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Privatization of PSU's - Is NLC in the Pipeline?

THE Government deserves to be congratulated for its decision to reduce its holdings in many public sector undertakings (PSU's) to below 50 percent and even its equity in certain cases to 26 per cent, thereby relinquishing its control over the day-to-day management of these enterprises. The purpose of disinvestments is two-fold. One, to generate cash, two, to improve their performance. 

Will NLC figure in the Governments scheme of things to be disowned. Is it feasible?

NLC can be disowned, if the Government decides to privatize the Power or minerals segments. What are the benefits associated with respect to these segments?

Minerals and Metals, and Coal and Lignite 
There are 13 public enterprises operating in the mineral and metals sector; and 9 companies in the coal lignite sector. The mineral and metal and the coal and lignite sectors in aggregate are earning small net profits, return of 3% to 5% were materialized on the capital deployed during the last one decade. Coal and lignite sector had returns of 4.5% to 3.5% during the same period. Disinvestments of the enterprises related to minerals, metals, coal and lignite should pay appropriate attention to the economics of natural resources.

Power is mainly a state-level issue. In the power sector, there are 4 central public enterprises. In aggregate, these obtained 13% to 9% returns. Selling these enterprises will bring good revenues for the Government.

Majority of the PSU’s in this sectors including NLC are just achieving break even and its performance is not to their capability. Many PSU's in various sectors are in fact making losses. 

Have Indian PSU’s achieved their objectives and should they be disinvested?

Historically, public sector undertakings (PSU's) have played an important part in the development of the Indian industry. At the time of independence it was felt that the political independence without economic self-reliance would be detrimental to the country’s sovereignty and autonomy in policy making. Hence, the basic objectives of starting the public sector were:· 

  • To build infrastructure for economic development and promote rapid economic growth and industrialization of the country.

  • To create employment opportunities and promote balanced regional development.

  • To create a self-reliant economy through the development of local industries for import substitution and by encouraging and promoting exports.

  • To generate invisible resources for development by earning suitable returns

  • To prevent / reduce concentration of private economic power.

The public sector has not really achieved the objective of social development, exceptions being certain companies like SAIL. The level of literacy and poverty has improved only marginally over the past four decades. Also the unemployment in absolute numbers have also gone up. Even in the case of profit making PSU like "our" NLC, there was no major industrial activities or local industry growth around Neyveli for the past five decades. Thus the first conclusion that can be drawn is that the PSU’s have not achieved the objectives of both profits as well as social development.

The Disinvestment commission set up by the Government of India has classified industries  into strategic, core and non-core

NLC comes into this core group.
The Core group industries such as NLC are capital or technology intensive, the most prevalent market structure is an oligopoly. With the entry of private sector in these areas, there may be a tendency towards oligopolistic market structures. Examples are telecom, power generation and transmission or petroleum exploration. The disinvestment commission of the Central Government felt that the presence of public sector would be necessary for sometime as a countervailing force and prevents concentration of private economic power. At the same time a proper regulatory mechanism should be in place in order to regulate industries particularly in a non-competitive market for protecting interests of customers.
In addition, the public sector should look at the basic industries with extensive and dispersed forward linkages. In some of these sectors the PSU's have considerable market presence and the private sector is yet to mature fully. Hence, according to the committee, it may be desirable to continue public sector presence in these basic industries till such time as the market becomes fully competitive. Thus in these core industries disinvestment is limited to a maximum of 49%.

So, right now the chances of disinvestment of NLC is negligible. However the general myth in Neyveli that there is no chance of disowning a profit making body such as NLC is also misplaced. The Disinvestment commission has in fact recommended to the Government to Enhance Government receipts by disinvestment in profitable PSU's. Thus even though the heat is salvaged, the smoke is still volatile.

Benefits in Privatization of NLC

Even though NLC is properly regulated and well-managed, disinvestment can yield benefits. Ownership change by itself yields gains in productivity. It is also possible that replicating public monopoly by private monopoly will increase productive efficiency because of reduced political and administrative interference; changed property rights; and more efficient financial management. 

Labor's Concern

Privatization move has often caused Labor unrest in Neyveli or else where in India. What's the basic reason for these tendencies?

Public enterprises in India often have an excess work force compared with similar enterprises in the private sector. As PSU's are disowned, in order to cut costs and improve productivity, some of the workers may need to be dismissed. 

Selling NLC to Workers 
A number of disinvestment analysts have recommended sale to employees, or at least the reservation of shares for past and present employees. So, what is the possibility that the NLC employees can be the owners of NLC? There are strong political reasons for reserving some shares of public enterprises to be divested for workers. Labor ownership of the firm may lead to more peaceful labor relations. It is possible that if the work force is reduced but labor ownership is granted, productivity will rise. Good management is possible with workers as shareholders since workers can observe the "unverifiable" contribution of fellow workers. Moreover, worker-ownership of disinvested firms can create political support for disinvestment. Trade unions are likely to extend their support to the disinvestment program if they see that the workers are going to become shareholders. Hence, the authorities may considering selling shares of public enterprises to workers at a discount. 

Why Disinvestment?

If we talk about Disinvestment in general (leaving all the sentiments & being part of NLC), it is not just an economic program. It is a part of the reform program and one cannot ignore the political, social, ideological, and legal dimensions of disinvestment. It invariably involves distributional issues: For instance, it may lead, at least initially, to the elimination of some jobs, shutdown of plants, relocation, and other issues associated with economic restructuring. The disinvestment program, which faces political impediments, must be politically desirable and feasible from the vantage point of the authorities. The authorities' program should be able to withstand the opposition of vested interest groups.
The installation of a new market-oriented Government provides an excellent opportunity for launching a disinvestment program. A strong and stable Government has the widest options regarding economic reforms and disinvestment. A correct assessment of constraints, particularly of political constraints, is required for designing a successful disinvestment program. Spreading ownership is obviously a political question. In India, compared to Eastern Europe, there has not been much discussion regarding the distribution of shares in the divestiture process. However, in India, disinvestment is regarded as a political question. The support from the politically active sizable middle class is crucial for making the disinvestment program in India a success.
The allotment of shares for sale will reflect political leverage. The stakeholders of disinvestment include the authorities, the workers and the management of public enterprises, the consumers, the private investors, including foreign private investors, and the general public. There are three main political constituents. First, existing Indian entrepreneurs; second, management and workers of the enterprises in question; and, third, the general public. Different kinds of disinvestment represent various balances of power in society. Hence, in designing the disinvestment program for a country, such as India, a close reading for the underlying forces and fractions in society should be conducted. If reform and disinvestment offset the existing balance of power, it may lead to social instability rising from the aggravated sections of the public. To broaden the support for disinvestment, sections of the voting population can be made shareholders of the enterprises that are disinvested. The Government that carries out such a program can count on the support of the new shareholders and the beneficiaries of the disinvestment program.


Even though NLC is performing well, disinvestment can improve productivity. In the Global era of liberalization Neyveli can even be opened to international market forces. However Disinvestment ought to be accompanied by the removal of distortions and unnecessary Government interventions. The central  economic reforms should take place within the framework of macroeconomic stability, guided by prudent fiscal policy and appropriate monetary policy. If accompanied by reforms in its labor and bankruptcy laws and the deregulation of the economy, disinvestment can stimulate NLC's productive efficiency and financial growth. By enhancing the productivity, and strengthening the competitiveness,  NLC will contribute towards the National development and enhance the vision of reducing poverty, and improving the quality of life of the Indian people.

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An article by RPN - Chief Editor -