Can India’s privatization push revive its economy?

The Indian government’s deal to sell its flagship Air Indiawas touted by supporters as a landmark move in a drive to privatize the debt-laden airline, and other public services.

Critics say privatization could mark a decline in the quality of government-supported organizations.

Air India’s privatization drive had been in the works for about four years. However, past attempts to offload the loss-making airline hit several roadblocks, including government insistence on retaining some shares in the airline, and political backlash from left-wing parties.

Ultimately, it was Tata group, India’s oldest conglomerate, that agreed to pay $2.4 billion (€2.1 billion) for the carrier in October 2021. The sale is expected to close in December.

Several state-owned companies ‘for sale’

The government’s most determined push for privatization came during Finance Minister Nirmala Sitharaman’s budget speech in February, in which she unveiled an ambitious plan to sell large state-owned companies.

The minister announced that with the exception of four strategic sectors, the government would either privatize or close all public sector enterprises (PSE).

These strategic sectors include atomic energy, space, and defense, transport and telecommunications, power, petroleum, coal and minerals, and banking, insurance, and financial services.

However, even in these four strategic sectors, the government would retain “a bare minimum” number of firms, Sitharaman said.

Privatization in India has become a politically sensitive issue. It was one of the key reforms in 1991 when the government opened up the Indian economy, saving it from the brink of collapse.

It gained fresh momentum at the turn of the century under the right-wing government led by the Bharatiya Janata Party (BJP).

But divestment has courted political and legal controversies.

“The fear among the political class is that when the public sector enterprise is privatized, a lot of the jobs are lost,” said Shankkar Aiyyar, a political economy analyst and author of The Gated Republic: India’s Public Policy Failures and Private Solutions.

“But what they are unwilling to accept is that 100% of the jobs are lost when the company has sunk into the ground,” Aiyyar told DW.

Successive governments were hesitant to pursue privatization until it was revived by the current government.

“Every political party, when in government, promotes privatization, and opposes it when in the opposition,” Aiyyar said. “This Jekyll and Hyde personality of Indian politics persists.”

“If enough jobs were being created elsewhere in the economy, privatization would not have so much resistance and pushback,” he added.

The case for privatization

The underlying rationale behind the privatization of sluggish government-run companies is that they would perform better in private hands.

Proponents of the plan also argue that selling these large companies would raise billions of dollars that could bolster the government’s resources.

“We need to have success in liquidating some of these companies, closing them, selling the land and the assets. This we have yet to achieve,” said Ajay Shankar, a retired senior bureaucrat who led the government’s Department of Industrial Policy and Promotion.

The proceeds could fund new infrastructure and replenish government finances battered by the coronavirus pandemic, Shankar argued.

Profit not the only goal

Opponents of privatization say public sector enterprises were formed with all kinds of objectives, and profit-making was not among the primary goals.

Prabhat Patnaik, a Marxist economist and former professor at New Delhi’s Jawaharlal Nehru University, argues that being unprofitable is a symptom of inefficiency.

“Some of these companies were formed to develop technological self-reliance, others to tap the mineral resources of the country and make sure that the proceeds of the resource come to budget,” he told DW.

On the other hand, a foreign company in India could be highly profitable, but still not bring value to the Indian economy, he said.

Patnaik described privatization as akin to handing over the nation’s wealth to a “bunch of private oligarchs” in the name of reform.

Government ownership of companies usually promotes an underlying commitment to public welfare.

In many cases, public sector enterprises maintain prices for their goods and services that are affordable to the general public.

Economists have long called for reform within the public sector enterprises.

“The government can give financial autonomy and streamline the functioning of these companies, but it cannot simply hand over public sector enterprises for a song,” said Patnaik.

“The amount that the government is getting in every case is just a tiny fraction of the assets of the company.”

Is divestment better than privatization?

As the government faces a fiscal deficit and a slowing economy, made worse by the pandemic, the need to raise funds has become more pressing.

But Patnaik argues that from a macroeconomic standpoint, privatizing an asset is the same as a fiscal deficit.

“Handing over a public enterprise means putting equity into the hands of a private buyer,” he explained.

“Fiscal deficit means putting bonds into the hands of a private buyer. The macroeconomic consequences of the two are exactly the same.”

“The whole argument that selling private companies gives the government resources is a false one,” Patnaik added.

The government, according to officials, is expecting 500 billion rupees (€6 million, $6.7 million) in dividends from public sector companies in the current fiscal year.

Many have called for divestment as an alternative. This would mean that the government sells some of the shares and assets in its companies, transferring control to the private sector without a change in ownership.

Supporters of the plan additionally argue that a public-private partnership would attract the best professional managers from the market to publicly funded companies.

“There is every reason for the government to own what it owns but there is not enough justification for it to manage what it owns,” author Aiyyar said.

“Ultimately, the fewer economic entities managed by politicians, the better it is for the economy,” he said.

Edited by: Leah Carter