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Will Mukherjee’s Budget deliveron disinvestment promise?

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When Videsh SancharNigam Ltd (VSNL)was sold to the Tatas,

the telecom company’s thenchairman and managing direc-tor S.K. Gupta used a meta-phor that partly explains whydisinvestment hasn’t alwayshad a smooth ride in India.

“It is like an arranged mar-riage of a daughter,” Guptasaid on 13 February 2002 atBombay House, the Tata head-quarters. “The daughtershould continue to deserve allthe love and affection.”

Gupta was alluding to thefears of millions of public sec-tor employees about job cutsaccompanying privatization,especially when hepleaded for patiencefrom the Tatas for “ac-climatization”.

Ratan Tata, chairmanof Tata Sons Ltd, wasimpassive, merely say-ing that the “profes-sional organization”would be leveraged ful-ly in the coming years.A large replica of a cheque foraround Rs1,439 crore washanded to then communica-tions minister Pramod Ma-hajan to symbolize the moneythe Tatas had paid.

These concerns that Guptareferred to translated into thestout resistance to asset salesby the Communists, which ef-fectively put disinvestmentinto cold storage during theUnited Progressive Alliance’s(UPA) first term from 2004 to2009. Now that the Congress-led government doesn’t needCommunist backing, privatiza-tion is back on the agenda.

Disinvestment first caughtthe public’s attention whenYashwant Sinha, finance min-ister in the short-lived Chan-drashekar government, pro-posed in the interim budget of1991 to disinvest 20% of hand-picked public sector firms.

A few months later, Sinha’ssuccessor as finance minister,Manmohan Singh, started theprocess and surpassed budgetestimates by raising Rs3,037.74crore in fiscal 1992. However,since then, disinvestment re-ceipts have generally fallenshort of budget targets. Since1991, aggregate proceeds fromdisinvestment (excluding therecent NTPC Ltd issue) havebeen Rs57,682.93 crore, less

than a single year’s service taxcollection.

D.K. Srivastava, directorof the Madras School ofEconomics, who was amember of the 12th Fi-nance Commission(2002-04), said moneyfrom asset sales couldn’tbe relied upon as it wasn’t“a steady stream”.

Disinvestment has per-haps generated more contro-versy than any other policy de-cision since 1991.

Pradip Baijal, who becamesecretary in the disinvestmentministry in 1999, was in chargeat the time of the VSNL sale.He recalls the current PrimeMinister cautioning him aboutthe pitfalls.

“Manmohan Singh told methat you can get into trouble,”Baijal recalled. “People couldquestion your motives.”

Eight years have passedsince VSNL was privatized.The Tatas transformed the or-ganization into a multinationalenterprise even as its monopo-ly over international long-dis-tance telephony was endedahead of the promised dead-line. Much else has changed atVSNL, including its name; thecompany is now called TataCommunications Ltd.

“VSNL had a strong positionin the international long-dis-tance voice and Internet seg-ments of the telecom business,”said Srinivasa Addepalli, seniorvice-president, corporate strate-gy, at Tata Communications.

It also came with a robust in-frastructure as well as a soundtechnical team that managedthe international and Internetnetworks, apart from generat-ing cash. “The company had a

strong balance sheet that ena-bled it to expand into newbusiness areas and markets,”Addepalli said. The Tatas usedthat cash astutely, puttingsome of it into Tata Teleservic-es Ltd and making a fewbig-ticket acquisitions such asTyco Global Network and Tele-globe that transformed the In-dian firm into a global opera-tor of undersea cable networksand satellite links.

“VSNL has successfullytransformed itself from a sin-gle-market, single-businesscompany to becoming a lead-ing global provider of commu-nications services,” Addepallisaid. “Tata Communicationshas invested over Rs10,000crore over the last seven-eightyears in building infrastruc-ture and services capabilities,in India as well as globally.Tata Communications has alsomore than doubled its organi-zation size during this period.”

The VSNL strategic sale cameduring the height of India’s dis-investment experience, whichBaijal demarcated into threephases: The first was between1991 and 1998 when smallholdings of public sector com-panies were sold; the secondlasted from 1998 to 2006 andfeatured the strategic sale offirms such as VSNL, IndianPetrochemicals Corp. Ltd andBharat Aluminium Co. Ltd(Balco). In the third phase sincethen, the government has beenback to selling small chunks.

In 2009, disinvestmentmoved to what could possiblybe classified as the fourthphase. The UPA governmentexplicitly linked disinvestmentto investments in social sectorareas such as education andhealth. Opposition to disinvest-ment seemed to fade as the re-ceipts were directly linked tobenefiting the poor. That has

increased the magnitude of re-ceipts finance minister PranabMukherjee can anticipatethrough disinvestment in thecoming Budget from estimatedreceipts of Rs1,120 crore in thecurrent year.

This new phasehas also beenmarked by econo-mists with experi-ence in govern-ment puttingforth a clear intel-lectual and ethi-cal case for disin-vestment.

In January2010, Vijay Kel-kar, chairman ofthe 13th FinanceCommission,said: “When thestate chooses to own Re1 ofsomething, this comes at thecost of owning Re1 of some-thing else.”

Kelkar pointed out thestate’s assets need not remainstatic for all time. In hisspeech, he cited analysts whohad valued the Central publicsector companies at between$400 billion and $500 billion(Rs18.5-23 trillion), or close to50% of the size of the economy.

Kelkar’s views were echoedby Shubhashis Gangopadhyay,who was economic adviser tothe Union finance minister in2008. “If we can logically andconsistently argue that weneed education and health forevery citizen, since it is theirbirthright, then it is the re-sponsibility of the governmentto find the resources,” he said,providing an ethical contextfor disinvestment.

The essence of the argumentby Gangopadhyay and Kelkaris that a huge amount of gov-ernment capital is locked up inindustries where private com-petitors are thriving. It no lon-

ger makes sense for the gov-ernment to keep its capital inareas where the private sectorhas managed well. Instead,this needs to be deployed inareas where private participa-tion has not yet produced ade-quate results or is unlikely todo so for a long time.

Merely by listing public sec-tor companies on stock ex-changes, there could be pro-ductivity gains through indi-rect channels such as en-hanced transparency andaccountability, economistssuch as Kelkar have argued. Alinked argument is that thecurrent structure of govern-ment ownership has yieldedmeagre returns on capital.

“They give you a returnwhich is around 2%. If thesePSUs (public sector units)were in education and health,then a return of around 2% isunderstandable,” Gangopad-hyay said. “Most of these PSUsare in areas where private sec-tor units operate, and theydon’t earn 2% on their capital.So clearly, there is a waste.”

For the moment, it would ap-pear there has been grudgingacceptance of disinvestment asan inevitable development byall sections. However, the UPAgovernment has clearly indicat-ed it would retain the publicsector nature of its companiesby keeping majority ownership.The stand appears conservativewhen juxtaposed with the sug-gestion by the chairman of thePrime Minister’s economic ad-

visory council, C.Rangarajan, inApril 1993.

Rangarajan, ashead of a com-mittee on disin-vestment in1993, suggestedthe governmentsell 74% or all ofa public sectorunit if it was notoperating in anarea explicitlyreserved for thepublic sector.

The jury is outon where the fourth phase ofdisinvestment will go. Baijalsaid “it will evolve into privati-zation” of the kind India sawalmost a decade ago. Srivasta-va, on the other hand, said dis-investment would be markedby an incremental approach,even in the absence of politicalopposition.

For the moment, disinvest-ment appears set to live up, atleast partially, to the promise itshowed in 1991 as a source ofrevenue. For VSNL and Balco,growth may be stymied in thefuture if the government con-tinues to hold a sizeable equitystake. Unless the governmentdecides either to retain or al-low their stake to get reduced,the new promoters may find ittough to continue with theirambitious expansion plans,because there is only so muchyou can raise as debt.

satish.j@livemint.com

It has perhapsgenerated morecontroversy than anyother policy decisionsince the reforms began

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Nanotechdevices mustbe regulated

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Spurred in part by the con-troversy over Bt brinjal, the

government is planning a reg-ulatory board that will overseeall the new nanotechnologydevices that come to market.

“The reason we had problemswith Bt brinjal is because wedon’t have a strong regulatorybody,” said T.N. Rao, director ofthe Centre for Nanomaterials atthe International Advanced Re-search Centre for Powder Metal-lurgy and New Materials, a Hy-derabad-based lab. “Nanotech-nology is being used for medi-cine and health. We must besure that it is being used safely.”

Nanotechnology, the study ofmaterials on a sub-microscopicscale, is one of the hottest trendsin global science. The govern-ment has already spent part of aspecial Rs1,000 crore fund for na-notech research. Nanoparticlesare at least 1,000 times smallerthan a human hair, and havehuge potential in medicine, agri-culture and lifestyle products.

But products based on nanote-chnology have also created con-troversy. When Samsung re-leased a “Nano Silver” washingmachine in the US, environmen-tal groups claimed the silver-laced waste water might damagethe earth. The US’ Environmen-tal Protection Agency temporari-ly banned the machine, and is inthe midst of drafting regulationsspecifically for nanotechnology.A version of that machine isavailable in India.

Regulation will present itsown set of challenges. “Wedon’t even have standards forjudging what makes a productdangerous,” said Rao. “Onwhat basis will they regulate?”

There’s also the risk nanotech-nology might end up in the samestew at Bt brinjal. The genetic en-gineering approval committee, astatutory body formed under theEnvironment Protection Act,conducted a series of tests on Btbrinjal but passed the final deci-sion on to the ministry of envi-ronment and forests. The result-ing debate went on for monthsand involved politicians, non-profit organizations and courts.

“The regulatory board willhave experts from all differentfields, including medicine andagriculture,” said Rao, whoheads the department of sci-ence and technology’s NanoMission, responsible for givingout the research funds.

Rao first announced the po-tential regulation over the week-end at the International Confer-ence on Nano Science and Tech-nology, a nanotechnology con-ference at the Indian Institute ofTechnology, Bombay. He saidthe board will be formed some-time next month.

Strategic sale: A 13 February 2002 photo of Tata group chairman Ratan Tata (right) holding a replica of acheque for Rs1,439.25 crore with then communications and technology minister Pramod Mahajan (centre)and VSNL’s managing director S.K. Gupta in Mumbai.

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