The Politics of Public Sector

Selling 5% of shares in the Neyveli Lignite Corporation (NLC) is the recent controversy that’s dividing Tamil Nadu’s opinion leaders. Whilst some ardent ‘reformists’ support selling the stakes, other ‘labour-friendly’ leftists oppose the move and warn that it will affect thousands of NLC workers.

This has spawned another round of debate about whether our public sectors should be ‘donated’ to the private sector. When the reforms began, the leftists didn’t have much hold over their arguments. However, recent developments, such as crony capitalism, aggressive controls by companies such as Reliance and tax evasion problems by big telecom players have encouraged them to come to the foreground in support of these public sectors and, some even going to the extent of propagating return to the socialist era.

There are multiple issues becoming interlinked here. Let’s look at the issues rather than trying to address the concerns of these leftists.

The public sector corporations are the residues of our socialism era. They were instituted as part our nation building strategy. They were not ‘intended’ to be profit-making machines. They were also inspired by the Soviet Union’s model of government taking initiative in building heavy industries. Remember, until 1916, Russia was a peasant nation and after the Bolshevik Revolution, within a generation, it has turned itself into an industrialised nation. Many European nations, including England, industrialised almost over a century and it took considerable labour cost to achieve that. Nehru, and of course the rest of the developing world, was impressed with this achievement and they wanted to emulate that. Here a couple of things should be registered in defence of Nehru. He aspired to emulate only their industrialisation model and, unlike other nations, did not emulate their authoritarian governance. Secondly, his overall economic model was not borrowed from Soviet. It was inspired by Fabian Socialism and his (Nehru) model was also approved by all the industrialists of that time through their Bombay Plan.

Now, returning to the point, these public sector models were attempted differently in other countries. Japan encouraged, even subsidised, private enterprises and protected them from western competition. They tolerated several failures of these companies until they succeeded. Toyota is one key example.  

India, however, followed a combination of Fabian, Soviet and Swadesi strands. These ideas were useful until the 60s, when the nation-building was the goal in everybody’s mind.

We had dropped most of these ideas during the nineties and the noughties. Although we benefited to a large extent from the liberalisation, we are also paying some huge price for our unbridled capitalistic tendencies. One of the key results is the crony capitalism, where the practice of relatives and proxies of the ministers getting contracts and licences, especially in respect to handling our natural resources, has come for heavy criticism. Secondly, the private companies, both domestic and foreign, having profited from the capitalism started controlling the governments, so far as to go to the extent of deciding who will take over which portfolio in the government. And if the minister related to their portfolio causes them trouble, they even went to the extent of replacing him with another, more cooperative, one.

But those are the problems to be countered differently. Let us approach this problem in two angles. The first one, these issues are there world over. When Microsoft was mired in various copyright cases, there was a danger of the company being split up. At that time, Bill Gates went to the extent of threatening that, if there was an adverse judgement  he will seriously consider moving Microsoft out of the US. This led to the federal government to ‘weaken’ case in order to help him. When the Sub-Prime Crisis exploded in the UK, the government mulled over some banking reforms to prevent such problems recurring in the future. But HSBC, along with other banks, lobbied aggressively to nullify such a prospect. However, these problems are to be tackled differently and also they are often quite temporary. For instance, I don’t think Microsoft is in a position to issue a similar threat today. So, the market equals out by itself. Sadly, that is not the case with a public sector.

The second one, the above incidents, when they come out they are widely criticised, condemned, and, sometimes, even reversed. Just imagine if it involved a public sector: you wouldn’t even hear of what is happening inside. Often the management positions of these public sector organisations are used for patronage purposes, to be awarded to party people and ‘loyal’ officials. More often than not, the ‘spoils’ are shared among the cronies. 

The second point is the widespread belief about ‘profit-making’ Public Sector Units (PSUs). This belief insists that some PSUs are making profits and they should be left alone. This is again a myth. Profit making PSUs are as fictitious as the Santa Claus. Even if they appear to be making profits, what we should really look for is whether such companies have recovered the Return on Investment (RoI). It won’t be possible to identify even a single company. Even if we have to look at profits, there are different parameters. For instance, before 1991, Doordharshan was surely a profit-making television channel. But could the DD have made enough profits that can surpass the combined profits of the hundreds of private channels today? Same with BSNL before 1991 and the dozens of telecom companies today.

The third aspect is about the growth potential of public sector. Look at the technological, cultural, social and economic impact of today’s television industry. Could DD have provided such an explosive financial growth as well as cultural impact on its own? Look at the technological and social reach of telecommunication today. Was BSNL able to achieve this much of penetration during its time? Has anybody forgotten three to four years of waiting time for a telephone connection? The advance of Rs. 15,000 for a dial-up internet connection with the assured connectivity of 5 in 10 attempts?

There is another side effect of these PSUS. It is becoming virtually impossible to privatise, or even partially disinvest, these companies mainly due to the iron grip the unions command over them. Due to our back-breaking, stringent labour laws these unions have become a law unto themselves. These archaic labour laws are again residual of the socialist era. They are a single biggest barrier to investment and institutionalisation of many of our cottage industries. There are several businesses that operate as ‘un-organised sector’. They operate small, but employing hundreds, often even thousands, of labour on contract- or coolie-basis. They are steadily avoiding formalising this businesses because, then, these labourers would become employees thereby forming unions and, consequently, threatening their business. Refer to Edward Luce’s In Spite of The Gods to know more. 

This has two effects: an estimate states there are about 80 million such daily labours working in the ‘un-organised sector’ who are being denied an opportunity to join the ‘organised sector’ because of a million or two public sector employees, who are already used to the comfort and laziness of their jobs! Secondly, imagine the economic benefits of 80 million people becoming part of the organised sector? How much tax it will generate, educational, social and other benefits it will entail? This is not happening because we all want to ‘protect’ the public sector employees many of whom are notorious slackers!

Simply, Public Sector Industries were a legacy of Nehruvian Socialism. They had a purpose in the 50s and 60s. They should have been disinvested in the 70s itself, but India became far more socialistic and small-minded due to the adverse and destructive economic policies of Indira Gandhi. Today, they have clearly outlived their purpose and it’s beyond the due date that they need to be wrapped up. This article has not even touched the subject of the tax money being wasted in keeping these companies alive, but I think it has built enough case even without bringing up that point.