Reclaiming the public sector

Print edition : September 11, 2020

A protest to “Save India, Save Public Sector” outside the Reserve Bank of India, Hyderabad on August 9. Photo: G. Ramakrishna

A comprehensive book on the evolution, transformation and continuing role of nationalised enterprises in India.

In the early stages of the formation of public sector enterprises [PSEs] in the country, Prime Minister Jawaharlal Nehru described them as “temples of modern India”. But by 1991, there were demands by the government as well as private industries for the privatisation of PSEs because of their poor performance. It is this transformation that constitutes the theme of Govind Bhattacharjee’s book. The author, a former civil servant and currently Professor of Applied Economics at the Indian Institute of Public Administration, New Delhi, was closely associated with PSEs in different capacities during his service in the government, including as Director General, Office of the Comptroller and Auditor General of India.

PSEs have come to be identified with socialism as against free enterprise. But historically, that is not the case. During the Meiji era of 1868-1912, Japan achieved a major transformation of the economy through state initiatives, including government investment in key sectors and state-owned enterprises. Of course, after the Second World War, when many former colonies, including India, became independent, there was the Soviet example to consider. Nehru was an admirer of the Soviet pattern of industrialisation, but he also knew that it could not be copied in India. Hence when it came to formulating an economic policy for independent India, the decision was in favour of a mixed economy consisting of both private and public sectors, privileging the latter, which would seize “the commanding heights of the economy”.

The author begins by clarifying what public sector enterprises are: “being financed by public funds, they are accountable to Parliament through statutory standing committees or bodies constituted for the purpose of enforcing public accountability” (page 43). He also quotes another scholar according to whom a public enterprise is “an institution operating a service of an economic or social character on behalf of Government but as an independent legal entity, largely autonomous in its management, though responsible to the public through government and parliament, and subject to some direction by the government…” (pages 43-44). In this sense, PSEs are found practically in all countries of the world, with capitalist countries not being an exception.

Indian polity being a federal structure, there are Centrally owned PSEs as well as State-owned enterprises. The book deals at length with both. During the First Five Year Plan period (1951-56) there were only five Centrally owned PSEs, with a total investment of Rs. 27 crore. By 2016-17, there were 444 units with a total investment of Rs.16 lakh crore. In the early stages, the expectation was that the PSEs would help achieve high rates of growth, self-sufficiency in production and contribute to import substitution. The PSEs initially concentrated on investment in infrastructure and heavy industries where the private sector was not eager to enter, and made substantial contributions. The position changed gradually both within the country and outside. By the 1980s, doubts began to be raised about the continuing role of the PSEs; many private sector units that had grown benefiting from the presence of the PSEs began to complain about their inefficiency. Regarding the Central PSEs, the author says that they had to “reinvent themselves continuously in order to remain relevant and adjust their objectives in sync with the changed national priorities. They had to improve corporate governance, upgrade the skill of their employees and adapt to the new technologies available for production, accountability norms and internal control mechanisms while aligning themselves to the market, and these challenges proved too much for many of them” (pages 101-102).

Regarding the State PSEs, the author says at the outset that “the landscape of our state public sector enterprises…reflects a dismal and sorry state of affairs” (page 150). Essentially, these are units that were earlier operated by the provincial governments as also the princely states that formed part of the Indian Union. Chief among them are the State Electricity Boards, State Road Transport Corporations and State Financial Corporations. Over time, many of them have turned out to be to providers of subsidised services to the public.

‘Dwarfism’ of banks

Another segment of the economy where the role of PSEs is debated is the realm of banking. If moneylending is a major function of banks, there were various agents doing this job in the early days. Often the rate of interest was not discussed between the lender and the borrower because the latter would be in dire need and the terms were covered up by the manner in which they were communicated, such as the amount to be paid per day. At the time of Independence, there were many modern banks as well, such as the Imperial Bank, which later became the State Bank of India (SBI). In 1969, the ownership of 14 major banks, together accounting for more than 80 per cent of banking business in the country, was taken over by the government. It was then a political move, but it also altered the banking scenario in the country “by converting ‘class’ banking into ‘mass’ banking and extending the outreach of banking to the remotest parts of the country, bringing banking facilities to the doorstep of the weakest sections,” as the author puts it (page 218). Nationalisation also channelled 40 per cent of the lendable funds to the priority sector consisting of agriculture, and the small sector in industry, housing, educational loans and so on. However, it is also a fact that “unscrupulous business houses were able to get a free pass from the government and the banking system” (page 238), as illustrated by the Nirav Modi and the Vijay Mallya cases.

When the economy was opened up it became clear that a critical issue facing the Indian banking system was “dwarfism”, with only the SBI listed among the top 100 banks in the world, while the United States had 18, China 12 and Japan, South Korea and United Kingdom six each. Partly to rectify this problem, a series of mergers of banks was attempted, which also did not improve matters much.

From 1991 onwards, the performance of all nationalised enterprises, industries and banking alike came to be critically examined in terms of the global ideological “state vs market” debate. The champions for markets were not only the powerful multi-national corporations (MNCs) but also the World Bank and the International Monetary Fund. They claimed that “state capitalism” had, by and large, failed; an example given was that in manufacturing the public sector represented 50 per cent of the investment, but only 15 per cent of value added and had lagged behind the private sector in terms of profitability. It is not necessary to go into the details of the debate. According to the New Industrial Policy Resolution of 1991, only atomic energy, mining of atomic minerals and railways would be reserved for the public sector, although there was no privatisation rush immediately and that had to wait until a new coalition of political parties came to power early in the new century. The period from 2001-02 to 2003-04 saw the maximum number of disinvestments by the government, all of them profit-making PSEs.

The author sees a continuing role for PSEs. “The public sector has to have a social orientation and remain citizen-centric; in times of economic or financial emergency, disaster or national calamities, PSEs are the ones to rely upon to mitigate the sufferings of the citizens… At the same time, they need to be operationally independent, financially self-reliant and commercially competitive, and for this, it is essential that there has to be a formal, institutionalised separation between the government and the public sector” (page 348).

This reviewer has no doubt that for anyone who desires to examine the future of industrialisation in our country and of the role of the state in that process, this book will be an important resource, especially because of the data it has assembled, and the sources it has consulted. It is hoped that future editions will have a glossary of abbreviations.

This article is closed for comments.
Please Email the Editor