The Broad Mind  

Mr. Vijay Kelkar, Chairman of the Finance Commission delivered the 26th Sir Purshotamdas  Thakurdas Memorial Lecture at Mumbai on 29th January. An extract from his talk titled On Strategies for Disinvestment and Privatisation:

19.              A useful way to visualise this is essentially as a balance sheet adjustment. Suppose the government undertakes a portfolio adjustment, where Rs.10,000 crore  of shares of Air India is sold and used to build 2000 kilometres of highways. Let us trace through the full implications of this. Even if Rs.10,000 crore of shares of Air India constitute a minority sale (i.e. ‘disinvestment’ in the Indian jargon), then certain efficiency gains are obtained. We now have our own empirical evidence which show that the mere act of listing induces improved productivity. Four channels seem to be at work: listing induces increased transparency, the stock market brings pressure on senior managers by doing daily performance evaluation, corporate governance is typically improved after listing, and to the extent that employees are given some shares, they become more aligned towards the growth and success of the organisation.

20.              If Rs.10,000 crore of shares of Air India constitutes a majority sale (i.e. ‘privatisation’) then even bigger efficiency gains are obtained. Extensive international evidence shows that productivity goes up strongly after privatisation. The increase in India’s GDP because of a better run Air India is the first gain from the proposed portfolio adjustment. The second gain from the proposed portfolio adjustment lies in obtaining an additional 2000 kilometres of highway. The benefits for India of this public asset are simply enormous. The 2000 km of highway that we do not have is the opportunity cost that we suffer every year owing to an investment of Rs.10,000 crore in Air India.

21.              In short, I am proposing that it makes a lot of sense for India to undertake this portfolio adjustment of public sector assets to switch from owning Air India to owning highways or public health infrastructure or augmenting “environmental capital”. I want to emphasize the full picture. The motivation for disinvestment or privatisation should not be narrowly seen as being only about maximising the proceeds from the sale of assets. The real big gains come from the full picture. We gain when the private sector obtains higher productivity (and this happens even with mere disinvestment, but it happens much more strongly with privatisation). We gain when the private sector becomes more comfortable bringing capital into investing in India in regulated industries. And, we gain when the government is able to build highways and canals, metro systems and railroad, which are crucial for India’s growth and legitimately belong on the government’s balance sheet.

You can check out the complete address here. It is a must-read.