Liberalisation of economy

Deregulation: Licence to Loot Raj

Print edition : September 24, 2021

At the launch of the National Monetisation Pipeline in New Delhi on August 23, Union Minister for Finance Nirmala Sitharaman (centre) flanked by NITI Aayog Vice Chairman Rajiv Kumar (right) and CEO Amitabh Kant (left) Photo: Manvender Vashist/PTI

Jio telecom logos displayed at a mobile phone store in Hyderabad. Public interest in telecom is seriously compromised as the sector has been carved up between the two major contenders, Reliance Jio and Bharti Airtel. Photo: NAGARA GOPAL

Air India planes parked at the Indira Gandhi International Airport in New Delhi. The Department of Investment and Public Asset Management has said that the process of financial bidding for strategic disinvestment in Air India will be held in September. Photo: PTI

The story of India’s liberalisation drive is the incessant push towards deregulation and privatisation, which has promoted the growth of monopolies, old and new.

Thirty years is a long time, even in the life of a nation. And, when memories are baked into consciousness by the repeated use of particular kinds of imagery, reality appears surreal. The notion that economic liberalisation, which is supposed to have engulfed India in 1991—never mind the reality that its true beginnings can be pinned to 1980, marking the second coming of Indira Gandhi—brought freedom to Indians is the dominant narrative. In this rendering of a fairy tale, an unfree India was liberated 30 years ago, allowing it to move towards its second tryst with destiny. A key promise of liberalisation was that it would foster competition in ways that would release Indians from the shackles of the state. The overused cliche, the Licence Permit Raj, was cited to depict the oppressive system that kept Indian private enterprise in chains until it was banished by the fresh gust of liberalisation. This narrative is plain humbug, not just because it has scant regard for facts, but also because it distorts reality by standing it on its head. When Indian planning commenced after Independence, it envisaged a leading role for the public sector, not merely because of the “socialistic” political orientation of those in power but fundamentally because of the Indian private sector’s inability to do the heavy lifting in terms of investment.

As the historical record shows to those who care to seek it, Indian private industry ceded ground to the state sector for two primary reasons. First, it realised that it had neither the risk appetite nor the surpluses that were needed to make forays into heavy capital-intensive industries. Second, the Indian private sector realised that its markets were extremely limited, primarily because the base for national economic demand was narrow.

Thus, what was required was not just state investment but also state regulation. After all, the limited demand base meant that only a few players could function profitably. Licences were thus an answer to this binding constraint, an answer that was provided by the Indian state at the express request of Indian industrialists. In other words, private industry, instead of being enterprising, as is supposed to be their wont, actually invited state regulation as a means of self-preservation. Is it not ironical that the much-abused term, “protectionism”, is now used pejoratively to discredit all that was sound and rational at one time by those who benefited the most from it? The Bombay Plan, published in 1944-45, was the first clear articulation of this demand. Is it not rather rich for Indian industrialists to curse the same Licence Raj, after having not just sought it but benefited profitably from it?

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Of course, the well-worn story of the Ambassador car is often cited to illustrate the point that private industry was shackled by the Licence Raj, that it was thwarted from making better cars in India. Amusing and clever as this narrative may sound, it cracks open under closer scrutiny. Pray, what in the licensing system prevented the Birlas from producing a better version of the Ambassador? After all, licensing only prevented the unbridled entry of newer competitors; nothing in the system prevented better cars from being made. The justification for the licensing system—to which Indian industry willingly acquiesced in its own interest—was that the fragmented nature of the thin sliver of demand for its products did not warrant the unbridled entry and exit of competitors, which could have also had a calamitous impact on incomes and employment, an outcome those in power were wary of so soon after Independence.

Dismantling regulation

The story of Indian liberalisation is also the constant push by successive governments, irrespective of their stated or avowed ideological orientation, towards dismantling the regulatory systems that governed the economic life of the country. It is striking how remarkably consistent the state has been in chipping away at the regulatory structures governing the conduct and practice of economic agents. To recapitulate, soon after Independence the country enacted legislation that explicitly prohibited monopolies, provided safeguards and guarantees to industrial workers, and initiated welfare measures. These have been under relentless attack in the last 30 years.

At the heart of the liberalisation thrust have been two main currents. First, the ever increasing role of foreign capital, facilitated by trade liberalisation, hastened through tariff cuts and devaluation of the currency, and by loosening of controls on movement of capital for investments in not just the productive sectors but also the financial sphere. Concomitant with this has been the other current, one that has continuously restricted space for the state sector while facilitating and enlarging it for the private sector. While trade policy has facilitated the former, the relentless drive towards deregulation and privatisation has ensured that private interests increasingly occupied sectors of the economy even as the state backed off.

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Nothing illustrates this better than the fact that India does not have a national industrial policy. That is, the state does not have a stated set of means by which it seeks to achieve a set of enunciated objectives. Instead, all it sets out is an endless stream of wish lists, which are not backed by a coherent plan. While this may also be a question of intent of the state’s increasing unwillingness to invest directly in areas it officially says it is committed to, it also indicates a deliberate move to vacate space in favour of private interests. This is plain to all in every field—from education and health to heavy industry—illustrated best by the facile slogan: The government has no business to be in business.

Disinvestment scandals

The sway of liberal orthodoxy in the last three decades has been so powerful that even well-meaning sections of the progressive community have been taken in by the apparent logic of the prescription that the state should stay away from the business of actual production. And, the advocates of privatisation were willing to be patient, biding their time, but chipping away at their agenda. In the 1990s, when it was not yet feasible for the Congress to talk about privatising public sector assets, they coined a more polite term − disinvestment. Recall that the first attempts to sell public sector shares was through “bundles” of shares that were cross-held by Indian banks and financial institutions. In fact, the Chairman of the Disinvestment Commission, the illustrious G.V. Ramakrishna (as Chairman of Securities and Exchange Board of India, he played a key role in enforcing discipline on the notorious brokers of Dalal Street) told this correspondent 25 years ago that the commission was firmly against selling core, profit-making or strategic enterprises. The dilution of government stake, it was argued, would bring “market-based discipline” into the functioning of public enterprises.

Meanwhile, the deregulation of huge swathes of the economy created more pressures for public enterprises. For instance, the deregulation of the power generation sector, whose immediate result was the utterly one-sided deal that the Maharashtra government entered into with Enron (“The scandalous Enron deal”, Frontline, April 7, 1995), resulted in a massive squeeze on Indian public sector power equipment manufacturers like Bharat Heavy Electricals Ltd. (BHEL). The political masters were quick to understand that outright privatisation was just one course among the many available to them; there were other ways by which public sector units could be made to play second fiddle to their private sector rivals.

A few years later, the A.B. Vajpayee government sold 18 per cent in India’s premier gas supplier Gas Authority of India Ltd (GAIL), which has the biggest network of gas pipelines, at a scandalously low price (“Distress disinvestment”, Frontline, November 27, 1999). While these were attempts at actually divesting stake, there were other moves that effectively sabotaged public sector enterprises from within. The deregulation of the airline and telecom industries were both instances of sabotage from within, where the owner—the Union government— actively wrecked two of India’s pioneers in their fields. In the case of Air India (“Bowing to privatisation”, Frontline, August 18, 2017), this was achieved through the truant owner forcing the company into an impossibly large deal that would wreck it for life. The crisis at Air India was engineered through an elaborate charade. First, Air India and Indian Airlines, the national domestic carrier that was later merged into Air India, were forced to enter into a deal to buy 111 aircraft. The size of the deal was unprecedented and unheard of in the aviation business for an airline with the scale of Air India’s operations at that time. To make matters worse, the merger of the two carriers was done without a thought to the operational requirements—in terms of kind of aircraft needed and the size of the fleet—of the merged entity. But perhaps the airline may have survived even this if not for the fact that Air India was severely impacted by the criminal neglect of its operations.

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The “Open Skies” policy of the government allowed foreign carriers unlimited access to Indian markets, even though Air India itself faced severe restrictions on its operations overseas. But further misery was in store; Air India’s most lucrative routes, nurtured over decades, were under attack from private carriers that were allowed to fly the very same routes at the very same time slots as Air India’s flights, in effect undercutting the national carrier’s business. Air India was not even a victim of deregulation; it was a victim of an owner turned rogue. Air India’s collapse had nothing to do with market competition; it was wilfully sabotaged.

Fostering monopolies

The case of telecom was a little different, although the owner’s conduct was just as negligent. Until the 1990s, the country’s telecom network was run departmentally, by the Post and Telegraph Department. By all accounts, it had done reasonably well without having to be “corporatised”. In fact, in the euphoria over the inroads made by private mobile telephony in the last two decades, it is forgotten that the first wave of “revolution” in Indian telecommunications was achieved in the 1980s through the remarkably quick spread of the network of public call offices across the country, which was promoted by the Post and Telegraph Department. There was no reason why a department that oversaw this first wave could not have delivered the next wave of mobile telephony.

Yet, when mobile telephony arrived, the public sector companies BSNL and MTNL were kept away. Indeed, at every stage of the evolution of mobile telephony in India, from 2G to 4G, the public sector entities were deliberately kept at bay. When mobile telephony first came to India in the mid 1990s with 2G services, BSNL was the last player to be allowed in the country’s telecom circles. But even then, BSNL made spectacular gains, primarily because of its competitive tariffs, but also because of the greater integrity of its billing process when compared with private operators. However, as it gathered subscribers, it required to quickly scale up its network’s capacity; but orders for equipment were stalled by the government. Naturally, as call quality started dropping, subscribers deserted the service. Similar problems arose with 3G services as the company quickly ran into a spectrum shortage, which the government refused to address. Today, as 4G services are the norm, especially in the larger cities where high-speed wireless broadband is on offer, BSNL is still waiting, after the cream of the market has been mopped up by a duopoly led by Reliance’s Jio and Bharti Airtel (For an account of the rise of Reliance in the mobile business, read “Spectrum grab”, Frontline, September 30, 2016).

But Reliance’s new avatar is very different from its earlier one, in which it had failed spectacularly. Interestingly, both Reliance and the Tatas, two of India’s most illustrious business houses, were early entrants into the telecom business, and both had not only failed miserably but were caught indulging in sharp practices. While the Tatas were caught trying to convert a licence for “limited mobility” into one for providing full-blown mobile services in the early stages of Indian mobile telephony, Reliance was found to have illegally routed international calls through BSNL and MTNL networks in India, therefore depriving the two public sector companies of significant revenues. Reliance subsequently paid a fine to escape further penalties, but its first foray into telecom was a notable flop. Later, when the Ambani brothers fell out, resulting in a split of the empire, the telecom venture was palmed off to younger brother Anil Ambani, in whose hands it sank deeper into the red, pulling with it several Indian banks that had lent to the venture.

It is significant that the pundits who bemoan the lack of a “business culture” at state-owned enterprises have hardly anything to say of the fiasco at the Ambanis’ first run in telecom. Today, public interest in telecom is badly compromised as the sector has been carved between the two major contenders, with a third operator in the throes of a grievous meltdown. Although 5G services offer exciting prospects in the future, the fact that it is likely to be dominated by the two service providers implies that only a fraction of the potential can be realised.

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Aggressive deregulation has meant existing economic spaces being opened up to private interests. Even more ominously, new monopolies have emerged, as is illustrated by the rise of new ones in airports and ports, for instance, where the Adani Group rules the roost. The group now commands a significant share of airport and port traffic, apart from acquiring interests in mining and power generation. More recently, its forays into warehousing have attracted interest, especially in the context of the contentious farm legislation that has drawn the ire of the Indian peasantry.

India’s regulatory systems in sector after sector have lagged behind the practices adopted by the private players, especially the foreign ones. For instance, regulatory norms governing restrictions on the extent of foreign ownership in Indian telecom ventures were repeatedly flouted in the first two decades of liberalisation; private insurance companies often do the same even as the public sector insurance companies play by the book. Meanwhile, an airport regulator struggles to cope with truant airport operators who pretty much charge what they please. The menace of regulatory capture hangs in the air; after all, with several other much more important institutions in peril, what chance does a mere sector regulator have in these gloomy times?

“The are many ways to run down a public sector company,” a senior manager at Nalco (National Aluminium Company Ltd.), the Odisha-based public sector aluminium company, told this correspondent in 2003, when the Vajpayee government tried to privatise the company but met with stiff resistance (“Nalco: A story of resistance”, Frontline, January 17, 2003). Speaking to this correspondent after the privatisation exercise had failed, he said the outright sale of the company was only one dire possibility. More worrying, he said, were the attempts to “wreck the company from the inside” by preventing it from making newer and better products. “Reining in the company allows for space to be created for Nalco’s private competitors,” the manager remarked. The attempt to privatise Nalco was made after the first big-ticket privatisation of Balco (Bharat Aluminium Company Ltd.), which was acquired by Vedanta, the metals conglomerate, which is incidentally now in the running to buy Bharat Petroleum. That controversial privatisation (“Battle over Balco”, Frontline, March 17, 2001) was the first major one initiated by the Vajpayee government as it adopted the “strategic route” to privatisation. Today, Balco’s plant, now with Vedanta, is the only other competitor to Hindalco, owned by the Aditya Birla Group, in India. As aluminium prices have skyrocketed globally, the duopoly is sitting pretty, while the government has lost strategic control of a crucial sector in order to satisfy the whimsical fancy of not being in business.

Making business risk-free

What has happened to the Indian Railways best illustrates the far-reaching damage that can be inflicted without actually privatising an enterprise in its entirety. Over a period of time, services such as catering in the Indian Railways have been privatised. But these are marginal; the real damage has happened in the way large swathes of railway assets have been “islanded” into profit centres so that the revenues from such services are not available to the Indian Railways for investment into expansion of its network. The Dedicated Freight Corridors, for instance, have operated on this principle. Effectively, although rail finances have been used to pay for the investment, the revenues are not available to it. The idea is to have a separate island of activity that can then be hived off to private investors. In effect, while the Railways would have sunk capital into the project, private investors would reap the rewards flowing from such projects.

The NITI Aayog’s recent move to create a National Monetisation Pipeline (NMP) of Rs.6 lakh crore worth of national assets by putting them up for long-term lease to private investors is in keeping with the Modi government’s aggressive push towards dismantling state presence in productive sectors of economic activity. Roads and railway assets account for more than half the assets that are to be leased to private players (see chart). The previous experience with public-private partnerships showed that private companies were unwilling to make serious investments in projects unless the state actors took away the substantial portion of the risk from such projects. This raises the question: if private capital is to be completely spared all risk, then what is the point of capitalism anyway? After all, conventional wisdom says that the difference between a private enterprise and a citizen is the ability of the enterprise to bear risk unlike the latter. If business is to be so completely de-risked, what is the point of running a business?

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Four hundred railway stations, 90 trains (accounting for 5 per cent of all trains), 1,400 km of track (including access to overhead electrical equipment), 265 railway sheds, and 673 km of the lucrative Dedicated Freight Corridor are to be made over to private interests on long-term lease. Since the bulk of the investment in assets such as stations and track has already been made by the government, the private investment is likely to be only marginal. For instance, with the core of the railway stations already in place, the private investor may need to invest only a small sum, while being in a position to extract monopoly profits from having exclusive access to the asset. Moreover, there is a strong and perverse incentive for the private investor to flog the asset during the lease period, leaving behind only a shell at the end of it. In short, the NMP is not just a bad idea, it is positively fiendish.

For some years now—since 2013 to be more precise—the economy has remained stagnant. Private investment has failed to pick up, as is reflected in the poor rates of capital formation in the economy. The COVID crisis has only aggravated this. In such a situation, the sale or transfer of public assets to private entities is unlikely to bring in any additional investment. With the state committed to a conservative stance, which is reflected in its obsession with the fiscal deficit even in the pandemic, investment in new assets has failed to materialise. Deregulation and privatisation have thus had the effect of surrendering a bigger share of the national cake even as the cake itself has not got significantly bigger. In this sordid tale, the losers have been many, while the gainers have been a few. That has been the lasting legacy of three decades of liberalisation.

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