By Ajay Jaiswal

Edited By Nandita Singh, Senior Editor, The Indian Economist

This year’s Deepawali is a little different than previous ordinary Deepawalis. The Modi Sarkar is planning to unleash a privatisation drive. The grand sale of the PSUs, as announced in the Budget, will begin after the festive season. This move is the continuation of Atal Bihari Vajpayee’s aggressive privatisation of the public sector. While foreign investors consider this as India’s eagerness to do business with private enterprises, Indian corporates consider it as a strategic move.

The top companies that will be privatised are ONGC (Oil and Natural Gas Corporation), which has pioneered oil exploration in India, and IOCL (Indian Oil Corporation Limited), the company which has the widest reach in India. These two companies have been acting as the countervailing force against India’s largest corporation, Reliance Industries. Other companies include Coal India Ltd, BALCO, SAIL, BHEL, GAIL and Hindustan Zinc Ltd. At the end of the current fiscal year, the government wants to sell assets worth Rs 45000 crore of the PSUs.

What is the worth of a PSU?

Actually ‘worth’ is a meaningless term here as seen in several cases, as the real worth of a PSU, measured by the yardstick of market and banks, is controversial. There are various types of buyers in this sale. This includes retail investors, institutional investors (both local and foreign), and portfolio investors. Indian companies will be also participating in this national sale.

Why is the Private Sector interested?

The private sector is interested in acquiring the PSUs at a discounted price. The Private sector has come a long way since independence, and It is expanding at a very fast pace, exploring unchartered territories. Moreover, a large chunk of PSUs consist of a large investment in capital goods.

But will this sale be actually comforting for the Indian Economy?

Well, these strings of sales will only dilute the extent of government ownership, allowing the government to retain substantial ownership. So what is the debate for privatisation, if the government retains 51% of share?

Well the value of public enterprises to the government is a stock of capital instead of a stock of wealth. So it will indeed provide returns in the future. Secondly, selling the share of the PSUs will reduce the revenue flow, i.e. the dividends. Moreover, one should question the basic motive of privatising. The National Investment Fund, which will collect all the proceeds from the sale, says that they will use it for workers development, education and employment generation. These objectives are good, but the technique is debatable.

A prominent businessman put this in the right perspective to a newspaper correspondent some time ago: “Would you sell your house to buy a shirt or to pay for your next meal>” (Quoted from The Hindu). Indeed, the results achieved from previous disinvestments are really not appealing.

One argument may be that it will improve the efficiency of the PSUs. However, the role of the public sector is not to simply act as institutions of value generation, but to also play as a countervailing force against private companies. Imagine Reliance being the sole oil and gas company of the country!

It is true that the public sector does not work very efficiently (and in some cases in doesn’t work at all), but it has mainly to do with the functioning of the PSUs. It is affected by red-tapism and influenced by politics. So instead of just privatising them, steps should be taken to revive and improve them.

The government seems to be in a hurry to sell the public sector equity instead of borrowing, to fund its expenditures. This way it is giving up an income greater than the interest it would have to pay on its debts.


 Ajay Jaiswal is currently in his second year at college, pursuing a Bachelor of Arts degree in Economics (Hons) at Sri Ram College of Commerce, University of Delhi. Originally from Bokaro Steel City, Jharkhand. He is aspiring to be an IAS officer in the future. His interests lie in the area of Mathematics, Indian Economy and Global markets. He spends his time watching movies or reading. You can email him at ajay.jaiswal1795@mail.com.

Posted by The Indian Economist | For the Curious Mind