The Disinvestment debate

To the loony Left, privatisation of state-owned enterprises is anathema, even when it is termed disinvestment in the quintessentially Indian formulation. Manmohan Singh has already indicated that privatisation of state-owned oil and gas companies will have to wait. For a time it had appeared that the debate over privatisation was over: and the government had decided to get out of business for good. But the Congress-Left alliance’s return to power has re-kindled that old debate.

That is unfortunate. That debate should have ended by now.

Observing the privatisation process in India over the last decade has led to a simple (well known) conclusion – market competition and privatisation are necessary for economic growth. State-owned companies have only been profitable when they have been shielded from market competition and allowed to operate as monopolies – that is the inevitable conclusion from Sudhir Naib’s seminal book on Disinvestment in India

First, when market power is significant there is no systematic difference between public and private firms. Second, in competitive markets where other allocative inefficiencies associated with market failure are not substantial, often, private firms are more efficient than public ones. Third, the key factor driving performance is competition. When public enterprises operate in markets where they have market power, they do just as well (or poorly) as private firms operating under similar markets under regulation.

Out of 38 disinvested enterprises examined, six recorded losses; they include Hindustan Photofilms, Hindustan Machine Tools (HMT), ITI and the Steel Authority of India Limited (SAIL). On the other hand, ONGC, IOC, the Gas Authority of India Limited (GAIL), VSNL, Neyveli Lignite, Bharat Heavy Electricals Limited (BHEL) and several others increased their profitability. The explanation that the author offers is that the fall in profitability was in the case of enterprises operating in a competitive environment while improvement in profitability was in the case of enterprises operating in a monopoly environment. [Frontline]

State-owned enterprises operating as monopolies come at a tremendous cost to the taxpaying citizen. Remember the long waiting lists for telephones and the exhorbitant charges for international phone calls?

1 thought on “The Disinvestment debate”

  1. Totally agree. The Govt can’t be both player and referee in the same game. To be a fair arbiter to business, the govt must first itself exit business and then regulate business keeping consumer interest, and thereby net social welfare, paramount. It’s no secret that the exorbitent airfares and ISD calls to and from India are a result of misguided govt protection of own interests in PSUs like VSNL, BSNL, Air India et al. Time, we got this right!

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