The Birth, Growth and Demise of Public Sector | M.R. Narayan Swamy

BOOK REVIEW

The Public Sector and Privatization in India
by Sheela Dubey

Speaking Tiger
Pages: 271; Price: Rs 699

Jawaharlal Nehru was no doubt a great votary of the public sector but the ills plaguing what was seen as “Nehruvian socialism” – rampant nationalization, takeovers, a debilitating control system and discretionary use of the regulatory apparatus — did not surface during his time. Indeed, much before he passed away in 1964, he often publicly praised the role of the private sector. He was also open to course correction. This dualism in Nehru needs to be grasped well to know why the public sector got knocked off from its high pedestal in later decades, meeting a decisive end even before Narendra Modi swept to power.

Sheela Dubey, a public policy expert and an educator for long, succeeds in unveiling the story of India’s public sector with admirable ease. Devoid of any ideological baggage, this is a comprehensive story of how a government-backed public sector that at one time was once seen as the backbone of the economy got mired in inefficiency, transforming from a source of pride to a clear burden on the national exchequer.

Dubey wonders what would have been Nehru’s attitude towards the public sector had he lived longer. “The fact remains that the framework of the public sector, appropriate in the 50s and the early 60s, lost its relevance over a period of time and became a ritual, a mantra chanted without understanding its meaning; it ultimately became an albatross around the neck of the Indian economy and had to be dismantled in 1991.”

Lal Bahadur Shastri, who succeeded Nehru, was alive to the increasingly poor performance of the public sector, more so since he did not wear any ideological blinkers. He wanted the highest priority to be paid to agriculture. Nor did he look upon private business with suspicion; indeed, he sought an enlarged role for the private sector. He downgraded the Planning Commission. The chief economic adviser to the government, I.G. Patel, would write in his memoirs that Shastri was determined to unravel Nehru’s policies but wanted to go slow. As destiny would have it, he died after just 19 months in office.

It was public sector all the way once Indira Gandhi, Nehru’s daughter, became the prime minister. In contrast to Nehru who sparingly resorted to nationalization, she made it an effective state policy. She nationalized the entire coal industry, general insurance, copper industry, oil companies, a sixth of the textile industry (many textile companies were on the verge of closure) and wholesale wheat trade. She also nationalized 14 banks (and later six more) besides a prominent steel company. In 1974, however, after running into major problems, Indira Gandhi scrapped the takeover of wheat distribution.

Indira Gandhi inherited her father’s dislike of industrialists. The sweeping restrictive regulations put in place between 1969 and 1973 created a highly regimented, controlled and closed economy which stifled entrepreneurship, competition and innovation. By the mid-70s, she realised that excessive control of the public sector and overemphasis on the public sector had hurt economic growth. The turnaround in her thinking was evident when she declared in early 1975: “My views on nationalization are that we should not do it unless it is a must. We … are not really equipped to undertake such responsibility. If the government takes over production or distribution units and does not provide good services, it attracts greater blame than a private enterprise would.”

But it was too late. By the early 1970s, economic problems had come to grip India, leading to widespread anti-government sentiments which majorly hurt Indira Gandhi. But that is another story.

When Indira Gandhi returned to power in 1980 after a short-lived Janata Party government of contradictions, she was more pragmatic and less ideological. She realigned herself politically with the organised private sector and dropped her earlier rhetoric. It was felt that the declining trend in the rate of growth of the economy was mainly due to the poor performance of the public sector. IG Patel, the Reserve Bank governor, would later say that she lost the appetite for nationalization, and that the idea for the takeover of six private banks came from him. Economists openly said that most public sector enterprises had become standing examples of incompetence and inefficiency.

Rajiv Gandhi was critical about the overall performance of the public sector. He too downgraded the Planning Commission and took several major policy initiatives which sought to relax the scope and degree of state control over the public sector. In December 1985, Rajiv Gandhi openly lashed out at the pathetic show of the public sector and its propensity to drain public sector resources. His finance minister, V.P. Singh, put public enterprises on notice. For the first time since the First Five-Year Plan, the target for investment in the private sector was more than that for the public sector.

By 1987, Rajiv Gandhi went one step ahead and said the government could not take over sick private firms any more. “We cannot afford to be the hospital or ICU for every sick private sector industry.” At the same time, he did not take any substantial efforts to improve the working of the public sector.

The argument between socialism and the market was decisively settled in favour of the latter once P.V. Narasimha Rao became the prime minister and named Manmohan Singh his finance minister. Together, the two men unleashed sweeping economic reforms that dramatically transformed India. The areas reserved for the public sector were slashed from 17 to 8 and later to 3. Many of these were opened to the private sector with dramatic results. By 1995-96, when the Congress lost power, India’s economic growth was 7.3 percent.

The word ‘privatization’ was used for the first time by the government in a policy statement when Atal Bihari Vajpayee headed the government in 1998. Arun Shourie, as disinvestment minister, gave the privatization process an accelerated momentum. This led to allegations that national assets created over the decades were transferred to the wealthy at throwaway prices. A Supreme Court intervention halted the proposed privatization of HPCL and BPCL. Other legal challenges followed.

Manmohan Singh may have been the father of India’s economic reforms along with Narasimha Rao, but he got shackled when he became the prime minister in 2004 heading a Congress-led coalition backed by the Left. One of the first decisions was to close the disinvestment ministry. Privatization as a general strategy was ruled out. Mainly due to political pressures, the government did not shut even a single chronically loss-making public sector unit. Between the first and second UPA governments, economic growth slid from 8.9 percent in 2010-11 to 6.7 percent in 2011-12, to 4.5 percent in 2012-13 and to 4.7 percent in 2013-14.

Narendra Modi came to power with a clear intent that the government had no business to be in business. His government pursued an aggressive disinvestment programme. His second stint in power (from 2019) was characterized by a clear shift towards privatization of state-owned enterprises. However, in disinvestment, the government failed to achieve its targets in eight out of its 10 years, and in some years the difference between realization and end goal was very wide.

Dubey feels Modi was a reluctant privatizer. His own example as chief minister in Gujarat showed that loss-making public sector units could be turned around. The author, however, insists that privatization is the answer to India’s economic ills. But she is also concerned over the extreme inequities in the country. While the richest 1 percent of the population now owns 40 percent of India’s wealth, the bottom 50 percent own just 6.4 percent. But she doesn’t say if expanding privatization is linked to the skewed state of affairs.

Dubey admits that the public sector played a pioneering role in the self-reliant growth of the Indian economy. It built crucial infrastructure, and did a creditable job in widening, deepening and diversifying the industrial sector. The public sector also laid the technological base of Indian industry. It played a seminal role in opening backward areas and reducing regional imbalances. Its liberal employment conditions and fair wage structure helped hundreds of thousands.

But the public sector never evolved as planned. Its dismal performance began showing right from the late 1960s. Progressively, it became a burden on the exchequer. Its inefficiency adversely affected the functioning of all other sectors in the economy. With rare exceptions, the number of loss-making enterprises was never less than 100. The assurance of job safety irrespective of performance seriously affected the work ethic. Another major problem was micromanagement by the government. Along with lack of competition, everything combined to drag it down.

Dubey is clear that the government must cut its umbilical cord to the public sector. She wants the government to curtail its managerial role in the remaining public enterprises and stop appointing their CEOs and senior executives.

But Dubey is no champion of blind privatization. She wants privatization only for raising revenue for development work, not to reduce fiscal deficit. She warns that in India’s context, privatization runs the risk of creating monopolies and duopolies. A handful of Indian capitalists already dominate the market. If they buy up big PSUs, sizeable sectors of the economy will be under the influence of quasi monopolies. This could result in crony capitalism. “Governments have used privatization an as opportunity to distribute favours to their friends and supporters.”

Not only private sector enthusiasts but votaries of the public sector should read this well-researched book, an informed commentary on the rise and fall of state enterprises which once raised great hopes before shattering many dreams