Public Sector Industries Can Do More For The People If They Stop Focusing On Profits

Posted by Saransh Agrawal in Business and Economy
July 12, 2017

If the government tells you that something is good repeatedly, check again. The privatisation of the Indian public sector undertaking is one such thing. The idea sounds brilliant but it has a lot of flaws. A simple balance-sheet approach to privatisation is more suited to investment bankers than responsible governments.

Privatisation in India isn’t new, nor are the arguments for and against it. After the License Raj, privatisation has been one of the cornerstones of Narasimha-Manmohan’s 1991 liberalisation policies.

There’s nothing wrong with privatisation. The problem is that the focus of privatisation has shifted from socio-economic growth to wanting to show better numbers for the next election.

Generally, the arguments in favour of privatisation go along the lines of how public sector undertakings have shown a dismal performance in terms of profitability and return on investment. It is said that they are highly inefficient in terms of capital and manpower and are thus a huge waste of state resources. Another argument says that they produce ‘non-essential’ goods. Privatisation will increase the efficiency and quality through free-market, and help Indian businesses grow to become internationally competitive.

None of these arguments is entirely wrong, however, none of these is entirely right either.

The aim of public sector should not be profitability. In 2014, Prime Minister Narendra Modi said to US investors that the Government has no business being in business. Businesses are run for profit, government undertakings are meant for socio-economic growth.

For example, BSNL, the Indian state-owned telecom company, post operating profits but overall losses. One might argue that in an extremely competitive telecom market prices for the consumer is extremely low. So, BSNL with its outdated technology (3G vs 4G market), is a waste of resources. But the same profitability argument will find it hard to explain how a remote village in Jharkhand with a population of 5,000 can ever expect any private operator to set-up a $20,000 tower for connectivity there. The idea of a state-owned telecom should be providing access to all, not profitability. If in the near or distant future that requirement no longer exists or there exists private enterprise that has a similar aim, only then does it makes sense to privatise.

Hindustan Lifecare Limited is a leading brand for healthcare products like condoms. Some would say that condoms are arguably non-essential, excludable and rivalrous. True, condoms do not exactly fit into the macroeconomic development model and drive ease of doing business. However, for a country struggling with public health and population explosion, access to affordable contraceptives, and hopefully one day, free sanitary pads, are perhaps more important for a happier country than record FDIs.

The argument on efficiency is probably the most complex. For instance, one might say that subsidising sanitary pads or buying from private vendors may cost far less tax money than running a public enterprise. However, neither of these two solutions have a significantly better performance record than direct state administration.

If we look at roadways, there are significant variations in how roads are made in India. I’d like to compare the privatised system of roadworks that are employed by metropolitan corporations with the autonomous road construction done by the Border Roads Organisation (BRO). I personally find it marvellous how the BRO is able to maintain high-quality roads in tough terrains, something which most municipalities fail to achieve.

Also, the definition of efficiency is mostly only economic, not social or environmental. I’m not saying that state agencies have a high benchmark for environmental or social bottom-lines, they are far from it. But it is certainly easier to hold government entities accountable.

As far as being internationally competitive, there are three simple points to keep in mind.

Firstly, for a country which is acknowledged as one of the most attractive markets globally, international competitiveness in terms of an export-oriented strategy makes limited sense.

Secondly, government ownership can boost global competitiveness if done right. If we look at China, out of the 98 Chinese companies in the Fortune 500, 78% are state-owned. Clearly, it’s not about the ownership but the execution.

Thirdly, one hopes that by shifting the production base to India, one could generate long-term economic growth, yet the instruments which enable one to absorb the opportunity the fastest are being stripped down. For example, if you want to bring technology X into India. Unless you have a state-control, there’s no real way of ensuring that X will stay. Also, X’s utilisation depends on the availability of multiple factors around it. Unless there is an infrastructure to fully support X domestically, you can never really absorb it, which is the current case. Most of “Make in India” is often reduced to “Made in the US, Packaged in India”.

For a country with a surprising lack of social infrastructure, revamping public sector undertakings need to be more pragmatic. Rather than focusing on how much loss Air India has incurred, maybe it’s better to question how to use Air India as a tool to ensure air connectivity in India. What public sector undertaking really needs is a strong leadership and bold renovation under a bold leader, something which the reigning PM’s chest-size boasts to be.