In push for privatisation, create fair markets and competition

Representative image (PC- MoneyControl.Com)

In Budget 2021, Finance Minister Nirmala Sitharaman announced a disinvestment (privatisation) programme worth Rs 1.75 lakh-crore. The privatisation programme, especially of the two public sector banks, has ruffled feathers in Parliament. This led Prime Minister Narendra Modi to remark in the Lok Sabha that the ‘culture of abusing the private sector is no longer accepted’.

Modi’s remark hints towards Indian polity’s long-term mistrust of the private sector for much of India’s history. The polity cannot really be blamed as India’s colonisation began with the East India Company which was nothing but a private company.

A mixed model

The East India Company gave way to British Crown in 1857, and thus the seeds of mistrust towards private companies and capital were sown. The British granted India Independence in 1947 when the world was torn between the two models of American capitalism and the Soviet socialism. The two World Wars, along with Great Depression, also exposed and questioned the role of private capital.

All these factors led India to adopt the Soviet model where the five-year plans driven by public sector took centre stage. India was not alone in making this choice, with several European countries including Britain, also preferring to go the socialist way. The British had also left the Indian economy in tatters with Partition creating large economic losses as well.

The other factors which weighed in favour of socialism was the nationalist fervour, limited private investment, lack of foreign capital and so on. Having said that, India did not adopt a fully public sector-driven model but a mixed one where both public and private sectors were allowed to co-exist with each other.

The problem lies in not changing economic policy despite policymakers knowing it is not working. This is what happened in India too.

The mixed model soon gave way to a larger public sector and a limited private sector. The private sector was increasingly seen with suspicion and profit was considered a bad word. The private sector became highly concentrated via the managing agency model, leading to further distrust with the private industry. The government not just created public sector enterprises but nationalised private ones such as airlines, insurance, banking, coal, etc. It was becoming increasingly clearer that public sector approach is not working, but the lessons were ignored.

Crossing the river

Fast forward to 1991, where a crisis forced us to not only rethink but also act towards a more market- and private sector-driven economy. Then finance minister Manmohan Singh paved the way for opening the economy and signed off the speech by quoting Victor Hugo: “no power on earth can stop an idea whose time has come.”

While the Budget 1991 did set the tone for private sector, it never really moved concretely on limiting the role of the public sector. In other countries after the Thatcher-Reagan era, privatisation meant the government exiting entirely from certain businesses. However, in India, privatisation meant disinvestment where a certain percentage of government shares in the public sector were sold to either a strategic investor or to the public via listing on stock exchanges. The government was perhaps paying heed to the Chinese saying of crossing the river by feeling the stones. The political dynamics of coalition governments also played a role in governments feeling the stones rather than crossing the river aggressively.

Stuck in the middle

Over time, even disinvestment lost its true purpose. The government uses disinvestment proceeds to meet its expenditure and keep the fiscal deficit lower. Thus the major purpose of disinvestment was towards managing the fiscal deficit. After the FRBM Act in 2003, the fiscal deficit target became an obsession with the media and financial markets forcing the government to play to the gallery. There was more attention on whether the targets were being achieved and not as much on the ways in which the targets were achieved.

Thus, each time the fiscal deficit looked large, the government resorted to disinvestments; else it was ignored. Economists had suggested that fiscal deficit should be reported without the disinvestment proceeds, but this was obviously ignored by successive governments.

All these twists and turns in the disinvestment policy meant we never really crossed the river of privatisation. In fact, we remained in the middle of the river being pulled towards either side of the public and private sector.

This middle path got some support from the 2008 crisis which impacted the developed world, the torchbearers of capitalism and advocates of private sector. High unemployment and distress again brought the role of government and public sector to the fore.

Need fresh vigour

Coming to the current discussion, the government should move away from using disinvestment for deficit management to introducing a more concrete plan for privatization which must include a focus on governance. In the financial sector, for example, we have seen privately-owned entities fail and in process endanger the whole system.

Fundamentally, it is not ownership but governance which should impact businesses. Unfortunately, successive governments have not been able to reform governance mixing it with ownership. Many of the public sector firms have not just been running continuous losses, but also mired in deep corruption. The nationalist objectives associated with public sector have bitten dust.

However, there is one threat about privatisation which the government should address immediately. There are concerns that privatisation in its current form could lead to private monopolies and oligopolies. The government should use this opportunity to create fairer markets and competition, and not merely make hands change pockets.

When we finally cross that river, we shouldn’t say that the grass is always greener on the other side!