People's Democracy

IN one more brazen effort at sustaining and pushing through its failing "reform" process, the NDA government has, on February 5, chosen to simultaneously announce a broad set of policy changes covering diverse areas of the economy. The measures were a motley combination of more privatisation of large PSUs, a cost-cutting voluntary retirement scheme (VRS), further liberalisation of the foodgrain trade, and moves to dilute price control in the case of a number of commodities, notably sugar and pharmaceuticals. The synchronized announcement of these measures suggest that they are not just significant in themselves, but noteworthy because they were announced simultaneously.

However, though many of the new measures constitute marginal adjustments in areas where liberalisation has already been the norm, they are without significant implications. Take the area of foodgrain trade, for example, where it has been decided to remove all restrictions on movement of foodgrains, edible oils and sugar and to completely decontrol the sugar industry after operationalising futures trading. These measures were provided for in last year’s budget speech itself, when the finance minister had declared that his government intends to "review the operation of the Essential Commodities Act (ECA), 1955 and remove many of the restrictions that have been imposed on the free inter-State movement of foodgrains and agricultural produce and also on the storage and stocking of such commodities." He had also said that the government would "review the list of commodities declared as essential under the said Act and bring their number down to the minimum required." The February 5 announcement by removing 12 of the 29 items covered by the ECA begins implementing a decision announced in last year’s budget speech.

We must recall that even at the time of the last budget, observers had noted that this move, which allows for a greater play for market forces in the determination of supplies and prices, was one part of an overall scheme of dismantling the public distribution system and of the scheme of minimum support prices. The latter is clearly unviable if the reach of and offtake from the PDS is reduced as a means to cutback the food subsidy bill. Even now, reduced offtake has resulted in embarrassingly large stocks with the government, the carrying costs of which inflate rather than reduce the "subsidy" bill.

In an effort to clear those stocks the government has decided to remove quantitative restrictions on the export of wheat, wheat products, non-basmati rice, coarse grains and pulses can, if international prices rise and domestic supply falls, have major implications for the quantum and cost of domestic availability and therefore for food security. These measures are clearly driven by the "confidence" generated by a food surplus that results from consecutive good harvests and depressed domestic demand. But in an area where production tends to be volatile and acreage shifts are the norm, the basis for such confidence can be short-lived.

The other are where this round of decontrol is significant is drugs and pharmaceuticals. The removal of an additional 36 bulk drugs from the list of those 74 whose prices are controlled would result in a substantial increase in drug prices, as past experience with such initiatives amply illustrates. According to reports, an ORG-MARG Survey of 270 drugs decontrolled in an earlier round in 1995 found that around 45 per cent of them have registered a 20 per cent increase in price, while the prices of another 5 per cent had risen by 40 per cent.

These likely or possible consequences notwithstanding, all of these measures are part of processes that have been afoot for quite some time now. Hence, though important in themselves, the real explanation of the timing of further advance in those directions lies in the government decision to push ahead with privatisation through strategic sale of VSNL and four hotels owned by the ITDC and the Hotel Corporation of India. Unlike the other measures discussed this is directly related to the budget, as a precursor to which the package being discussed was announced. Recent budgets have made clear that the government has failed to achieve it’s own self-imposed, and often irrational, targets regarding fiscal deficit reduction, because of the tax concessions it has provided as part of economic ‘reform’. This makes the government dependent on non-tax resources to realise its oft-repeated commitment to ‘fiscal reform’.

But since the sale of profitable public assets to garner a one-time infusion of budgetary funds is clearly irrational, the government is desperate to make the privatisation exercise and instance of "reform" rather than budgetary manipulation. Starting with Modern Foods and BALCO, the government has been facing substantial opposition to its "strategic disinvestment" drive, aimed at transferring management control of PSUs to private agents at a small price. There have been two allegations which the drive has generated: first, that in its desperation to sell large enough volumes of PSU shares for budgetary reasons the government has been forced to offer private agents a concession in the form of management control in return for acquisition of as little as 25 per cent of the shares at extremely low prices; and, second, that in the rush for acquisition of profitable PSU shares this has generated in the private sector, non-economic considerations have influenced and distorted the process.

The disinvestments of VSNL and the petro-marketing firm IBP Co. Ltd., were indeed instances of the big-ticket privatisation drive of the NDA government. The irrationality of the process of setting a reservation price based on questionable assumptions and accepting the highest bid among those falling above this price comes through in both these cases. This is most obvious in the case of IBP. IOC won control over IBP with a bid of Rs 1153.68 for the 33.58 per cent stake, which is close to three-and-a-half times the reserve price. Was IOC’s bid irrational, or was it the reservation price and the price of just Rs 595 crore offered by the second highest bidder Shell? Sections of the financial media have been putting out speculative, and possibly planted, reports that this occurred because the petroleum minister forced IOC to more than double its bid in order to prevent the company going to private hands. The fact of the matter is that IOC is not only willing to stick to its commitment, but has also raised objections against the disinvestment ministry’s decision to keep IOC out of the round of bidding for HPCL and BPCL on the specious grounds that in the event of its victory it would become a monopoly in the petroleum area.

The argument is specious for a number of reasons. First, in capital-intensive areas like petrochemicals a high degree of oligopoly, even if not monopoly, is the norm. And collusion between oligopolists, which is common in the oil industry, can yield results similar to those in situations of monopoly. Second, since the divestment of HPCL and BPCL are to occur only after the administered price mechanism is dismantled, import prices would set limits to the prices which can be charged by domestic players. Finally, as IOC itself has been quick to point out, in other areas, such as the divestment of petrochemical giant IPCL, players like Reliance have not been kept out even though it would enjoy a position of monopoly in many products if it wins the bid for that company. Clearly, the effort to keep out IOC is driven by the disinvestment ministry’s desire to save itself the embarrassment of receiving a quote that makes nonsense of its reservation price and the price offered by private bidders who tend to win the bid.

The results that occur when private players are the sole bidders is clear in a case like VSNL. The government had fixed a reserve price of Rs 1218.38 crore for the 25 per cent stake being divested in VSNL. The VSNL stake was handed over to Panatone Finvest, a Tata group company, which made a bid of Rs 1439.25 crore amounting to Rs 202 per share. Reliance, Tata’s competitor in this case reportedly bid Rs 1346.25 crore. Are these rational offers? They would appear to be so when measured against the prevailing market price of VSNL shares. But interestingly, since sale at a higher-than-market price would require the bidder to make an open offer to individual shareholders of the company to purchase their shares at the price offered for the stake divested by the government, public sector shares have perked up in the markets. On the day when the result of IOC’s bid was announced, the share prices of IBP rose by 20 per cent. This was to be expected since shareholders already had the option of receiving a premium from IOC. But what is interesting is that simultaneously the shares of IOC and of BPCL and HPCL also shot up. That is, the market was accepting the explicit and implicit valuation that IOC has made of the shares of petroleum companies.

If the market was wrong in doing so, there was no reason to believe that the original valuation it held was right either. On the other hand if it was right, the influence that prevailing stock prices have on the valuation process is indeed irrational and could be exploited to those who want to divest or acquire PSU shares at bargain prices.

Put simply, even if we ignore the many arguments against privatisation, the manner in which divestment is occurring is clearly distorted. There could be one or a combination of two explanations for this. First, the government’s desperation to find resources for its budget is pushing it to court private buyers with bargain prices, given its emphasis on the immediate benefit of garnering budgetary resources and refusal to recognise the long term loss involved for the exchequer. Second, factors other than firm level or social rationality could be driving the process. In either case, opposition to the accelerated privatisation thrust is bound to be intense. It is possibly in an effort to deflect or dilute such opposition that the government chose to combine the disinvestments announcement with other unrelated "reform measures", so as to cloak a faulty process in the garb of economic reform and use that to defend the decision.