Privatisation Files: Modi’s Flagship Policy Faces Pushback From Key Ministries — BQ Exclusive

The Modi government’s privatisation push faced resistance from key ministries, documents accessed by BloombergQuint show.

Source: BloombergQuint
Source: BloombergQuint

The Narendra Modi-led government’s push towards privatisation—the strongest India has seen in many years—faced resistance from a number of key ministries within the administration, show hundreds of pages of correspondence exchanged over a seven-month period. Despite this pushback and a number of unresolved issues, Finance Minister Nirmala Sitharaman announced the new Public Sector Enterprise Policy in the Union Budget of 2021-22 presented on Feb. 1.

BloombergQuint has accessed a series of communications between the Department of Investment And Public Asset Management and different ministries starting July 2020, which culminated in a cabinet note dated Jan. 23. These documents were accessed through the Right to Information Act, 2005.

Privatisation Files: Modi’s Flagship Policy  Faces Pushback From Key Ministries — BQ Exclusive

The privatisation policy was first detailed by the finance minister in May 2020, alongside the economic package to deal with the Covid-19 pandemic. The Finance Ministry’s Department of Investment and Public Enterprises, which was entrusted with the task of framing the policy, reached out to 49 ministries and departments, along with the Niti Aayog for comments through a draft note circulated on July 6, 2020. Although ministries were given about two weeks to furnish responses, comments and suggestions poured in for months, with many of them raising concerns.

In all, as many as 21 ministries and departments supported the policy without offering any significant comments. Seven departments wanted sectors controlled by them to be in the strategic list, seven sought an exemption from the policy, another three departments gave conditional approval and 10 sent in suggestions and comments, while some raising issues.

DIPAM officials declined to comment on the story and emails sent on March 19 remained unanswered.

Privatisation Files: Modi’s Flagship Policy  Faces Pushback From Key Ministries — BQ Exclusive

Red-Flags From Strategic Group

The privatisation policy, in its final form, has divided sectors into strategic and non-strategic. While the government will keep “bare minimum presence” in strategic sectors, all companies in the non-strategic sectors will be considered for privatisation, merger, or closure.

Concerns emerged not just from sectors pushing to be in the strategic list but even from those who were in the category yet argued for special exemption from the privatisation policy.

For instance, the Ministry of Defence, in a letter sent on July 20, 2020, emphasised that defence manufacturing should continue to be under state-owned entities “in the interest of national security” as they are “critically important due to their unique functionalities”. Defence is on the strategic sectors list.

Defence manufacturing is a specialised form of industrial production where the quality standards are highly stringent as compared to other commercial production. This sector can be broadly classified into four verticals i.e. land systems, naval systems, air systems and miscellaneous. All four verticals have their own strategic importance and are complementary to each other.
Letter From Department of Defence Production (Approved by Defence Minister Rajnath Singh)
Privatisation Files: Modi’s Flagship Policy  Faces Pushback From Key Ministries — BQ Exclusive

There are a total of nine state-owned defence companies. Divestment is already underway for Bharat Earth Movers Ltd., where the government intends to prune its stake from about 54% to 28%.

In its response to the Defence Ministry’s suggestions, the disinvestment department said the new policy is aimed at improving domestic production “by encouraging private sector participation across all sectors by way of privatisation of public sector enterprises, which shall allow infusion of private capital, technology, innovation and best management practices....” The response was included in the final cabinet note dated Jan. 23, 2021. It emphasised that defence has been retained as a strategic sector even though 100% foreign direct investment is allowed in the defence industry and production of defence equipment is permitted within the private sector.

BloombergQuint’s email to the Defence Ministry spokesperson and message to the office of the defence minister on March 19 was not answered.

There are other departments in the strategic sectors list that raised their own concerns.

The Department of Space wrote a letter on July 24, 2020, suggesting that the two state-owned firms under its control—Antrix Corp. and New Space India Ltd.—shouldn’t be considered for privatisation. The former is facing “huge litigation with a liability of around Rs 9,200 crore” owing to an international arbitration award and the latter is “at the core of the government’s plan for opening up of the space sector, the letter said, even though the department said it was “in support of the proposal” of privatisation more broadly.

Response to an email sent by BloombergQuint to the department on Tuesday is awaited.

The Atomic Energy Department wanted two out of four firms within its administrative control to be outside the scope of the privatisation policy, according to its response dated Sept. 30. 2020. It recommended minority stake sale in a third.

In the case of NPCIL, the department said that up to 49% stake can be divested following a case specific review. For Uranium Corp. of India Ltd., the ministry viewed it as the only company engaged in mining and processing of uranium, “which is a strategic material having a bearing on national security”. For Indian Rare Earths (India) Ltd., the department argued that it be kept out of the privatisation policy “since it’s normally practiced globally that critical resources are kept under government control, based on geopolitical circumstances the country is expected to face”.

The office of the Secretary of Atomic Energy declined to comment.

In a letter to the DIPAM on Aug. 4, the Ministry of Coal pointed out that Coal India Ltd. has been facing industrial relations issues “in response to commercial mining, etc, which is affecting coal production adversely.” “It has been the stand of the Ministry that CIL and its subsidiaries are not being privatised,” the letter, which was approved by Coal Minister Pralhad Joshi, said.

The ministry made the case that since the coal sector has been thrown open for private coal mining, diluting the government’s stake in the sector “is no longer germane”. Coal has been included in the strategic sectors list.

BloombergQuint’s email to Coal Minister Pralhad Joshi and his office on March 19 didn’t elicit any response.

To be sure, while a broad policy has been approved, case-by-case decisions will follow, a point made by DIPAM in its responses to concerns raised by various ministries.
Privatisation Files: Modi’s Flagship Policy  Faces Pushback From Key Ministries — BQ Exclusive

Make Me Strategic

A number of ministries that didn’t make the strategic sectors list argued that they ought to be in the category, the communications show.

The Ministry of Petroleum and Natural Gas was among them. The government is encouraging a gas-based economy with the PNG and CNG segments of city gas distribution networks seeing investments of over Rs 90,000 crore, a letter dated Aug. 11, 2020 said. Strategic sectors like power and fertiliser are also dependent on gas supplies. Other projects like Talcher Fertilizers, Konkan LNG at Dabhol and Indraprastha Gas Grid in North-East are also being taken up.

It would be advisable to consider entire Gas Value Chain Sector (Gas Transmission, Gas Processing and Gas Trading) as strategic sector. We request to include gas trading as a separate strategic sector.
Letter From Ministry Of Petroleum And Natural Gas (Approved by Minister Dharmendra Pradhan)

The ministry gave an “in-principle” approval to the draft proposal of DIPAM with these observations. An email sent by BloombergQuint to the minister and a message to his office on March 20 were not responded to.

One of the most comprehensive responses, making the argument for inclusion in the strategic sectors list, came from the Ministry of Shipping. It prepared and sent a 30-page report on the subject.

All our neighbouring countries have national shipping companies—China, Bangladesh, Pakistan, Russia, Nigeria, Iran, etc. Even a smaller nation than us, namely Bangladesh, has a sole state-owned shipping company established just after its independence, which has plans of inducting 32 vessels by 2041. 
Letter From Shipping Ministry Dated July 24, 2020.
Privatisation Files: Modi’s Flagship Policy  Faces Pushback From Key Ministries — BQ Exclusive

Alongside, the ministry sought a review of the government’s decision to sell a majority stake in The Shipping Corporation of India Ltd., the communication showed. However, the process of stake sale has already reached an advanced stage as the government is said to have received multiple bids on the expression of interest, which was invited in December 2020.

The disinvestment department, in its response to these concerns, said when the privatisation of SCI was being proposed, the shipping ministry had given its “no objection” in writing through a letter written in October 2019.

BloombergQuint’s email and message sent to the office of the shipping minister, Mansukh Mandaviya, sent on March 19 was not answered.

Pharmaceuticals and Health

The government’s privatisation policy was announced at a time when the world was grappling with the first wave of the Covid-19 pandemic. Yet, the government didn’t include healthcare as a strategic sector.

This was opposed by the Ministry of Health and Family Welfare, which wrote a letter approved by Minister Harsh Vardhan, on Sept. 1, 2020, stating it supports the proposed privatisation policy “subject to the inclusion of healthcare services as a strategic sector” where presence of a state-owned unit is needed. It cited the experience of the Covid crisis in making its case.

Privatisation Files: Modi’s Flagship Policy  Faces Pushback From Key Ministries — BQ Exclusive

However, in the final cabinet note dated Jan. 23, DIPAM was of the view that the “the private sector in India is well equipped in production of medicine/ health care products and in development of vaccines and capable to meet the vaccine needs of the country as well as to meet the needs of global markets.”

Queries sent to the office of the health minister on March 20 were not answered.

In the pharmaceuticals sector, official records showed Minister of Chemicals and Fertilizers DV Sadananda Gowda had requested Niti Aayog vice-chairman Rajiv Kumar and the Finance Minister on July 3 to “reconsider” the privatisation of pharmaceutical firms Karnataka Antibiotics And Pharmaceuticals Ltd., Bengal Chemicals and Pharmaceuticals Ltd. and Hindustan Antibiotics Ltd..

“Pharma PSUs (public sector units) are covered under the criteria of ‘strategic sector, as they are performing an important role in national (drug) security, checking markets imperfections and public purposes and other over-riding national interest,” a letter dated July 24 sent by the Ministry of Chemicals and Fertilizers, approved by Gowda, said. The ministry sent another letter in November 2020 reiterating its request, which wasn’t accepted.

“India’s pharmaceuticals industry is the third-largest in the world by volume and the 14th largest in terms of value. India contributes 3.5% of total drugs and medicines exported globally,” the DIPAM said, while rejecting the idea. The DIPAM made it clear to the ministries that the new policy will not affect or change the ongoing disinvestment transactions.

BloombergQuint’s email and message sent to Gowda on March 19 remains unanswered.

Privatisation Files: Modi’s Flagship Policy  Faces Pushback From Key Ministries — BQ Exclusive

Not Unanticipated

To be sure, the government was conscious of the resistance it may face in implementing the policy.

“In the process of disinvestment - privatisation or strategic sale, there could be resistance from the CPSE or the department. This can be overcome if such CPSE is brought under DIPAM’s control,” the Department of Economic Affairs suggested in a letter sent on July 30, 2020. The idea to introduce this enabling provision however was not accepted.

Note: This is the first part of a series of reports on the government’s privatisation push.

Here's part two: