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Jehangir S. Pocha
Out Of The Box

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Try to re-imagine privatisation

India is in a bizarre position; its 56 billionaires have more money than its poorest 600 million people.

rivatisation is a buzzword again. Someone in the Narendra Modi government utters it at least once a day. The promise of privatisation is old — it will dismantle Indian socialism and bring the much-needed moolah into government coffers. But the manner in which India has gone about selling state-owned assets needs change.

All too often, the government has simply (under)sold public sector companies directly to private individuals. So billionaires such as Anil Aggarwal, have pocketed government companies, such as Balco, for a song and become even bigger billionaires. All the money the exchequer has received from such sales has immediately been used up by successive governments in their annual budgets.It is time to end both practices and re-imagine privatisation. Money got from selling public assets should go to a special account and be used only to build new national assets, like railway lines and dams. It should not be put into the government's general account and spent on salaries and subsidies. To do this is akin to selling the family silver to pay for an extended honeymoon.

Until now, all governments have indulged in this financial recklessness simply because doing so helps reduce India's fiscal deficit (the gap between what the government earns and spends). But Prime Minister Narendra Modi's promise of responsible governance holds out the promise that he might end the practice.

More significantly, the selling of government companies directly to private industrialists, or listed companies controlled by them, also allows these individuals to pocket most or all the gains of privatisation. To ensure these gains are shared more broadly, the government should aim to turn PSUs into widely-held public companies with millions of small shareholders and professional managements overseen by a board of directors. India barely has a handful of these professional mega-corporations, such as L&T, and it is time building more becomes a major economic priority. What does this mean in practical terms? Well, consider a company like the Life Insurance Corporation (LIC). It is huge, profitable and decently run. But it needs to be privatised so it can raise more capital and become more entrepreneurial.Under the traditional privatisation model, the government would simply sell 51% of LIC's shares to an Indian or foreign insurance company. Instead of this, the government should sell 51% of LIC's shares to the general public in small lots, of say, 50 shares each. This way, millions of Indians could become the new joint owners of LIC and directly benefit from the gains of unleashing this navratna's potential.

Significantly, the government could also use the process of allocating LIC shares to fulfil other public responsibilities. For example, it could give war widows, seniors and other groups that need assistance preferential allotments of LIC shares. Since just only 2.5 million Indians own shares, the government could also prioritise allocations of LIC shares to first-time shareholders. Middle-class earners, such as school teachers, nurses etc., who have shunned stocks out of fear or unfamiliarity, will probably accept a government offer than gives than a relatively safe exposure to companies like LIC.

This can be game-changing.

The Central government alone can raise about Rs 100,000 crore through privatisation over the next two years. Assuming these shares are sold in small lots of Rs 10,000 each, this could create 10 million new shareholders. This can reignite India's somnolent retail investors. Despite a soaring Sensex, about 1 lakh investors have closed their demat accounts (stock trading accounts) in the last six months alone. But if LIC stock does well for these 10 million shareholders, they will probably invest more in the company as well as the other professional companies created out of privatisation.This will allow Indian firms to raise more capital with greater ease. It will also draw savings away from unproductive investments, such as gold, which depletes India's foreign exchange reserves.

Also, past privatisation attempts have often failed because vested interests, such as unions, argued that selling PSUs is anti-people. Politicians have capitulated because they feared pushing for privatisation opened them to charges of cronyism and because voters were disinterested in the issue. Making ordinary people the beneficiaries of privatisation can totally reverse this dynamic and actually speed the government's much-delayed privatisation plans.

Lastly, ensuring state wealth is divested to ordinary people and not the super-rich will also curb rising economic inequality. India is currently in the bizarre position where its 56 billionaires have more money than its poorest 600 million people. Much of this inequality is because traditional economic policies have resulted in only a handful of people cornering most of the benefits of liberalisation.

Consciously sharing the benefits of privatisation will show cynics capitalism isn't just for the rich and ensure PSUs maintain their mission of serving the larger public good even in their demise.

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