Strategic Sectors | PSUs should continue to play a pivotal role

The disinvestment policy announced by Finance Minister Nirmala Sitharaman brings into sharper focus the question of allowing public sector units (PSUs) to hold sway in crucial realms such as space and defence. These — along with atomic energy; transport and telecommunications; power, petroleum, coal and other minerals; and banking, insurance and financial services — are ‘strategic sectors’ where PSUs will continue to have a role.

At the same time, the new rules allow Central Public Sector Enterprises (CPSEs) in other sectors to be privatised as and when the NITI Aayog puts them up for disinvestment. The latest Public Sector Enterprise Survey identifies 257 CPSEs including 184 profit-making enterprises.

Since the late 1990s, successive central governments have hesitated to carry out any serious PSU disinvestment, steadfastly refusing to cede majority stakes in profitable PSUs to industry. This was widely criticised because the government’s presence in non-strategic sectors such as, say, ship-building not only denied opportunities for competent private players but often led to inefficient PSUs bleeding the exchequer. So, ran the argument, the government must step aside and allow industry a bigger role in these sectors.

While this argument has its merits, strategic sectors such as defence, space and oil exploration represent the other side of the coin where the government’s role is rightly viewed as a necessary evil. The only rider being that this role should be based more on collaboration, rather than competition, with industry. This is even more significant today when industry participation is perceived as pivotal to New Delhi’s ambitious plan to raise India’s current annual defence production of Rs 80,000 crore to Rs 1.85 lakh-crore in the next five years.

Countries such as the United States, Russia and China have their own domestic defence industries that supply their respective military forces based on arms contracts given by the government. This has a major downside as it lends political overtones to the military-industrial complex, and major corporations often monopolise the sector.

In the case of India, industry plays a far lesser role than defence PSUs in arms acquisition, although a sizeable number of private players actively participate in the defence sector.

Unfortunately, the lack of competition and adequate R&D wherewithal of these companies have led to the absence of a robust public-private partnership in this strategic sector. No wonder then that this has often spelt unacceptable delays in the completion and delivery of major projects.

In fact, a recent study by Boston Consulting Group says India’s private industry, which provides sub-contractors to defence CPSEs, accounts for less than 10 percent of the country’s defence spending. This is in sharp contrast to the CPSEs’ contribution of 20 percent.

The defence reforms set in motion recently will hopefully rectify this and provide greater synergy between the private sector and the government in line with the ‘Make in India’ initiative — the cornerstone of the country’s indigenisation programme. One good way of redefining the role of defence PSUs is perhaps to include periodic and systematic audit mechanisms in the proposed reforms for these sectors. Such measures will go a long way in ensuring PSUs offer healthy competition to industry in the sector and the partnership endures.

Disinvestment in the space sector may be easier to carry out. Unlike the defence sector, where the military and industry never had a level playing field, the space sector — read the Indian Space Research Organisation (ISRO) — always had industry involvement in some form or another in its satellite and launch vehicle programmes. Compared to the state-run Defence Research and Development Organisation (DRDO) and its subsidiaries, ISRO enjoys remarkable autonomy which enables it to outsource the building of several small to mid-sized satellites — ranging from 300 kg to 2000 kg — to private players, their manpower and facilities.

The idea is for ISRO to provide the requisite training for industry at its centres and share its time-tested design and testing facilities, leaving ISRO scientists free to focus on R&D for other key technologies. Corporate houses such as Godrej, the Tatas, L&T, HAL and Mahindra now routinely supply critical systems, spacecraft parts, and even liquid propulsion for launch vehicles. Since low cost access to space is the watchword in the global space industry, opening the door wider will encourage more big players to join in the effort to bolster India’s launch capability, which currently boasts 30-35 percent cheaper launches than other countries.

This is not to suggest that private players be given unfettered access to strategic sectors such as space where PSUs must continue to have a crucial balancing role. After all, unregulated industry involvement in the space domain would be the last thing anyone wants — and least of all ISRO.

By its very nature, space technology needs heavy investment and this opens up the possibility of rich private entities dominating the sector. It is with this in mind that the government has established a new PSU, New Space India Limited (NSIL) that acts as ISRO’s commercial arm. The NSIL is mandated with marketing ISRO’s R&D projects and help build launchers such as the Polar Satellite Launch Vehicle (PSLVs) and Small Satellite Launch Vehicle (SSLVs) with industry collaboration.

However, for these unprecedented structural reforms to work, the government has to draw up adequate regulatory frameworks. Only then will the new policy achieve its goal of attracting “huge private sector investment, enhance productivity and take India to a higher growth trajectory,” as NITI Aayog chief Amitabh Kant says.