For a Ministry of PSUs

Dr Bharat Jhunjhunwala
Central Public Sector Undertakings are on a high. Narendra Modi has a track record of successfully turning around PSUs of Gujarat. According to a report, the Gujarat State Fertilizer Company was a loss-making entity in 2003. Modi gave a free hand to its management. Its sales have grown at 12 percent per year and it made a profit of 520 crore in 2013 against a loss of 391 crore in 2003. According to another report, the net profits of six major listed Gujarat PSUs have increased by 13 percent per year during Modi’s reign. Undoubtedly the success of Gujarat is a milestone. Yet this is likely to prove inadequate at the Centre. Reduction in sugar level of a diabetic due to daily walk does not mean that the disease has been cured. It will bounce back up as soon as the circumstances change just as the dogs tail curls up again as soon as the stick is removed. Instead of focusing on the temporary and short-term solution of turning around the PSUs, Modi must implement the NDA-I policy of privatization.
There are four levels at which the PSU reform can be undertaken. The first and the best way is to sell controlling stake and hand over control of the PSU to a private entrepreneur as done in the case of Maruti and few other companies under NDA-I. The problem here is that privatization can be troublesome in sectors where PSUs hold dominant position. We have only recently seen the row over pricing of natural gas. Reliance and ONGC were the only two players. In such situation private players can take the country for a ride. They can use their monopoly position to extract huge profits from hapless consumers just as oil- and coal sector PSUs have been doing for a long time. There is, therefore, need to put in place a strong regulator before privatizing dominant companies like Indian Oil Corporation, Coal India or State Bank of India. Privatization is best because it gets rid of Government interference in working of the PSU at its root. Retaining control of PSU with the Government while giving autonomy to managements is a second-best solution. It still permits Government interference as soon as the Minister changes, for example. Privatization, on the other hand, precludes such backtracking. The Government cannot interfere after majority stake is transferred to a private party. At the same time the regulator would ensure that they do not overcharge. Further, the Government is likely to get a better price because the strategic buyer would be willing to pay more for control of the Company.
Privatization, however, had been discarded by the UPA in favour of disinvestment on grounds that the public has a right to own controlling stake in PSUs built with taxes paid by it. NDA-II under Modi is also set to discard privatization in favour of autonomy. There is a need to rethink. Mokshagundam Visvesvaraya, the Dewan of Mysore, formulated the problem well. The role of the State, he said, was not to run industries. That was the private sector’s job. However, this did not mean leaving the task to them alone. The State had an active role in supporting the private sector. The starting of new industries called for entrepreneurship and adventure. The private sector suffered from the fear that capital that was invested might be lost. Therefore, says his biographer Narayana Rao, Visvesvaraya held that the Government must itself start new industries on a pilot basis and hand them over to private hands when successful. The Hindu tradition too says that the King should not enter into business. This is the model Modi must espouse.
The second level of PSU reform is to make a separate Ministry of PSUs. PSUs owned by various Ministries will be all transferred to this Ministry. This will drastically reduce the day-to-day interference in their working. The role of the parent Ministry will be limited to providing policy guidelines. For example, Ministry of Coal may direct Coal India Limited to reduce the quantity of production and focus on improvement of quality or vice versa. The Ministry of PSU will be wholly focused on running the PSUs and will hopefully provide better results. This model has been successfully implemented in China. An entity by the name of State Assets Supervision and Administration Commission (SASAC) has been created few years ago. About 200 PSUs owned by various departments of the Central Government have been transferred to SASAC. A post by the Boston Consulting Group says: “Thanks at least in part to SASAC’s efforts, SASAC-controlled companies have achieved substantial performance improvements in terms of both revenues and profits.” Similar centralized Ministries have been formed at the State level to manage all PSUs owned by the respective States. I think we must adopt this model as a second best alternative after privatization.
Disinvestment stands at the third level. It leads to minority shares being traded on the bourses. That results in the working of the PSU being scrutinized by the investors. For example, the UK-based Children’s Investment Fund is a minority shareholder in Coal India Limited with the Government owning 90 percent. Yet, objections from this Fund led to the Government agreeing not to issue any directives to Coal India that would affect its profitability. Such scrutiny by the share market is valuable but, in my opinion, grossly inadequate to put the PSUs back on their feet. The workings of PSUs continue to be enmeshed in bureaucracy and inefficiency prevails as previously.
The fourth, last and least beneficial and, maybe, even harmful level is that of changing hats as had been done by UPA-II with ONGC buying shares of Indian Oil Corporation. Such ‘disinvestment’ does not create scrutiny by the share market, does not get rid of the interference from the parent ministries and does not put the PSU in the hands of a private entrepreneur to be run on business principles. It is good that Modi is not considering such stratagems.
Modi must rethink of the basic purpose of establishing PSUs. Nehru’s model was that the commanding heights of the economy will be in the hands of the Government. This has thankfully been abandoned after the collapse of Soviet Russia. The other purpose was to jumpstart the economy. Government must step in and establish PSUs in sectors where private sectors  fear to tread. Once established these PSUs should be handed over to private businessmen as Visvesvaraya had explained. Question is whether improved performance of the PSUs as envisaged by Modi will serve this purpose? Indeed the nation will get some immediate relief from the losses being incurred by these PSUs. However, this will be step backwards because a great opportunity to privatize and eliminate the disease at its root would have been lost.
(The author was formerly Professor of Economics at IIM Bengaluru)

Follow our WhatsApp channel