I have never been a great believer in government disinvestment in industry just for the sake of disinvestment. Wholesale disinvestment, without any coherent strategy behind it , adds very little. The biggest example of such practice is probably that of Russian privatization of the last decade where it simply privatized inefficencies and created a new generation of robber barons). In India, things are better. But short term thinking is in abundance. The government has a disinvestment target, but not always a disinvestment strategy.
Privatization of oil industry is a hot button issue. The Supreme court had recently ruled that the government can not privatize HPCL without first passing a motion in parliament. The election is round the corner. In the fractured parliament, there is very little chance of this measure being passed. Faced with the danger of its privatization target going awry, the ministry of Petroleum has hit upon the brilliant idea of disinvesting HPCL into ONGC . ( ONGC is India's largest Oil and Gas exploration company).
The bureacrats must be feeling very pleased with themselves. They have hit two birds with one stone. It helps them towards meeting their disinvestment target for this year and also meets the Supreme Court directive.
There is a certain business logic to this. ONGC and HPCL bring complimentary strengths and have a strong synergy. But there are also a lot of things wrong with such a course of action. Firstly, the whole idea of privatization is to get government out of industry. ONGC is, for all practical purposes, a public sector company. Considering the size of its footprint, there is also very little likelihood of its getting completely privatized in near future. By merging HPCL with ONGC, the government is creating an even bigger beast, which will no doubt have an even bigger bureacracy.
Secondly, As ET noted in its editorial, there is the cost of funding it. The government is highly likely to pass the buck to ONGC. ONGC is finding its feet in the deregularizing environment. Why mess it up?
Thirdly, mergers and acquisitions are incredibly difficult to pull off; a public sector enterprise will have neither the skill set, nor the stomach, to make it happen.
It is much better not to do it, rather than do it wrongly. I think the better idea would have been to wait and to do it properly after the election, rather than to botch it up in order to meet some stupid target.