Privatizing the Public Undertakings – IMPRI Impact and Policy Research Institute

A Momentum needed for India

Dhiraj Nayyar

Until last year, Air India was a chronically underperforming public-owned airline. It hadn’t made a profit in almost two decades and was saddled with $8 billion in debt. Its planes continued to fly only because the government spent billions to keep them operational.

Finally, one year ago, Air India was sold to the Tata Group, the country’s largest diversified business conglomerate, and now it is set to place orders for 500 aircraft worth $100 billion to help it tap into India’s booming aviation market. Its turnaround should encourage the government to privatize the 250-plus other operations it owns. (Vedanta Resources, my employer, has been involved in privatizing some Indian government assets.)

These include an array of businesses: defense equipment manufacturing, energy generation, telecommunications, oil production, textile making, and many more. In almost every sector, except perhaps nuclear power, more efficient private businesses exist, and they are weighed down by government competition.

Certain government-owned enterprises make a decent profit, but only those that are either protected from competition or given special preferences. Coal India, for instance, had a monopoly on coal mining until last year. And even these companies’ value is eroding over time. A cursory comparison of the benchmark BSE Sensex index with the benchmark index of Public Sector Undertakings (government-owned companies) listed on the BSE India stock exchange shows how government operations have stagnated over the past decade even as private businesses have grown 300 percent.

Private vs. public companies in India

Narendra Modi, India’s prime minister, has often said that the government has no business being in business. Yet after eight and a half years of his tenure, Air India is one of only two enterprises that have been successfully privatized. (The other is a stand-alone steel plant, closed for operations, also sold to the Tata Group.) Efforts to sell Central Electronics and Pawan Hans (a helicopter service) were blocked by courts and the government after questions were raised about the buyers’ credentials.

The challenge here is more practical than ideological. Any proposed sale of government assets raises suspicions about their prices and whether they are being sold to ”cronies” or “oligarchs.” Air India was an exception because the company was owned by the Tata Group before it was nationalized in 1953. Its sale was viewed as justice, not a giveaway.

The only way to determine the right valuations and buyers are to first list the businesses on India’s booming equity markets. At present, about one-third are so listed. These are also the best performing, highest value, and most likely to become more efficient. They include the Oil and Natural Gas Corporation, NTPC (formerly known as the National Thermal Power Corporation), the Container Corporation of India, and the Steel Authority of India. Stock markets lend transparency to pricing and valuation.

And to ensure that no single individual or firm takes control of any one government business, a cap of, say, 10 percent should be imposed on equity ownership.

All of India’s government-owned companies can become independent, high-performing, and highly valued. Privatization will also provide revenue that the country can invest in infrastructure. At a time when many avenues for growth are constrained by a difficult global economy, privatization can provide the economic momentum that India needs.

This article was first published in The Washington Post as How India can sell hundreds of government-owned businesses on December 20, 2022.

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