The topic for today is quite esoteric but I will try to explain my point as clearly as possible.
Disinvestment is the sale or liquidation of the assets of an organization. It can also refer to the reduction of capital expenditure, reallocation of resources to more productive areas within the organization and making the operations of the organization lean and in line. Public Sector Undertakings (PSUs) are the state owned enterprises in India. These organizations were started to increase the industrialization of the country in wake of independence. Back then India used to be a primarily agrarian economy.
So what necessitates the disinvestment of PSUs in the first place? PSUs were first set up after independence in 1947 taking into consideration the need for accelerating growth of core sectors of the economy. Most of the major industries such as coal, petroleum, heavy metals, heavy engineering were nationalized. The companies associated with these industries generated a lot of employment and revenue. They provided a secure job proper housing, education and medical services as perks of the job. Also, since the operations of these companies were very bureaucratic in nature, the efficiency was very low. Be it expansion in different countries, increasing production or cutting down overhead costs, the companies had to take permissions from the government for every action. Also, due to the job being so secure, the employee productivity was abysmally low. Even the punishment for charges of organizational corruption was not termination but just a transfer to a less lucrative location, which was merely a slap on the wrist. This only increased corruption and laziness among the workers. Due to the domino effect of these reasons, these PSUs started making significant losses. In the period of 1986-91, PSUs ate up 39% of the country’s GDP as investment while only contributing 14% back to it. Needless to say, there was widespread industry sickness in government owned enterprises.
Despite this, some PSUs have managed to churn out profits. These PSUs are the ones which are at the national scale dealing in precious commodities such as coal, oil etc. So is there a need for disinvestment in these companies? Let us explore the possibilities.
Arguments for disinvestment :
- Disinvestment raises valuable resources for government – This can be used to reduce fiscal deficit and cause the government to garner more resources for infrastructure development.
- Lean government is clean government – Disinvestment will ensure that government ownership is limited to only certain organisations. It will also result in reduction in number of ministries and bureaucrats and hence lesser corruption.
- Disinvestment is part of major structural reforms – Government initiated structural reforms in the 1990s such as liberalization and opening of foreign trade. Disinvestment was a welcome addition to this. It also sought to increase competitiveness of public sector undertakings and creating investments and job opportunities.
- Government gets to spend on development – Disinvestment frees up government’s spending capacity in key areas such as military and welfare.
Arguments against disinvestment :
- Disinvesting profit making PSUs will result in losses – There will be loss of dividend earning for governments which are disinvesting profit making public sector enterprises. Currently, the expenditure of the government far exceeds its revenue and selling the stake of profit making PSUs will lead to squeezing of the revenue sources for the government. This will result in higher fiscal deficit.
- Job losses are an unavoidable consequence – PSU disinvestment comes with a rider- job losses are a natural consequence for the employees when privatization sets in.
- Tax rate in PSUs is higher – Corporate houses shell out less in terms of tax returns while PSUs are charged with higher tax rates. Disinvestment goes one step further in capitalizing on PSUs and feting corporates at their cost.
- Benefits of disinvestment are largely appropriated by the corporate sector –Only 0.5-0.7% of the general population invests in the equity market, disinvestment would mean that the control of the companies will go to large corporate houses and institutional investors and not the common man thus defeating its purpose.
In the end, it can be said that while disinvestment offers a valid short term profit, it is not in our best interests to completely privatize our PSUs. It is sectors such as power, petroleum, coal an defense where privatization is not in the national interest. Rather than selling profit making PSUs, the focus should be on turning around sick PSUs. The cure lies in seeking a lasting remedy rather than just a quick fix.
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