Context:

Union Finance Minister Nirmala Sitharaman recently announced major reforms for Public Sector Undertakings, as a result of which many sectors are likely to see large-scale consolidation and divestment of State-run firms.

What is the Background?

• The government will soon announce a new PSU policy, which will focus on privatising PSUs in non-strategic sectors based on feasibility.
• The policy will, in parallel, specify certain strategic sectors in which the “presence of PSEs in public interest” will be mandatory.

What is the objective?

• In strategic sectors, at least one enterprise will remain in the public sector but private sector will also be allowed.
• To minimize wasteful administrative costs, the number of PSEs in strategic sectors will ordinarily be only one to four.
• Others will be privatised/merged or brought under holding companies.

What is Privatisation?

• As the term suggests, Privatisation means migration from the Public to Private Sector through the transfer of ownership, management and control.
• In India, privatisation is aimed at improving the inflow of Foreign Direct Investment (FDI) or investment in sectors that require technological advancements, thereby directly providing a boost to Economy.

What is the need for this move?

• The finance minister said there is a need for coherent policy where all sectors are open to the private sector while public sector enterprises will play an important role in defined areas.
• The minister also said no fresh insolvency cases would be initiated for up to a year, in a move to avoid a wave of bankruptcies from companies hit by the coronavirus outbreak.
• Debt incurred by companies due to the coronavirus outbreak would not be considered a default under the country’s bankruptcy code.
• Bankruptcies in India are expected to climb as the coronavirus outbreak hits distressed companies harder in Asia’s third-largest economy.

Has Privatisation been successful?

• Privatisation or opening up a sector to private participation has not always led to bountiful gains.
• Take the case of telecom and aviation sectors, where the public companies – Air India and BSNL/MTNL – gradually ceded control as multiple private operators entered and prospered over the years.
• Of course, service standards and the bouquet of services on offer improved, country wide penetration of airline and telecom services also improved vastly because of private enterprise.
• And the public sector enterprises in both these sectors went from being profitable market leaders to massive loss makers, operating at the margins of the industry.
• But today, both telecom and civil aviation sectors are in deep financial trouble (even before Covid hit airline operations) due to skewed tariff policies and some historic baggage.
• And the abundance of private operators has done little for the viability of either sector.
• Not just the public sector companies in each, now even some private operators are seeking government concessions.

Conclusion

The view that the government should exit all except a limited number of sectors considered strategic is fine, as long as the exit strategy also makes economic sense. Besides, the handing over to the private sector has not always led to improvement in parameters. Also, there is the matter of the lakhs employed by PSEs and what to do with such a large workforce, especially after the Covid19 induced unemployment.

Reference: https://www.youtube.com/watch?v=Tt-5c162Eqk&list=PLVOgwA_DiGzoqQsGjmamTu6f453RWpm_I&index=3&t=0s