Privatisation of Public Sector in India – Social Issue Essay, Article for Class 12, Graduation and Competitive Examination.

Essay on “Privatisation of Public Sector in India”

Fifteen years after Margaret Thatcher put PSES in 15 major public industries on the block, their service has declined the quality and safety, tariffs have risen sky-high, and their management remains indifferent, if not crisis-ridden. Privatisation is now seen by many sensible Britons as a big mistake, indeed a monumental error. British Airways, long tom-tommed as privatisation’s greatest success story, is in dire trouble and hunting for partners. British Telecom’s tariffs are among the highest in Europe. Britain’s privatised water supply is so costly that many people prefer to be disconnected altogether. This has created health problems in poor areas, under-dried up. the water companies’ myopic ecological policies, 20 rivers have

In India, however, we seem determined to repeat every blunder in the Thatcherite book of privatisation. The dominant media response to the Cabinet disinvestment meeting was one of faked disappointment -although 33 PSEs were posted for a sell-off, the highest number at one go. These include shipping Corporations, Hindustan Zinc, STC, MMTC, Hindustan Organic, and even Indian Oil, India’s only Fortune-500 giant. Besides, there is the “old” list of Air India, Indian Airlines, IPCL and ITDC. Private industry groups are already salivating at the mouth at this sell-off. Assocham, CII, and FICCI have all enthusiastically welcomed the decision, which they see as the wholesale transfer of ownership and control from “the public to the private sector”, not just a means of “raising revenues through sale. of a minority share of equity”.

Indian and foreign businessmen are gloating over the government’s embrace of the proposals they themselves made in various narrowly constituted advisory committees (which carefully excluded independent experts, trade unionists excluded independent experts, trade unionists and consumers), For instance, Messrs G.P. Goenka, Nusli Wadia and Rajeev Chandrasekhar made a presentation to Mr. Vajpayee on behalf of the PM’s Council on Trade and Industry. They recommended making the disinvestment plan “foolproof” by putting “the strongest” PSES on the market first. This is what happened. The fit between industry self-interest and government policy could not have been tighter.

The contrast between sky-high expectations from privatisation (in India) and its actual experience (in Britain is explained by the fact that Thatcherism has proved bankrupt in its homeland whereas our policy-makers live in a time warp. They think that privatisation is a magic wand and the key to a glorious future. This probably reflects sheer ignorance coupled with market fundamentalism. The time has clearly come to de-ideologize the issue and reject the simple equation between privatisation’s gung-ho advocates (modern” and for- ward-looking) and its critics (state-obsessed “dinosaurs”). The issue of liquidating public assets in vital sectors must be treated with utmost caution, prudence and wisdom. A wrong decision has enormous implications for the economy and people’s welfare.

The present government’s approach to PSE privatisation is distinct from that of the 1990s regimes although all have used di- vestment to finance the fiscal deficit-i.e. to fund their own profligacy. (This government too wants to garner Rs 10,000 crore via this route rather than tax the elite). In vogue today is the idea of handing PSES over to “strategic partners” -typically, big private companies in the same industry. Thus, there are plans to sell oil sector PSES to oil multinationals like Shell, IPCL to Reliance, and aluminium PSEs to one of the world’s biggest cartels. This approach is downright pernicious. It is liable to create monopolies. In fact, management gurus like Michael porter sharply criticise the government for selling Modern Foods to Hindustan Lever as an anti-market measure violative even of US anti-trust laws.

Secondly, “strategic partnership” is vulnerable to cronyism and misuse. And yet, the government is prepared to go to ludicrous lengths in such “partnering”. The Public Enterprises Selection Board recently asked Jet Airways to recommend “suitable executives” to head Indian Airlines, no less! Jet is Indian Airlines’ biggest rival, with a stake in weakening, even grounding, that airline. This is like asking the wolf to guard the chicken coop!

However, there are even deeper flaws in the market-fundamentalist argument for privatisation. The argument is based on three wrong premises: that the private sector is inherently more efficient than the public sector; that privatisation has been the norm, not the exception, in the path to rapid industrialisation; and that private enterprises can be made to perform some of the functions historically associated with PSES. To start with, it is extremely doubtful if ownership determines efficiency. Even a number of World Bank studies say it is not ownership, but management, that matters. In many countries, PSEs have a more stable, steady, if relatively low-yielding profit performance. Private corporations are more volatile; their profits fluctuate wildly. India has a considerably higher incidence of sickness in the private sector than in the public, with 250.000 sick companies in the former.

The return on capital from our PSES is low, but not unacceptable so, between 1990 and 1997, the equity put into PSEs was Rs 65,000 crore. The ploughback was Rs 88,000 crore. The value of just the top 10 PSEs is over Rs 500.000 crore. A recent CMIE study found that PSES use capital more efficiently than more private companies. Despite overstaffing, bureaucratic interference in management, pricing constraints, and other debilities, our PSEs have managed to perform. They must be reformed, not privatised.

Secondly, the “mixed” economy paradigm has typically been the key to rapid industrial growth. During the Golden Age of Capitalism (1945-73), the public sector in the OECD countries accounted for 40 percent plus of GDP. Even in the USA the most private industrial economy, certain infrastructure activities have always been public – e. g. electricity where public utilities account for 60 percent. In France and Germany; or Italy and Spain, PSES competes successfully with private companies in fields as diverse as banking, automobiles, aerospace, construction and oil/gas. In the “Asian Miracle” economies, it is the state’s role, not the markets, that ex- plains fast growth: indeed, economist Robert Wade entitled his book on East Asia, Governing the Market.

In its “pristine,” full-blown form, privatisation has been prevalent not in Western Europe or Japan, but in the “disaster economies” of Eastern Europe. Here vast swathes of public property were suddenly transferred into private hands. This spawned a criminalised “mafia capitalism”. The Russian economy has shrunk by one-half since 1991. Eastern Europe has experienced the world’s worst-ever and most prolonged war-like depression except that there has been no post-War reconstruction. Privatisation is hardly a successful or attractive model.

Then there are privatisation’s costs to the public exchequer. For instance, most British PSES were under-sold. Prices of British Telecom shares doubled within a month of sale a loss of £3.3 billion to the public. Electricity shares were sold 60 percent cheaper. In Russia, De Beers got a five-year concession on diamonds for one-fifth of the value of the diamonds to be mined! In India, the Comptroller and Auditor General estimated that the public lost Rs 3,342 crore in undervalued PSE shares sold in 1991-92.

However, the Vajpayee government has learned no lessons. It doesn’t even have a clue about how to evaluate the PSES’ worth. Most Indian PSES are not quoted on the stock market. And Fils have been deliberately beating down the prices of these that are quoted, for instance, the Indian Oil share has a book value of Rs 315 but is quoting at an artificial Rs 152. Many PSES are sitting on vast amounts of real estate, now worth hundreds of billions. Unless PSEs are properly valued, we won’t even know how to price their shares.

Finally, some nagging questions arise: Should we squander away a world-class asset like BHEL? Does India really gain by selling STC and MMTC which have developed exceptional trading expertise and saved us billions in grain and metal deals? What substitute is there for ONGC and Oil India, which alone have discovered hydrocarbons here whereas MNCs reported no finds for decades? How can we promote regionally balanced growth and other worthy social goals without support from PSES? It is one thing to sell off hotels. It is quite another to divest valuable, painstakingly built, public assets. That defies economic as well as political logic.