Divestment drive - the road to fiscal discipline

The Central government, which came on the mandate of development, due to the growing aspiration of the Indian youth is setting  its privatisation agenda. The Union Cabinet on last Wednesday approved shutting down of public sector Hindustan Cables and accepted a Rs 4,777.05-crore package for payment of wages and other benefits to its employees.

This follows a recent guideline issued by the Ministry of Heavy Industries to expedite the process for closure of Central Public Sector Enterprises (CPSEs) so that all administrative ministries will follow a uniform procedure in this regard.

NITI Aayog, which has been made the nodal agency, to identify the PSUs for sale/closure, is understood to have identified 44 companies for strategic disinvestment and 26 loss-making PSUs for closure.

Although an exhaustive list of the PSUs to be privatised is not available, eight loss-making India Tourism Development Corporation (ITDC) hotels — the ones in Bhubaneswar, Puri, Jaipur, Jammu, Guwahati, Ranchi, Puducherry and the Lalitha Mahal Hotel in Mysuru — are sure candidates for privatisation.

Hope of efficiency

The hospitality industry seems upbeat about it. “It is a good decision for the government to divest from ITDC Hotels, either partially or completely. Privatisation will help bring new efficiencies on board, that will help make these very fine hotels compete more favourably in this very dynamic environment,” said Dipak Haksar, Chief Executive at ITC Hotels and WelcomHotels. 

“Privatisation or even a Public-Private Partnership (PPP) will result in the infusion of technology and a change in work practices and culture, which can help the hotels become formidable players on a global platform,” Haksar, who is also the Chairman of Assocham Tourism Council, added.

Uneven dispersion

According to the latest data published by Assocham, the major chunk of investments in hotels and tourism industry in India is centered in the Gujarat-Maharashra-Karnataka belt. Maharashtra leads the investment table with 16.6% of total investment in the sector, followed by Karnataka (14.5%) and Gujarat (11.8%). The region accounts for a whopping Rs 40,138.5 crore of investment in the sector, while an all-India figure stands at Rs 93,422.5 crore. 

But when it came to the number of domestic tourist visits, Tamil Nadu led the way with 23.3% of the share, followed by Uttar Pradesh (14.3%) and Andhra Pradesh (8.5%). Given the fact that privatisation is not geographically centered, it can give a push to the dispersion of investments in the sector, in areas where it is needed more. As seen from the data available, the states with most investments in the sector do not see the heaviest flow of tourists.

No govt role in ‘soft skill’ biz

Investment gurus are also seeing this decision as a great move. “It is a no-brainer in this 21st century, that the State has no business to be in the business of hospitality, or in any of the ‘soft skill’ businesses. India, in 2016, is no longer a capital-starved economy, which would necessitate the State to provide the physical infrastructure of hospitality and tourism,” said Anurag Sharan, Managing Director of Southern Fidelity Securities.

He added, “Private enterprise does a far better job in this area, given that today, the differentiator in the hospitality and tourism industry is not merely the physical structures, but the service levels, the attention to detail and management, in all of which, the state, with its heavy hand, fails miserably.”

Disappointing spectrum auction

On April 18 this year, DH carried a story titled ‘Is fiscal Consolidation a distant mirage?’ It stated, “Fiscal consolidation was a priority in the previous Budget too. Last year, the government focused on divestments for reducing the fiscal deficits. This year, the government will be focusing of the receipts from the spectrum auction. There is a serious underlying worry in these measures, which has got hidden under the wrap of fiscal consolidation. These measures are ad-hoc in nature. These measures don’t reflect any structural reform to contain deficit, but focus more on the one-off receipts.”

Earlier this week, spectrum results were disappointing.  The government raised Rs 65,789.12 crore in revenue, of which less than half will accrue to the exchequer in the current fiscal year. The money is just a fraction of the Rs 5.63 trillion (at base price) of spectrum put up for sale in the auction of 2,354.55MHz of radio waves that some analysts said were too expensive. The government sold 41%, around 965MHz.

“The Cabinet decision to sell off Hindustan Cables initiates the process of a strategic sale of public enterprises.  With this, it is hoped that the government will undertake a strategic restructuring of all the 44 enterprises the NITI Aayog has recommended.  In fact, it is important to go beyond the consideration of loss for many enterprises, even if they make profits that can be best run by the private sector,” said Govinda Rao, Emeritus Professor at National Institute of Public Finance and Policy.

Role of 14th Finance Commission

“The 14th Finance Commission has made important recommendations on disinvestment based on the strategic importance of the company based on opportunity cost and it is hoped that the government will expand the process. Ownership is not a substitute for regulation and often, the government simply runs businesses which actually require only regulation.  Besides, there are large loss-making units like Air India, which are beyond restructuring and should be sold off,” Rao, who is also a member of 14th Finance Commission, added.

Bleeding PSUs: contingent liability

The analysts believe that loss-making entities are a contingent liability for the government, so privatisation seems to be the way out. “Loss-making PSUs are a drain on the finances of the government. Non-closure of the PSUs, even for non-operational ones, leads to accumulation of statutory dues for the company and is a growing contingent liability for the government,” said Ranen Banerjee, Partner and Leader Public Sector and Governance at PwC India.

“Privatisation of the viable loss-making PSUs help in unlocking their value while closure of the unviable ones helps plug the bleeding of the government finances. It is good to see some definitive steps towards these that would further augment fiscal consolidation efforts of the government,” he opined.

If the roadmap is selected carefully, the government can set things right with this privatisation drive, like the fiscal consolidation and plug bleeding of the government revenues. It needs to be seen whether it will be a dampener like HAL divestment (which was cleared on November 9, 2012) and the latest spectrum auction.