Disinvestment hiccups

Print edition : September 14, 2002

Dissonance in the National Democratic Alliance over the question of disinvestment comes to a head over plans in the petroleum sector and other dimensions of the ongoing privatisation drive.

FOR all the preceding bluster, there could not have been a greater anticlimax. The September 7 meeting of the Cabinet Committee on Disinvestment supposedly had before it momentous issues and themes: the future of the economic reforms process itself had been pitted against the strategic interests and security of the nation. Leading a virtually solitary charge for the cause of reforms was Arun Shourie, the Union Minister for Disinvestment. Ranged against him were Defence Minister George Fernandes, whose insistence on introducing the security dimension into the debate had earned him an invitation to the committee; Human Resource Development Minister M.M. Joshi, who was obviously representing the case of the guardians of ideological purity in Nagpur, and Petroleum Minister Ram Naik.

Disinvestment Minister Arun Shourie.-SEBASTIAN D'SOUZA/AFP

With the mediation efforts by Prime Minister A.B. Vajpayee and his deputy L.K. Advani failing to narrow differences between the main players, the Cabinet decided to postpone a decision on the disinvestment of public shareholding in the two petroleum giants: Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL). The fact that a clear time period of three months has been specified for bringing the issue back to the Cabinet for consideration, indicates that Shourie was able to put forward a strong case for himself.

The basic arguments against disinvestment in the petroleum sector have been rehearsed and repeated all too often without serious refutation from the other side. The three petroleum refining and marketing companies - HPCL, BPCL and IndianOil - have been consistently contributing handsomely to the Central exchequer and have not for the last decade or more placed any kind of a serious demand on scarce investment resources. When the Central government is running not merely a fiscal deficit but also a major deficit on its revenue account, it makes little sense for it to dispose of assets that earn it a regular stream of profits. This would, to rehash the old analogy from prudent house-keeping, be akin to selling the family silver to pay for the groceries. The case for disinvesment, if at all, can only be made for assets that fail to yield revenues that cover costs incurred in their maintenance.

When the security dimensions were also brought in, it was evident that the case for disinvestment in petroleum was rapidly losing ground. That Shourie managed to hang on for quite as long as he did and make out a case that was for all its speciousness sympathetically received in the financial press, points to certain extraneous elements that influenced the debate. What these could be are fairly clear. And they point to the rapid transition of economic policy in the "reforms" regime from the illogical to the surreal.

On August 31, the Union Cabinet approved a giant bail-out plan for the troubled mutual fund, the Unit Trust of India (UTI), which will at a conservative estimate, total Rs.15,000 crores. Another package for the Industrial Finance Corporation of India, which could cost the exchequer Rs.6,000 crores, is believed to be in an advanced state of preparation. Rather contrarily, with all these additional expenditure commitments being undertaken, Finance Minister Jaswant Singh has pledged himself to a policy of moderation in taxation. His first major decision since taking charge of the Finance Ministry in July was to hand out a series of tax concessions for the middle income groups.

Defence Minister George Fernandes.-AJIT KUMAR/AP

In announcing the UTI rescue package, Jaswant Singh made the rather heroic claim that it would be entirely "revenue neutral", with no implications for the budgetary balance. The entire financial requirement would, in other words, be met through bonds and guarantees. This is a device that has been much favoured in recent times. The public sector banks in the mid-1990s had their capital augmented to meet new prudential norms through an issue of bonds, which will be due for redemption in the near future. More recently, the oil pool account deficit was bridged through a similar issue of bonds prior to the decontrol of oil price. Guarantees are contingent liabilities which would devolve on the Central government in the event that UTI fails to meet its obligations to investors. Bonds are deferred liabilities which would in the immediate future entail an interest burden on the Central government. But they would not cause a dent in the fiscal apparatus, except at the time of redemption.

True believers in the "reforms" agenda have been a trifle disturbed by this expedient. It is quite transparently a means to keep the more onerous financial burdens off the budgetary books, merely postponing the reckoning for the duration of the bonds' maturity. Rather than adopt this high-risk strategy, the true enthusiasts of reform have urged that a massive public sector disinvestment programme be pushed through to fund the restructuring of troubled public financial institutions.

An alternative route was proposed by policy realists who feel a sense of accountability for the UTI's travails and are aware of the pitfalls along the disinvestment route. The UTI, they point out, holds large blocs of shares in several major companies in the Indian corporate sector. It could start offloading some of these assets in the market, pacing out the transactions judiciously so as not to undermine market valuations drastically, and raise the liquid cash required for its bail-out over time. And if no viable schedule of market operations could be worked out, the policy of "strategic sales" was an obvious alternative.

Curiously, "strategic sales" of UTI assets was firmly ruled out of court very early in the day, ostensibly because of the risks of jeopardising the shareholding pattern of the Indian corporate sector and destabilising existing managements. That the same arguments were not given quite the same credence when it came to public control of the strategically vital petroleum sector, is an indication of certain biases inherent in the policy debate today.

Another factor that underpins the ardour of the disinvestment lobby is the presence on the wings of India's largest private enterprise, Reliance Industries Ltd (RIL). Since its refinery in Gujarat was commissioned, RIL has been uneasily dependent upon IndianOil to market its products. It has with its characteristic audacity sought to drive an advantageous bargain, only to be rebuffed on several occasions. Early this year, it put in a bid for a controlling stake in IBP Ltd only to suffer the mortification of seeing IndianOil making off with the prize with a bid that was twice as large.

The growing tensions between RIL and Ram Naik have been the talk of Delhi's political circles for months together now. That these may have in some oblique way influenced the series of media leaks about highly questionable allotments of petroleum agencies by Naik, has also been the subject of much speculation. Yet in the ideologically driven disinvestment programme that Shourie presides over, RIL has enjoyed some favour. It was able to overcome serious reservations about its growing monopoly control over the petrochemicals sector and take over the giant Indian Petrochemicals Corporation Ltd just a few months back. And there is little question that when HPCL and BPCL are placed on the auction block, RIL will be one of the few Indian corporate entities that could make a serious bid. Shourie has in recent times been thinking out aloud about the advisability of proscribing a bid from IndianOil for the other two petroleum giants. If raising cash for the Centre is his sole motivation, then there is little reason why he should be thinking along these lines.

The more committed zealots of privatisation argue that the only antidote for monopoly is foreign participation in the petroleum industry disinvestment process. How the national interest will be served by allowing in the predatory giants that dominate the global petroleum industry is yet to be explained with any clarity. But then, it has for long been clear that the disinvestment process that Shourie presides over has little in the nature of an economic rationale. The country, however, may just be waking up to the serious costs to the public interest that his ideological crusade could cause.

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