Leave the PSUs alone for now

Government sell-off is a stimulus for itself and might not work at this juncture

When the global slowdown hit India in 2008, it was perhaps the first time that the term “stimulus” was formally used in the Indian context to describe the measures taken by the Union government to tackle the economic distress. Since then, finance ministers have been called upon to unveil “stimulus” packages for a sector or the economy that seems to be in trouble due to conditions beyond their control or even when it is a self-induced disruption like demonetisation.

The Cambridge dictionary meaning for stimulus is “something that causes growth and activity” so in that sense, it is an apt description of government interventions for reviving the economy or particular sectors. It is also a much better term than bail-out which conveys a sort of hand-holding by governments and carries the impression of an unusual favour to an industry.

Last year, when there were clear signals of an economic slowdown, it took the Union government some time to acknowledge it. No sooner did the political pressure mount, than a host of stimulus measures — some of them old but re-packaged with timelines and more effective monitoring — were announced.

In one important stimulus to address the problem of credit, Union Finance Minister Nirmala Sitharaman in September 2019 came out with the concept of “shamiana meetings”. Some 400 identified districts were lined up to provide loans to non-banking finance companies, retail borrowers, including homebuyers and farmers, in these loan melas beginning October 3. Funding issues faced by micro, small and medium enterprises, too, remained an underlying concern behind most stimulus measures announced by her since then. The strategy last year was weekly announcements, which Sitharaman chose to make at different fora across different cities, like Mumbai, Kolkata and Chennai and not just New Delhi.

This time round her five packages were announced on consecutive days but only in the national capital’s Media Centre because travel is restricted. Besides, there isn’t any political compulsion since state elections are not knocking on the door. Bihar goes to election this year, and West Bengal and Kerala next but the process of voting itself will need to be re-invented now that Covid-19 has made any form of contact difficult.

The government and the Reserve Bank of India’s focus on providing liquidity remains unchanged even now. The difference this time is, almost all sectors — except perhaps food — have seen demand destruction. There could be different sets of problems that come with excess liquidity, but the idea here is to discuss one measure that the government announced in order to improve its liquidity position: It has decided to go whole hog into privatisation.

There is no dramatic policy change in this announcement made on May 17, though Sitharaman’s stated course is different. Sectors will be reclassified as strategic and non-strategic after which a cap of four public sector underakings (PSUs) will be followed for “strategic” ones and for non-strategic there is no cap so far, which implies there is no need for majority government ownership in any of the PSUs that fall under this category.

Currently, there are only two strategic sectors — atomic energy and railway operations. The second one already has a window to open up in the finance minister’s February 2020 Budget where she said private operators will run trains. Even in the atomic energy sector, the Manmohan Singh government allowed the private sector to form joint ventures with government companies. Anil Ambani’s Reliance group, Tata Power and GMR had even explored options to form joint ventures with Nuclear Power Corporation but somewhere along the line the mega plans fell through.

If the government reclassifies sectors now, the number of strategic sectors can only go up or may be have atomic energy only. The probability of taking off all the sectors from the strategic list is nil considering that atomic energy whips up nationalist sentiments and no ruling political party can risk doing that at this point of time. But then what would the government gain if the number of strategic sectors is taken up to half a dozen by including petroleum, aviation, power and defence production?

First, the number of PSUs will come down to four in all the six sectors. This, according to the finance minister, could be done through PSUs buying peers or privatisation. PSUs are already left with little cash because of previous pay-outs to government. Public issues can be an option, too. Then, there will be myriad non-strategic sectors which will be perhaps easier to let go of.

Through whatever means the government tries to reduce its play, it will only suck out liquidity from the system and bring the government some money. The big caveat, however, is the buyers of government stake should feel comfortable enough to take the risk of owning assets in the current market where demand destruction is the rule rather than the exception.

The NDA government’s decision to announce packages is logical but the thinking behind what actually is a disinvestment programme and not a growth or even a revival stimulus is hard to understand. It will be better if the government tests the water by first privatising companies for which decision had been taken years ago.

Sell Scooters India, a smaller bet, or Bharat Petroleum Corporation Ltd, which is more professionally run and where the option of another PSU buying it has already been ruled out by an expression of interest floated in March. The safest option, however, is to let the government-owned companies be what they are at this juncture. Disinvestment will be no stimulus even for the government if there are no credible buyers and if the valuations are at an all-time low.