in favour of it. For instance, in India during the 90s, many of the caste-based political parties were strongly against privatisation due to fears that reservation quotas would be affected. While gradual privatisation certainly has its benefits, such as time to implement policy reforms and regulations that promote competition in the market, it also has its drawbacks. 

Since India has taken such a long time to sell-off many of its state owned enterprises (UPA-I and UPA-II basically brought the process to a standstill), these companies have essentially devolved to a point of undesirability. Scooters India has not produced a single scooter since 1997 and could not find a buyer for more than two decades until it finally shut down in January 2021. These companies were already making losses back in the 90s, and it’s not like the management over the years has some how gotten better. The government could have raised more money back then if it was more decisive over the sale of certain enterprises. Today, the Finance Minister has announced that it will simply shut down those companies for which it cannot find a buyer.

Privatisation on its own is not enough

During the 80s and 90s many were uncomfortable with the concept of privatization. Studies since then have shown however that it is difficult to say whether private ownership on its own is good or bad. It mainly has to do with how the economics of a certain country works. If there is strong growth and good policy in place then this will certainly help the case of any business. If there are weak institutions riddled with corruption then it will likely lead to negative outcomes. In India, private involvement in sectors like insurance and telecom were not allowed by law until the late 90s/early 2000s, and since these laws have been changed we have seen rapid growth in both these industries. Maruti was sold to Suzuki in 2007 and has since seen its share price grow seven-fold. Hindustan Zinc and Jessop & Co. are some of the other examples of privatized firms that turned into profit making enterprises.

The governments motivation to sell-off firms like Air India, Bharat Petroleum, and so on has more to do with the fact that it needs to raise some money owing to a high fiscal deficit, and a common sense way of doing that is by privatising firms that should have been privatised a long time ago. While revenue generation is a very direct positive outcome of privatisation, it is perhaps not the most important one in the long run. Many of these firms are sitting on assets that have been unproductive for a long time. Privatization will lead to the better use of resources such as land, labour, and capital which will in the long run increase the productivity gains in the economy.

For feedback, comments and views write to pavan@bclindia.in

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