PSU banks are important for the government’s social outreach
program to be indiscriminately disposed of
Ever since British Prime Minister Margaret Thatcher opened up
the London financial markets on 27 October 1986, there is a tendency to slot
reforms. Big-bang modifications are sought to demolish entrenched practices in
contrast to incremental revisions unveiled one step at a time. The aim of the
two approaches is the same: to make the system efficient. A sudden recast can
overwhelm stakeholders who have to adapt to the new environment without any transition
period. The outcome might not be visible immediately but casualties are in
plain sight, raising doubt about the exercise. Both demonetization and the
goods and services tax are expected to widen the tax base though high-value
notes were scrapped overnight and uniform indirect tax slabs were launched
after years of preparation and false starts. What was evident in the short term
was the discomfort experienced during the transformation. The introduction of electronic
trading and settlement was a major inflection point for investors. The process
was undertaken in small doses. Dematerialization of large caps was followed by
mid and small caps. The lower valuations attached to physical shares accelerated
the push to digital format. Nonetheless, it took 22 years since its
introduction to enter a completely paperless regime from end December 2018.The
annual budget exercise too is used to plug loopholes and launch initiatives. With
a few exceptions, such as in 1991, when the economy was opened across the
board, the announcements are not clubbed with measures that irrevocably change
the way business is done. Investors tend to separate the run-up and the period
after the change as different eras.
Despite undertaking four major disruptions including making
the real estate sector transparent and accountable and passing the bankruptcy
law, the appraisal of Narendra Modi’s track record invariably features the
sluggish pace of the privatization program. Comparisons are made with the NDA-1
government’s aggressive thrust, when a dedicated ministry was set up to
fast-track partial or complete withdrawal from PSUs. Diluting holdings in banks
and oil explorers and refiners despite facing resistance are cited as the
resolve of the AB Vajpayee government in getting out of running companies. In
contrast, the first tenure of the NDA-2 government was marked by PSUs buying
shares of other PSUs. Offers for sale to retail and institutional investors
were in bits and pieces. Now, 35 profitable and loss-making Central enterprises
have been identified for outright disposal despite the bizarre outcome of
strategic sale during the previous NDA rule. A hospitality property was resold
by the acquirer for a higher price. Another is again on the block. The three
hotels of the ITDC group barely managed to scrape through. There were no takers
for 51% share capital of Fertilizers and Chemicals Travancore despite the lure
of dual pricing and higher subsidy. It took 16 years for the Tatas to get
permission to monetize the land that it had bagged with the 25% equity in VSNL
in 2002. The failure to get any bidders for over three-fourth holding in Air
India due to its Rs 33000-crore debt is a rude reminder that PSU assets are not
exciting buyers. It is now clear that the enthusiasm of the disinvestment drive
20 years ago cannot be replicated.
What has changed? The
subsequent UPA- 1 and -2 governments did not build up the momentum by giving
operational freedom to even those PSUs that are listed. Petrol prices were
de-regulated in 2012 after a committee’s recommendation a decade earlier. It took another seven years to free diesel. Fuels,
however, continue to remain outside GST, enabling the Central and state governments
to revise taxes as per political expediency. Phone-banking ensured credit lines
to cronies. The pile-up of NPAs turned off investors from PSU banks. Remedies
such as recovering bad loans through bankruptcy proceedings, insulating
appointments of top officials and business decisions from political
interference and capital infusion are making them attractive. Merger of
associates with SBI and among three government-owned lenders is leading to consolidation
in the space. The use of banks for last-mile transmission of many welfare
schemes had triggered a clamor for the government to retreat on concerns that
Mudra loans to set up micro enterprises have the potential to turn sour. The
din subsided on revelations of governance missteps at some private banks. As
Gujarat chief minister, Modi turned around salvageable state organizations by assigning
bureaucrats instead of politicians to run them. That the Nifty PSU Bank index
has outperformed the Nifty and the Nifty Bank index since the last two phases of
the Lok Sabha polls captures the market’s optimism about their return to health
rather than ceding of government control.
-Mohan Sule
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