Gist of Important Articles from IIPA Journal: Public Sector in Independent India Suresh Kumar
Gist of Important Articles from IIPA Journal
Public Sector in Independent India Suresh Kumar
PUBLIC SECTOR IN INDIA
The public sector in India, as in most other countries of the world, has been the principal instrument for fulfilling the role of the State as an entrepreneur. State intervention in the market arises out of two main reasons. Either, the market does not exist at all, as was the case with most developing countries who had acquired independence from colonial rule in the second half of the 20th Century, mainly located in Asia-Africa and Latin America; or, there were cases of severe market failures which required governments to intervene decisively in public interest as was the case in many developing and even developed economics, like the UK, France, Italy, etc.
Mixed Economy Model
In the50s and 60s and even 70s, the economic development in most of the less developed countries and the newly independent nations took place either on a mixed economy model or an autarkic State controlled model. In India, as far back as in 1956, through a parliamentary resolution, a mixed economy model was adopted which gave the public sector a strategic and pivotal role in the process of development. In pursuit of the objective of development by direct intervention in strategic areas, massive investments were made over the past four decades to build a public sector which was expected to acquire a commanding role in the economy, at least in the size and scale of operation and especially in the economic infrastructure area.
Public Sector’s Commanding Role and Reasonable Return for Investment
The commanding role, however, assumed a level of efficiency on the part of public sector which will generate resources which would be made available to other sectors. However, this did not happen. On the other hand, there is no doubt in the minds of informed observers of Indian Economy currently that although the Public Sector has played an important and critical role in economic development of the country all these years, the current benefits from it are not (and have not been) commensurate with the investment made. Its cost of maintenance is high and it is now a net burden on the Economy. This investment is of the order of about $ 50 to 70 billion. The return on this investment has varied between a poor two to five per cent in the last few years. Considering that the investment funds must have come out of savings which are being serviced by the government at about 12 per cent, a return of two to five per cent would appear to be too paltry to enable servicing of the equity as well as the loan content of that investment adequately. Quite obviously, the government is using budgetary resources (or further savings) to service both equity and debt.
It must be considered fair for any nation to expect a reasonable return from public investment. Consequently, the categorical need for restructuring such investments is clearly unavoidable, based on a closer re-look at their initial objectives, their current structure and their likely future, despite the fact that in the past this was avoided for various reasons of public policy which are no longer valid and, therefore, no longer avoidable in the light of the new policy of plugging the Indian economy into the global market on the premise of its efficiency and competitiveness.
Rapid Expansion of Public Sector Despite Poor Performance
In India, like in most developing countries, 60s and 70s were characterised by interventions by the State in the market place and the public sector seems to have grown at a rapid pace. The almost euphoric expansion of Public Sector in India in this period led even to interventions in areas which were not at all strategic, like hotels and manufacture of consumer goods, like scooters, soft drinks, bread, etc.
Even though the Indian public sector attracted the best human resource in brains, talents and skills, the problem of poor performance, lack of competitiveness and low productivity was entirely due to management control structure characterised by multiple principals and multiple goals, which forced them into a bureaucratic rather than commercial mode of behaviour characteristic of which was lack of autonomy and accountability. Therefore, there was need on the part of government for both the strategies, i.e. (i) of being able to let go, and (ii) to fashion an administrative interface between itself and the enterprise that optimised their commercial performance by tackling the problems highlighted above. The new policy package, which emerged in 1991 out of the unique Taxonomic Examination and Performance Contracting System, effectively addressed these issues and requirements by focusing on a dual strategy, and, therefore, could be termed as being both flexible and comprehensive.
REFORMS NEEDED IN FUTURE
Imperatives of Efficiency under New Economic Policy
The logic that emerged was that the new objectives of greater ‘efficiency’ and productivity could be achieved by exercising a family of options for the whole portfolio rather than carrying on as before. The two imperatives at work were: (a) the burden on the budget had risen which required reduction of expenditure on account of PSE’s and simultaneous improvement of their performance, and (b) the consequences of industrial deregulation and trade liberalisation will be to expose public sector (as well as Indian private sector whose performance was dependent upon the public sector dominated infrastructure) to intense competition and, therefore, poor performance on the part of public enterprises would not only be unacceptable but, if allowed to go on, will halt the very reform process. The obvious conclusion was that performance, in a competitive environment of global dimensions, was the key to their existence and, in the light of a logical and humane policy of exit for them through the BIFR route, their existence under all circumstances could not be taken for granted.
The year 1991 was to prove the watershed for economic policy in general and public sector policy in particular. But, I think, the very perceptive remark of Jha was to haunt the latter. Six years down the line, one can see very limited movement in what could be considered a comprehensive policy formulation. It is the inherent logic and dynamism of the policy which has prevented it from being altogether buried and abandoned by the frozen mindsets.
Elements of New Economic Policy Affecting PSEs
The pre-1991 policy, which was unidimensional and status quoist, failed to deliver either adequate growth or allocative justice. What it delivered in plenty was inefficiency, red-tape and corruption. The post-1991 thrust was on greater efficiency, productivity and competitiveness in order to plug into the global market. This required a policy which was multi-dimensional and permitted options to either retain or let go investments.
The seven new elements of the policy were restructuring of: (a) policy environment, (b) portfolio of investments, (c) equity or ownership pattern, (d) boards of PSUs, (e) quality of interface between the government and the boards, (f) sickness in PSEs, and (g) safety net for workers. It is worthwhile noticing that not only issues of investment policy were tackled but also issues of corporate governance of PSUs in order to improve performance and, at the same time, dealing with sickness and poor performance by exercising all available options rather than carrying failures indefinitely for want of options.
It is unfortunate that such a comprehensive policy, on whose each element some steps were initiated, the people at large generally tended to consider it as a policy of disinvestment for covering the yawning fiscal deficit and nothing more. And once a misplaced criticism of the actual operation of disinvestment was started, reinforced by the mindset of the old policy whose life span had not ended, progress on all elements of the policy slowed down to a virtual halt. Even the disinvestment operation failed because, except for the year 1991-92, the budgetary targets were never met. The appointment of a Disinvestment Commission by the United Front government does not carry with it any conviction about a move forward in the direction of public sector reform since this Commission has no viable charter. The disinvestment process remains in doldrums.
Pace and Direction of Reforms
While all the seven elements of the policy are closely interrelated, the element relating to restructuring of equity is the key element of the pace and success of the reform process. Progress here would set the pace and direction of further reform. For example, the area and type of investments in future, the nature of PSU boards, the quality of their interface with the government in the Memorandum of Understanding (MOU) process, the type of disclosures to the public at large about the public enterprises’ performance, the contents of MOUs seeking greater autonomy, quality of Safety Net, the quality of Chief Executive Officer (CEOs), and all other elements, would critically depend upon the overall policy and strategy of disinvestment.
Autonomy-Disinvestment and Setting up of Apex Body
They would also require fundamental changes. Already such changes are discernible in some of the recent policy announcements about autonomy and reconstitution of boards.
The Rangarajan Committee on disinvestment was set up in recognition of the importance of this issue. The committee made two extremely important policy recommendations.
One related to limits of the level of disinvestment in a three-tier operation, and the other was setting up of an apex body to conduct actual operation. The implication of the former is flexibility, as opposed to rigidity in dealing with the public sector portfolio. The implication of the latter was a recognition of the failure of the administrative ministry system to enhance public sector performance and, hence, its incapability to undertake the task of restructuring.
On both counts, there is a discernible sense of aimlessness. On the three-tier operation, the government is unable to go beyond the one they started with in 1991.
Retention of 51 per cent equity continues to remain the mantra. The mindset of ‘socialism’ prevails, amongst all sections of governance or even amongst those who are outside, without options. The Nehruvian legacy continues to hold sway, though Nehru himself would have changed it.
And the apex body created is given no powers to execute the policy, resulting in enhancement of powers of the administrative ministries, instead of reducing, to the further detriment of PSU autonomy and accountability. This, in brief, explains the performance of the Disinvestment Commission.
The apex body, in order to be effective, has to be able to cut across the line of ministries. Instead, it finds itself being ignored by every ministry. The overwhelming impression seems to be that only lip-service is being paid to the reform process in the public sector. And that is a great pity.
Disinvestment with Efficiency and Productivity
There are some general lessons for effective disinvestment. Any country embarking on a liberalisation and globalisation policy has to focus on efficiency and productivity. These concepts are not anti-employment as some tend to shrilly complain but are actually pro-employment generation. In achieving desired results, there cannot be islands of efficiency and inefficiency. Everyone has to focus on efficiency, and here, the government has to take the initiative. In other words, government cannot run an inefficient public sector and expect others to be overly efficient to make up for public sector inefficiency. Here, the term public sector includes the aspect of governance itself, clearly demanding that the government should show itself more as an efficient service provider rather than power-wielding controller.
The silver lining is that, despite contrary signals, the reform process is not being abandoned. This proves the point made by L.K. Jha, which has been mentioned at the outset. Let us hope that we are delivered of the old mindset earlier rather than later so that the national interest is better served at this point of history.
Significant Latest Developments
1. Lesson to be Learnt from China
Even while I write this, some events have taken place which are likely to have an immediate impact on resurgence and further implementation of the Indian policy. The Chinese Communist Party President Zemin declared openly in September 1997 that the state sector is ‘irrational’ and that job losses by closing uneconomic and unviable units will have to be tolerated. This should help the Indian Left, which has made the reform process virtually come to a stop since 1995, to reformulate their position and pursue the path of greater national interest as opposed to their party’s interest. China is looking at a redundancy level of about half-a million. The figure we had calculated in regard to our sick units is half that and our policy was avowedly more liberal towards those who were likely to be phased out. If this part of reform could now kick start, the performance of the remaining PSE’s can be shown to have dramatically improved and the rate of return of capital employed could easily climb up to eight per cent in no time.
2. Impact of Fifth Pay Commission Bonanza
Another connected event, that is grant of higher pay packages to government employees beyond the recommendations of the Fifth Pay Commission, proves the point that it is a great adversity which changes the mindsets. The initial public sector disinvestment was driven by an unbearably adverse economic situation in 1991. Once that situation was overcome, the process stopped, helped greatly by alround uninformed criticism that the sales were badly managed. Once again, the financial situation, aggravated by profligacy of all concerned, has led to the 49 per cent disinvestment mantra being sought to be abandoned, demonstrating the effect of adversity which puts paid to political stancing. One wonders whether the reforms process can be hastened by provoking crises? In any case, for an enlightened public sector policy, all these are contemporary gains which will lead to success.