Budget 2020: Will it set the stage for the govt to exit public sector?

Navneeraj Sharma

In 1991, India decided to change its development strategy and unshackled its private sector, increased integration with the global economy and kickstarted the process of exit of government from many sectors. Since then, the government has been slowly trying to exit various sectors of the economy and shifting its focus to be a policy enabler and regulator.

The past strategic disinvestment in hotels, mining, telecom, and information technology has given a boost to the economic activity. This overall strategy has paid rich dividends and India’s economic growth has shot up from 4.2 per cent during 1951-90 to 6.6 per cent during 1991-2019.

The current disinvestment plan has been subject of deep interest because it is seen to plug fiscal gaps so that the government can meet its expenditure commitments. However, this is at best a secondary reason to disinvest.

With the economy in the midst of a slowing growth, the government’s exit from several sectors through strategic disinvestment is one of the key tools to effect a turnaround. That is so for the following reasons.

Market economies display an inherent Darwinian natural selection through which inefficient firms get outsmarted by their efficient rivals and exit the market. However, when the government is at helm of affairs, it becomes tough to shut down those firms as it can always find resources to fund them.

This problem gets further complicated when collective institutions like governments sport behaviourial biases just like human beings, and they don’t want to part with what they own. This makes the exit of the governments from a sector very difficult one.

Reports by the Department of Public Enterprises and the CAG (Comptroller and Auditor General) highlight the extent of this problem. At the central level, loss-making government enterprises ran up collective losses to the tune of Rs 80,000 crore between 2015-16 and 2017-18. This problem is even more severe at the state level where the losses were in the order of Rs 62,000 crore for 15 states in 2015-16.

It is also very difficult to achieve a level-playing field between government companies and the private ones. The government as a principal shareholder acts in the interest of its own firms, but this could interfere with its larger function of efficiently regulating the market and developing a sector.

This issue becomes even more challenging if the sector is going through a distress where the government intervention is required. It may so happen that the government’s responsibility of managing growth of the sector and its own firms may not align with each other.

The other salient feature of a well-running market is that a new technology or an idea can completely disrupt an old model. A behemoth is replaced by a startup which itself becomes a giant, only to be disrupted by a new entrant with better technology. The government’s involvement in the ownership can delay this process as they try to prolong the life of the firms they own, and it slows down the process of the technology adoption in a country.

The most fundamental problem of having public sector firms is that they in the long run end up blocking resources which the government should be using to finance its core social sector spending in health, education, defence and promotion of basic sciences through research and development.

A comparison of the overall size of the government across the world throws up crucial facts. The Indian government is smaller in size than many of its capitalist counterparts such as the US, the UK and Germany. However, the latter countries focus more on social sectors like health, education and less on running public sector firms.

Therefore, the natural corollary of this analysis is the government needs to find a mechanism to exit from the public sector and use the saved resources for health care and education. At the same time, it needs to set up sectoral regulators or strengthen the existing ones by increasing their strength and capacity to monitor the functioning of the firms.

In nutshell, the government needs to get smaller and bigger at the same time, depending on the context. It is likely that this will unleash a wave of productivity gains that can power the economy.

The Prime Minister recently affirmed his philosophy that the “government has no business to be in business”. As the Union finance minister presents the first Budget of this decade, we hope that it starts off a process where the government gets itself out of all businesses in the next 10 years.

Navneeraj Sharma is a senior professional with Tax & Economic Policy Group, EY India. Views expressed are personal.