The author was chief economist at CII, and is now founder of CERG Advisory, a corporate consulting and economic advisory company. He can be reached at omkar.goswami@cergindia.com.

Public sector mergers are the talk of the town. If newspapers are to be believed, the IDBI-IFCI merger is a done deal; we should expect a series of big-time mergers to create four to five mega-sized public sector banks; the MTNL-BSNL merger is about to happen; and soon, we will see a merged public sector oil giant. Ministries as varied as finance, petroleum and telecommunications are united in using the argument of scale economies to root for merging PSEs under their bailiwick. It all seems to be forward thinking, size-oriented heady stuff. But are they necessarily going to be good for competition, consumers and the economy?

Let us look at the proposed IDBI-IFCI merger. Given the terrible state of IFCI, everyone privately agrees that the best option would have been to liquidate it. However, it can't be done politically. For one, there is the 'wisdom' that India still needs development finance institutions (DFIs), which has become even more pervasive under the present political dispensation. A careful debate ought to demonstrate that in a world of debt swaps, the distinction between long-term finance to invest in fixed capital (hitherto the domain of DFIs) and shorter-term finance for working capital is specious. Banks can, and have lent oodles of money for plant and equipment at significantly lower interest than DFIs. With securitised debt swaps, there need be no such thing as tenor mismatch between liabilities and assets. But as is often the case, 'wisdom' prevails over logic. Secondly, IFCI has a huge liability in terms of its public bonds, much of which is held by employee provident funds. So, liquidating IFCI entails a severe haircut for bondholders, and the government can ignore this only at its peril.

Therefore, we are perforce opting for a poor second-best solution where a fairly distressed IDBI is being persuaded to merge with IFCI. Naturally, if the government wants to mitigate IDBI's balance sheet costs of this merger, it would have to provide some serious tax and deferred payment sweeteners. These would eventually come out of the exchequer and comprise a dead-weight loss. Moreover, IDBI will have to oversee the workings of a demoralised institution, which will stretch its management bandwidth to the hilt. I wonder if these costs have been taken into account.

"That's a bad example," you might say. "Everyone knows why IDBI is being persuaded to merge with IFCI." Fair enough. Take, instead, the proposed MTNL-BSNL merger. What is the logic of that? If, under the pressure of private sector competition, MTNL is finding it difficult to expand its footprint and high-value services in Delhi and Mumbai, it should focus on its operations, garner additional capital and do all that is needed to regain market presence. Why should one expect that MTNL's merger with a heavily-protected, public sector telecom juggernaut called BSNL solve its problems? And how will telecom consumers be better off by it?

Let me end by stating a few obvious things. First, international experience shows that four out of five mergers fail because of wrong assumptions, overstretched balance sheets, relatively high cost of acquisition and, most important, inadequate post-merger organisational integration. Second, shotgun mergers between two PSEs are unlikely to create mega-efficient corporations. Each will carry organisational inefficiencies, and the additional costs will most likely overshadow synergies. Third, in high entry barrier, monopolistic industries like oil, mergers could be inimical to consumer interests, which is why major mergers abroad must be scrutinised by a country's competition commission. Fourth, mergers per se are no panacea.

That doesn't mean that PSEs should shun mergers. Let that choice rest on the management of these companies; let them use data to convince their independent boards; let it be approved or rejected on merit, and without huge tax sops; and let ministries not decide what's good for their corporate wards. Mergers aren't tea parties. Let's approach them carefully.