(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Una Galani
MUMBAI, Dec 19 (Reuters Breakingviews) - India is getting comfortable with the “p” word - for privatisation. For decades, the government has stealthily reduced its role in industry by stealth, allowing private companies to gain substantial market share in nearly every sector of the economy. But as inefficiencies weigh on the public purse, there is appetite to take things further. One iconic company, Air India, is already on the block and expectations are growing that a sale of public goodies will follow if Prime Minister Narendra Modi wins a second term in 2019. That looks tougher but still likely after a narrow win Monday for the ruling Bharatiya Janata Party in the leader’s home state of Gujarat.
The legacy of India’s socialist past, particularly under then Congress party leader Indira Gandhi a generation ago, is clear from the state’s interest in everything from hotels to banks and mining. Around one third of India’s 244 central government-controlled public sector companies, which excludes the banks, were loss-making as of March 2016. The BSE PSU Index, comprising the main listed companies and lenders where the government has a stake of at least 51 percent, has underperformed the benchmark Nifty 50 over the past five years by more than half.
Hopes were high that privatisation would start afresh under the BJP, which oversaw India’s last drive to give up control of state entities, between 1998 and 2004. One of the most successful sell-offs from that period was that of carmaker Maruti Suzuki, worth around $1 billion when it was listed around 14 years ago. It now boasts a market value of $43 billion.
Since taking charge in 2014, Modi has been reluctant to follow in the footsteps of his party predecessors, despite minimal public opposition to government asset sales beyond the labour unions, said Adi Godrej, Chairman of the Godrej Group, at a Breakingviews Predictions event in Mumbai last month.
Instead, the prime minister has embraced the private sector in other ways, easing restrictions on foreign direct investment, including in areas like defence to support its “Make in India” campaign to expand domestic manufacturing. He has also set, and routinely missed, ambitious annual targets for disinvestment, where New Delhi sells down chunks of its holdings in companies like Coal India while retaining control.
A combination of inaction and inefficiency has contributed to decline. The rise of private-sector rivals over the decades has smashed the monopoly of the state in many areas. Think Air India in air transportation, BSNL in telecommunications or the Steel Authority of India. These entities, which are the country’s top three loss-making non-financial state companies, have buckled to nimbler players in their respective industries. Air India’s market share has shrunk to around 13 percent, for instance, while upstarts IndiGo and SpiceJet have snaffled up customers.
In banking, India’s 21 state lenders continue to dominate the financial system in terms of total assets but are weighed-down by bad debt. Better-capitalised private sector rivals are gaining ground by extending loans more efficiently. After banks were nationalised from 1969, state-backed players had a monopoly until 1994. Their market share then slipped to 70 percent by 2007. State banks now hold closer to two-thirds of total assets.
The impending disposal of Air India, a flying reminder of India’s inefficiencies, could set the ball rolling for more deals. The national carrier, with debt of more than $8 billion, has made losses for almost a decade. Mooted buyers include Tata and InterGlobe Aviation, IndiGo’s parent. A successful sale in the current financial year would help contain the fiscal deficit and make Modi look more prudent ahead of a general election due in early 2019.
Bank stakes would be the next obvious assets to put on the block. One reason India nationalised lenders decades ago was to ensure credit reached the rural poor and to make certain that funding was available for big business. Yet state banks have been slow to the serve the underprivileged and have run into trouble for financing large projects that stalled for various legal and regulatory reasons. New Delhi’s recent commitment to a $32 billion bailout of state banks brings into sharp focus the financial burden that comes with control.
A sale of the private sector - and specifically the reduction of New Delhi’s shareholding of banks below 51 percent – will inevitably happen if Modi wins a second term, Rakesh Jhunjhunwala, one of the most influential billionaire stockpickers in India, predicted at the Breakingviews India Predictions event. That, he added, is also the answer to fixing the governance problems that bedevil state firms. Companies that have New Delhi as majority shareholder have little control over pay, incentive plans, and board appointments.
Jhunjhunwala’s sentiments are echoed across the industry. Arundhati Bhattacharya, until recently the chair of State Bank of India, the country’s largest lender, reckons privatisation is a matter of if, not when. The lender she used to run already prefers to refer to itself by the shorter acronym of SBI – attempting, in its own way, to minimize the role of the “state” in the bank.
A number of reforms led by Modi over the past three years, from demonetisation to the rollout of a nationwide goods and services tax, aim to ultimately increase India’s tiny tax base. Boosting returns to taxpayers through the privatisation of inefficient companies is the least the government can promise.
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- The Indian government is likely to begin selling assets in companies, including banks, if Prime Minister Narendra Modi wins a second term, billionaire investor Rakesh Jhunjhunwala said on Nov. 30 at a Breakingviews Predictions event in Mumbai. A general election is due to be held by early 2019.
- Separately, Air India is likely to be split in two to fast-track its privatisation, the Financial Express reported on Dec. 12, citing official sources. The report added that New Delhi would seek to complete the sale of at least part of the airline by the end of the current financial year.
- India’s ruling Bharatiya Janata Party won 99 seats out of 182 in the Gujarat election, on Dec. 18, retaining control of the state the party has ruled for almost two decades, albeit with a smaller margin.
- Reuters Breakingviews hosted its inaugural Predictions event in Mumbai on Nov. 30. The panel included Arundhati Bhattacharya, ex-chairman of the State Bank of India; Adi Godrej, chairman of Godrej Group; billionaire investor Rakesh Jhunjhunwala; and Zia Mody of AZB & Partners.
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Editing by Rob Cox and Katrina Hamlin