Power of Now in privatisations: Attempts to time the market to realise best price create more welfare loss than gain

By Bhagwan Chowdhry and Prasanna Tantri

One of the key announcements made by finance minister Nirmala Sitharaman, as a part of the Atmanirbhar Bharat package, is about privatisation. We welcome the policy. We especially like the intention to completely move out of non-strategic sectors and limit the government presence even in strategic sectors. We do have some concerns about its actual execution given that the government is trying to get the timing right.

It’s understandable that the government wants to realise the best prize for its assets as any seller would. But assuming that the government, or even private players, can estimate the right time when the prices will be higher is not supported by finance theory – if we could time the market, we will all be rich without much effort.

Furthermore, viewing privatisation from the narrow prism of bridging the current year’s budget deficit is myopic. The most important goal of privatisation is to transfer the management of capital from the incumbent inefficient management to a more efficient management. From a broad economy’s point of view, it is the transfer of management of capital that matters and not the transfer price between two parties. Seen holistically, even the government revenue is maximised with a quick and efficient privatisation rather than endless delays waiting for the right price.

Therefore, as long as a fair and competitive process is followed, timing should not matter as much from a welfare point of view. In any case, if the government sells something at a price below what would prevail later, it would have ended up transferring money to many of its own private investors which should in any case be seen as stimulus spending in times of crisis.

Consider Hindustan Zinc. The government sold its 45% stake for close to Rs 750 crore in 2002. In slightly more than one and half decades the valuation went up more than 40 times, the installed capacity more than 5 times, and profits over 1,000 times. Maruti is similar. It used to sell 25,000-30,000 cars under government control and now it sells close to 6 times as much. Its market capitalisation increased more than 45 times.

The evidence is not restricted to self-selected anecdotes such as Maruti and Hindzinc. Nandini Gupta, professor of finance at Indiana University, has carefully studied partial privatisation and found that even partial privatisation improves efficiency. The number of full privatisations in India are too few to conduct a scientific study.

Now consider Air India. The Naresh Chandra committee recommended privatisation as early as December 2003, when Air India had significant market share and low debt. Fast forward a decade and a half, Air India is saddled with more than Rs 52,000 crore of debt and less than 14% market share. The Rs 25,000 crore bailout implemented in 2013 has disappeared into thin air. The only way government can hope to sell the airline now is by pushing the debt burden to taxpayers. Had the government bit the bullet 10-15 years earlier, Air India would have created more jobs like Hindzinc and Maruti and that too without burdening the taxpayers.

Given these anecdotes and findings of careful research world over, waiting for a perfect time to privatise is counterproductive. Delay wastes resources. We suggest that the government go ahead with already planned privatisation of five large companies. It will send a clear message to the markets about the credibility of the government’s announcements. Once credibility and trust are built, the valuation of all PSEs on the block is likely to soar, more than making up the loss on the initial set of companies.

In fact, the initial set of privatisations will create the right market conditions for future privatisations. In addition, government will realise benefits from increased future taxes from the companies themselves and their employees. We sincerely hope the government completes the privatisation programme without chasing the illusory and expensive goal of timing the market.

The writers teach at Indian School of Business