A critical discussion of the disinvestment/privatization process in India since the start of the economic reforms in 1991

Abstract

With the elections over and a reforms-friendly Congress government with majority being voted back to power in India in April/May 2009, the issue of disinvestment/privatization of public sector enterprises is expected to become a focal one soon. This research note purposes to provide a critical understanding of the various policy issues and implementation methods that have arisen from and out of the disinvestment/privatization process in India since the economic reforms began in 1991. In doing so, it also aims to bridge a critical gap in the reforms policy literature in this area. The key issues that are raised in this paper are as follows: (a) the policy basis for the disinvestment/privatization of state-owned enterprises in the reforms period in India; (b) the methods chosen for such; and (c) the limitations and constraints of the implementation of such policy. The approach in this research note is that of a critical discussion of the broader disinvestment/privatization policy process as a whole.

Keywords:

• disinvestment
• privatization policy
• India
• economic reforms
• sale of public sector enterprises

Notes

1. The committee observed that a few SOEs that had healthy balance sheets could raise the requisite funds from the market through the sale of shares. However, the committee recognized the limitation that this form of raising money could present for the sick SOEs and the further problems that could be created in terms of the ownership structure of the SOEs as a whole.

2. The BIFR was later wound up in the later years of financial reforms to avoid legal and bureaucratic delays in the disinvestment process.

3. The core group industries were mostly capital intensive and infrastructure related, such as telecommunications, power and petroleum, where oligopolistic competition could be encouraged.

4. Equity in 31 PSEs was offloaded by the government by breaking them up into 825 bundles. Each bundle comprised of equity of nine PSEs. The PSEs were divided into three categories – average, good and very good. The PSEs were valued on the basis of their individual Net Asset Values (NAV) in relation to the book value of Rs. 10 per share. The NAV needed to be above Rs. 50 a share for a PSE to be rated very good, Rs. 20–25 for a PSE to be good and under Rs. 20 for being average. A key criticism was that the NAV of each PSE was computed on the basis of book value and not market value, thereby creating less value for all the PSEs.