T N Ninan: All doors not closed

WEEKEND RUMINATIONS

It is now a given that privatisation has been taken off the shelf of acceptable policies, at least as long as the UPA government is in office. That should not mean that all doors have been slammed shut in the face of the reformers.

Finance Minister Chidambaram has rightly argued that disinvestment can happen so long as the government retains control as the majority shareholder.

This may not be the best solution for all situations, but it leaves sufficient scope for selling to the public the government's shares in everything from the oil giants to the public sector banks, and from the power generating firms to the phone companies.

This is good news for several reasons. Giving private investors a stake in these national giants will subject them to the discipline of the market, and to meeting investor expectations.

This becomes a test for their managements but also for the controlling shareholder, which is the government. If a public sector oil company has results that don't compare with (say) Reliance, then investors will ask questions and analysts will make "sell" recommendations "" and a crashing share will not be a vote of confidence in the public sector.

This market rigour can be a more effective spur to both performance and corporate governance than the public sector watchdogs, whether it be the CAG or the CBI, the Vigilance Commissioner or parliamentary committees.

There is a benefit to the stock market as well, which needs greater depth. The more heavyweight companies that get quoted, the greater the market capitalisation figure "" and as a consequence the less manipulable are stock market indices.

The fact that companies like ONGC, Maruti and SBI are quoted on the stock exchange makes the market an infinitely more broadbased business reality that would have been the case otherwise. It also makes it easier for overseas institutional investors, looking for ways to buy into the India story, to pump more money into the country.

The market today is so thin that the favoured stocks have long since reached the prescribed limits for FII holdings. Since it is known that the FIIs don't want to buy into small-cap companies and also need the assurance of liquidity (so that exit is easy, as and when that option is resorted to), market depth is an important factor to keep in mind.

If there is greater depth, it creates the room for greater financial inflows "" which (if we are to believe the CMP) is what the UPA government wants.

There will be a larger message as well. The last two weeks have created doubts in people's minds about which way India's economic policy is headed. The contents of the CMP have not helped matters.

While the government has its constraints, given its dependence on the Left for commanding a parliamentary majority, this should not come in the way of pursuing those policies that reassure the key elements who take investment decisions, both in the country and outside, who need now to see for themselves that India is not careening off the high road into some economic cul de sac.

There remains the problem of finding ways of preventing more Ram Naik kind of ministerial conduct, whether it is in the handing out of petrol pump contracts or preventing public sector companies from taking their own pricing decisions.

Dr Manmohan Singh should work out a method whereby ministers in charge of the PSUs' parent ministries have a clear understanding of what kind of issues they can intervene in, and where they have to leave things well alone.

In other words, the promise of public sector autonomy has to be given shape and form. The "navratna" concept (though it has not worked exactly as planned) gives some pointers, in that there are explicit contracts between the company and the ministry on the agreed objectives and business plans, accompanied by operational freedom to implement those plans.

Even more importantly, as far as possible the public sector companies should be asked to seek funds from sources other than the Budget "" so that an external lender's or investor's independent judgement becomes an extra safeguard against, say, foolish revival schemes (of which there have been no shortage).

These are not perfect solutions. But since the immediate political realities are not about to change, it would be wise to try and maximise the scope of what is possible.