Karnataka's agenda

In Karnataka the disinvestment programme does not restrict itself to privatisation; it has led to a large-scale closure of once-thriving state undertakings.

in Bangalore

A VIGOROUS and rapid disinvestment drive in State undertakings is currently under way in Karnataka. `Disinvestment', a term from the World Bank lexicon, might appear far less loaded than `privatisation', which better describes the process. Indeed, a disinvestment policy does not restrict itself to privatisation measures alone, as the Karnataka experience has shown. It also envisages a policy of large-scale closure of state undertakings, if the privatisation option is seen as non-viable.

A concrete move towards a comprehensive dismantling of the State sector was first made with the establishment of a Public Sector Restructuring Commission in March 2000. The agenda was, however, set in motion in February 2001 when the S.M. Krishna government announced its policy on Public Enterprises and Reforms. In August 2002, a Department of Disinvestment and Public Enterprises Reform was establshed. D.B. Chandre Gowda, Minister for Law and Parliamentary Affairs, is now additionally in charge of the Disinvestment portfolio. For a State government facing a severe resource squeeze and mounting deficits, amputating loss-making state sector units may in the short run outweigh the negative consequences of their closure/privatisation, namely, the loss of around 10,000 jobs in the first phase of disinvestment. This figure will double, at the very minimum, when the second phase of disinvestment is complete by mid-2005. In the long run, however, the multiplier effects of a policy of forced de-industrialisation, particularly in the spheres of employment and production, may not be easily compensated by the promised benefits of privatisation and market reforms.

``The fact that disinvestment will hit employment and production is something that we are very conscious of,'' Chandre Gowda told Frontline. "However, these undertakings have become white elephants, and they are sinking. In order to revive them you need more than Rs.6,000 crores which the State cannot afford.''

Karnataka has had a strong tradition of state sector-led industrialisation. Bangalore owes much of its growth to the establishment of several public sector industries in the 1950s, which in turn spawned a thriving small scale sector of ancillary units. This phase of industrialisation also gave rise to a large number of technical training institutes. They produced the technical manpower that in the initial decades after Independence was absorbed by a burgeoning industrial base, and later by the information technology boom. But this is only one side of the picture. Prior to Independence, the princely state of Mysore under Nalwadi Krishnaraja Wadiyar and his illustrious Dewan, Sir M. Visveshvarayya, started several ventures that created employment and generated other economic spin-offs. Among these were the Mysore Iron Works (later the Mysore Iron and Steel Works), the Mysore Sugar Factory, the Mysore Soap Factory, the Mysore Paper Mills and the Mysore Silk Weaving Factory. Independence bequeathed to the new State a thriving public sector. Itwas expanded by successive governments in Karnataka. The 1990s saw the performance of the State sector dipping, both owing to years of bad management practices and new forms of competition in the wake of liberalisation.

Restructuring of the state sector has been on the government's agenda ever since. However, the terms of reference given to the Public Sector Restructuring Commission did not appear to suggest that a radical dismantling was on the cards. The terms included the evaluation of state public sector enterprises (PSE) for the purpose of promoting greater productivity and profitability; making suggestions for the reduction or elimination of budgetary support; and showing ways to make viable undertakings autonomous and profitable. The Commission was asked to evolve a long-term reforms programme that would help the government identify a) those PSEs that need state support, b) those that need strategic partners and c) those for which restructuring measures could be suggested.

In 1999, Karnataka embarked on a major reforms programme to make itself eligible for a World Bank loan. The first tranche of the $150-million the Karnataka Economic Restructuring Loan (KERL) was sanctioned in 2001 with an important conditionality of accelerating public sector reforms. The government of Karnataka showed it was serious about its agenda by announcing that Policy on Public Enterprises and Reforms.

The policy presents a harder position on reforms than was reflected in the terms of reference given to the Public Sector Restructuring Commission. The policy states that PSEs that are commercial in nature and are in competition with a strong private sector presence would be "restructured'' through privatisation or closure. Those not involved in commercial activities would be restructured by the induction of strategic partners, or through mergers, so as to reduce dependence on State budgetary support. No new PSEs would be started unless for the "expeditious execution'' of specific major projects, for example for infrastructure projects. Finally, "rationalisation'' of employment in the PSEs would be ensured through implementation of voluntary retirement schemes.

The Restructuring Commission was asked to take a decision on 20 of a total of 78 PSEs that have a total of 1,62,000 employees. Out of the 78, five are utilities (public and power utilities), dealt with separately under the reforms programme; 32 are manufacturing enterprises, 23 are service and marketing enterprises, 16 are development enterprises, and two are financial institutions. Based on March 1999 data, the government investment in these undertakings was Rs.6,393 crores out of a total investment of Rs.18,331 crores. Only 35 companies showed profits (Rs.265 crores); 33 showed losses (Rs.204 crores); and 25 PSEs showed negative net worth.

Based on the recommendations of the Restructuring Commission, 10 of the 20 PSEs are to be closed (with two more likely to be closed); four are to be privatised; and in the case of five, decisions are yet to be finalised .

The Commission was guided in its decisions by criteria such as carried forward losses, government's commitment by way of loans and share capital, and the question whether the company was involved in an activity for which a strong public sector presence was necessary.

The Commission recommended 19 PSEs for privatisation/closure in Phase-II of reforms. The High Power Committee set up to monitor public sector reforms has cleared 13 PSEs for disinvestment.

THE trade union movement has been critical of the disinvestment drive. However, it has been unable to stop it owing to its own weaknesses.

``Disinvestment can hardly be described as state withdrawal,'' said V.J.K. Nair, Karnataka State president of the Centre of Indian Trade Unions (CITU). "This is state intervention in favour of capital and global monopolies, and against the interests of society in general''. Nair gave examples of several highly rated and profitable state sector undertakings that were driven into losses. "Mysore Lamps was the best service industry in the electricity sector. It serviced several large municipalities, and had the best technology in sodium vapour lamps. NGEF was one of the finest industries in this sector. There are monopoly interests behind the closure of these two industries.'' The products of Mysore Paper Mills, according to him, did exceedingly well even in competition, as the company had its own forests, and also made paper from bagasse, a waste product of sugar mills. Mysore Lac Industries is the only company making indelible ink. "State sector losses are not just a story of corruption. There was a political drive to see the state sector liquidated,'' he said.

An entire lot of skilled workforce thrown out of jobs with tardy compensation packages can hardly find jobs for which they have been trained. The ancillary sector has virtually collapsed. The industrial township of Peenya, on the outskirts of Bangalore, once a thriving estate of small scale units, has practically closed down. The impact of privatisation is already in evidence.