Opinion | How India is selling hundreds of state-owned companies


Dhiraj Nayyar is Director of Economics and Policy at Vedanta Resources.

Until last year, Air India was an underperforming state-owned carrier. It hasn’t made a profit in nearly two decades and is saddled with $8 billion in debt. Its planes keep flying only because the government spends billions of dollars to keep them running.

Finally, Air India, which was sold a year ago to Tata Group, the country’s largest diversified conglomerate, is now poised to order 500 planes worth $100 billion to help it tap into India’s booming aviation market. Its shift should encourage the government to privatize more than 250 other businesses it owns.

These include a range of businesses: defense equipment manufacturing, energy production, telecommunications, oil production, textile manufacturing, and more. In almost every field, with the possible exception of nuclear energy, there are more efficient private players, weighed down by government competition.

Certain state-owned enterprises earn substantial profits, but only those that are protected from competition or given special preferences. For example, Coal India had a monopoly on coal mining until last year. Even these companies have declined in value over time. A cursory comparison of the benchmark BSE Sensex index with the benchmark 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 sector growth 300%.

Prime Minister Narendra Modi of India has often said that the government should not be in business. Yet eight and a half years into his tenure, Air India is one of only two companies to have been privatized successfully. (The other, a stand-alone steel mill, closed operations and was also sold to the Tata group.) Efforts to sell Central Electronics and Pawan Hans (helicopter services) were blocked by courts and the government after they challenged the buyers’ certificates.

The challenge here is more practical than ideological. Any proposed sale of government assets will raise doubts about its price and whether it will be sold to “crowns” or “oligarchs”. Air India is an exception, as the company was owned by the Tata Group before it was nationalized in 1953. Its sale is seen as justice, not a giveaway.

The only way to determine the right valuation and buyer is to first list the business on India’s booming stock market. Currently, about a third are listed as such. These are also the top performing, highest value and most likely to become more efficient. They include Oil and Gas Corporation, NTPC (formerly National Thermal Power Corporation), Indian Container Corporation and Indian Steel Authority. The stock market provides transparency for pricing and valuation.

And to ensure that no individual or company controls any government enterprise, there should be a cap on equity ownership, say 10%.

All state-owned enterprises in India can become independent, high-performance and high-value companies. Privatization will also provide revenue that the state can invest in infrastructure. Privatization could provide the economic impetus India needs at a time when many avenues for growth are constrained by a difficult global economy.

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