SHOULD PUBLIC SECTOR BE PRIVATIZED
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INTRODUCTION: In the context of the reforms undertaken in the Indian economy, the question of privatization of the public sector has assumed great significance. DEVELOPMENT OF THOUGHT: The Issue of privatization can be discussed only by taking into consideration the state of the Indian economy and the role of the public sector in its development since independence. This essay points out that in the existing state of the Indian economy the State has a definite role to play to tackle the problems of illiteracy, primary health, poverty, unemployment and income and regional disparities. The public sector has played a catalytic role in these areas. But the ability of the public sector to cope with the demands of the economy is being questioned. Scores of sick units especially in the services, banking and transport sectors are a cause for serious concern. The public sector has also failed to generate resources for development to the extent it was desired. Dilatory decision making has resulted in time and cost overruns in public sector projects. On the contrary, it is equally true that the private sector would not have the needed capital if all PSUs were to be privatised in one go. The crucial issue in the Indian context is the need to make both the public and the private sector efficient. For this purpose, management needs to be vastly improved. CONCLUSION: Privatization should not be a goal in itself It should merely be a strategy to increase profitability, productivity and efficiency of the economy. |
 The issue of privatization of public sector undertakings is now a widely debated one. When we talk of privatization, it is the relevant context that matters, namely, the efficiency of the economy, it’s level of development, resource prospects, socioeconomic imperatives and the socio-political perspective. All these matters must be taken into account as we examine the question of privatisation.
 Let us take the case of the Indian economy and the role of the State in its multidimensional development.
 First, we are still a developing economy with about 30 per cent (that is, around 250 million) people below the poverty line, who do not have access to necessary shelter, primary health care, safe drinking water and so on. About 50 per cent are illiterates in the literal sense of the term. In this kind of economy, the State has a definite role to play. The role of the State gains further significance by the fact that there is a growing problem of unemployment.
Second, there is a wide disparity between the rich and the poor. It remains for the State to provide economic opportunities for the poor so that they too can go up the prosperity ladder. In the past forty years, the public sector undertakings have played some positive role by helping to generate a large middle-class population. This catalytic role of the State will perhaps have, to continue for many more years to come.
 Likewise, there are also wide inter-regional as well as intra-regional disparities in the levels of development. No worthwhile investment would flow towards backward regions unless the State comes forward and provides the necessary infrastructure. Sometimes, industrialisation in a backward region may have to be initiated and innovated by the State. This is a practice commonly adopted in many countries.
 Besides, the imperatives of development expand the State’s socio-economic responsibilities enormously. The level of development in agriculture and rural economy calls for the supply of inputs at concessional rates because of the limitations of the principles of market pricing. The poor must be provided with the basic amenities and facilities at subsidised rates. The workers have to be provided even food at subsidised rates to keep the wages under control. Even industry has to be provided with support facilities often at less than market costs if it has to be competitive. In this kind of a scenario, it is difficult to envisage that the role of the State should be minimal.
But does it mean that the issue of privatization is irrelevant in the Indian context? Why is it then we are talking of privatization? In what follows, we will try to deal with these questions.
An objective analysis of the Indian economy would make it clear that the thrust on the public sector in the earlier plans (resulting in the increased role of the State), was a move in the right direction. Without the public sector, we would not have been able to build the modern industrial economy that we now have. It may be said that while the private sector has helped in achieving import substitution in the area of consumer goods, the public sector has filled in the void of infrastructure and basic industries. While it accounts for over 25 per cent of the GDP, it is responsible for the bulk of employment in the organized sector.
Despite the positive role played in the rejuvenation of the economy, the public sector has come in for sharp criticism from many quarters, including those who were once great champions of the sector. The reasons are too well-known to need any elaboration, but a brief overview of the causes may be relevant.
The public sector was set up to achieve the commanding heights of the economy. It was supposed to infuse necessary strength and resilience to it ensuring, among other things, that the private initiatives could flourish on its support. It was expected to provide basic raw materials and inputs, encourage ancillarisation, create economic opportunities for the people and perform various social responsibilities which the private sector was not in a position to undertake. The public sector has undoubtedly played its part but not as efficiently. There ate some who say that the public sector has failed miserably but that may be unfair.
The private sector depends almost entirely on the public sector for its supply of some of the vital basic raw materials and other inputs like coal, iron and steel, aluminium, power, finance, transport, and telecommunication services. In a manner of speaking, the performance of the private sector has come to be determined to “a great extent on the performance of the public sector. And this is where the pinch is. The private sector has a lot of grievances with regard to the availability of raw materials and inputs, quality of products and services and cost of products. If the private sector wants to grow at the rate of, say 10-12 per cent a year, this will not be possible since the supply support from the public sector will be difficult to ensure. Again, the cost structure of the public sector has led to a high-cost syndrome which has made the entire economy uncompetitive, compelling the government to bear the heavy burden of subsidies.
The loss-making PSUs (in 1988-89, out of 222 Central PSUs, 104 units made a loss of Rs 1,906.51 crores) are now considered a liability in view of the budgetary support required by them. The losses are sought to be -covered by increasing the prices of products manufactured by them leading to all-around increases in prices thereby sustaining the inflationary momentum. This again necessitates increased subsidies. But what is worse is that this kind of situation is subjecting the PSUs to further hardship. The existence of the loss-making units is affecting the performance of the profit-making units. According to a recent report, there are 40 PSUs that have been identified as chronically sick units, which are worth closing down.
Within the services sector, banking and road transport has caused serious concerns. The more serious of these is the phenomenon of sickness amongst the commercial banks, which shows that in the given condition of the economy and the regulations that the banking sector is subjected to, the commercial banks cannot operate efficiently. In brief, the public sector has failed to project itself as a shining example of being a guiding force.
The lack of performance has become even more obvious today when the economy is facing a serious resources crisis and we expect the public sector to generate internal resources for reinvestment purposes. At this juncture, the public sector has failed to rise to the occasion. According to the latest CSO estimates, while the savings of the household sector and private corporate sector have registered significant increases, the public sector savings have suffered a fall, declining by 1.5 per cent. The net disserving of the public sector showed a steep rise from Rs 9,782 crores in 1988-89 to Rs 13,165 crores in 1989-90.
The concerns are attributed to certain factors that are inherent in the system and to the faulty approach in some cases. While the concept of the public sector was propagated with all fanfare, not much at the mention was given to evolving an environment that is conducive to the efficient functioning of the PSUs. On the contrary, the PSUs were allowed to be completely dominated by the bureaucratic-political stranglehold that not only dampened the spirit of the technocrats and the professionals but also caught the PSUs in a maze of difficulties. More than bureaucratic influence, it is the ‘political interference that has been largely responsible for the present state. Apart from excessive accountability imposed on them, the public sector managers are also subjected to many pressures from above, which deprive them of the autonomy and flexibility and renders their functioning ineffective and inefficient.
A major problem in the way of efficient operation of the PSU is their inability to take timely decisions, which is due partly to the factors explained above and partly to the decision-making process that has been in operation. The delays create most of the complications. These have resulted in the inefficient implementation of projects leading to the colossal time and cost over-runs, which affect, on the one hand, the effectiveness of planning and, on the other, the financial and economic viability of the projects from the commencement stage itself.
There is yet another serious aspect that relates to the socio-economic obligations imposed on the PSUs. Let it not be misunderstood that these obligations can be given up. The public sector by its basic rationale is supposed to fulfil certain socio-economic obligations. What is not realised is that when socio-economic obligations are imposed and the principles of market price cannot be applied, there is an indispensable need for a flexible environment and effective monitoring of operations..11 it is not provided, the socio-economic obligations will become the cause amounting losses and sickness. This is what has happened to the Indian public ‘sector. PSUs in banking, power and transport sectors have been particular victims.
The situation is made all the more difficult since the socio-economic obligations are never-ending in nature. The basic objectives/targets that these obligations are supposed to meet remain unfulfilled anyway. In 1950-51, we had about 250 million people below the poverty line and we still have as many now, if not more. The number of people belonging to socially and economically backward classes has increased over the years. The number of illiterates has increased by about two-and-a-half times since 1950-51. Agriculture needs today as much attention as required during the sixties. The tiny and small scale sector always calls for increased support. One can go on multiplying such examples. All these things continue to keep the government, and obviously the public sector, under the pressure of socio-economic obligations which impose severe burdens in the form of subsidies on the government and losses on the PSUs.
 It is in this background that the demand for the privatization of the PSUs has gained momentum while the basic impetus comes from the worldwide movement for privatization and dismantling of the centrally planned economies. To put it briefly, there are two main aspects which favour the idea of privatization. First is that of inefficiency. Over the years, about Rs. 100,000 crores have been invested in the central PSUs alone, but the rate of return from this investment has been extremely low. What is more important is that inefficiency of the public sector is now coming in the way of overall growth and efficiency of the economy. We cannot aim at a high (planned) rate of growth if we do no: upgrade the existing infrastructure industries (all of which are in the public section tor) and if the same do not operate at optimum capacities. The second aspect is that the country is facing a serious resource crisis which is coming in the way of formulating the Eighth Plan. With the serious concern about the growing fiscal deficits, it is felt that the privatisation of some of the PSUs (particularly the profit-making ones) could solve the resource problem to some extent.
The demand for privatization, it should be noted, has come not only from those who are staunchly in favour of the private sector but also from several official committees as well. The Abid- Hussian Committee had suggested the sale of public sector shares to the public. Some of the state governments have also indicated their intention and taken measures to sell some of the public enterprises.
From the point of view of industrial policy, the Schedule A (industries) is no longer considered sacrosanct and the Government has already permitted private sector participation in areas like power and telecommunications. The basic premise is that in the case of infrastructure, there is a pressing need to augment supply and hence the policy of exclusive reservation should be given up. It can be said that our historical perception of the role of the public sector is undergoing a change. Distinct flexibility of thought is discernible. At the same time, it cannot be said that the idea of privatization, in its strict sense, has been accepted fully. It is this aspect that calls for closer scrutiny.
Is privatization (in the sense of outright sale of PSUs an appropriate policy? Is privatization feasible? These are important questions that need to be examined. The questions relating to other forms of privatization, namely, the sale of shares of the PSUs, and participation of the private sector in the areas hitherto reserved for the public sector, also deserve careful examination.
 First, we are facing a resource crunch. The sale of shares, of PSUs, may resolve the resource problem for the Government to some extent. But, it may pose a problem for the private sector. The private sector has been critical of the tax-free bonds floated by the PSUs. The argument is that the tax-free facility is a discrimination against the private sector and it amounts to encroachment by the public sector in the capital market, which earlier was exclusively the prerogative of the private sector. At the same time, is doubtful that public sector bonds can be sold without some kind of incentives, since the internal resource generation being poor, the PSUs, cannot ensure the market rate of return.
Second, the loss-making and/or sick units are a real problem. In the capital market, inefficient units have no place. It would not be possible to sell shares of loss-making units unless some incentive scheme is evolved. A suggestion has been mooted that such units should be sold out in entirety. But there may not be many takers.
Third, while the idea of participation of the private sector, is welcome and feasible has been agreed in principle, it may take quite some time before private enterprise participates substantially or ventures into core sectors like power, construction of roads and similar areas. A primary issue is that of price, which has to be allowed to be determined on the basis of the law of supply and demand. Under the given socioeconomic context, that is, perhaps, not possible and the private sector cannot accept the price as an exogenous factor.
 In this context, a -point that needs to be noted is that privatisation (or even private sector participation), may not be a feasible proposition unless price reform is achieved. The price policy (particularly of those relating to infrastructure) has to be reformed in such a manner that the PSU operations are profitable even after discharging socioeconomic responsibilities.
As we are debating this issue, there is a need for more objective assessment. The overwhelming the impression is that the public sector is inefficient and that inefficiency, has penetrated deeply into the operation of the PSUs due to various reasons. But inefficiency cannot be the sole logic for privatization. A comparative analysis of efficiency in the public and the private sectors would reveal that the former is not the only one at fault. Inefficiency is a general phenomenon that pervades all segments of the economy. As a consequence, privatization of the PSUs it is apprehended will not solve the problem of inefficiency, unless the factors contributing to inefficiency are tackled and eliminated.
The crucial issue in the Indian context is how to make the economy efficient. Both, the public as well as the private sectors need lobe made efficient. The basic issue then is that of management. It is unfortunate that during the past forty years, we have paid very little attention to evolving a management culture that would be conducive to the national economy. On the contrary, an ineffective style of management has been allowed to perpetuate itself, although unintentionally. Take the case of public sector first. Beginning with 931. Pandit Jawaharlal Nehru had been unrelenting in his support of a socialist economy, which he later on modified and called a socialistic pattern of society (under pressure from his colleagues in the party and the intermediate regime of influential business groups). He was equally forthright in his arguments in favour of the public sector and giving it the position of commanding heights and as the temples- of modern India. But hardly anything concrete or substantial was done to develop proper guidelines for efficient management of public enterprises. One can even say that this vital question was overlooked completely.
With the launching of the public sector, the bureaucracy found itself saddled, with a responsibility for which it was neither prepared nor trained. Even today, the bureaucracy is not properly trained in the management of industrial establishments. It is true that there are examples of a few good public sector managers,, but the government made an inconsequential contribution to it. The personal qualities of successful managers mattered a lot. Pandit Nehru perhaps did not foresee that the public sector undertakings could be vulnerable in the hands of the politicians and would ultimately become victims of the system (and over-lordship). The management of the public sector has thus been left at the mercy of the untrained bureaucracy and the politicians. The professionals and the technocrats are treated as subordinates meant only to carry out orders.
 With these major structural barriers to efficiency, it is not difficult to understand low productivity in the public sector. It is wrong to believe that with privatization, these barriers will vanish. No, they will not. Privatization itself does not mean an end to governmental interference. Such interference is frequent in the operations of the private sector as well. Even the political parties exert a considerable influence over private sector operations. More the autonomy of the Chief Executives of the PSUs and a corresponding reduction of official and political interference will, perhaps, go a long way in improving profitability and resource efficiency. Subsequently, it would be necessary to withdraw the support given to the PSUs by the government in the form of budgetary support, price and purchase preference, the facility of tax-free bonds etc. In other words, the enterprises will have to be left to fend for themselves in an atmosphere of a liberal regime.
It is, at any rate, imperative to put limits to further growth of the public sector. This may not be possible and/or desirable in the case of infrastructure and some basic industries, but in the area of consumer and intermediate goods, there is no reason why there should be a further expansion of the public sector. Even in the case of certain capital goods industries like-tractors, machine tools, there is no need for further expansion of the public sector, while, in due course, the existing units may be privatized. The shares of the profit-making public sector undertakings can be sold (say 50%) to the public with a ‘stipulation that no individual or company holds more than a specified percentage of the total shares to be released.
To sum up, in the context of the In the Asian economy and its inherent conditions, the following, suggestions may be considered with regard to privatization:
‘We cannot go all-out for privatization. It may not work. What is more important is an improvement in the system to make it conducive to efficiency and productivity. Since privatization implies diversion of resources from new areas of investment to the purchase of existing units, it may not be a desirable way of using scarce resources.
We should do away with the policy of exclusive reservation of areas for the public sector. Let both the public and the private sector invest in the core sector/ Schedule ‘A’ list of industries and let there be an atmosphere of free competition between the two. It would even be desirable that in certain sectors where large investments, sophisticated technologies and managerial expertise are required. the Government and the industry join hands and set up joint sector projects.
The interference by bureaucracy and political leadership must be minimised in favour of operational freedom. There is a need for blending the socio-economic objectives with those of commercial objectives. In this context, the role of an appropriate pricing policy assumes critical importance.
Attempts should be made to revive the loss-making public sector undertakings by identifying the factors that are responsible for the losses and by making an earnest effort to remove the bottlenecks. While doing so, the government may also like to sell those units if a suitable offer comes from the private sector. The sick public sector units that cannot be revived or sold may be closed down.
Particular care has to be taken to ensure that the existing profit-making enterprises are provided with the necessary environment for further growth. Such an environment has to be provided not by giving protection but by giving freedom of operations.
In the services sector, particularly banking, insurance, transport and telecommunications, the private sector should now be allowed to enter and compete with the public sector institutions. Individual and corporate investors should be allowed to hold shares of the public sector undertakings up to certain limits. This will make the PSUs work more efficiently. It may also resolve the problem of a resource constraint of the government to a considerable extent.
Privatization, it has to be conceded, is not a goal in itself. In the larger interests of economic development. Privatization is a strategy to achieve profitability, efficiency and productivity. It is a path which, could lead to greater efficiency where the status’s management capacities are severely limited.
