India: Privatisation for Profit and Purpose

Between 2009 and 2016, the market value of India’s eight largest government-owned enterprises (also referred to as public sector undertakings or “PSUs”) declined by 33% at a time when India’s benchmark Nifty index increased by 9%. This divergence is driven largely by the productivity gap between government and privately-owned entities in India. The private sector has a critical role to play in India’s current journey to become a US$5tn economy within the next decade. While some of the required economic value creation will certainly be derived by the growth and incremental productivity increases of existing private sector companies in India, a significant portion will need to come from the c.12% of the economy that is currently generated by government-owned entities, the unlocking of value from which will require privatisation and restructuring.

Successfully privatising government-owned assets in India will require a shift in mindset away from the ad-hoc approach to privatisations that Indian governments (including the current government) have traditionally adopted. Instead, India will need a comprehensive and structured privatisation program that combines targeted selection and execution with a series of supporting policies and reforms that drive the competitiveness of the privatised assets and their industries as a whole, while addressing the demands of a growing number of stakeholders who are demanding that companies meet a wider purpose than only making money.

The first two years of the Modi-led government’s first term (2014-2019) are widely seen as having been insufficiently ambitious, given the size of the mandate secured, with slow execution. This time around, the government is aiming higher to create a quicker and lasting impact on India’s political, social and economic fabric through a series of big initiatives. This month’s Sign of the Times provides an outline of how the India’s privatisation programme can be one of these big initiatives and a key platform for the country’s growth, modernisation and development.

Context: The Case for Privatisation in India

The correlation between economic growth and the private sector is irrefutable. While governments throughout history have sought to control economic activity through direct participation or heavy regulation, the world’s richest and most productive countries today are those with the highest rate of private participation in the overall economy. While there are arguments for direct state participation in economic activity in extreme circumstances (such as the bailouts of the US and UK banks following the global financial crisis), the private sector has generally proven to be the most effective mechanism for matching supply and demand and private enterprises are the most efficient participants in them. The privatisation of state-owned assets in order to increase overall wealth creation follows from the evidence.

A number of countries since the late 1980s have launched ambitious privatisation programmes, raising in excess of US$3tn in asset sale proceeds , and providing significant empirical evidence across both developed and emerging market economies regarding the benefits of privatisation in the process. Enterprises in China (see Figure 1), Mexico and the United Kingdom reported productivity, profitability and shareholder return improvements of up to 24% (cumulatively) in the first five to ten years after being privatised . Additionally, privatisation has also helped drive employment generation, with evidence from China indicating that new job creation by entities increased by approximately 50% cumulatively in the first six years after they were privatised.

At this point, it is noteworthy that the calls for the role of capital markets and capitalism to change is increasing and is focused on the need to be more conscious of their impact on society and the environment as well as on equitable behaviour, in general. Privatisation is not contrary to these factors, but it is clear that regulation and incentives are required ensure the the more equitable distribution of the value it unlocks as well as to achieve the wider goals a country may have

As India plots its journey to a US$5tn economy, it clearly needs to benefit significantly from the productivity, profitability and employment gains associated with privatisation. Realising these benefits, however, will require a fundamental shift in mindset and behaviour as it pertains to privatisation. For the better part of the past two decades, the Indian governments’ approach to privatisation can be best described as half-hearted.

The recent attempted privatisation of the country’s flag carrier, Air India, 2018 is a case in point, with the sale process failing to result in a single bid for the state’s 76% stake in the national airline. Prospective investors at the time listed a number of issues with the privatisation process, including the proposed post-transaction governance of the company, the planned ongoing role of the Indian government, and unrealistic valuation expectations for the stake sale. While these issues could simply be attributed to poor process management (and therefore fairly straightforward to rectify), there is a deeper-rooted issue with the approach to privatisation in India, which is viewed by many political parties through the lens of a broader political-economic ideology .

Given the potential controversy that surrounds privatisation, governments tend to opt for the less controversial route of continuing to support underperforming PSUs, mainly by leveraging the finances of large and profitable ones. In India, this has included the likes of the Life Insurance Corporation (“LIC”) of India or the State Bank of India (“SBI”) to provide “bail outs” . This strategy, however, in addition to placing the capital of these institution’s minority shareholders and customers at risk, but is also myopic, and unsustainable over the long run as the performance gap of PSUs vs the private sector continues to widen and their losses continue to grow (see table below).

With the exception of a few PSUs that are either critical to national security or carry out core responsibilities of the state that cannot be efficiently delivered by the market, most of India’s government-owned entities could benefit from private sector intervention. During the financial year ended 31st March 2017, the cumulative net losses of 93 of India’s 270 PSUs in India amounted to c.US$5bn. The maths is simple, a c.25% improvement in profitability across these 93 companies (in line with the privatisation impact experienced Mexico) could translate into annual gains of c.US$6bn for the country, in addition to the est. $330bn of one time value that privatising all of India’s PSUs would bring.

Given the compelling maths, current and future Indian governments need to place privatisation squarely within the context of the overall economic benefits they need to deliver to the population that they need to take out of poverty, and place “ideological” considerations to one side. This is not to say that they need to not weigh the potential social costs associated with private ownership of PSUs (including employee retrenchments and an increase in prices of goods and services and other measures that will likely be taken to drive productivity). In this regard, India can look to the privatisation strategies implemented by other countries in order to potentially address these issues.

Privatisation: Fives Lessons from Other Countries

Since the early 1980s, over 100 countries around the world have privatised state-owned businesses in industries like steel, railways, airways, airports and aerospace; as well as utilities like gas, electricity, telecoms and water, raising in excess of US$3tn in proceeds in the process. The United Kingdom was one of the first proponents of large-scale privatisation and in the 1980s, under the government of Margaret Thatcher, and sold off a series of flagship assets, many of which had been nationalised during the time of austerity following the Second World War. The programme initially focused on industrial companies but later expanding to utilities as well in an attempt to raise revenues and reduce public sector borrowing.

Despite the arguably mixed success of the UK de-nationalisation programme, it created a wave of interest and a number of other countries, including both developed and emerging market economies, across Europe, Latin America and the Asia Pacific, followed suit. While countries that followed a structured privatisation process with robust processes and controls like Germany, Mexico, New Zealand and Chile were considered successful, others like Russia and other member states of the former Soviet Union were less fortunate, largely due to weak oversight and corruption. China also experienced success with its privatisation process (as highlighted in Figure 1, above), albeit not without some important lessons learned, particularly as it pertains to the treatment of vested interests and special interest groups.

An evaluation of past privatisations around the world suggests that an important driver of success is the presence of an accompanying policy environment that enables a successful privatisation process and allows privatised entities to succeed in the long-term. The important lessons that India should bear in mind while crafting its own privatisation program are:

The key lessons from the privatisation experiences of various countries over the last three decades serve as a valuable list of “core principles” and India would do well to adapt and institutionalise these principles as it embarks on its own privatisation journey over the next few years.

Future Proofing: Enhancing the Economic Impact Through Social Impact

While capitalism and trade have delivered enormous benefits to advancing economic welfare, global awareness of some important adverse effects of capitalism including environmental, employment quality and income inequality, is growing. Privatisations are a transfer of activity from private to public hands and will be under scrutiny in current times as to the value they add to stakeholders beyond just the buyers. If governments cannot explain the broader value of privatisation to the public, they risk the programme itself. And in democracies, they risk their election prospects.

Privatisations will therefore need to explicitly consider their current and future social value. At the most basic level this is on the fate of employees that have found themselves moved from the public to the private sector. Even though privatised companies are strong net job creators, in India, PSU employees have been among the strongest hindrances to privatisations over fears of restructuring driven redundancies, a loss of benefits, and the increased intensity of private sector workplaces in terms of workload and productivity. The Indian government will clearly need to allay these fears as part of the privatisation process. This means putting in place safeguards or post privatisation requirements to ensure that affected employees receive competitive compensation, benefits and skills relative to their private sector counterparts, allow the privatisation to meet key social objectives without unduly impacting its core economic objectives.

Beyond social impact in this narrow sense, India’s government has the opportunity to utilise the privatisation programme to take the high ground on delivering social outcomes alongside economic benefits. Forward looking companies around the world, India included, are adopting ‘conscious capitalism’ to create businesses that are ethically grounded with a focus on serving a broad set of stakeholders and meeting a wider purpose than only making money. With the positive link between these practises and increased competitiveness demonstrated across a number of studies – with one finding that investment portfolios focusing on companies practising conscious capitalism generate twice the returns of the overall market over the long term - the arguments for conscious capitalism are both social and economic.

The case for India seeing privatisations to actively promote modern enterprises that will deliver on both fronts is being made by leading organisations the world over that evidence that economic and social benefits are tied over the medium to longer term. This implies the Indian government would favour privatisation bids by progressive parties or by implementing best practises at PSUs as a part of the overall process for preparing PSUs for privatisation. While such an endeavour makes commercial sense, the government needs to be careful to not use it to extract value in ways that are simply pandering to vested interests and ultimately will undermine the privatisation programme. A few of the cornerstones of such a charter include:

  1. Common Good Purpose. Conscious businesses are galvanised by higher purposes that serve, align and integrate the interests of all their major stakeholders, while not losing their focus on profitability, market share and value. Companies like Google, or Unilever exemplify this mission driven model.
  2. Focus on Maximising the Value of People. Conscious businesses create cultures that promote innovation and employee engagement, thereby driving higher productivity, yet they do not over-employ. Companies like Microsoft, and Starbucks demonstrate how people are a key asset.
  3. Delivery of Quality and Innovation. A commitment to deliver goods and services of the highest quality are key for conscious businesses, driving significant investments in people, processes and infrastructure and improving competitiveness and differentiation. Apple and Whole Foods demonstrate how a quality ethos is a key ingredient in success.
  4. Investment in the Community. Conscious businesses are committed to the betterment of the communities that they impact or operate in, apportioning a share of their profits towards this objective. Companies like Patagonia or the Body Shop exemplify the view of themselves as part of a ‘system’ that operates in a country or market.
  5. Environmental Impact. Conscious businesses seek to minimise the adverse environmental impact of their operations, recognising the correlation between their long-term cost structures and environmental footprints. Disney and Nike are examples of companies that have achieved advantages by taking out the costs associated with waste and pollution.

In addition to these practises, PSUs will of course also need to implement high quality standards for governance in general, including anti-corruption and anti-money laundering processes. These measures are of course critical requirements for internationalisation and access to foreign markets in their post privatisation state. And it goes without saying, that these practises will need to be implemented in a manner that does not disrupt the commercial performance of privatisation candidates or create a disincentive for potential investors or bidders, but instead attracts those bidders that are world class.

A Privatisation Blueprint for India that Combines Profit and Purpose

The economic and strategic rationale for India to privatise a number of its PSUs over the next 12-24 months is clear, and the need for a structured privatisation programme is equally clear. This process is multi-faceted and will involve the careful balancing of a number of moving parts that range from the mundane (such as target selection and process management) to the ambitious (including big-ticket policy reforms and the creation of bold, long-term entities and frameworks). As such, India’s privatisation blueprint needs to comprise six critical elements, each of which are detailed below.

    1. Target Priority Industries/Entities First. The first step in the privatisation process is to identify the state-owned entities that most appropriate for sale to private sector investors. The selection criteria for this list should combine a number of elements, including: (a) the strategic benefits that the said privatisation would deliver to both India and more specifically, the sector that the entity operates in, (b) the ease with which the entity can be privatised, and (c) the current financial condition of the entity and its expected ability to grow as a private company. The potential list of initial companies to consider is a long one, and indeed various governments have mooted the privatisations of many of these enterprises at various times, including Air India (aviation), BSNL, MTNL (telecom), Bharat Coal, and Rashtriya Ispat Nigam (steel), among others. In addition to such near-term candidates, there are a number of other companies across sectors like postal services (India Post), railways (various rapid metro rail projects), utilities (state electricity distributors) and banking that could benefit from private sector ownership. However, the execution considerations associated with divesting these entities are arguably more complicated due to the pan-India nature of their operations and the nature of their employee base (largely blue-collar in nature); the government should more likely consider these for a second privatisation wave to be executed when the India’s has fine-tuned its privatisation blueprint.
    2. Create a ‘New Deal’ for the Privatised Public Sector. The economic and strategic benefits of privatising Indian state-owned entities (including the ones outlined in the table above) notwithstanding, current and future governments will need a clearly defined “transition plan” for the public sector employees that stand to be impacted by the privatisation of state assets. These employees, in addition to being backed by influential labour unions, also represent a significant portion of the country’s labour force (c.70% of India’s total labour force is employed by the public sector). As such, the government will need to identify creative solutions to both incentivise these employees to co-operate in the privatisation process and allow them to continue to productively contribute to the country’s economy.
      Leveraging the lessons of other countries and taking into account regional considerations applicable to India, the following are a list of a ‘New Deal’ that the government should consider for privatisations:
      1. Issue Stock Options in PSUs Before Privatisation. The aim of such initiatives is to align incentives between managers, employees and shareholders.
      2. Introduce Structured Skills Development Programs for Public Sector Employees. One success factor is ensuring that public sector employees are well skilled and suited to participate in the private sector economy (and the broader labour market) and without addressing this, organisations are set up to fail.
      3. Separate Commercial and Non-Commercial Activities of PSUs. PSUs need to be restructured to focus exclusively on commercial activities – previous mandates may have been confused by government’s and vested interest’s broader agendas - to ensure they can compete in a more open marketplace; entailing moving public activities to other government or non-governmental entities.
      4. Transfer Public Sector Employees to Other (Productive) PSUs or Other Government Institutions. . While many may be suited to the private sector, others may not and so governments need to provide a mechanism for talented employees who chose to remain in the public to be able to do so.
      5. Underwrite Employment Benefits of Public Sector Employees Until They Find New Jobs. Some of the proceeds of privatisation will need to provide support for public sector employees used to a certain level of benefits in terms of pensions, holidays, sick pay and so forth. While these may not be the market norm, they represent a real barrier to supporting privatisation that the government will need to pay the price for buying out.
    3. Implement Critical Enabling Policies. There are multiple important high-level policies that are crucial to the long-term success of privatisations in India, given its long history of a socialist regime, namely:
      1. Reform Labour Laws. As highlighted in a previous Sign of the Times, the Indian economy is hamstrung by archaic labour laws that disincentivise employee hiring and retrenchment. Eliminating these restrictions is required to instil confidence amongst private sector investors that will not participate without believing organisational structure and compensation at PSUs can be changed.
      2. Reform Land Acquisition Laws. Private sector investment in India is also impacted by restrictive land acquisition laws, particularly as it pertains to landowner consent and environmental impact. Easing these restrictions is required in sectors like aviation (airport management) and healthcare deliver, where there are greenfield privatisation opportunities and incoming investors may need to acquire land.
      3. Liberalise to Increase Competitive Intensity. In India, there still exist a few sectors, namely, utilities, railways and mining, where state-owned entities operate as monopolies. These sectors could benefit from being private sector participation; as a precursor to this privatisation, the government should deregulate these sectors and reduce competitive barriers.
      4. Reduce Foreign Investment Restrictions. India for the foreseeable future will continued to be dependent on foreign investment to stimulate growth. While the current government has taken many steps to boost foreign investment, in order to maximise foreign investor participation in privatisation processes, it should consider easing government approval-related restrictions in aviation (airlines), telecommunications and broadcasting.
      5. Institutionalise Transparency. As highlighted previously, the government’s introduction of e-auction platforms to distribute resources to the private sector represents a step in the right direction. It should look to build on this progress and institutionalise transparency across the spectrum of privatisation processes by establishing technology-drive, real-time auction portals, empanelling third-party experts for and making clear and regular representations to the public over the status of each privatisation process.

      The current government has already made progress in some of these policy areas, most notably transparency and encouraging foreign investment; in other areas, however, like the amendment of labour and land acquisition laws, progress has been painfully slow. Over the next 6-12 months, the government will need a concentrated effort to create a comprehensive policy framework enabling subsequent privatisations.
    4. Favour Future-Proof Practices. As outlined earlier in the document, by placing conscious capitalism as a key pillar of its privatisation program, the Indian government can deliver sustainable economic and social benefits to the country that extend well beyond additions to the exchequer or productivity improvements from privatisation. Achieving this will require the implementation of a number of future-proof practices throughout the privatisation process, including:
      1. Pre-Privatisation. As highlighted in a previous Sign of the Times, the Indian economy is hamstrung by archaic labour laws that disincentivise employee hiring and retrenchment. Eliminating these restrictions is required to instil confidence amongst private sector investors that will not participate without believing organisational structure and compensation at PSUs can be changed.
      2. In-Process Criteria. Include the submission of ‘conscious capitalism’ as an integral part of the PSU auction processes and making their assessment as selection criteria for winning bids.
      3. Post-Privatisation. Earmarking a fixed minimum share of asset sale proceeds towards specific development funding.
    5. Managing the Process. An important part of the blueprint pertains to the actual sale of identified PSUs in an efficient manner. Issues pertaining to timing, valuation, process transparency, decision-making and alignment of various stakeholder interests all need to be accounted for. Multiple Indian governments have historically faltered during this part of the process, evidenced by the country’s limited privatisation track record over the last decade and current and future governments will a robust management process to repeatedly deliver successful and efficient privatisations. Key components of this process include:
      1. Expert legislators and regulators to create an industry framework that allows the privatised company to compete effective with private sector entrants and drive overall industry productivity;
      2. Third-party experts to make clear and credible representations to the public regarding the rationale, benefits, obstacles and status of each privatisation process;
      3. Local and international investment banks for matters of valuation and commercial terms to ensure domestic and international markets are galvanised;
      4. Independent auditors to oversee the execution of auction processes and the evaluation of private sector bids and
      5. Experts to advise on the environmental and social consequences of a proposed privatisation process, and to help evaluate bidders against previously established environmental and social impact criteria
    6. Creating Supporting Long-Term Institutions and Frameworks. India’s privatisation blueprint, while mostly reliant on its current government for establishment and execution, needs to be one that transcends an individual government or political party. As such, the privatisation blueprint being established will also require the creation of institutions and frameworks that continue to create and maintain momentum for India’s privatisation targets in the long-term. A few examples of these institutions and frameworks include:
      1. Launching the “Temasek of India” India creates a sovereign wealth fund that can invest and attract capital to its key assets.
      2. Establishing an Oversight Committee for the Sale of State-Owned Assets in India. The UK and Germany provide examples of oversight committees that protect the government, the PSU and bidders.
      3. Creating Industry-specific Deregulation Frameworks.There are ample lessons from privatisations in Germany, UK, China and Russia on what works and does not for India to draw from.

Conclusion: Privatisation is Critical to Creating a US$5 trillion Economy and Modernising India

With a privatisation programme based on the blueprint laid out above, drawing on the lessons of others but making it its own, and with profit and purpose at its core, India will be able to efficiently privatise critical sections of the economy at scale and speed, and India’s growth ambition requires nothing less than this. A previous Sign of the Times highlighted the unique nature of India’s growth drivers, its demographic dividend, ongoing urbanisation, mass technology adoption, its growing consumer base, and increasing financial inclusion. While, as previously stated, these factors are largely independent of government policy, they require support to be fully unlocked in a timely fashion.

India’s entrepreneurs have established companies that have thrived domestically and grown to take their place among global leaders in their respective industries. Invariably, these have been industries with high degrees of private sector participation and competition, such as IT services, pharmaceuticals and consumer goods. Indian companies in sectors dominated by PSUs or with limited international competition, such as financial services or energy, on the other hand, have failed to scale to international competitiveness. Privatisation is therefore clearly critical to India’s growth agenda. In addition to the obvious benefits of creating liquidity for the government and driving productivity, a successful privatisation strategy will not only attract foreign participants across a range of sectors, but also underpin the innovation and entrepreneurship India needs to achieve its growth ambition to a US$5tn economy and beyond.

For India to achieve an annual GDP growth rate in excess of 5% it needs an initiative that draws in huge capital stimulus. This is a key requirement for achieving a US$5tn economy within five years, and privatisation is that stimulus initiative. It is also an opportunity for the Indian government to make strides to deliver its twin agenda of modernising and galvanising India to achieve its short-term target and putting it firmly on its longer-term growth trajectory. However, like every major programme of change, it requires a concerted campaign to succeed. Luckily, privatisation is a well-trodden path. The barriers to launching such a programme in India are many, and largely focused on the power of trade unions and other vested interests. This forces India to think differently. As luck (perhaps) would have it, the world is in the midst of a growing movement that demands capital is more conscious of its impact on society and the world at large. This provides the perfect backdrop for a development focused BJP government to go beyond the achievements of others’ privatisation programmes and embrace an approach that combines economic and social goals, delivering better businesses from the perspective of both profit and purpose.


  1. Revenue to GDP ratio for central government owned entities as of March 31, 2017; Source: Government of India
  2. Source: The World Bank Growth Report
  3. Source: Privatisation Barometer
  4. Sources: World Bank; Megginson, W “Privatisation, State Capitalism and State Ownership of Business in the 21st Century”
  5. This ideology is linked to the term “swadeshi”, which was an economic strategy centred around the domestic production of goods and services, championed by Mahatma Gandhi during the Indian independence movement. A number of political parties in India have cited this while opposing privatisation; In June 2019, an affiliate of the Rashtriya Swayamsevak Sangh (“RSS”), which is the ideological mentor of the ruling BJP government stated its opposition to the government’s plans to privatise Air India 
  6. In early 2019, LIC was asked to purchase the shares of IDBI Bank, an underperforming government-owned bank
  7. Source: OECD Report
  8. Source: “Thatcher’s Golden Legacy of Privatisation”, February 2017
  9. World Bank
  10. The remuneration of the head of a privately-owned bank in India is c.29x higher than that of the head of a PSU bank; Source: Live-mint 
  11. China’s largest SOEs are run by senior bureaucrats for whom CEO positions are stepping-stones in their political careers. E.g. Zhou Yongkang, the disgraced former politburo standing committee member convicted of corruption, ran China’s largest oil company for years before become China’s security chief.
  12. Source: World Bank
  13. Source: World Bank
  14. In an EY report to the government after the conclusion of the privatization process, the government’s decision to retain a 24% stake in Air India and the nature of its shareholding rights post-privatisation were cited as key factors that dissuaded potential investors; Source: Various press articles
  15. See the January 2017 Sign of the Times: The Shape of the World to Come Part II: The Key Challenges Facing the World
  16. For more information see ‘ The Need for Conscious Capitalism’, a Sign of the Times interview with Michael J Gelb, and ‘Conscious Capitalism’ by John Mackey and Raj Sisodia
  17. Sources:  ; also see Purposeful Company task force’s 2016 Interim Report”  

  18. See GPC’s June 2019 Sign of the Times,  “Delivering on the Victory in India’s 2019 General Election”
  19. In these sectors, government approval is still required for any foreign investment in excess of 4
  20. See the February 2019 Sign of the Times: India’s Journey to a US$5tn Economy: Growth Beyond Policy 9%
  21. See appendix for definitions and sources