Indian Prime Minister Narendra Modi is implementing an ambitious plan to reform the country’s central public sector enterprises (CPSEs) – companies owned by the federal government. However, rather than liberalizing the market and privatizing the firms, the initiative may end up consolidating the government’s hold over the economy.

During the election campaign in the summer of 2014, Mr. Modi promised “minimum government, maximum governance” as his guiding philosophy for the economy. His oft-repeated mantra both before and after the election was that “the business of government is not business.” Yet many who expected big economic reforms, especially the privatization of many of the CPSEs, have been disappointed.

In the past three years, the government claims to have raised almost 880 billion rupees ($14 billion) from “disinvesting” its holdings in CPSEs, an increase of over 60 percent from the previous government’s last three years in power. “Disinvestment” is a frequently used euphemism in India for the government selling stakes in state-owned firms while retaining controlling or significant shares. Full-blown privatization is unpopular and politically contentious.

In the annual budget presented in February 2017, the government proposed an ambitious plan to raise another 720 billion rupees (about $11 billion) from disinvestment. There is reason to be skeptical that it will reach this target. Over the past decade, on average, less than 60 percent of the annual disinvestment goal has been met. The increased revenue from disinvestment in the past three years has come from public offers issued by listed CPSEs, many of which are oligopolies.

Government in Business

There are about 235 CPSEs, which account for about 20 percent of the country’s gross domestic product (GDP). The 47 of them that are listed on the Bombay Stock Exchange account for about 12 percent of the bourse’s market capitalization. There are also about 1,000 public sector enterprises owned by state and local governments.

Many of these firms are inefficient and burdened with debt. About two dozen CPSEs are estimated to have loans greater than their total assets; around 80 generate too little operating profit to cover the interest on their loans. According to some estimates, a third of India’s CPSEs made losses in the fiscal year ending in March 2016. A fifth of CPSEs have been in the red for three straight years.

Still, the political and social appetite for improving these firms’ performance by moving them to the private sector has been limited. Privatization remains a political taboo, and “disinvestment” has been the preferred method across the political spectrum. Over the last two decades, India has had a Disinvestment Commission guide the government on how to sell its stakes in CPSEs, and the Department of Disinvestment to implement the process.

From 2000 to 2003, when Prime Minister Atal Bihari Vajpayee (one of the founding members of Mr. Modi’s party) led the National Democratic Alliance coalition government, important strides were made. Some 30 companies were privatized, including chemical, computer and automotive firms, as well as many hotels. But other than that short spurt, India’s disinvestment process has been creeping along for the past 25 years. The main objective has been to raise revenue to reduce the fiscal deficit, with very limited success.

The Track Record

Against this backdrop, Mr. Modi’s repeated assertion that “the business of government is not business” was bold. It spurred hope for dramatic reforms, and even privatization. As the head of the Gujarat state government for 12 years, Mr. Modi did implement a few initiatives to streamline administration and improve the performance of some government enterprises, particularly in the power sector. However, privatization was not among his preferred strategies.

Last year, NITI Aayog, the government think tank, was asked to provide a road map for reforming CPSEs and take over the role previously played by the Disinvestment Commission in identifying the CPSEs for disinvestment and suggesting the appropriate strategies. The document has not been made public, but according to media reports, NITI Aayog looked at 76 mostly loss-making CPSEs and suggested a slew of options – from closure, to strategic sale, restructuring and disinvestment, as well as consolidating and retaining a few companies.

NITI Aayog’s proposed road map for disinvestment (according to reports)

  • 76 CPSEs (mostly loss-making) selected for analysis
  • 26 identified for closure
  • 16 recommended for strategic sale
  • 5 hold properties on lease from state governments that could be either sold or leased to the private sector or returned to the states; these mostly include hotels
  • 3 need to be merged with their parent companies
  • 2 should be maintained as they are
  • For about 20 others, NITI Aayog said any decision on their sale should be taken only after recovery plans are fully implemented
  • For a few others, further assessments are needed to come to any decision

In the meantime, Mr. Modi’s government also changed the name of the Department of Disinvestment to the Department of Investment and Public Asset Management (DIPAM). The move implies that the government is reviewing the strategy of gradual liberalization, and the 25-year-old process of slow privatization via disinvestment may be discontinued. The government considers the CPSEs as assets and investments and wants to maximize the revenue they generate, more by improving their returns than from selling stakes to the private sector. At times, this will mean even strengthening oligopolies.

The government faces three big obstacles. First is the question of valuation. It is commonly believed that many of the CPSEs are sitting on vast amounts of land. What is not so well understood is that in many cases, the CPSEs may not actually own the land, and may have been given the land on lease by the state or local government, or some other government agency. Given the poor state of India’s land records, this is not a surprise.

Secondly, there are lawsuits affecting quite a few CPSEs, including some where restructuring and revival are proceeding under court orders. Some firms are unlikely to find a buyer unless their debt is restructured or written off. The third challenge is to figure out how to smooth the transition for these companies’ employees. This raises even more difficult social and political questions than valuation. Many unions regularly protest disinvestment.

The Road Ahead

The Modi government has so far disinvested from two CPSEs. In April, it sold a 9.2 percent stake in National Aluminium Company, reducing the state’s holding to 65.4 percent. In May, it floated 10 percent of Housing & Urban Development Corporation in an initial public offering on the BSE. Almost 70 percent of the company’s portfolio consists of government-sponsored urban infrastructure projects. The government has also decided to transfer three hotels managed by India Tourism Development Corporation to their respective state governments.

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