Good judgment is needed to push privatization: The Tribune India


Undergo Roy

Senior economic analyst

NEVER since the 1990s, when as part of new economic policies the government sought to step back from its previous position of holding the top of the economy, the public has slowly acquired shares in the blue chip industry. public. This process resulted in the avowed policy of the current government to divest as much as possible its participation in the public sector without seeking to retain control, that is, towards outright privatization.

But privatization is not easy and as long as the government remains a major shareholder, it must be careful what it does. The government’s recent experience with the bloody Indian Railway Catering and Tourism Corporation (IRCTC) offers a despicable lesson in how to deal with investor sentiment, although it theoretically can do pretty much whatever he wants with the fact that he owns a controlling stake in the company.

In another recent development, the process of government withdrawal from ownership of business entities has come full circle. At the height of privatization, the government began to float and own a development finance institution (DFI) again by establishing the National Bank for Infrastructure and Development Finance (NBFID). It was then that with the conversion of IDBI and ICICI into commercial banks, it was assumed that DFI was a dead idea whose time was over.

The sum total of the lessons learned from these two cases is that while the government does not have to be in business, its entire approach to privatization needs to be nuanced and it will hurt its public image if it is wrong in the process. illusion that one size fits all. .

In other words, we return to this terrible idea, symbolizing political interference in business decision-making, taking what is called a “case-by-case” approach. In a broader political sense, it can be said that there is only one rule that is never broken – namely, all the rules will have to be broken at one point or another.

Now the details of the two instances. The government owns 67 percent of the shares in IRCTC and, as the de facto owner, can do pretty much whatever it wants. The IRCTC also has a sort of monopoly – in online booking of rail reservations and catering on the railways. This is a key source of revenue for the business, with the fees it charges for booking online representing up to 71% of its excess (PBIT or earnings before interest and taxes).

So one fine morning, in his constant search for income, he decided to ask IRCTC to share 50 percent of what he earns from the reservation service. All hell broke out in the stock market immediately, with IRCTC stock plunging nearly 30%. The government realized it had blundered, and to its credit, without sitting on prestige, in less than 24 hours, overturned its decision to pick up the pocket of the IRCTC.

No prizes for guessing how the stock market reacted. The share price rebounded and, in a sense, all was forgiven and forgotten. The whole episode should be seen in the context of the government’s initial sale of part of its stake in the company to the public through what is called an “offer to sell” which met with a huge success because the investing public knew that the IRCTC has a secure source of income without having to do anything to sell the product (online reservations).

Now we come to development finance institutions and NBFID. In the good old days, there were three IFDs – IDBI, ICICI and IFCI. Their job was to lend for the set-up of infrastructure projects that needed so much funding and the gestation period (the time it took to reach equilibrium, if it ever got to this point) so long that the commercial banks of the time which only handled short-term deposits and loans could not afford to finance them.

DFIs were able to lend to long gestation projects because they had access to long term funds, unlike commercial banks. They could issue securities that provided them with longer-term funding and, by and large, they operated under special dispensation from the Reserve Bank of India (RBI).

Then came the currency crisis of 1991 and the Narasimha Rao government with Manmohan Singh as finance minister. The government felt that the stock market and banks could finance long gestation projects and DFIs were a headache because they made little money and swallowed up a lot of government money.

Thus, IDBI and ICICI converted into banks (IFCI was in the red and became moribund). But lately, the IDBI has been in trouble because its overload of non-performing assets has been declared a “weak bank.” The government had no desire to invest a lot of money in it and therefore asked LIC to take it over, thus making it technically private property. The government has now announced its intention to privatize IDBI in the true sense of the word. Of the trio, therefore, only ICICI manages to survive on its own.

At the same time, the government whose main agenda is to advance the country’s infrastructure sees an urgent need for a conventional DFI. Therefore, he designed one and created the NBFID which will have both development and financial goals.

It will help develop a deep and liquid bond market in line with international standards for long-term infrastructure finance in India. In addition, it will develop markets for various types of derivatives (for interest rates and currencies). It will also seek to bring equity capital from global institutional investors to India with a view to attracting green finance. For example, financing solar and wind energy projects, as well as the capacity to manufacture solar energy modules, will be an area of ​​interest.

Thus, it will invest both on its own and also play a role in creating an ecosystem that will facilitate investment in infrastructure, from domestic and foreign sources. To facilitate investment in NBFID securities, the government has designated them as “approved” securities, thereby giving them the status of treasury bills and longer-term government securities. The objective will be to support infrastructure projects throughout their life cycle by promoting the financing of sustainable infrastructure.

What both examples tell us is that privatization is a complex process in which, at the end of the day, the government must adapt its approach on a case-by-case basis.

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