Statement on DPE Notification on Guidelines for PSEs

Statement

Peoples’ Commission on Public Sector and Services

We wish to express our outrage and deep concern about the recent notification issued by the Department of Public Enterprises (DPE) in the Union Finance Ministry, which sets “guidelines” for the new policy for public enterprises in the “non-strategic” sectors.

The “guidelines”, issued on December 13, which give effect to the new policy, announced earlier this year, at the height of the pandemic, threaten to undermine the role of public sector enterprises in promoting economic development, while also promoting equity. The considered view of the members of the People’s Commission on Public Enterprises and Public Services is that these guidelines undermine the role of PSUs in enabling the state to play its role in promoting welfare. Moreover, the argument that resources mobilised through privatisation would release resources for development is a specious one. Instead, we believe that privatisation of public assets, made at deeply discounted rates, would shut off avenues to future revenues from PSUs. Several aspects of the guidelines also threaten the autonomy of the public sector enterprises, which would adversely affect their functioning.

The ostensible objective stated when the policy was officially announced by the Finance Minister in February 2021 was that “the government aims at making use of disinvestment proceeds to finance various social sector and developmental programmes and also to infuse private capital, technology and best management practices in Central Government Public Sector Enterprises”. Members of the Commission believe that the guidelines will, in fact, undermine the very objectives stated by the Finance Minister earlier.

For the following reasons, we feel that the above cited notification stands vitiated.

  1. The notification runs counter to the government’s mandate and, as an arm of the government, the CPSEs’ mandate to play the role of a “welfare State”, as envisaged in the Directive Principles of the Constitution. In addition, one of the clauses of the notification that seeks to monetise the land assets of the CPSEs violates the “public purpose” requirement in the erstwhile land acquisition legislation under which the States had originally acquired lands for the CPSEs.
  2. The assumption made by the government that disinvestment proceeds would amount to additionality of Budget resources is a fallacious one and, there are other several more prudent alternatives available to the government to generate resources for public expenditure on priority sectors.
  3. The notification violates the concept of autonomy of the CPSEs, as envisaged in the Companies Act under which most CPSEs are set up.

1. Legal implications:

CPSEs, set up in pursuance of Article 19(6)(ii)  of the Constitution are to be deemed to be the “arms” of the State under Article 12. They therefore constitute an instrumentality of the State which is obligated by the Directive Principles to play the role of a “welfare State”.  As discussed at length in our first report (hyperlink), the State’s and the CPSEs’ welfare objectives include  reservations for the SCs/STs/OBCs [Article 16(4)], “welfare of the people” [Article 38(1], “minimise inequalities in income” [Article 38(2)], ensure that the ownership and control of the material resources of the community are so distributed as best to subserve the common good” [Article 39(b)] and ensure that the “operation of the economic system does not result in the concentration of wealth and means of production to the common detriment” [Article 39(c)].  

Privatisation of the CPSEs will imply that they will no longer play the role expected of them as indicated above, which amounts to shrinking the space available for the Centre and the CPSEs to be able to discharge their Constitutional mandate of promoting the welfare of the citizens.

In addition, Para 3.2.1(b) of the Guidelines refers to the government’s intention to identify the non-core land assets with the CPSEs, transfer them to a Special Purpose Vehicle (SPV) and, in due course, “monetise” the same. Most CPSE lands were acquired in the past under the erstwhile Land Acquisition Act of 1894 on the clear understanding that such acquisition was for a “public purpose”, a term defined in Section 3(f)(iv) of that Act as “for a corporation owned or controlled by the State”. In view of this, it will be prima facie illegal if the ownership/ control over those lands is transferred to a private entity.

2. Disinvestment proceeds as a source of additional budgetary resources:

The argument  that suggests or implies that the sale of public assets is a non- inflationary  means of raising additional resources as it implies no recourse to fiscal deficit, is invalid. In terms of macro-economic effect, there is no difference at all whether government borrows directly from the banking system to finance additional expenditure visualised or whether it raises equal amount of resources through the sale of PSEs to the corporate sector which borrows from the same banking system to finance its acquisition of such PSEs .

Furthermore,  privatisation of a public asset involves surrendering  entitlements to the stream of future receipts that the asset would generate and which are the basis for assessing it’s current value. The  proceeds from the disinvestment will be meagre compared to the real value of the assets sold because of the inbuilt bias in hasty privatisation towards undervaluation of assets. Moreover, the corporate sector which would buy the public assets would be raising most of the needed resources from the public sector banks.

Instead, there are several other more cost effective ways to raise additional resources. For example, the government could prune non-productive and low-priority items of expenditure, minimise expenditure on tax concessions given to corporate businesses etc. On the receipts side, the government could raise additional resources by imposing redistributive taxes such as higher income tax for higher slabs of income, consumption tax on conspicuous consumption levels, real estate taxes, wealth tax, inheritance tax, higher capital gains tax, taxes on profits accruing from speculative trading in the stock markets and windfall profits etc., which will also be in line with the Directive Principles that require progressive reduction in income/ asset inequalities in the society, reduction in concentration of wealth and so on. There are studies that show that reduced income inequality in the long run will facilitate balanced and sustainable growth.

3. Autonomy of the CPSEs:

Clause 3.1.5 of the notification empowers the administrative Ministry to “remove” summarily  the Chairman and the functional directors of a CPSE, if they fail to “cooperate” with the implementation of the Guidelines. This amounts to intimidating the senior managers of the CPSEs to comply with the Guidelines, which are prima facie illegal. Such an arbitrary intervention will also violate the provisions of the Companies Act under which many CPSEs have been constituted, as the Act provides for an elaborate procedure for electing a Chairman and the other Directors of a company and their removal. Though the government is a majority equity shareholder in the CPSEs, it cannot trample upon the rights of the minority shareholders. Even in the case of such CPSEs set up under specific laws enacted by the Parliament, the relevant legislations empower  the government to issue only policy directives that do not interfere with the governance of the CPSE. 

The latest approach to privatisation, hasty, drastic and disruptive

The latest notification, in our view, is an abrupt pronouncement of a far reaching policy, with drastic changes, that differ substantively from the earlier policy statements (Disinvestment Policy statements of November 1997, February 2003 and July 2007 and policy statements on closure of sick CPSEs in October, 2015 and June 2018). It bears no continuity with the earlier policy. While the earlier measures to privatise the CPSEs proceeded in a measured manner over a time frame of around two decades, the policy notified now aims at hasty privatisation of the CPSEs over a compressed time frame of a few months. It arbitrarily defines the the “strategic” sectors to be Atomic Energy, Space, and Defence, Transport and Telecommunication,Power, Petroleum, Coal, and Other Minerals and Banking, Insurance, and Financial Services. It seeks to privatise all CPSEs in the non-strategic sectors and also privatise even CPSEs in the strategic sectors, subject to the minimal presence of a few CPSEs in those sectors.

Such a hurried sale of the assets of the CPSEs, built assiduously over the last seven decades, would be highly imprudent and would result in their being undersold to a few corporate businesses, that will seriously hurt the national interest. Such an indiscriminate sale of the public assets would lead to violation of Article 39(b) [“material resources of the community to subserve the common good”] and Article 39(c) [“the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment”].

Such drastic changes in the policy on CPSEs have both inter-sectoral and inter-generational implications. Any policy that involves privatisation of the public assets should necessarily be preceded by and based on wide consultation with all the stakeholders, including the States, the CPSE employees and the public at large and a discussion in the Parliament. No such public consultation has taken place in the instant case.

In view of this, we call upon the Union Government  not to proceed with the implementation of the above-cited guidelines on disinvestment.

Peoples’ Commission   

About Peoples’ Commission on Public Sector and Public Services (PCPSPS): Peoples’ Commission on Public Sector and Services includes eminent academics, jurists, erstwhile administrators, trade unionists and social activists. PCPSPS intends to have in-depth consultations with all stakeholders and people concerned with the process of policy making and those against the government’s decision to monetise, disinvest and privatise public assets/enterprises and produce several sectoral reports before coming out with a final report. Here is the first interim report of commission- Privatisation: An Affront to the Indian Constitution.

For more information, please contact:
Thomas Franco +91-9445000806+91-9443129404
ngcfranco@gmail.com

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