Friday, August 19, 2005

India's Privatization

Or, "De-Nationalization"

India is interesting, until the early George H. Bush administration India has always been the great "Mixed-Economy", a socialist democracy. However with a lag effect India has "modernized", following, again with an Indian lag effect, the Thatcher-Reagan reforms of minimizing the role of government in the economy, especially through the privatization of government-owned businesses. This has of course contributed to the high economic growth rates India has experienced, 8.6% annually as opposed to the world average of 2.8%, according to the World Bank 2005 World Development Indicators . Much as China's economic reforms have led to its growth (9.3%).

These market reforms - the best way to distribute a country's resources as opposed to a centrally-planned system (prices are necessary) - have been until just recently aided by a divided government, with a pro-market ministry and a more socialist parliament. Now that a more "leftist" party is in government, the privatization of Republic of India-owned enterprises has stalled.

Privatization is complex, just look at the Russian voucher cases, or even now the Australian telecomms monopoly Telstra. What is the fairest most equitable way to divest government ownership to the citizenry? How is corruption minimized during the sale of government-owned assets, yet how are market efficiencies achieved in the most timely manner?

The short answer for privatization is:

1) For countries without well-developed stockmarkets: to ask for competing bids for full ownership of a company's assets, with at least three bidders through public notice and public hearings all done on a clearly-adhered to timetable,

2) For countries with well-developed stockmarkets (where shares are traded with transparency and there is a "deep" market - meaning more than 20% of people in a country own stock either directly or through pensions): to float shares publically for ownership of a company on the stockmarket.

3) Enterprises should be sold wholesale, as-is, without any restructuring or regulatory changes. This keeps the "special favors" regulatory regime and tax-payer subsidized "re-restructuring" (cash injections) rent-seeking to a minimum for the benefit of the citizen taxpayer and achieves market efficiency (non-productive assets seise to exist) quickly.

Until the recent government, India had been using a process of negotiating terms for businesses to be privatized with a single buyer, as opposed to offering shares on the stockmarket or accepting transparent bids from three or more offerors (the international standard for government procurement).

"The perfect is the enemy of the good", Jean Cocteau. It could be argued that the least bad alternative, as opposed to keeping such things as Bharat Heavy Electricals subsidized by the taxpayers, is to keep the privatizations on-going, but to look for more transparent methods in the medium-term, and if the government/parliament thinks the financial market needs development, then to use the privatizations as a way to develop, make more clear and equitably-traded, the stockmarket by setting the example with the privatzations of the government-owned companies.

In a country as large and diverse as India, the lag effect of halting market-reforms would take awhile to be noticed but they would be, and the lack of a rising tide of economic growth would be felt throughout.