New government must revive disinvestment
Prime Minister Narendra Modi has never made a secret of the fact that he prefers reviving public sector enterprises to privatising them. This is probably part of the reason why, unlike in the last National Democratic Alliance regime, there is no minister for disinvestment in Mr Modi's government. The prime minister's track record as chief minister of Gujarat featured the turnaround of several public sector undertakings, or PSUs, owned by the state government - the example often given is that of Gujarat State Fertilisers & Chemicals, which was making a loss in 2003 but now provides a return on equity of 15 per cent. It is claimed that Gujarat PSUs were insulated from political interference by Mr Modi, and that lies at the heart of their resurgence.
Still, there are good reasons why this should not be the automatic approach that Mr Modi takes at the Centre. As prime minister, he will certainly realise that stake sales in central PSUs have an important role to play in financing infrastructure development. However, there are deeper questions that need to be addressed. The prime minister has never been slow to repeat his slogan of "maximum governance, minimum government". At the heart of this idea surely must be the idea that the government should no longer be the dominant player in wide swathes of the economy. It is being reported that the various responsible ministries will urge the government to move forward on opening commercial coal mining to private players, and on disinvestment in other natural-resources PSUs like Hindustan Zinc. These proposals must be acted on. Other PSUs that are bleeding the exchequer, such as Air India and Bharat Sanchar Nigam Limited, must also be on the short list for disinvestment, which could eventually pave the way for privatisation. This is not just a matter of fiscal expediency. It is also about redefining the state's role in the economy - a place where Mr Modi can make his mark on history.
It is also worth noting that the government has a fortuitous window of time in which stock market valuations are high and broader retail investor interest is growing in shares. The Sensex is at an all-time high. Mid-cap and small-cap stocks are also doing well, demonstrating that investor interest extends beyond foreign institutional investors and blue-chip stocks. In order to both take advantage of and broaden this moment for Indian equities, the government should announce its schedule for the further disinvestment and eventual privatisation of various PSUs. There have been legitimate concerns expressed in the past that disinvestment might be held up by the lack of suitable buyers. If the only people willing to buy public assets are potential oligarchs, there is a very good reason to postpone or abandon the sale of PSU shares. This is a valid concern, but there is no reason to suppose that it cannot be addressed before the government embarks on disinvestment or even privatisation. In fact, the market expansion over the past month has revived all the retail interest that had been missing for years. Thus, it is a propitious moment to revive the privatisation project. And disinvestment of government shares in PSUs will be a good start.
Markets will find it hard to justify stretched valuations in the face of single-digit earnings growth
Economic Survey rules out need for such reforms; analysts believe fiscal tightening, rural stress and political debacle might be restrictive