• SEPTEMBER 14, 2002

Disinvestment disappointment

Having slowly found its feet over the past two weeks, markets once again tripped, as a spanner was thrown into the 'disinvestment' works. Adding to the gloom was 'war talk', west of the Atlantic. Consequently, crude oil prices have been firming up, threatening to further dibilitate the global economy.

Coming into the week disappointed, investors' in unprecedented fashion, dumped public sector (PSU) stocks, especially Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL), which collapsed at start of the week. The BSE Sensex fell by over 1% this week. Section of investors and media got one more reason to malign the Government.

We have maintained that disinvestment historically has been a 'random event'. Not being an insider, one cannot possibly perceive the 'risk factors', which could de-rail momentum of the programme. A perspective of the challenges has been highlighted by the Minister of Disinvestment in a leading business magazine. Having said that, we reckon, the Government recognises that disinvestment -- now privatisation -- is a question of not 'if' but 'when'. Consequently, short-term bets could back-fire but a long-term horizon could result in better outcomes.

On the subject of 'when', progress in a developing democracy is hostage to consensus building, leaving aside in-sincere intentions (and there is lots going around) and therefore decision-making takes longer. The three month deferrment of the programme, it seems, is to re-build consensus on privatisation among coalition partners and especially within the ruling party. Opposition was not towards disinvestment, which could be sale of Government holding to the public, but towards privatisation of public assets. On the other hand, we always compare with China and momentum of economic development achieved by that country. But then China is under military rule and building consensus may not be a priority. Some reports suggest, China has the largest number of state executions, which could indicate 'my way or the highway' approach. Therefore, India needs to recognise that while freedom must be enjoyed it must also be respected, especially by those who could be sabotaging Government efforts on privatisation.

Over the nineties, political & mass consensus has shifted from a socialist mind-set to a more market driven ideology ('capitalism' still seems to be a bad word). Thinking shifted from Government ownership of assets to true public ownership -- sale of Government equity to financial institutions and the public -- to raise resources and increase PSU accountability. This thinking has now shifted to strategic sale -- privatisation -- of Government assets. In addition to the above benefits, privatisation leads to better allocation of resources. Also, tax payers' money is not required to be exposed to the 'commercial risk' of business.

While disinvesment targets have not been met in the past, one should also consider that the Finance Minister could very easily set an achievable target. Over the past two years, resources have been unlocked from public assets not through public sale of equity or PSU cross holdings but through privatisation. The number, as a percentage of target has also been increasing.

That said, supporting Government action runs the risk of diluting urgency in reforms, as one tends to become complacent. Therefore, a discerning populace is required to determine a fine balance of 'carrot & stick' approach. And in last resort, should the Government reverse decisions supported by the majority, the mandate to govern can be offered to party/ies with more alligned ideologies.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407