Divestment - What can go wrong with UPA's plan

Divestment is in the air. Expectations from the new government are high. Without the policy shackles the Left parties had imposed on the government between 2004 and 2009, Prime Minister Manmohan Singh appears all set to give a big push to divestment of government equity in public sector undertakings.

The Union Budget for 2009-10, to be presented in the first week of July, is likely to outline the new government's action plan on divestment, which may even include closure of sick state-owned companies.

What can go wrong? A lot, if the Manmohan Singh government does not recognise the political reality. Yes, the Left is off its back. However, the Congress has other allies too. Will the Dravida Munnettra Kazhagam allow Dr Singh and Finance Minister Pranab Mukherjee to go ahead with either closure or sale of the loss-making Hindustan Photo Films Manufacturing Company? Will the DMK withdraw its objections to divestment of government equity in Neyveli Lignite Corporation? Even the Trinamool Congress, the other important ally of the new government, will have serious reservations about any proposal to close or sell the many ailing PSUs located in West Bengal.

It is not that the DMK and the Trinamool Congress have any deep ideological opposition to divestment or closure of unviable sick PSUs. More than ideology, these parties' concern over divestment will stem from its likely impact on the mood of voters in the next Assembly elections to be held just two years from now in Tamil Nadu and West Bengal. While the DMK will hope to return to power in Tamil Nadu, the Trinamool Congress will work hard to throw out the Left and form its government in West Bengal.

In such a situation, obviously, they will not like to appear as favouring the Union government's move to close or sell PSUs, particularly in these two states. No political party will like to be associated with any proposal that results in obvious job losses or relocation of employees and then lose votes in the elections.

Therefore, it will be naive of Dr Singh or Mr Mukherjee to expect either the DMK or the Trinamool Congress to agree to any proposal for divestment or closure involving PSUs in Tamil Nadu and West Bengal.

These allies might eventually agree to the divestment plan, provided the PSUs located in Tamil Nadu and West Bengal are exempted at least until 2011. That is a safe guess to make, given the high political stakes the DMK and the Trinamool Congress have in their respective states.

Therefore, the first thing that can go wrong with the divestment plan is that the government may not recognise the political sensitivities of its two key allies. If it does not, divestment may once again become a big enough controversy to derail the government's larger reforms agenda. Indeed, it would be unfortunate if that were to happen.

The second thing that can go wrong with the divestment plan is the manner in which the government explains to the Congress legislators the need and the purpose of the entire exercise.

It will be a serious mistake if the Congress leadership did not encourage a proper debate and discussion among its party members on the question of PSU Divestment. It may have 206 members in the 15th Lok Sabha, but they come from different backgrounds and they should be convinced about the need for divestment so that they can defend it before the electorate and, in particular, other important stakeholders like the trade unions.

The Congress also must avoid committing the same mistake for which the Bharatiya Janata Party paid a heavy political price, of being branded as a party that made a business out of selling government equity in PSUs.

So, it might make better political sense not to hurry with divestment and avoid getting caught in a controversy. The government should first get parliamentary approval of the important legislative bills for reforms in pension, insurance and banking.

Yes, the divestment plan can be prepared now, but its execution should wait for a politically opportune time.