Improving India Part 3- On Privatization and Disinvestment of PSUs
A Case Study of Indian Telecom
This is the third article in the Improving India series.
Our Indian Finance Minister had announced that the Government would be strategically disinvesting certain PSU’s for better management of government resources. This move has attracted a lot of criticism in the Indian circles where a lot of us calling the government various adjectives like “corporate slaves”, “Ambani Agent”- as if looking upto Ambani as a hero is something to be ashamed of. In this article, I would be explaining the need for divestment and privatization of Indian PSU’s and how it would impact us in the long term. I would be taking the example of telecom sector- one which is virulently abused by decades of “nationalization”.
TABLE OF CONTENTS
In this article, I would touch upon the following points
- Why do we need private companies?
- What sectors must the government ideally be concentrating on?
- Why are most Indian PSU’s in bad shape- Case Study using Telecom
- Would privatization of PSU’s really lead to poor services?- A Case Study using Telecom.
- What should be the larger role of the government?
- Is the move to privatize the PSU’s good or bad?
But before that- some history lessons first.
India picked “socialism” as a middle path in 1947 and it was not as if we had done an elaborate case based analysis on which economic models would be better. To be fair with Nehruji- [I have the highest respect for Nehru, BTW], in hindsight- both the supporters and the opponents of Nehru- say a lot of things in favor of their argument.
But the fact is Nehru’s economic priorities and favor of a closed economy at that time was due to a lot of factors- Nehru’s world view being shaped by his European University education where Communism/ Socialism was appealing, and lack of a proper economic right wing in India to counter Nehru’s left wing economic policies.
Horror of 1980's
The 1980’s were one of the darkest decades in Independent India’s history. Wars, communal riots, ethnic cleansing- all of them caused and exacerbated by the lack of economic opportunities.
When the rest of the world was racing ahead in the boom post the Cold War, India sucked due to a lot of poor political and economic choices. China , USA, Russia- the three major powers accelerated in their economy. So did our Eastern World- Japan, Indonesia, Singapore, Korea.
Why do we need private companies?
Imagine a world where there are no corporations and the government controls everything. Wait- we need not imagine. We can just turn around and ask our grandfathers and fathers how long it took for them to get a simple landline connection to their house, or book a scooter, or open a bank account. The answer would be anytime ranging from 2 weeks to 2 months depending upon the availability of resources. Today- I can easily get more than 5 connections in my name, can easily collect data about the vehicles I want and make a choice, and opening a bank account is just a matter of filling an online form and verification which happens within couple of business days.When the government controls the means of production, supply-chain and distribution , it results in corruption, delays and a higher cost which has to be borne by the end user. Why can’t the government do this efficiently?. The answer to that is government’s forte is not doing business. Policy making and running a business are two different domains and you cannot expect one person with an experience in only one of these domains to do both and be successful. There has to be a balance
Having private companies in strategic sectors which impacts public gives incentives to innovate and add better value to consumers.
What sectors must the government ideally be concentrating on?
This is a question I am often asked. What sectors should we leave for private players in India?. Can we trust our private sector to handle it properly?. Isn’t government sector safe and secure when it comes to jobs?. Should not there be a trade-off between social good and quality?. Why can’t we sacrifice efficiency in the short term for the cause of common good?.
The simple answer to the question is — anything that the private sector can handle it better than the government- should be left to the private sector. For example, the following sectors should be left to private players in India:
> Airlines
> BFSI
> Telecom
> Hotels and restaurants
> Travel and tourism
> E-Commerce
> Construction and Real Estate
> FMCG
>Automobiles
In India, the government should be limited to only these sectors
>Defense
> Police and security
>Infrastructure
>Power
>Railways (for why Railways needs to be with government, you can refer to Part -2 of the Improving India series)
Indian Government was in the business of almost all the above sectors and even in 2020, it has a major stake in telecom, airlines, automobiles, hotels. These defunct PSU’s are sucking a lot of money which the government could otherwise spend on healthcare, infrastructure and defense.
Why are Indian PSU’s in such a bad shape?
Here, I am going to take the example of telecom sector where we can starkly see the difference between the PSU and private players in terms of efficiency and quality of service. You can take any sector — airline, hotel chain, automobiles, but the underlying principle is the same
The above figure shows that there are over 676 million Broadband subscribers and 1170 million telephone subscribers in India as of April 2020.
In terms of market share by volume, private players have nearly 90% of the market. PSUs like BSNL and MTNL have little over 10%.
Lets look at some more data:
The above financial statement of BSNL shows the employee benefits expense [salaries, gratuity, bonuses] to be the highest component which is more than 14 trillion INR. This incurs a loss of nearly 30 Lakh per share of BSNL. The next cost component is the financing costs of nearly 8000 Million INR. Please take a moment to digest the enormity of these numbers, and imagine why PSU’s are running in losses.
Lets posit this PSU against a private player with nearly 3 times the market share of BSNL.
As against BSNL- the employee benefits is just 60 billion INR for JIO, whereas the same number for BSNL is for 14 trillion INR.
Infact, the major portion of expense for Reliance is not employee benefits, but goes towards raw material acquisition. Contrast to this- BSNL spends less than 10% of what it spends on employee salaries towards acquiring new licenses. Financing costs of Reliance are less than a hundredth of what BSNL spends on the same.
Would privatization of PSU’s really lead to poor services?
This is another misconception amongst some educated youth that public sector reaches the poorest of poor more than the private players. But when we dig into the data, we can see that this claim does not have a leg to stand upon
As you can see, there has been a steady decline in the # of subscribers for BSNL and MTNL . Infact- most of the BSNL market is comprised of Wireline subscribers, and even BSNL is losing this segment to Reliance and other private palyers
The big red line towards the far right shows how much the BSNL had lost even in its traditional market. Should we continue to keep funding the loss making PSU’s?.
What should be the role of the government?
In successful countries with lesser corruption perception index, the role of the government is maintained to a minimum. It should be the same in India as well. The role of the government should be that of an enabler
- Create a framework that sets and enforces standards. Like having a clear tax paying mechanism and a transparent audit process of the same.
- Execution of penalties for social costs. Many times there are a lot of social and environment costs that occur [in case of factories- releasing pollutants into rivers and air]. The government should tax the companies for the same and compensate the public who are impacted by the cost
- Enforce a contract- that if you had opened a factory or a new mine, you should stay in the country business for a set period of time and be in profit for that time. That ensures the company does not run away with the money and at the same time stays competitive
- Create SEZs- This comes as part of Infrastructure/ Urbanization category [that article is in progress] which fosters innovation and employment.
Is the move to privatize the PSU’s good?
I feel this is one of the best decisions taken by our finance minister so far. Lets go back to the BSNL scenario. If the government sells BSNL, it can save 14 trillion INR per year , which otherwise goes into paying the employees and and 8 Billion INR which goes into funding a defunct PSU which incurs a loss of 30 lakh INR.
This money can be used to fund a lot of other infra projects, social schemes and even build that temple in Mathura..[just joking on the last one…;-)]
