Public Sector

Time to revitalise the public sector

Print edition : July 17, 2020
It is surprising that the government does not envisage a major role for public sector enterprises in its post-COVID-19 strategy for development, and plans to disinvest in them, although PSEs have clearly outperformed the private sector in micro efficiency.

The Indian people need the public sector. The COVID-19 period has proved this beyond doubt. The Narendra Modi government is determined to privatise the public sector1. The latest decision, announced by Finance Minister Nirmala Sitharaman on May 17, makes it clear that the government will privatise all Central public sector enterprises (CPSEs) in non-strategic sectors. While in the strategic sector there will be only up to a maximum of four PSEs, the private sector also will be allowed entry into it. PSEs in defence will be privatised. Participation of private investment has been allowed in space-related activities, including planetary exploratory missions. Thus, what is strategic is not clear. A policy on the public sector would be announced soon, said the Finance Minister. The danger of privatisation hangs over the head of the entire manufacturing sector and all public services.

The paradox is that the announcement of this mega privatisation drive has been made under the Atma Nirbhar Bharat Abhiyan (ABA) package which is supposed to achieve reduction in import dependence and creation of a self-reliant India. The Central government has a budget target of Rs.2.10 lakh crore from disinvestment in the current fiscal, of which Rs.1.20 lakh crore is expected to come from CPSE disinvestment2.

Strategic and non-strategic

It is baffling that the resolve to privatise the public sector was announced as part of ABA packages and the Budget Statement of 2020-21. Strategically, PSEs were to make India self-reliant, technologically as well as in product markets, and promote import substitution. Strategic sector means arms and ammunition and allied items of defence equipment, defence aircraft and warships, atomic energy (except in areas relating to the operation of nuclear power and applications of radiation and radio isotopes in agriculture, medicine and non-strategic industries) and railway transport. All other CPSEs will be considered non-strategic. Some CPSEs being arbitrarily classified non-strategic and others being classified strategic goes against the logic of the ABA. The entire public sector being subjected to destructive competition from foreign investors poses a major threat to the country’s economic sovereignty, technological autonomy, national security and political stability.

The ABA foreign direct investment reforms are focussed on allowing 100 per cent FDI in telecom, automobiles, chemicals, textiles, airlines, plantation, mining, petroleum and natural gas, defence manufacturing, broadcasting, civil aviation, agriculture and animal husbandry, railway infrastructure, industrial parks, cash and carry wholesale, e-commerce, and pharmaceuticals; 74 per cent FDI in private sector banking; and 49 per cent FDI in insurance. They invite FDI even in retail trade.

This time privatisation will engulf a large number of technology- and talent-intensive sectors such as the Indian Railways, Air India, oil and gas companies such as Bharat Petroleum, Steel Authority of India Limited (SAIL), Shipping Corporation of India (SCI), and North Eastern Electric Power Corporation (NEEPCO). Under the hammer of privatisation are CPSEs engaged in capital-intensive manufacturing of electrical and non-electrical machinery; the production of metals, chemicals and fertilizers, ships and aircraft, rail engines and heavy machinery; and public services covering power, coal, oil, gas, railways, aviation, telecom, defence, electronics and pharmaceuticals. These enterprises have contributed to import substitution and absorption of foreign technology and promoted export of manufactured goods and engineering and design services.

The policy of total privatisation of PSEs, ignoring their current and future roles in indigenous technology development, public health, environmental protection and social welfare and without any certainty about the proceeds the Central government will be able to collect in a turbulent economic environment, is dangerous. It does not make sense to privatise all PSEs: with the neoliberal cadre of bureaucrats and hired foreign consultants advising the government on what is strategic, it will be nothing but hara-kiri.

The mystery is that all this is happening even when the financial performance of PSEs in manufacturing and non-financial services is proving superior to private sector firms in terms of taxes and profits, that is, return on capital3. When the public sector is outperforming the private sector in terms of “micro efficiency”, and has a larger surplus to invest in technical progress and manufacturing, it is a paradox that the state is unable to envisage a major role for PSEs in India’s post-COVID strategy for the development of manufacturing and public services. Figure 1 provides a comparison with the private sector on the parameter of return on capital, an indicator utilised for the assessment of “micro efficiency” of enterprises. See also Table 1 for details of the continuous improvement in the performance of CPSEs in respect of all the key parameters.

In the 1990s, the focus was mostly on greenfield privatisation. The economic reforms initiated in that period included measures favouring significant private sector entry, creation of independent regulatory authorities, disaggregation of supporting government infrastructure from state-owned enterprises with which the private sector would be competing (for example, the separation of the government-owned airline from government-owned airports) and liberalisation of pricing regimes. Performance contracts—memoranda of understanding (MoUs)—sought marketisation and improvement of performance through the signing of an agreement between a PSE and its administrative ministry in order to facilitate autonomy in exchange for greater accountability in the administration of public sector enterprises4. In no case was disinvestment more than 20 per cent of the total equity.

In some areas, privatisation also got withdrawn or stopped before completion. In 2005, the government scaled back its privatisation programme, scrapping plans to sell strategic stakes in 13 state-owned companies, including the major power equipment manufacturer Bharat Heavy Electricals Limited, the mining firm National Aluminum Company, and PSEs dealing with construction, shipping and fertilizer manufacturing. In some cases, certain projects were withdrawn because of economic issues such as high transaction costs or the lack of interest by private entities. A significant role was played in this by coalition governments backed by communist parties, trade unions, and local communities.

Reduction in government commitment

However, the government reduced the level of support to PSEs. It did not prioritise the contribution of the public sector to self-reliance, that is, encouragement to the units to contribute to import substitution and indigenous technology development in a big way5. A conventional pro-market reform belief is that PSEs reduce economic growth because they are inefficient at the micro level or they absorb scarce resources that can be used more efficiently by private enterprises. This understanding is flawed because technical progress plays a central role in economic growth.

Privatisation has helped large corporates. By handing over Indian Petrochemicals to Reliance, Ambani was made a monopoly in petrochemicals. The Tatas recovered their total investment cost in Videsh Sanchar Nigam Limited by selling a few properties in Mumbai alone, and now Tata Telecommunication is defunct. Is this efficiency? In Gujarat, Adani, Ambani and the Tatas are subsidised: in most of their projects the government provided viability gap fund (VGF) free. It is hard to miss the changes taking place in China’s energy landscape. In 2019, China produced 40 per cent of all the wind turbines in the world. It made three-quarters of the world’s solar panels. Nearly half of the electric vehicles on the planet today, and half the hydrogen-fuelled vehicles, are owned by the Chinese.

The conditions for higher potential profitability to transform into sustainable and rapid economic growth include sufficient demand, commitment to technical progress, and environmental protection. COVID-19 has taught policy-makers to value public health and labour welfare. There is evidence to show that public sector enterprises create economy-wide positive externalities that promote economic growth and sustainable development. Life Insurance Corporation of India (LIC), in which the government invested just Rs.105 crore, invested Rs.21,40,106 crore last year alone in government projects. LIC is the only company in the world that gives 95 per cent of its profits to policy holders as dividend. Still, the government wants to list and privatise it, which amounts to a crime. Public sector enterprises are the institutional basis of the Kaldor-Verdoorn effect and its link with productivity growth.

Public infrastructure

Cluster development is a priority area for industrial policy. The public sector has acted and still can act as a facilitator of technology diffusion. The breadth and depth of the contribution of PSEs to the development and diffusion of technology and industry in Bengaluru, Chennai, Delhi, Hyderabad, Kochi, Kolkata, Mumbai, Pune and many other cities are incomparable. In the neoliberal paradigm, the government is typically portrayed as having a rather limited role. The government is often restricted to the tasks, competences, and qualifications of a regulator, an administrator and a fund-raiser to facilitate industrial clusters. Creating public infrastructure is a one-sided strategy meant to reduce the cost burden of the private investor. This strategy cannot lead to innovative clusters. Industry corridors, special economic zones (SEZs), district industry centres (DICs), software parks, biotech parks, incubation centres and many more such schemes are examples of government investment for the private sector but they are failing to get the private sector to make in India.

The government does not want to strengthen the existing public sector drug units. It has started the process of privatising four out of five units. The proposed production-linked incentive scheme meant to reduce import dependence on China does not even aim to promote indigenous technology under development in the Council of Scientific and Industrial Research (CSIR) system of laboratories for deployment in domestic manufacture of import-dependent bulk drugs/drug intermediates/key starting materials. During the COVID-19 period, another major scheme announced by the Department of Pharmaceuticals, to set up bulk drug parks in the name of strengthening domestic production of active pharmaceutical ingredients (APIs), is again about only providing common facilities and financial assistance.

The puzzling part is that a similar approach was tried in Baddi in Himachal Pradesh and Visakhapatnam in Andhra Pradesh but did not lead to technologically and structurally competitive API production. It is a matter of serious concern that the NITI Aayog has ignored the recommendations of the feasibility study report of the Pharmaceutical Export Promotion Council of India (Pharmaexcil) on the development of competitive API production. The Baddi Bulk Drug Park in Himachal Pradesh, announced by Anurag Thakur, Union Minister of State for Finance, is not suitable for API production from the basic stage and was not recommended by the Pharmaexcil report.

The short-sighted approach to decisions in respect of the future role of the public sector is evident from this announcement. Bulk drug parks have a strategic role in the revival of technologically self-reliant manufacturing. The decision to privatise public sector drug units casts a serious doubt on the political commitment of the Central government. The revival of Kerala State Drugs and Pharmaceutical Limited (KSDP) and the contribution it has made to the tackling of COVID-19 in Kerala indicate the potential of the public sector when the political leadership is committed and willing to do the needful in respect of policy-making and enterprise building.

It is the strategy of keeping the government out of business after 1991 that prevented the country from indigenously developing the capability to invest in production, innovation and diffusion of indigenous technology. The government needs to learn from the failures of the “Make in India” programme. FDI and domestic private investment have not flowed into manufacturing. The bulk of the collaboration agreements signed by the public sector have been for technical collaboration. More than four-fifths of the agreements related to the manufacturing sector. A sizeable amount was purchased by the public sector through lump sum payments. The perpetual outflow on account of royalty payments was low. Complementarity between R&D and technology import, higher average propensity to adapt key technologies, and emergence as a supplier of technology to other firms are the indicators of technology competence developed through investment in technology absorption and assimilation. There are also many examples of horizontal transfer of technology from the PSEs. The CPSEs active in heavy engineering sectors, petroleum, oil exploration, telecom, and chemicals and pharmaceuticals have made significant contributions to the development of the country’s industrial base. But they have not been given due credit for the helping hand they extended6. The public sector can be the deliverer in manufacturing: its surpluses and capacities alone can help India become self-reliant.

Telecom, electricity, railways, oil and gas, space technology, pharmaceuticals, new technologies, insurance, banking and so on are most crucial for a self-reliant India6. These can be made a success only by the public sector. In Atmanirbhar, 80 per cent of the package announced is for the banking sector, the public sector banks. But the government wants to reduce their number from the present 12 (it was 20 before March 20) to four and privatise the rest, which will destroy the economy. It is time for a relook and for concentrating on reconstructing the economy to benefit the majority of people through public enterprises and services instead of playing benefactor to a few corporates.

Dinesh Abrol is co-convener, Peoples’ First Campaign, and former Chief Scientist, CSIR-NISTADS. Thomas Franco is convener, Peoples’ First Campaign, and former general secretary, AIBOC.

Footnotes

1. The Finance Ministry informed Parliament on July 22, 2019 that in 2018-19, the proceeds from disinvestment were Rs. 84,972 crore. Strategic disinvestment has been guided by the basic economic principle that the government should not be in the business to engage itself in manufacturing/producing goods and services in sectors where competitive markets have come of age, and economic potential of such entities may be better discovered in the hands of the strategic investors owing to various factors, e.g. infusion of capital, technology up-gradation, and efficient management practices.

The Finance Ministry added that the government would also be able to monetise its investment in CPSEs. Among the units that will go under the hammer include: Project & Development India Ltd, Hindustan Prefab Limited (HPL), Engineering Project (India) Ltd, Bridge and Roof Co. India Ltd., Pawan Hans Ltd., Hindustan Newsprint Ltd (subsidiary), Scooters India Limited, Bharat Pumps & Compressors Ltd, Hindustan Fluorocarbon Ltd. (HFL) (sub.),Central Electronics Ltd, Bharat Earth Movers Ltd. (BEML), Ferro Scrap Nigam Ltd.(sub.), Cement Corporation of India Ltd (CCI), Nagamar Steel Plant of NMDC and Alloy Steel Plant, Durgapur of SAIL. In disposing of five entities —HPCL, REC, NPCC, HSCC and DCIL —in last two years, the government did not make profitability a criterion.

2. Disinvestment of government stakes in companies has become a major source of non-tax revenue in recent years, with collections of Rs 1 lakh crore in FY18, Rs.85,000 crore in FY19 and Rs.50,300 crore in FY20. With market conditions not being conducive, the Centre might nearly halve the disinvestment revenue target of Rs 2.1 lakh crore for FY21. Among the strategic deals, the Centre is banking on the sale of its entire 53.3 per cent stake in oil retailer-cum-marketer BPCL to raise Rs.70,000-80,000 crore. The Department of Investment and Public Asset Management (DIPAM) has recently extended the deadline for expression of interest in the stake from potential buyers until July 31.

3. See Sushil Khanna (2015), The Transformation of India’s Public Sector, January 31, 2015, Vol. 1, No. 5, Economic & Political Weekly for how in manufacturing CPSEs are able to provide better return on capital employed than either private sector as a whole or any segment of private sector, like business group-controlled firms, independent private Indian firms or foreign-owned private firms (Sushil Khanna, 2015). In services, public sector enterprises were largely profitable, providing a lower return than private investment in most of the period with performance improving in 2000-2005, but plunging into losses after 2009.

4. Between 1990-1993, approximately 120 PSEs signed or were identified to sign MoUs.

5. For instance, until 1991, PSEs enjoyed a 10 per cent price preference over their private competitors in government procurement. This was phased out in the period 1992 to 1995. The share of budgetary support in the plan investment of PSEs has also come down from 23.5 per cent in 1991-1992 to 18.6 per cent in 1992-1993. Nonetheless, despite the adoption of parallelisation reforms, the government still does not follow a hard budget policy. Loss-making PSEs are still subsidised and they rely heavily on borrowing from state-owned banks. For instance, despite reforms in the banking sector, the State Bank of India was recently forced to bail out a textile mill and a manufacturer of railway carriages.

6. Indian policy-makers need to treat the examples of horizontal transfer of technology from BHEL, BEL, IDPL, HAL, HMT, IPCL, ONGC, DOT and many other such public enterprises as an important parameter for the assessment of the contribution of CPSEs.

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