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Modi govt must push PSUs to compete with the private sector

By AK Bhattacharya
August 25, 2014 13:42 IST
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Prime Minister Narendra ModiWith the Modi government not keen on privatisation, it is imperative for the petroleum and natural gas ministry to adequately strengthen the public sector units in the sector to help them face the new competition from the private sector. 

It has become more than clear by now that the Narendra Modi government's treatment of public sector undertakings (PSUs) will not be very different from the way the Manmohan Singh government treated them in the last 10 years.

Yes, the disinvestment of government equity in PSUs will continue, to help the government bridge its fiscal deficit, but there would be no outright sale of such units or dilution of government equity in them below 51 per cent.

Indeed, this is one policy area where the Modi-led government is different from the one that was headed by Atal Bihari Vajpayee.

That government, from 1998 to 2004, had privatised about a dozen PSUs through strategic sale of its equity in them, in addition to selling off as many as 18 hotel properties of the state-controlled India Tourism Development Corporation.

In contrast, the Manmohan Singh government diluted its stake in many PSUs, but there was no strategic sale of shares leading to privatisation.

Take what the Modi government is planning for the public sector banks' recapitalisation to help them meet the new and more stringent capital adequacy norms stipulated under the Basel-III arrangement.

One option could have been to allow a few of these PSU banks to raise capital from the market, which would have diluted the government's stake in them below 51 per cent.

Remember that the Vajpayee government had mooted the idea of diluting government equity in PSU banks to 33 per cent. However, that idea met with stiff resistance from many quarters and it was dropped.

What is the Modi government doing about it now? It has ruled out the idea of reducing government stake in public sector banks below 51 per cent.

Instead, it is moving a Cabinet note to create a holding company for all public sector banks, which will then be less constrained to raise capital from the market.

And the concern over any dilution of government stake below 51 per cent would be somewhat reduced.

The proposed structure of the holding company and its relationship with the subsidiary banks are still not clear and the finance ministry is in consultation with the department of legal affairs in the government to finalise the details.

But what this exercise underlines is the Modi government's conservative approach to PSUs as far as their ownership is concerned.

At the same time there are legitimate concerns within sections of the government on how the PSUs will be able to face increasing competition from the private sector and not be a drag on the central exchequer because of their increased need for funds and other kinds of support from the government.

Already, public sector banks have faced the heat of competition from the new-generation private sector banks.

Similarly, state-owned insurance companies have seen a steady erosion in their market share, thanks to the entry of private players. Once the foreign investment norms for the insurance sector are eased, the competition for public sector insurance companies will become more intense.

A similar - in fact far worse - fate had awaited the state-controlled telecommunication companies after the entry of the private sector in this area in the 1990s.

Today, companies such as MTNL and BSNL have been relegated to being relatively small players in key markets, thanks to the rapid growth and expansion of the private telecommunication companies.

Even selling their stakes are a problem and fraught with the danger of getting a poor price and response from the capital market.

The petroleum sector is another area where the public sector will come under increasing pressure in the months to come.

With the international crude oil prices hovering at around $100 a barrel, the Modi government's stress over oil subsidies will be much less as the state-controlled oil companies' under-recoveries are set to be wiped out.

The government's oil economy budget had assumed the rupee-dollar exchange rate at Rs 60 and crude oil prices ranging between $105 and $110 a barrel during the year. On both counts, the government and public sector oil companies have been net gainers so far in the year.

A fallout of this development is that private sector oil companies are planning to re-enter or expand their retail marketing operations.

Earlier, they had scaled down their retail operations in view of the widening gap between the retail prices and the costs of marketing the products and processing the crude oil (also known as under-recoveries for the marketing companies). What this means is that the competition for the state-controlled oil marketing companies will get more tough.

Consumers will certainly benefit since they will have a choice and private sector marketers will do everything in the book to increase their market share.

The good news is that within the petroleum and natural gas ministry there is an increasing awareness about the need to strengthen the marketing and management skills of the public sector oil companies.

Oil and Gas Minister Dharmendra Pradhan is reported to be focused on reviewing the way the state-controlled oil companies are preparing to face the competition ahead even as the government plans to eliminate the remaining price controls in the sector in the coming months.

With the Modi government not keen on privatisation, it is imperative for the petroleum and natural gas ministry to adequately strengthen the public sector units in the sector to help them face the new competition from the private sector. Whether that will help the oil and gas companies in the public sector is, of course, a different story.

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AK Bhattacharya
Source: source