Postponing the sale of state-owned assets will give Vajpayee government time to come up with a strategic design
What has happened to India's privatisation program, steaming right along and now at least temporarily derailed? You could answer this question in a single word; you could smugly say 'politics' and leave it at that. But there is more to India's hesitant sell-off of state assets than infighting among political parties and the allocation of patronage.
Prime minister Atal Behari Vajpayee's announcement that privatisation would be halted for a three-month period has been greeted with chagrin at home and abroad. On ice now are the sales of Hindustan Petroleum, India's largest oil refiner and a jewel in the crown of the state's portfolio, and Bharat Petroleum, the nation's largest gasoline retailer.
The immediate problem is, indeed politics, and the disappointment is justified, but only to a point. India is still building a national consensus on the trimming and reshaping of its huge state sector. The direction is clear, and Rome wasn't unbuilt in a day. More to the point, a moratorium until the end of the year presents the Vajpayee government with a chance to think through its privatisation policy and come up with something resembling a strategic design. The record to date suggests the prime minister is likely to squander the moment, but the opportunity is there to articulate a clear policy.
Until recently, the New Delhi government was having a pretty good year on the privatisation side. In February, it sold VSNL, the telephone and internet operator, to the Tata Group. Then went a 54% stake in Maruti Udyog , the number one Indian automaker, which was picked up by Suzuki Motor for $250m. The government's remaining interest is scheduled to be sold over the next couple of years.
More recently, New Delhi agreed to sell 26% of Indian Petrochemical to Reliance Industries, the nation's largest corporation, for $310m. Hindustan Copper and Shipping of India are among the other companies scheduled for privatisation.
Along the way this year has come a modest torrent of initial public offerings on the Bombay stock exchange and a not-so-modest increase in foreign direct investment (FDI). FDI grew last year by two thirds, to almost $5bn. In the first quarter of 2002, it was up 85%, to $1.35bn, from the same period a year earlier.
India seems at last to be outgrowing the negative image it has suffered abroad. Will the abrupt postponement of two big privatisations blunt the growing confidence of foreign investors? Does it signal a significant setback in New Delhi's privatisation plans? It shouldn't, and not really, are the short answers here.
India's budget target for privatising state assets this year is almost $2.5bn. As things stand, it's unlikely to make that, but it will be close, and so what if it falls short? The argument that produced the moratorium is one worth having, at least in its more elevated aspect.
If union leaders, the opposition Congress Party, and all manner of local politicians are still able to grandstand with an emotional defence of a state sector so unwieldy it serves no one well but its administrators, you know the question of privatisation hasn't been adequately addressed. The simple fact is that even the poor would be better served by a public sector whose resources were better concentrated.
India's state and federal governments account for between 40% and 50% of the nation's capital investment. It's too much for a country perennially strapped for funds, one that still counts its 'BPLs', those below the poverty line, in the hundreds of millions.
No one any longer has the nerve to argue that privatisation and liberalisation are panaceas. But neither, to state the obvious, is the status quo in India. What should be public and what private in a developing society? And how should designated public assets be turned private? India is the perfect place to pose these questions. Were the government to spend the next three months coming up with answers, the pace of the reform process might not be so unpredictable.
Bloomberg newsroom, New York
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