From the Vault - Disinvestment, Semiconductor, Shipping.

 

Evolution of disinvestment in Indian PSEs.

With the passing of the Constitution (First Amendment) Act, 1951, nationalisation of private firms became a standard policy tool by the Government. The Act stated that ‘the citizen’s right to practise any profession or to carry on any occupation, trade or business conferred by article 19(1)(g) is subject to reasonable restrictions which the laws of the State may impose “in the interests of general public”’. The Act allowed for nationalisation or trading by the state in any business.

Soon under the Air Corporations Act, 1953, the Government nationalised nine airlines—Air India, Air Services of India, Airways (India), Bharat Airways, Deccan Airways, Himalayan Aviation, Indian National Airways, Kalinga Airlines, and Air India International—and brought them under two PSEs, Indian Airlines, and Air India International. This was followed by nationalisation of life insurance in 1956 through the Life Insurance Corporation Act 1956, whereby 154 Indian insurers, 16 non-Indian insurers, and 75 provident societies were nationalised into Life Insurance Corporation of India (LIC). Through the General Insurance Business (Nationalisation) Act, 1972, the general insurance business of 55 Indian companies and the 52 foreign insurers was nationalised. Further in the banking system, the government nationalised 14 banks in 1969 through the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, followed up by a second round of bank nationalisation in 1980, through which another six banks were nationalised. Coal mines were also nationalised during the period 1971-1975. Nevertheless, the issue of nationalisation has always been a highly debated issue, to the extent that in the year 1958, the then Finance Minister, Mr. TT Krishnamachari, had to resign owing to controversies around nationalisation of LIC (Mundhra Scandal, 1958).

After the 1991 reforms, there was a transition in thinking about public and private sector. The term ‘disinvestment’ was used first time in Interim Budget 1991. The concept of strategic sales of state-owned companies became a part of policy debate. This government stakes were sold in as many as 12 public sector companies during this tenure, including Maruti Udyog, Hindustan Zinc, Bharat Aluminum and Videsh Sanchar Nigam Limited. The process of disinvestment continued intermittently over the next decade 2004-2014, until the recent emphasis in this direction over the last five years.

After 2014, the disinvestment policy was renewed with stake sales in PSEs such as Hindustan Petroleum Corporation Limited (HPCL), Rural Electrification Corporation Limited (REC), Dredging Corporation of India Limited (DCIL), Hospital Services Consultancy Corporation Limited (HSCC), National Projects Construction Corporation Limited (NPCC), THDC India Limited and North Eastern Electric Power Corporation Limited; and successful listing of PSEs like IRCTC, HUDCO, Cochin Shipyard Ltd., General Insurance Corporation, New India Assurance Company Ltd., Mazagon Dock Shipbuilders Ltd. (MDL) and RailTel on the stock market. In order to realize the mission of New, Self-reliant India, there was a need to redefine public sector participation in business enterprises and to encourage private sector participation in all sectors.

Against this backdrop, New Public Sector Enterprise (“PSE”) Policy for Atmanirbhar Bharat was notified on 4th February 2021. The policy intends to minimize the presence of the Government in the PSEs across all sectors of the economy. Under the New PSE Policy, public sector commercial enterprises have been classified as Strategic and Non-Strategic sectors. Following four broad strategic sectors have been delineated based on the criteria of national security, energy security, critical infrastructure, provision of financial services and availability of important minerals- (i) Atomic Energy, Space and Defense; (ii) Transport and Telecommunication; (iii) Power, Petroleum, Coal and other minerals; and (iv) Banking, Insurance and Financial Services.

The B.E for disinvestment proceeds for the year 2021-22 was fixed at Rs 1,75,000 crore. So far, Government has received Rs 9,330 crores (as on 24 January 2022) from disinvestment of CPSEs through Offer for Sale (OFS) route and sale of shares through the stock exchange. CPSE stocks have gained traction among the investors, as reflected in the BSE CPSE index, which has risen by 40.02 per cent since January 2021 to date (24 January 2022), in comparison to the benchmark index, which rose by 23.33 per cent. Total dividend receipts from CPSEs in 2020-21 stood at Rs 39,607 crore, which exceeds the Revised Estimate (RE) of Rs 34,717 crore, and is more than actual dividend receipts (Rs 35,543 crore) during the previous financial year. Total dividend receipts in the current financial year (as of 24.01.2022) stand at Rs 40,201.47 crore.

Since 2016, the government has given ‘in-principle’ approval for strategic disinvestment of 35 CPSEs and/or Subsidiaries/ Units/ Joint Ventures of CPSEs and IDBI Bank. During the present year, with progress on privatization of Air India, the government has crossed a significant milestone with M/s Talace Pvt Ltd, a wholly-owned subsidiary of M/s Tata Sons Pvt Ltd emerging as the successful bidder for sale of 100 per cent equity shareholding of GoI in Air India along with equity shareholding of Air India in AIXL and AISATS. Share Purchase Agreement was signed among M/s Talace Private Ltd, Air India and Ministry of Civil Aviation on 25.10.2021. This progress on privatization of Air India is particularly important, not only in terms of garnering disinvestment proceeds but also for boosting the privatisation drive.

Shipping Container Shortage and Rising Trade Costs

The stress in the container shortages can be captured in the Drewry’s3 Composite World Container Index4. The Index stands at US$ 9,698.33 per 40ft container as of 20th January 2022. This is US$ 6,656 higher than the five-year average and remains 82 per cent higher than a year earlier. Such a significant rise in price for a prolonged period indicates that the disruptions in the global container market are not yet over and will continue to impact the global sea trade

 Also, the freight prices on major global sea routes have observed an upward trend during the same period.

The shortage of containers has also impacted the Indian sea trade. According to the Federation of Indian Export Organisation set up under the Ministry of Commerce and Industry, the lack of containers has resulted in rising sea freight rates in the range of 300 per cent to 350 per cent5.

Further, the production of the new containers has slowed since 2019. Simultaneously, a rise in the disposal of containers has also been observed for the same period. Thus, the overall growth in the containers has fallen from 11 per cent in 2019 to 5 per cent in 2021. Unless the production is ramped up significantly across the globe, this will remain a persistent problem.

Semiconductors industry spillover in the automobile industry

A report by investment bank Goldman Sachs 2021 states that the supply chain disruptions in the semiconductor industry have spillovers in over 169 industries. The manufacturing of semiconductors requires large amount of capital and has an average gestation period of 6-9 months. Moreover, it has a fairly long production cycle of about 18-20 weeks. Hence, any recovery from the supply chain disruptions will be a slow and costly affair.

The report further stated that microchips and semiconductors account for about 4.7 per cent of value added by the automotive industry6. With the delay in supply, the average lead time7 in the automobile industry for 2021 has been around 14 weeks globally8. India has also experienced similar trends in the automobile sector. As per data from the Society of Indian Automobile Manufacturers (SIAM), carmakers sold 219,421 passenger vehicles in the domestic market in December 2021, down 13 per cent (YoY). This is not a demand problem but a supply-side issue. The information from various car manufacturer’s websites reveals a cumulative pendency of over 7 lakh orders as of December 2021.

 

Transitioning to clean energy

 The two main pillars for mitigation action to achieve net-zero carbon ambition are transition to clean and renewable sources of energy and storage of this energy. The World bank in its report Minerals for Climate Action has in its report mentioned that this transition from conventional fossil fuel-based energy to clean energy as well as battery storage will be more mineral intensive. Minerals and metals like copper, aluminum, iron, manganese, nickel etc are critical for developing clean energy sources like solar PV, wind, nuclear while minerals like lithium and graphite are important for energy storage. Therefore, on the policy front, it is pertinent to prepare for this. In this regard, the following is essential 

1. Pace at which shift from conventional fossil-fuel based sources is made. The pace will determine the extent and mix of investment in renewable sources of energy.

2. With the developed countries as frontrunners of net-zero emission plans, it is important to avoid the risk of being a late comer. The inelastic supply of minerals is already in increasing the prices of minerals which is likely to shoot up even further in the future.

3.Encourage R&D to ensure effortless switch to renewable sources of energy. This may also include focus on developing technology that recycles, reuses and repurposes minerals.

The recent surge in prices of natural gas in Europe on account of higher energy demand coupled with cold spells across the region and slower winds to run wind turbines has resulted in lower electricity output. The energy crisis being experienced by Europe brings to the fore the need for having a diversified mix of sources of energy of which fossil fuels are an important part. Simultaneously focus should be laid on building storage for intermittent electricity generation from solar PV and wind farms to ensure on-demand energy supply.

Source -Economic Survey 2022