Home Insights Privatization of the Public Sector – IMPRI Impact and Policy Research Institute

Privatization of the Public Sector – IMPRI Impact and Policy Research Institute

Privatization of the Public Sector - IMPRI Impact and Policy Research Institute

Arun Kumar

The government is accelerating the process of privatizing the public sector under one pretext or the other. This process was set in motion in 1991 with the new economic policies (NEP) but now using the excuse of dealing with the pandemic and sensing that the opposition is subdued since the protest is not easy, the government has speeded up the process. It is talking of disinvestment, monetization of assets, and strategic sale. All of them constitute privatization in different forms.

Governments have justified these moves on grounds of raising funds for further investment and increasing expenditures on the social sectors (like, education and health) and on welfare schemes for the poor. By focusing on the last two, the government has been trying to create a political constituency in support of privatization.

IForms of Privatization

The public sector has been projected as inefficient, corrupt, and loss-making and therefore, wasteful of public resources. While businessmen favor this argument, governments have successfully also sold it to large parts of the middle class. The attempt has been to isolate the public sector employees who have been protesting against privatization.

The present government’s moves would succeed if the poor and the middle classes come out in support of privatization as a result of the ongoing propaganda. The media has played an important role in pushing this agenda since it is largely controlled by big business which hopes to reap a huge benefit from privatization at throwaway prices. The favorites of the rulers and the rulers themselves hope to benefit from this.

Since 1991, privatization has taken different forms – disinvestment, strategic sale, and PPP. Monetization of assets which is a form of PPP has now been added to this list. Disinvestment has meant selling a part of the equity of a PSU to private investors while keeping the control of the company with the government.

The strategic sale allows the control of a PSU to pass into the hands of a private party, like, in the case of Air India. PPP, as the name suggests, is a partnership between the public sector and a private sector entity. Here the public sector took the risk while the profit went to the private party. This was given up for a variety of reasons, like, losses in infrastructure investment and public opposition to the scheme.

Now the government is going in for monetization of the public assets across the board — roads, railways, stadia, etc. It is handing over these public assets to private parties for long periods in lieu of an upfront payment. It is claimed that they are not being sold and will return to the government after the period is over. So, it is like a PPP. It is argued that these assets are under-utilized in the public sector and would be better utilized under private control.

Effectively these assets will be sold at low prices given that they are under-utilized and therefore their current profitability is low. Also given the current downturn in the economy, it is unlikely that they would suddenly turn profitable unless they are given away at low valuations. Cronyism is likely to come into play with the favored businesses getting the assets. Just like happened in the case of privatization of airports, any competitors could be bullied by threatening them with raids and official harassment via agencies. Witness, what is happening in the case of Big Bazar which Amazon was to acquire, and suddenly Reliance entered the picture and now a legal battle has ensued.

Privatization after the collapse of the Soviet Union led to the emergence of monopolies in Russia with control of PSUs passing on at throw-away prices to Kleptocrats — former top government functionaries. In India too, one of the mechanisms of cheaply giving the PSUs to the private parties has been to first turn them sick or bring down their profits to low levels. This lowers their present value so that they can be handed over cheaply to private parties.

There are many ways to bring down PSU’s profitability. First, to make faulty decisions at the political level, like, the merger of Indian Airlines and Air India and ordering a large number of aircraft that could not be immediately put into operations. Secondly, keep top management posts vacant for long so that decisions pass into the hands of bureaucrats and politicians who can then manipulate the PSU.

In 1991, it was reported that 35 top PSUs did not have either the Managing Director or the Chairman of the Finance Director. Thirdly, impose impossible social obligations so that losses follow. For instance, banks, insurance companies, etc. have had to bear the cost of servicing the poor and commercially weak entities resulting in lower profitability.

II. Supply-Side Economics

It is then clear that PSUs have lacked autonomy due to political and bureaucratic control, resulting in non-commercial considerations dominating their decision-making. Then it is argued that the public sector is inefficient and that creates the ground for privatization.

The privatization process started in 1991 under the pressure of conditionalities imposed by the IMF and the World Bank. But, now the pressure is not external but internal, generated by the belief in ‘supply side’ economics. It is based on the argument that the private sector has to be encouraged to invest more via granting it concessions. For instance, when the public sector’s role is reduced, the monopoly power of the private businesses rises, and that enables them to make more profit.

The presence of a PSU in a sector checks the ability of the private sector to charge higher prices. Take the example of steel or coal or education institutions where both the public and private sectors operate. There, the private sector cannot charge arbitrarily high prices. If there is a Mother Dairy booth close by then the private sellers of fruits and vegetables cannot arbitrarily raise prices or speculate by creating shortages.

So, `supply side’ policies seek to whittle down the public sector, as announced in June 2020 under the Atmanirbhar Bharat scheme. The idea is that once the public sector weakens government policy will have to depend on the private sector doing well. So, at every downturn of the economy, the private sector will be able to extract more concessions from society, including weakening labor’s bargaining power.

The theoretical idea underlying `supply side’ policies is to raise private investment in the economy which has been declining since 2012-13. Since the public sector is in retreat, investment can only be boosted via the private sector. The issue is can privatization lead to an increase in investment?

Privatization in any form implies a reduction of the government’s capital stock. Even if it invests the money raised through the sale of capital, there is no net addition to investment. The private sector has to divert investment from its other activities to buy the asset. So, there is no net increase in its investment either. Thus, net-net, neither government nor the private sector invests more. It is only a transfer of assets. So, additional demand is not generated.

For the private sector to invest more, there has to be an additional demand. If total investment in the economy does not rise, additional demand will not be created and then private investment will not get a boost. So, under the present conditions of low demand due to the pandemic, `supply side’ policies will not deliver.

Further, under these circumstances, the valuation of the public assets would be below their real value and the private sector will get them cheap while the public will lose. Finally, the private sector can currently raise funds to buy the public assets since banks are flush with funds and looking for opportunities to give credit to sound projects. What better than to give to cronies acquiring assets cheap with assured profits? It all fits in with the scheme designed for favored businesses.

III. Role of Public Sector

Why is the public sector needed in India?

India has an overwhelming number of poor citizens. Only 3% can be said to be well off and perhaps another 7% are the middle and the lower middle classes. So, only 10% are not poor and this is 138 million people; larger than the population of Russia or Mexico. The rest 90% are poor even if many are not extremely poor.

The markets and the corporates cannot cater to the poor. That is why since Independence, the public sector has had to play a critical role in India. At the dawn of Independence, it was recognized by the leadership, due to their realization during the national movement, that the citizens are not to blame for their problems. The problems they faced, poverty, illiteracy, ill-health, etc., were a result of colonization.

The citizens could not solve their problems since they could not set up schools or hospitals or create employment for themselves. Thus, the collectivity had to solve the citizens’ problems and that is why the government was given the central role for taking care of the basic problems faced by the citizens.

The importance of the public sector has once again been highlighted during the pandemic. The private sector could not cater to the transport, health, banking, education, etc., needs of the marginalized and even the middle classes. Market failure under normal situations is well known and this becomes even more crucial in adversity, whether it be floods, drought, or a pandemic.

The public sector in India has been providing the basics of life, such as social and physical infrastructure. As argued above, it keeps prices in check. It has enabled optimum utilization of the nation’s resources when its savings and investment were very low in the 1950s. It fulfilled the needs of capital at a time when the private sector lacked capital. The Indian economy adopted the mixed economy model under these circumstances with the public sector given the leading role.

However, the public sector at its peak produced less than 30% of the output and its principal role was to promote capitalist development. The goal in India was never a socialist development even though the rhetoric implied that. Taking care of the poor or providing public services is done in all capitalist economies, under welfare capitalism, especially since the Second World War. This has been seen as essential for capitalism to develop. Further, all capitalist economies provide public goods, such as defense and merit want like, education and health. Industries with increasing returns to scale, like, telecommunication and broadcasting, used to also be in the public sector.

IV. Privatization of PSU Banks: Hobbling Policy

Public sector banks have played a crucial role in the development of the Indian economy and providing support to the marginalized sections. Prior to the nationalization of banks the private sector banks mostly served urban areas and gave loans to select clients. Now the banks are catering to the poor through Jan Dhan accounts and implementing various government schemes designed to help the marginalized like Mudra loans, ECLGS and PM Svanidhi. The private sector has played little role in all these schemes. PSU banks have also taken over or helped entities (say, SBI and Yes bank) that have gone sick and that has affected their profitability.

Instead of lauding the PSU Banks for their contribution to society, the government is seeking to hand them over to the private sector. So, in the future, the government’s capacity to help the marginalized sections of people will decline. Its capacity to help the economy during a crisis (like, during the pandemic) will also decline. Society will be increasingly at the whims of private capital.

Why this is not clear to policymakers is because they are acting at the behest of the private financiers backing the rulers. These moves are not driven by any considerations of efficiency. The private financiers will take over the PSU banks to fund their own further expansion to strengthen their monopoly power in India thus aggravating inequalities.

In fact, presently India’s private sector banks are substantially owned by foreign capital. So, handing over PSU banks to the private sector is like handing them over to foreign capital. Already India is under pressure from international finance capital to follow policies, not in the interest of the vast majority and this situation can only worsen with the privatization of PSU banks.

V. Globalization Strengthening Capital 

At least since the 1970s capital has become highly mobile. This has enabled it to extract concessions from governments. It goes where it gets more favorable terms — where the tax rate is lower, labor unions are kept in check, etc. The decline of the Soviet bloc since the mid-1970s and the 180-degree turn by China weakened the possibility of an alternative for the developing world and India. Capitalism has become the only possibility and capital has taken advantage of that. Finance capital has risen dramatically with its interest propagated by international financial institutions like the IMF, the World Bank, and ADB.

Labour has also weakened due to divisions within its ranks. Like in India, the unorganized sector which employs 94% of the workforce goes unrepresented everywhere. It is unable to demand a living wage for itself. This makes it the reserve army of labor which weakens organized labor. Public sector employees need to give a lead to unifying workers, farmers, and marginalized groups.

For this, they have to present an alternative to the current rapacious capitalist model. The public sector has to run as a public sector and not as an adjunct to the private sector. The onus is on the employees to show that the public sector serves the interest of the public. They need to become whistleblowers to check cronyism and corruption and oppose `supply side’ policies broadly and not only when the ax falls on them and their PSU.

VI. Conclusion

Today the assault on the wider public sector is three-sided; from International Finance Capital, Indian Big businesses, and the political class. There is a need to challenge the invalid comparison of public and private sectors based on their profitability. Any comparison must take into account the social obligations of the public sector. Regarding the `supply-side policies’ being pursued, it needs to be pointed out that in the current situation of weak demand, they will fail and aggravate the crisis. Finally, weakening the public sector is weakening society to face any future crisis. For instance, PSU Banks have played a stellar role during the pandemic. Their privatization can only make the task of governance more difficult in the future.

This article was first published in Mainstream Public Sector in India Faces a Three-Sided Assault.

Read another piece on NGOs, FCRA, and Foreign Funding in National Interest by Dr. Arun Kuam in IMPRI insights.

Read another piece by Dr. Arun Kumar titled कहीं बुलबुला न बन जाए यह तेजी in IMPRI Insights

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Read another piece on a sustainable development model by Dr. Arun Kumar titled This Path of Development is Toxic in IMPRI insights.

About the Author

Dr. Arun Kumar is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences. The views expressed are personal.

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