Disinvestment: Sell-off or sell-out?

why should the government sell public sector shares at all? and what should the money from disinvestment be used for? there are good and bad reasons for selling public sector shares. for many decades, socialist governments created a huge public sector mainly through borrowed money and nationalisation. nehru wanted the government to control the commanding heights of the economy. the private sector for a time commanded the lesser heights. indira gandhi was outraged when the private sector (along with some princes) financed the swatantra party, which emerged in the 1967 election as the biggest opposition party. congress\’ parliamentary seats shrank dramatically that year, and non-congress state governments came up all across north india. indira gandhi was not going to tolerate this. in the holy name of socialism, she abolished privy purses, and hence the power of princes. to squash big business, she raised the maximum income tax rate to 97.5 per cent and a stiff wealth tax as well. this was supposedly for “garibi hatao\’\’, but actually for “swatantra party hatao.\’\’ she nationalised the banks, coal, insurance, oil companies and took over hundreds of sick private sector mills. this meant she alone controlled the purse strings of the economy. this growth of the public sector had nothing to do with the public interest, unless you believe that indira was india. in theory, the public sector belongs to the people of india. in practice it belongs to netas and babus, and has always been a web of patronage and kickbacks. i saw a small but graphic illustration of this when visiting madras in the 1970s. now, the only factory of idpl in madras, a surgical instruments plant, had proved a disaster and closed down. but the idpl guest house remained open, for use by vips. the main rationale of idpl in madras was not to make drugs but serve vips. i remember asking the wife of an ics officer in the 1970s how she managed on her husband\’s meagre salary of rs 3,500 per month. she replied that the public sector ensured that they always had cars at their service, meals at five star hotels, holiday homes, and free travel. socialism had squeezed their official income, yet provided compensating comforts via the public sector. but of course these were minor comforts from the viewpoint of politicians. the real gravy lay in extracting kickbacks and providing jobs for favoured henchmen. i recall participating in a panel discussion in bombay in the late 1980s on expanding public sector refineries. many oil refineries had shut down in the west, so i argued that the public sector should buy second-hand refineries at rs 100 crore each instead of building new ones at rs 1,000 crore each. an ias participant leant over to me whispered; “a second-hand refinery of rs 100 crore will produce a kickback of only rs 10 crore, whereas a new refinery costing rs 1,000 crore will produce a kickback of rs 100 crore.\’\’ he was right, of course. clearly, the original rationale for a huge public sector was farcically misguided. today, we need an altogether different role for the state. instead of trying to monopolise production, or attempt what the private sector can do equally well, the state should focus on tasks that it alone can do: providing basic education and health, rural development, fair regulation, a decent police, a decent judiciary and a decent administration. alas, for four socialist decades, ideologues focused on increasing public sector monopolies while letting critical state functions like justice, policing and administration wither away. the state ceased to perform its most critical functions and concentrated instead on expanding its web of patronage and kickbacks. the best reason for disinvestment is to put an end to this, and change the role of the state. selling government equity will produce two lesser gains also. first, it will generally improve the management of public sector enterprises (though there could be exceptions). second, the sale will provide funds which can be used to improve social services or reduce the public debt or both. a bad reason for disinvestment is to raise some money in desperation to stave off bankruptcy in a mismanaged economy. yet this is the key reason why budget after budget proposes disinvestment. if indeed the government wanted to change the role of the state, it would have sold three quarters of public sector companies by now. in fact ministers are very reluctant to let go of their sources of money and patronage. bankruptcy is finally forcing changes, but in inconsistent ways that often means depressed sale prices. yashwant sinha proposes to reduce the government\’s equity in public sector banks to 33 per cent, yet retain government control. but no investor will buy bank shares in such circumstances save at throw-away prices. only incurable optimists will believe that rs 10,000 crore of disinvestment will take place by the end of the financial year. yet it seems the government is indeed serious about selling air india, indian airlines, ibp, bits of ipcl and maybe even maruti. some progress is better than nothing.