Myth busting : Privatisation of PSUs

 India has now been independent for about 73 years , yet the fears of a capitalistic colonial past haunts us. It is because of such past that for about 44 years since independence we followed a socialist model of governance. While a balance of payment crisis did allow us to switch to a more capitalistic economy , the ideas is socialism still run deep in our heads. It is because of such unconscious tilt towards socialism that even after 30 years of private sector catapulting India to global heights , we come on streets against the privatisation of Public Sector Undertakings (PSU).

In this blog I try to defend the idea of privatisation our PSUs. I will also try to address all the major arguments against such privatisation which have taken the form of myths creating demons of private sector.

Myths addressed -

1. Privatisation will reduce employment opportunities.

2. Selling of PSUs is like selling of family silver and will lead to losses for government in the long run.

3. Only loss making PSUs must be sold and not profitable PSUs.

4. PSUs contribute significantly to the revenue of the government.

To begin with let me just give you a glimpse of the sectors which currently have government enterprises. We are all aware about certain strategic sectors which are dominated by PSUs e.g the oil retail sector , the minerals sector etc.

However we also have a PSU running hotels - ( Indian tourism development corporation - Ashok Hotels) , PSU travel agency ( Balmer Lawrie ). If you feel this was unnecessary we also have PSUs making floor cleaners ( Bengal chemicals ). 

Moving on, let us now address all the stated myths. To begin with there is a perception especially among students seeking government employment that -

1. Privatisation will lead to reduction in job opportunities. 

Let us try to understand this using the case study of Maruti Suzuki. It began as a government of India enterprise inn 1981 as Maruti Udyog Limited. Originally it had 75% share of government and 25% with Suzuki Japan. In 2002 the government decided to let go of its majority stake in the firm and transfer the management to the private sector. At that time ( 2002 )  the whole company was valued at about 4300 crores. However today it is valued at 2.18 lakh crore!! i.e a rise of 4700% in about 18 years.

When it started it's model was based on importing a specific number of cars from Suzuki to be offered to the middle class. It employed about 850  people directly without much of indirect employment as cars were mostly imported. Today the direct employment has grown by about 1800% to 16000. Add to that lakhs of indirect employment created due to spare part manufacturing , other accessories manufacturing etc. This shows not only does the value of the enterprises increases but also the net employment generated increases.

Image: growth of automobile industry in India. Observe the spikes post 1981 and after 2002.

Also , to all those seeking government jobs , kindly put a hand on your heart and ask yourself do you seek such job for 'public welfare' as a service? or is it out of our inherent desire to be paid for not doing any work.

2. Selling government companies is like selling ' family silver '.

The other most prevalent misconception about privatisation is that it is equated with killing the goose which gives golden eggs. It is believed that this will give one time money in the short run but will be a loss in long run as government revenue will be affected.

Let me counter this with another case study of Hindustan Zinc. In 2002 , the government of India decided to give up its 45% stake in Hindustan Zinc at about 800 crore INR. The government retained 30% stake in the company. After shifting the management to private sector the company witnessed a boom like never seen before. Today the company is the world's second largest miner of zinc and is among the top 10 silver producers. So was it a loss to government?.. the retained 30% stake of government is worth 27000 crore INR today!!. The dividends from it today are more than the total worth of the company when it was privatised.

Image : For every 1 rupee invested in a PSU , the return is just 14 paise.

3. PSUs work for public welfare thus they must not be privatised.

This is another argument which has seeped into our thinking from our socialist roots. people argue that the aim of PSUs is public welfare thus they must not be judged based on their balance sheet.

Again let us counter this with another case study about Air India. As of today Air India has outstanding loans of about 60,000 crore INR , its accumulated losses are about 70,000 crore INR. Yet it is still in operation. To get the context , Jet Airways was grounded when its losses were not even 50% ( about 25,000 crore) of what are with Air India. Yet since Air India apparently serves public welfare by providing subsidised air travel to our 'poor' politicians and bureaucrats , its losses must be funded by the taxpayers (Sarcasm intended! ). Even by selling Air India for free today , the government can save about 70,000 crore INR yearly. P.S. the budget for MGNREGA is about 50,000 crore INR.

Image : Increasing burden of losses on Air India over the years.

4. Only loss making PSUs must be sold

As soon as someone talks of privatisation of BPCl the first argument which is thrown is that it is a profitable enterprise and hence must not be sold. This is true to an extent that atleast the government does not need to bear the burden of its losses. 

But we need to see that is BPCl and other such oil marketing companies are making profit out of efficiency? or are they ' Allotted millionaires ' in the sense that they have a monopoly in the market hence are profitable.

One may argue that even private sector companies are allowed in the oil marketing sector e.g Reliance  Petroleum or Essar Petroleum. But we need to understand why these firms were thrown out of business in India. In 2008  the government announced what is called the administered price mechanism for diesel. In simple words it meant that the government fixed the rate of diesel and any incurring loss due to lower rate would be given as subsidy by the government. However the catch was that only PSUs were eligible for such subsidy.

For example  , if the cost of diesel was about 75 per litre , but the government decreed it to be sold at 50 per litre. The government would subsidise it for PSUs and pay them Rs 25 per litre for the loss incurred but not for private players like Reliance who were forced to switch to international market. Thus all private competition was thrown out of market, a monopoly was establised and hence our beloved BPCL became profitable.

Thus, such profitable PSUs such as HPCL , Coal India Limited etc are profitable not because of their efficiency but due to state established monopoly. This prevents the true growth of efficient private sector firms and acts as a hurdle to the growth of the market. Consider how the telecom industry boomed after private firms were allowed.

As for the last argument about they being a source of revenue for the government is considered. According to economic survey  2018 , total money invested in about 257 PSUs is about 14 lakh crore.  This is giving rise to a profit of about 1.4 lakh crore. Of this profit about 10 firms contribute about 75% of the profit. Thus privatisation would allow that 14 lakh crore to be freed and be better invested in education and promoting ease of doing business. This will allow for creation of new firms in the private sector. Any loss of revenue can easily be compensated by taxing the profit of such new Unicorns.

To conclude I put my weight behind the recent government policy of limiting PSUs to 4 strategic sectors including - Defense , Banking , Insurance and Energy. It must be understood that only when we create wealth can we think of distributing wealth!.

There is no business of government to be in business!!

Jis desh ka neta vyapari , uss desh ki janata bikhari!!

Amit Chauhan.