Divestment: Jaitley should recast public sector policy by taking tips from Finance Commission’s report

Finance minister Arun Jaitley has once again hinted that the government can go in for privatisation of profit–making public sector companies. Speaking at conference in Delhi on Wednesday, he indicated that companies other than loss-making ones could be taken up for strategic sales and the government may even give up management control. If this actually happens, then it is a welcome change in this government’s approach to the public sector. Last year, at a press conference on the government completing 100 days in office, Jaitley had disappointingly said it would follow the previous government’s policy – selling off the loss-making ones if they were beyond redemption and keeping government stake in profit-making ones at a minimum of 51 percent. Last week, the Economic Times had reported that the government plans to wind up the Bureau for Restructuring of Public Sector Enterprises (BRPSE) and replace it with a committee that will take faster decisions on whether or not a sick public sector enterprise should be revived. The United Progressive Alliance government had set up the BRPSE in line with its no-privatisation policy. It was mandated to try and revive public sector enterprises and only those that could not be resuscitated were to be sold off. Did that help? The annual Public Enterprises Survey 2012-13 (the most recent which is available) points out that the number of sick public sector companies came down from 90 in 2004-05 to 66 in March 2012 but in March 2013 the number had climbed back to 79. [caption id=“attachment_2125109” align=“alignleft” width=“380”]  Union Finance Minister Arun Jaitley (left) and Prime Minister Narendra Modi
--PTI image[/caption] It’s not clear, however, whether the government will be working to a plan on the public sector and privatisation or whether it will play eenne-meenee-mina-mo when choosing companies – loss making or profitable ones - for stake sale. It is time for a directional shift in the policy towards the public sector. In its report the Fourteenth Finance Commission suggests that the public sector policy be recast in the light of what it calls `new realities’ and lists 12 of these new realities. Many public sector enterprises, it points out, were set up when the private sector did not have capabilities in many areas; that has changed now and most public sector companies have has largely served the purposes for which they were set up. “The dynamism of the Indian private sector has been globally acknowledged and hence its comparative advantage relative to India’s public sector should be recognised.” Internal reforms and the global integration of the Indian economy have ended public sector monopoly in many areas. Effective and independent regulation has been seen to be a better instrument to deal with market distortions than reliance on the public sector. Different mixes of public and private ownership and management control are now possible. The strategic perspectives that influence public sector entry into a particular area are not cast in stone and keep changing. The Commission suggests prioritising public sector enterprises on the basis of certain principles. The government would have a predominant or majority stake respectively in those categorised as high priority and priority. These will be in areas considered `strategic’, or where the enterprises have “earmarked or assigned natural resources with sovereign or quasi-sovereign functions. They could be enterprises “required to cater to market imperfections” or whose returns on investments are higher than any alternative investment by the government; and public utilities, “where some presence of public enterprises may be desirable as a reference point for getting more reliable information for the regulators”. Some of the companies it has put in this category are the petroleum refineries and marketing companies, power generation companies, coal mining companies, BSNL and Air India. All the others, the Commission has said, can be categorized as low priority or non priority and privatized or sold off. These could be in areas where the public sector monopoly has ended and private players are doing well, in activities where there are no restrictions on imports are permitted, where the public enterprise is either not a public utility or is one subjected to independent regulation, where the enterprise is not a statutory monopoly; and loss making and sick enterprises. This last category can be retained in the public sector if “there are other compelling reasons of broad public interest” to do so, but this has to be “commensurate with fiscal costs”. It is possible to quibble with some of the reasons the Commission puts forward to retaining government control in the public sector. If, as the Commission has argued, market distortions are best handled by independent regulation, why should there be need for enterprises to cater to market imperfections? Going by its own logic, why should Air India be categorised as a priority enterprise? Does the government really need to manage and control enterprises where returns on investments are higher than alternative investments? Even so, this is a more cogent and clear policy framework on the public sector than the ad-hocism that has prevailed ever since the government started disinvesting in public sector enterprises in the early 1990s. Even in this government, there are mixed signals on the public sector. On the one hand, Prime Minister Narendra Modi talks about the government not being in business. On the other, the heavy industries ministry identifies companies like Heavy Engineering Corporation for revival, when there is enough – and far superior - heavy engineering capability in the private sector. Such confusion needs to end. Modi is not an ideological person, but on this issue he needs to clarify what his government’s philosophy towards the public sector is, perhaps taking tips from the Finance Commission’s report, and then proceed in a determined manner.