Indian Government on Privatisation Spree: Too Little, Too Late?

Posted by: on Dec 2, 2019 | No Comments

psu privatizations

The global economic slowdown has reached Indian shores. Almost every major financial institution has slashed the country’s growth forecast. In October, the IMF revised its GDP growth forecast for fiscal 2019 from 7% to 6.1%. If that wasn’t bad enough, Moody’s cut its estimate to 5.6%.

The slowdown in India’s economic growth has gone on for longer than expected and the government is worried. The IL&FS has a mammoth debt burden of ₹94,000 crore. And, the government fiscal deficit from January to October stood at ₹7.2 trillion.

As a way to overcome this crisis, the government is turning towards selling its stake in various PSUs. The government hopes to privatise some big public names like Shipping Corporation of India, BPCL and Air India. It is working on a proposal to privatise about 20-25 airports operated by the Airports Authority of India (AAI). This mega reform agenda is hoped to generate about ₹78,400 crore, according to current market prices, helping the government increase revenue generation to fund projects.

While this is a positive move, it is something that the government should have done years ago.

The Underperformance of Public Sector

Let’s face it. What is the government’s stake in PSUs? It is nothing but money from taxpayers, who have no say in the running of these organizations. The motive of any executive team should be to maximize benefits or returns for the investors (in this case the taxpayers). But, in government run enterprises, that is not the case. The BSE CPSE Index (designed to measure the performance of Central Public Sector Enterprises) has underperformed the benchmark BSE Sensex by 269% since 2000. So, these government enterprises have clearly not provided any value for Indian taxpayers.

Why Private Companies Succeed Where PSUs Fail

Public sector companies are inherently incompetent. This is because they do not have a profit motive. Instead, misplaced social welfare ideologies keep them overstaffed and inefficient. The executive team does not have any incentive to work towards the progress and growth of these enterprises. At private companies, managers and other employees have skin in the game. Their jobs, promotion and incomes depend on the company’s performance.

Private companies select people on merit – on the basis of their skills and experience. Public enterprises have other motives and may select people on the basis of caste or race. Also, irrespective of performance, PSUs cannot get rid of surplus or unproductive workers.

Given their profit motive, private companies will always work toward optimum utilization of resources and strive towards zero wastage. Any wastage of resources immediately impacts their bottom line. In the absence of the profit motive, government enterprises remain inefficient.

The social ideologies make PSUs unresponsive to what the market really demands or needs. On the other hand, private companies will produce what the market needs and maintain high quality to remain competitive.

Political interference in public companies prevents them from making the best decisions. Private firms don’t need to worry about political popularity. Given their profit motive, they focus on developing products that are demanded by consumers at the lowest possible cost.

Sometimes public companies have very short-term goals, depending on upcoming elections. Private company can focus on long-term goals and steer its efforts in the right direction.

Privatisation is the Answer

Apart from better utilization of scare resources, privatization leads to more competition in the market. This means consumers have more choice. Plus, competition will push all companies to strive harder to increase efficiency and productivity, while producing better-quality goods and services. They will also spend on R&D and innovate new and improved methods of production and more advanced commodities.

Without privatization, taxpayers suffer, consumers suffer, and the overall economy suffers. Penalize businesses and there will be less jobs, lower tax revenues and slowdown in economic growth.

Disinvestment is the right move for the government. It’s something that India should have done decades back. Also, policymaking needs to be for the long term. Not just to bail out the government during troubled times. Although the disinvestment target for fiscal 2020 has been raised to ₹1,05,000 crores, this is still a small part of the overall PSUs. It’s time for the government to give up total management control and support the private sector with policies that favour businesses.

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