>SOE DIVESTMENT POLICY (MORGAN STANLEY)

SOE Divestment Policy: Missing the Big Picture?

India government is sitting on considerable assets: Our very broad estimate indicates that the total market value of government companies is US$406 billion. Our estimate, which we believe is conservative, excludes central government assets in the form of infrastructure facilities and operations that are not yet corporatized.

India’s divestment plan on a slow track so far: India has so far collected only about US$14.4 billion from divestment over a period of 18 years, an average of US$800 million p.a. About 87% of the divestment receipts are from the divestment of stakes without transferring management to the private sector.

Opposition to divestment protects only a narrow section of the population: The common concern is that divestment will result in job losses in the public sector. In our view, this argument misses the bigger picture as it focuses on a very narrow portion of the population. The total work force employed in quasi government entities (including public sector undertakings) of the central government is 5.9 million people, just 1.4% of the total workforce.

Formal efforts to protect labor actually work against labor’s interests: India is likely to add 141 million to its working age population of 750 million by 2018, according to estimates by the United Nations. Restrictive labor laws now in place have been a deterrent to employers, forcing them to prefer capitalintensive options over production. We believe the solution to rising unemployment in India is more flexibility, not less.

Gains from divestment can outweigh job losses in privatized PSUs: The government could, we believe, easily collect US$15-20 billion per annum for the next three to four years from divestment and invest this in rural and urban infrastructure. Indeed, we believe this would trigger a matching amount of investment in manufacturing by the private sector, boosting overall employment.

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