India Considers Complusory Privatization of Largest Corporations

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Macroeconomics

I think it was Plato who first said necessity is the mother of invention. Well after decades of the world telling India it should dismantle its socialist state apparatus and give enterprise a free reign it is a rising budget deficit that is creating the necessity for the government to become more inventive about the solutions. Top of the list thankfully appears to be a massive privatization program of state owned corporations.

Almost uniquely among major democracies, India’s state still owns a huge number of potentially world class manufacturing companies, a hangover from its socialist past. In a budget speech, Finance Minister Pranab Mukherjee has proposed that all corporations, both state and private should have a minimum 25% of shares held by the public. Of course the market could not absorb such a phenomenal shift of ownership in a short time frame so the government is proposing the sale of 5% per year over a number of years in an attempt to create a more liquid and efficient share market which is not so volatile to thin volumes. Needless to say in the process, the government would raise of billions of dollars from the sale of shares across a huge swath of India’s manufacturing landscape. The new rule could impact 3,000 of India’s largest corporations according to an Industry News article, raising some US$53bn at current prices over the next five years. Prime Minister Manmohan Singh ‘s government is seeking to complete share sales in state companies such as Engineers India Ltd. and Steel Authority of India Ltd. to raise a record 400 bn (US$10bn) rupees this year. Mr Mukherjee has pledged to shrink the deficit to 5.5% of gross domestic product in the year that began April 1, from a 16-year high of 6.9% in the previous 12 months.

Privately held corporations would be caught up in this new rule too, companies like Reliance Power owned by billionaire Anil Ambani, allowing better company valuations and more transparency say officials. Privatization of state corporations are not unknown by this administration. Currently state owned Coal India Ltd the world’s biggest producer, was looking to raise R130bn ($3bn) from a share sale next month but has now postponed the move until September as price levels across emerging market stock exchanges have collapsed. And therein lies a problem, at least in the short term, for the government’s ambitions. The markets are highly risk averse at the moment with funds being pulled out of emerging market stocks, the phenomenon is probably short term as the long-term growth prospects are good but for this year at least sales will be slow to take off.

In the medium to longer term though, the governments move is to be applauded, governments do not make good managers of companies, too many decisions are made for political rather than economic reasons and unquestionably these firms will benefit from exposure to the rigors of a more open market place and shareholder influence. Indian state enterprises are notoriously bureaucratic, over staffed and inefficient. Like Britain’s state owned telecoms, gas, airlines, oil companies, and so on that were privatized in the 1980’s and then enjoyed two decades of strong growth, India’s state organizations stand to benefit if the privatization program is taken through to its logical conclusion and these corporations are eventually bought to market.

–Stuart Burns

Comment (1)

  1. Sunny Sandhu says:

    In a country where tons are led to rot as people die of hunger ,
    where around 2 lakh rupees per person is lying in swiss accounts ,
    government or i would say manmohan singhs economic experiment ,
    does what it loves to do play poker …

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