The primary aim of a democratically elected government is to provide good governance without an authoritarian approach to the administration of the people. Generally, the government concentrates on matters pertaining to financial and economic policies along with other functions like internal and external security and foreign affairs. Apart from this, it gives the utmost priority to public health, value addition for human resources, infrastructure for the ease of living and industrial setups, remunerative prices for agriculture and farm infrastructure, trade, industries and commerce for the furtherance of the nation with social responsibility.
The implementation of the post-1990s reforms became mandatory for the country irrespective of the ruling party, especially for executing their tasks in all the sectors connected to finance and the economy. The primary goal of any popularly elected government was to discharge its responsibilities for serving basic amenities to the people, along with the vital tasks of internal and external security, and minimize their role in other unimportant functions since the government had a limited role in those areas in the post-Reforms era. The then Union Government had established Public Sector Undertakings (PSUs) after 1947, since India was formed as a structured democratic country with new aspirations after the freedom struggle. Thereafter, there was a requirement to provide employment opportunities and boost economic activity for our new country as there was a huge investment crisis domestically at that point in the private sector, due to limited resources and other constraints. These PSUs have served the nation all these years without any doubt, but simultaneously, there have been a lot of changes in the global economic scenario in the last 30 years. These have impacted India, and given the competitive environment today, the output of our economic activity has become important because it affects our presence in the global market.
In the year 1990, the then Union Government had taken a policy decision to remove the License Raj and facilitate Foreign Direct Investment. It had recommended disinvestment from PSUs in a phased manner as taxpayer money was being utilized to provide assistance for the losses. Such assistance is seen as unproductive expenditure and such approaches caused a shortage of funds which were needed for productive developmental expenditure. But, instead of shutting down the PSUs causing losses, the Union Government is accepting offers for private participation by means of divestment of shares, in part or whole, in the loss-making non-strategic PSUs. The objective of disinvestment is to either operate the loss-making PSUs by provisioning to perform capacity utilisation efficiently to achieve productivity with the available sources and alternatives or to accept private participation by the disinvestment of government shares for achieving the targets of production, productivity and cost effectiveness by optimum utilization of existing capacities or the expansion of the capacities of the entities with automation and the use of modern technology. Both options are a positive approach to turn around sick and potentially sick PSUs.
Another option is that PSUs can have a synergy by the disinvestment of government shares to prestigious and internationally renowned firms with a good brand image and output quality. A success story in this case is that of Maruti Suzuki. The car brand reveals how synergy could be created through timely strategic decisions. The success of the joint venture of Maruti Suzuki led Suzuki to increase its equity from 26% to 40% in 1987, then 50% in 1992, and further to 56.21% in 2013. Simultaneously, Maruti Udyog Limited (MUL) showed remarkable performance. MUL sold about 1.20 lakh cars in FY 1993, which increased to 18 lakh cars in 2018-19, with present cash reserves around Rs 40,000 crores. Their healthy financial condition also served direct and indirect taxes of around Rs 1.80 lakh crores, created millions of jobs and supplied exports to numerous countries across the globe.
The CAG reported that 80% of 189 underperforming PSUs have eroded their capital and now account for accumulated losses of around Rs 1.50 lakh crores, which are a huge burden on the Union Government exchequer. The Union Government has tried to revive some of these entities by providing financial assistance through various measures, but most of them are still rated as underperforming. One important case study here is Air India. Although the Union Government provided it a bailout package of Rs 30,000 crores in 2012, the turnaround plan was a total failure and Air India has not shown the desired results. It continues with its operational losses with more than Rs 50,000 crores in debt.
The Union Government has kept its eye on underperforming PSUs in order to take appropriate remedial measures as per expert opinion with the consultation of the NITI Aayog. But the Vizag steel plant has now become a significant case study in the divestment in PSUs as it has taken the form of an emotional issue. Besides being an economic concern, it has established itself as a matter of Andhra pride, because it was built with the sacrifice of 32 lives in 1982. The steel factory had been established under the name Rashtriya Ispat Nigam Limited, with the support of the USSR, in the pre-reforms era. It began with a 3.5 metric ton capacity per annum. At that point, there was a lack of private investment opportunities for the corporate sector and it had been incorporated by the Union Government as a PSU. This company has been registering operating losses (profit before taxes) continuously: in the years 2015-16 it was Rs 1,702 crores, in 2016-17, Rs 1,690 crores, in 2017-18, Rs 307 crores, and in 2018-19, Rs 1,369 crores. The exact amount of losses during 2019-20 will be known after audited financial statements are available. Moreover, during the Covid-19 lockdowns, the capacity utilization of the plant reduced 13,000 tons to 14,000 tons of metal per day as against the previous capacity of 20,000 tons.
Critics are saying that the operating losses are only due to the higher side of the raw material input cost since no mines of its own are available to RINL. Hence, intellectuals are requesting the Union Government and State Government to allocate mines for its captive consumption to make the unit profitable or merge RINL with SAIL for its sustainability, keeping in view the emotions of the people of Andhra Pradesh, especially as “Vishaka ukku, Andhrula hakku” (the Visakha steel unit is the right of Andhra).
But there is a point of contention here. On 20 May 2006, the then Chief Minister of Andhra Pradesh, Y.S. Rajasekhar Reddy, had appealed to the Prime Minister not to merge the Visakhapatnam Steel Plant with SAIL. The Prime Minister had shown his concern for the state by allocating Rs. 8,600 crores for the expansion of the steel plant with an intention to merge it with SAIL. But it had been stopped due to the CM’s appeal. If RINL had been merged with SAIL then, the Visakha steel factory unit of RINL might have continued as part of SAIL today, without the problem of not having its own mines.
Prior to this, the Union government under the leadership of former Prime Minister Atal Bihari Vajpayee had provided assistance by restructuring capital two times. The first time, in 1993-94, the Government of India had converted a loan of Rs. 1,184 crores to equity capital and Rs 1,604 crores as 7% non-cumulative redeemable preference shares. Further, the Union Government had assisted with a Rs 149.40 crore loan interest waiver and converted a payable interest of Rs 791 crore into an interest-free loan. This had been facilitated to save about Rs 582 crore in interest per annum. The second time, in the year 1998, GoI had converted a Rs 1,333.47 crore loan into 7% non-cumulative redeemable preference shares to save about Rs 325 crore as interest per annum. Hence, the Union Government provided assistance as and when it was required, but the unit failed to turn around in its operating profits.
The privatization of the steel plant has caused an emotional outburst in Andhra Pradesh. However, the Union Government is concerned about the continuous losses, which will lead to the shutdown of the unit. The sacrifices of the 32 people will amount to nothing if the plant cannot be saved. The unit needs to be revived with the world-class, efficient management of South Korean steel giant POSCO. It is required to safeguard existing employees and others who are dependent on RINL. There is a lot of speculation about this proposal since the assets of RINL hold more than 24,000 acres of highly valuable lands, which may be alienated at a cheaper cost and incur huge losses for the Union Government. Meanwhile, POSCO has been approached by both the Union Government and State Government of Andhra Pradesh to express their interest in setting up the Greenfield Integrated Steel Plant in Visakhapatnam and it entered into an MoU with RINL. RINL Visakhapatnam has a 7.30 million tonne capacity plant and is a sea shore-based integrated steel plant. It holds over 24,000 acres of land with access to the Gangavaram Port, where raw materials arrive.
Earlier, POSCO had proposed a 12 metric tonne per annum capacity plant at Jagatsinghpur, Odisha at the projected cost of more than Rs 50,000 crores on 4000 acres for the Greenfield plant, with 1000 acres for developing a residential and commercial township. An MoU had been signed between POSCO and the Government of Odisha in 2005, but it did not materialise due to protests by locals. However, less than 5000 acres of land was more than sufficient for POSCO’s setup. In a nutshell, the assessment of land requirements shall be evaluated carefully and land shall be developed by the Union Government on its own for the better utilisation of resources in that local area by establishing a SEZ for auxiliary units for the proposed new steel plant with buyback tie-up and other possible future industrial development projects can be taken up. Otherwise, the decision of the disinvestment process of RINL will be black spotted and opposition parties will use it as a political opportunity against the BJP as both regional parties have already started agitations to oppose the disinvestment process in RINL by wooing people with provocative speeches. All this is just to grab the attention of the public, rather than solving the problem.
The world is now a global village and creating an environment conducive to the ease of doing business is a vital part of trade, commerce and industry. Hence, governments of all the countries need to review their priorities and align them towards inclusive growth and better living standards for all people, along with the growth of the economy. The aspirations of people have also changed over the last 70 years. Emotions are important, but in economics, the end result prevails over emotions since inclusive growth and prosperity are a priority. If disinvestment in PSUs is not done at the appropriate time, it may lead to disaster. However, the government must keep in mind public sentiments and ensure that all reasonable options are exercised before it begins the process of disinvestment.
The writer holds a degree in commerce and works as an FCA.
