Cover Story

Undermining public sector

Print edition : February 05, 2016

BHEL employees take pledge on the company formation day in Medak on January 1, 2015. Photo: Mohammed Arif

Prime Minister Narendra Modi at the Rourkela Steel Plant before dedicating a 4.5-million-tonne expansion at the plant to the nation, on April 1, 2015. Photo: By Special Arrangment

Steel Authority of India Ltd's Director (Personnel) H.S. Pati during a visit to Salem Steel Plant in Tamil Nadu in November 2014. Photo: BY SPECIAL ARRANGEMENT

Neyveli, May 1963: Prime Minister Jawaharlal Nehru at the 600-megawatt thermal power station set up with Soviet collaboration. Photo: THE HINDU ARCHIVES

January 1, 1962: A stamp commemorating the first public sector oil refinery near Guwahati in Assam. Photo: THE HINDU ARCHIVES

Economic liberalisation has steadily corroded the public sector, allowing private players to acquire valuable assets at low prices and demand extraordinary concessions, but this predatory exercise will have severe ramifications for the workforce and national progress.

In early January, the Bharatiya Janata Party (BJP)-led National Democratic Alliance government’s Ministry of Finance sent out two contradictory signals. The first was a statement from Finance Minister Arun Jaitley that increased government spending on public investment would be used as an instrument to revive the sagging economy. “We made an increased allocation towards public investment last year. Public investment will continue to remain stepped up. When you are fighting global slowdown, public spending has to lead the way,” he is reported to have declared at an event to mark the 10th anniversary of the establishment of India Infrastructure Finance Company Ltd (IIFCL), a government enterprise mandated to provide long-term finance to infrastructure projects.

On the day this statement was reported, news also broke that the Finance Ministry had written to the Railways that Central funding for it would be cut by Rs.12,000 crore relative to the original budgetary allocation, bringing it down to Rs.28,000 crore from the Rs.40,000 crore provided for in Budget 2015-16. According to reports, the Ministry said that “the ceiling of Rs.28,000 crore for Plan expenditure in Revised Estimate 2015-16 is fixed after careful review of pace of expenditure and the resource position of the government”.

Thus, the blame for the cut had been apportioned between the Railway Ministry’s sluggish investment record and the resource crunch afflicting the Central government.

Specious argument

However, the specious “lack of funds” argument appears to be the dominant explanation for the cut. The Finance Ministry also said that in the missive it would not be able to respond favourably to the Railways’ request for additional funds to meet the costs of implementing the Seventh Pay Commission’s recommendations. In its view, “Since the liability of the General Revenues towards implementation of the recommendations of the 7th Pay Commission is much larger in comparison to [the] Railways, it is not feasible to finance Railways on this account.” Moreover, it argued that: “As a departmentally run commercial organisation, [the] Railways is expected to meet its revenue expenditure from its revenue receipts.”

The message was clear. The Railways was to be left to its own devices in terms of generating funds to cover its enhanced revenue expenditure needs as well as bankroll the additional capital expenditure it requires to make. The government cannot raise additional resources from taxation, so if the Railways must spend more, it must raise tariffs and cut costs to generate greater surpluses.

This position is of significance because Economic Survey 2014-15 had identified the Railways as the principal vehicle for a public investment-led boost to government spending that would drive growth. In the words of the Survey, while “private investment must remain the main engine of long-term growth,” in the short- to medium-term, “public investment, especially by the Railways, will have to play a catalytic role” in triggering growth.

In fact, the argument in Chapter 6 of the Survey is that through additional allocations from the Budget, “the Indian Railways could be the next locomotive of growth”. But judging by the recent Finance Ministry letter, the Railways is now being goaded into raising tariffs to finance large additional expenditures or into finding ways to incentivise the private sector to make part of the investments.

“The Railways has now come on to, directionally, the right track. We are inviting the private sector, including foreign investment, into infrastructure... very shortly, the Railways is going to come up with its proposed bids for [the] development of 400 railway stations in the country,” Jaitley said recently. This amounts to stating that the public sector can no more play its hitherto-designated role, and that the private sector must occupy the spaces it has for long avoided because of the large investments, high risks and low profits involved.

This call to the private sector to play a role it abjured in the past stems from many presumptions characteristic of a neoliberal policy regime. The first is that the government has more or less reached the limit to additional resource mobilisation through taxation. Second, that the fiscal deficit and the level of public debt are at unsustainable levels, even though India’s public debt to GDP [gross domestic product] ratio is low by global standards. Third, that the private sector will be willing to enter infrastructural areas, if it is allowed to. And, finally, that the private sector will do a better job in terms of operation, delivery and profit performance.

Selling out

What is being ignored here is that the government is “cash-strapped” because it has failed to raise the resources needed to sustain its spending, on both physical and social infrastructure, without recording a significantly larger fiscal deficit. This is not because tax revenues have fallen short of budgetary projections. Rather, it is because budgeted tax revenues have been far short of requirements from the beginning, and because the government’s expectations of large non-debt capital receipts from disinvestment of public sector equity and privatisation through strategic sale of public enterprises have not been realised. Budget 2015-16 had projected disinvestment receipts at Rs.69,500 crore, of which Rs.41,000 crore was to come from sale of government equity and Rs.28,500 crore from strategic sale of public enterprises. But by the middle of the financial year, that target had been scaled down to Rs.30,000 crore on the grounds that market conditions were not favourable. Actual receipts may fall short of even that figure. While the magnitude of the sell-out is large, receipts are still not as high as the government would like them to be, and that becomes an excuse for neglecting the public sector.

This paradoxical position, where the inability to hawk public sector assets is seen as holding back investment in public infrastructure needed to stimulate sagging growth, reflects the transformed and contradictory attitude to the public sector under the neoliberal dispensation. The government’s attitude to the public sector is based on three premises. First, that a large part of the public sector is unprofitable because of errors in decision-making, managerial incompetence and overmanning with workers who are pampered relative to their private sector counterparts. Second, that this outcome is the inevitable fallout of public ownership under which nobody is ultimately affected by poor performance and therefore responsible, and because, under such ownership, extraneous factors varying from nepotism to corruption influence decision-making. And, third, “soft” Budget constraints resulting from financing by the Treasury allow these problems to fester and make the public sector a drain on the Centre’s resources.

The profitability issue

While some or all of these premises may be partly valid in a few instances, they are neither the full nor the dominant explanation for public sector profitability. Nothing illustrates this more than the evidence that provision of a certain degree of autonomy in pricing and investment decision-making during the early liberalisation years led to an improvement in performance and profitability in the public enterprises involved.

According to the official Public Enterprises Survey 2013-14, which provides data for between 213 and 234 of the 290 Central public sector enterprises (CPSEs) over the years between 2004-05 and 2013-14, the number of profit-making enterprises rose from 143 in 2004-05 to 163 in 2013-14. The aggregate profits of the profit-making enterprises rose from Rs.74,432 crore to Rs.1,49,164 crore. The losses of loss-making CPSEs stood at Rs.20,055 crore in 2013-14, well below the aggregate profits, and CPSEs as a group paid dividends of Rs.65,115 crore and dividend taxes of Rs.8,700 crore. So much for the argument that the public sector is a net drain on government resources.

Moreover, there are reasons other than managerial incompetence under public ownership that can explain low profitability or even losses in the public sector. To understand these, it is useful to go back to the original reasons why the public sector was established, emphasised and expanded in the first four decades after the launch of planned development in 1951.

The principal reason was that there were a number of areas in industry and infrastructure private investors were unwilling to venture into because of the lumpy investments, long gestation lags, higher risks and inadequate returns associated with them. On the other hand, the emergence and growth of some of these industries was crucial for the industrialisation process, and their absence would constitute a drag on industrial growth. Thus, the state was required to invest in these areas to ensure their presence and, thereby, facilitate industrialisation.

The government's own realisation of the supportive role to be played by the public sector was reflected in the Third Plan, which stated that “a number of basic industries which require large investments and extensive collaboration with foreign firms or governments and which could be undertaken only on the assurance of future prospects, with no immediate gain in sight, would not normally be started if reliance was to be placed entirely on private enterprise”. If the government is forced to invest in some areas because low profitability and high risk discourage private presence, the corollary is that public sector units in such areas can hardly be highly profitable.

Secondly, there were strategic areas, varying from petroleum and nuclear energy to the Railways and telecommunications, where private control was either not advisable or public presence was crucial. In some of these areas, such as nuclear energy, profit considerations alone did not warrant investment. In others like the Railways, the government’s role in providing cheap urban and cross-country transportation kept profits low or negative.

It should be no surprise that in 2013-14, the two CPSEs making the largest losses were Bharat Sanchar Nigam Ltd and Air India, which together accounted for more than two-fifths of the losses of all loss-making units. The former, in its earlier identity as a departmental enterprise, bore the responsibility of building the infrastructure needed to provide landline connectivity across a large country, including areas with low telephone and call densities. The latter was called upon to connect locations that implied uneconomic routes, which no private provider would touch.

Finally, there were some “sunset industries” with lower relative profitability, epitomised by textiles, where the exit of private capital through the extraction and transfer of surpluses and the neglect of replacement and modernisation of equipment resulted in “sickness”. Since private capital chose to close down units in these areas, putting at risk the jobs of thousands of workers, the state had to intervene to take over the sick units and nationalise them. While National Textile Corporation (NTC) was a typical example of the outcome of this tendency, the problem affected other industries too. Even after much restructuring, textiles accounted for losses of Rs.273.69 crore in 2013-14.

Thus, given the objectives with which they were created, many public sector units were never intended to function like typical private corporations. This was reflected in the pricing principles adopted for the public sector. Firms in the private corporate sector aim to add on a margin above operating costs to cover overheads and deliver a profit. As long as the “market can bear” the price and sales do not collapse, the margin above costs can be raised to maximise profits.

Compared with this, pre-liberalisation governments in India (and elsewhere) have implicitly treated public sector prices as akin to an indirect tax. In some areas this ‘tax” is kept low so that the prices at which public sector products are sold are actually subsidised for the buyers. This could prevail in sectors where the product is an “essential” good or service (transportation and energy, for example) or where the government wants to keep prices of crucial inputs produced by the public sector low in order to facilitate the growth of a particular downstream industry or support the small-scale sector (say, steel and aluminium). In these areas, to cover losses, if any, and/or support investment in the units concerned, the government would compensate them with revenues garnered from direct and indirect taxation or dividends accruing from public sector units in other industries. Thus, pricing in the public sector was treated as one of the instruments in the government’s overall tax-cum-subsidy regime.

The combination of the areas into which the public sector entered and the pricing policy it followed meant that it would be segmented into various kinds of units. Some were bound to suffer losses, such as many units under NTC, while others would suffer losses or earn low profits because of the pricing principles adopted (steel and fertilizers), and some others would post significant profits because of being natural monopolies or deriving administered pricing benefits (petroleum). On average, through multiple means—taxes contributed, dividends paid out and disinvestment receipts—the public sector as a whole has provided more to the government than it has received in return.

Justifying privatisation

However, it was not these features of the public sector that were highlighted when the turn to liberalisation occurred. Rather, the claim was that the public sector was “inefficient” in the sense that most units were earning low profits or incurring losses, and acting as a drain on an already stretched exchequer. This led up to the assertion that the very idea of having a public sector engaged in industrial production was largely mistaken, and that it was not the government’s business to be in business.

Such arguments were used as the justification to pursue a completely different agenda: that of divesting equity in profit-making public sector firms in order to garner resources to cover the deficit on the Central government’s Budget resulting from a combination of poor resource mobilisation through taxation and unwarranted transfers, especially to the corporate sector.

The public sector, far from being a drain on the Central Budget, was actually being converted into a cash cow to meet deficit targets within an irrational and regressive fiscal regime. Every year the government sets itself a target for garnering “non-debt creating capital receipts” by the sale of public equity. Though the disinvestment strategy has proved difficult to implement to the extent desired, funds garnered through this route have been substantial.

There have been only two years since 1991-92, when the disinvestment and privatisation drive began, when actual receipts exceeded targets set in the Budget. But receipts from privatisation have risen significantly from Rs.4,843 crore (1994-95) and Rs.5,371 crore (1998-99) in those two years, when targets were realised, to a huge Rs.24,349 crore in 2014-15.

This “partial” success of the privatisation drive is attributable to the emphasis on the sale of equity in some of the most profitable public sector units and at prices that considerably undervalue the real assets and surpluses of these enterprises, and in resorting to “strategic sales” that involved the handing over of complete managerial and financial control to a private investor who commits to acquiring a bloc of 26 per cent of equity held by the state.

Through the provision of such concessions, the government’s equity stake in profitable public sector units has been substantially diluted over time, resulting not just in the erosion of the revenues of the state but its ability to use the public sector and its surpluses as a countercyclical instrument during times of slow growth. Since it is not loss-making units, which are a “drain”, that are being disposed of, the whole exercise is irrational in a financial sense.

In sum, the concern of the government is not the performance or profitability of the public sector. If that were the case, the emphasis would be on institutional adjustments that give autonomy to public sector units required to deliver on targets mutually agreed between the management, the employees and the government, as was recommended by an official committee headed by Arjun Sengupta, for example.

The real thrust today is to wind down the public sector to garner budgetary resources or sell assets to finance even current or consumption expenditures of the government. This suits the private sector and international capital.

It allows acquisition of valuable assets at relatively low prices, and where profits are difficult to come by, it allows the private sector to demand concessions such as flexible pricing or even funding support in the form of, say, viability gap funding in so-called public-private partnerships (PPPs).

Increasingly, PPPs are being seen as projects where the government carries all the risks and the private partner gets all the profits. The perception is that if the government does not provide such concessions, “revenues” from privatisation would be much lower than what has been obtained so far. Not surprisingly, the representatives of big capital, domestic and foreign, including sections of the media, take it for granted that privatisation is a major step forward in policymaking with respect to the public sector.

But the developmental costs of this predatory exercise are huge. So are the losses to the workers in the public sector, who are threatened with declining real wages and deteriorating working conditions, and to workers outside it, who might otherwise be able to present the wages and conditions of work in the public sector as the standard they legitimately aspire to.

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