Capitalist Democracy – The new India

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Capitalism: The one where innovation is encouraged. But, ultimately leads to inequality. Weirdly affecting the economy whilst creating efficiency.

 

Sale or liquidation of assets is termed as disinvestment. It is primarily done to reduce the fiscal burden, when the government is unable to source other forms of income. Especially at times of recession

Government disinvestment automatically leads to privatization. Wherein, private investors who see value in the asset will invest. This has two knock-on effects;

  • Primarily, the disinvestment will decrease the government holdings in that particular asset. Hence, the government can concentrate on other sectors of the economy.
  • Secondly, it’ll encourage the private players to handle the disinvested asset more competitively and efficiently. For, the asset will already be well placed in the market.

Remember, It doesn’t matter who the individual is. If his/her holdings in the company is less. Then, that will directly impact his/her hold on the company. An example seen in present days that of ‘TATA sons’. Tata Sons Pvt Ltd is the holding company of Tata Group.

Mr. Ratan Tata is among the best philanthropists India has ever seen. He’s the man where we can say “Bharat Ratna award deserves him”. The highest civilian award will be proud to have him. 

Top holders of Tata sons by various institutions and individuals.

But, Mr.Tata due to his selfless philanthropic works lost the hold on Tata sons (Empowered the Tata trust). No matter how influential an individual is. With less holdings comes up with less hold in the very company they established to its known success. So, with disinvestment. By reducing the holdings. Government will lose control over the asset. 

So, When governments plan to reduce their holdings, It certainly means, government wants the private players into the economy and at every level of the market. Isn’t that what the “Atmanirbhar Bharat” stands for. A self-reliant India, where democracy encourages private investors to take active part in nation building. Remember, Investing is a win-win situation. It’s a chain of events that empowers throughout it’s circle.

Unlike Chinese party (The CCP) based politics where the entire nation is in support of an ill fueled economy running it’s company at any cost possible. With no regards to ethics of management.

Disinvestment has other objectives such as reducing the fiscal burden on the government (reason for the government to disinvest from PSB, at present). Encourage the private investors to participate in the process of nation building and maintaining a healthy competitive market. 

So, why does the government have to invest in such enterprises to begin with?

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Government is an institution that provides “Free society”. In absence of any sense of coercion. What belongs to the government, belongs to every citizen of the state the particular government is governing. So basically, what belongs to you belongs to me too. When in such a situation where an asset is of everyone’s. The responsibility to maintain the same will fall on each of us. But, in reality none take responsibility. Such assets are taken up by the government to maintain its sustainability. 

The issue is not with the way government handle an enterprise. It’s the motive. Government run enterprises need not be profit motives. And hence, there is no requirement of efficiency and competitiveness. The enterprise’s primary motive is to stay afloat and maintain its existence whilst providing the service over a period of time.

With such a dynamic world where thousands of companies are dying and new companies take birth every single day. And, the sense of competitions is at its peak. Even the monopolistic company, those that are leading an entire sector are worried of competition in the market. The government enterprises are lagging behind.

A great example would be our BSNL. The company in its earlier days was a market leader in the telecom sector. Now, with cut-throat competition from Jio and others. The company has a market share of little over 10% and is declining. Now, look at what Jio has got us. Today, due to Jio entering the telecom sector. India has got over 560 million users and certainly the credit goes to all the players in the telecom sector. But, the sense of “easy availability of internet” was made possible by Reliance Jio entering the market

New internet subscribers from 2015 to 2023 (expected rise).

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One can argue the Government contribution to the current India via various public enterprises. None can deny the success of ONGC and other oil & refiners or the power generating companies. These companies are termed necessity (based on consumption) and need hefty cash spending’s to operate and run. 

But, just as how a King retires his throne to step down for the betterment of his kingdom to the new king. The government, from time-to-time has to disinvest from their holdings to encourage the private players. 

We had over 27 Public sector banks in India. Now, post consolidation the number has reduced to 12. The rumor is that the number will be further reduced to 5. And, the rest all banks to be completely privatized. 

There is a case against privatization. People at the notion that privatization leads to ‘being greedy’ thus leading to profit motive actions. The primary objective of any public institution is to serve the individuals at such a mission the one which private players didn’t see value in. 

The debate is not entirely wrong. The way public sector banks penetrate into the rural part of India is truly commendable. These PSB’s primary motive was to serve the banking facilities at any cost. This led to availability of banks all around India. Each bank branch adds up to the cost of maintenance. When the same is unable to break even, it’ll lead to loss for the shareholders. To avoid this, all the private bankers vouch for optimum location, customer base and marketing.

Drop in corporate profit growth rate due to Covid emergency.

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Since, the PSB’s primary motive (alongside the profit motive) is to provide services to each and every class of our society. Reaching even the remotest part of India. Remember, for a country to be self-sufficient. The banking network should be reliable and fully serviceable. PSB has done this in the best way possible.

But, now it’s time to be competitive and the same cannot be done at the cost of taxpayers. Over the years, both public & the private sector banks have shown their fair share of NPA’s and ill financing. An unworthy funding’s is a lost investment. One that’s not affordable by a country such as India. We need a huge amount of capital spending. Especially towards the infrastructure. The same has to be done due diligently and the banks play a major role.

Unfortunately, either the bureaucracy or otherwise has contributed to corruption in the banking system. Leading to huge scandals and influential financing. To overcome this issue, the primary step is to handover the management to the shareholders who take management accountable for their decisions

Over the years, many private and public institutions failed to make management accountable for their ill advised decisions. In the hope that the same will be taken care of in the coming days. Until then, we’ll see what the privatization got us in the near future. 

Disclaimer: All the information on this website is published in good faith and for general information purpose only. 

 

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Rakshith Pai
Rakshith is a CA aspirant with half a decade of investing experience. He manages a private fund management service, AUG Funds. Wherein, AU denotes Gold and AG denotes Silver, the two most precious metals on Earth.
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