One is all about boosting investment. Right now, the economy needs all the additional investment it can get, to give comatose growth a shot of adrenaline. If there is spare cash available with the private sector, policy should seek to incentivise it into fresh investment, not into acquisition of old assets. True, the government would get some cash in hand, and could carry out some capital formation, but there are multiple claims on government funds and only a fraction of the capital receipts from sale of public sector units to the private sector is likely to be channelled into new investment.
Senior economist Pronab Sen made this point at a seminar organised by SPJIMR recently, and he was broadly endorsed by the other economists on the panel—V Anathanageswaran, a member of the Prime Minister’s Economic Advisory Council, Rathin Roy and Ananth Narayan. Not one of them is a closet socialist pining for the good old days when the public sector occupied the commanding heights of the economy. Their opinion stemmed from what they perceived to be exigency of the current situation, not ideological bias towards state ownership or hostility towards this government.
The second reason is the price the government would get for its assets. At a time of crashing growth and low animal spirits, the competition to buy up public enterprises on the block would be anaemic and the money the government receives would be significantly lower than what it would get in a good market. Of course, the government would have to borrow from the market to get the money it would forgo by postponing privatisation, but that cost would be lower, by far, than the gain, discounted for the time value of money, to be made from selling the state-owned enterprises when the circumstances are favourable.
The third reason has political implications. Not only would the government be selling its stake in public enterprises cheap, the state would be accused of making funds available cheap to favoured industrialists to buy up the state’s family jewels. Interest rates have been slashed to boost growth in the economy. Offtake is weak and banks are chary of lending. In such a situation, if some big companies seek loans to buy up state-owned enterprises going cheap, banks would lend, happily. There is no reason to drag India’s needed privatisation project into an avoidable controversy: family jewels being handed over cheap to industrial cronies along with cheap loans to finance the acquisition.
In fact, the government should be setting up new public enterprises in sectors that are beyond the risk-taking capacity of Indian business, such as quantum communications, synthetic biology, new materials and the building blocks of microelectronics and communications technologies. What is strategic changes over time. The economy needs certain advanced capabilities to stay competitive on a global scale and some of these capabilities would be beyond the reach of the private sector. The state sector should move into such strategic sectors. Of course, it should vacate sectors that have ceased to be strategic and have become fully amenable to private sector enterprise, such as steel. But the timing of such vacation of erstwhile strategic sectors should be chosen to suit the government.