Public Sector Undertakings — A Tragedy Of Errors

Public Sector Undertakings — A Tragedy Of Errors

by Anand Ranganathan and Karan Bhasin - Monday, October 31, 2022 12:20 PM IST
Public Sector Undertakings — A Tragedy Of ErrorsPrime Minister Narendra Modi.
  • Public sector undertakings are a burden on taxpayer money, and most of them are not contributing to economic growth.

“Government has no business to be in business.”

Finer words were never spoken. They were spoken on the eve of the 2014 general elections, by a man who went on to win by a landslide, and became our Prime Minister.

Over the ensuing eight years, his government has only gone on to increase its business in business, and because it has done so, he has managed another landslide, and by all accounts will furnish a third, come 2024.

Meanwhile, his grand declaration lies buried underneath dust and grime much like a public sector file.

Here, we aim to dissect why he failed to keep his promise and yet Indians didn’t seem to mind.

In other words, we aim to discover why is it almost impossible to bring in much needed economic reforms in a country that has been taught to be risk-averse, generation upon government service generation.

Indians want better quality of public healthcare, of education, of infrastructure — but they also want government jobs.

The irony of this is often missed by most taxpayers — more so as some of them want the government to continue to remain in the business of banking.

Be damned that infusion of close to Rs 6 lakh crore worth of capital in the public sector bank has resulted in only a few of the banks having a net market capitalisation greater than the capital infused in recent past.

The tragedy is compounded by the fact that some want public sector banks even as they shout corruption every time a new loan is sanctioned or waived of a business house.

That a waiver is not the same as a write off is a different matter.

The point being made here is that if the banks were not owned by the governments, there would be no issue with such routine business and accounting exercises. Yet, those who yell about malpractices in public sector banks oppose their privatisation.

Evidence across the world has proven time and again, that governments should not be responsible for running any kinds of business. Their focus should be on providing public goods and services such as education, healthcare, and law and order.

Yes, a country can and should aim to be a welfare state but a welfare state can only succeed on the back of a capitalist not socialist state.

Governments may be good at distributing wealth but they are hopeless at generating it.

However, because the Indian state is busy running factories across industries, providing banking services — it is too distracted to do its primary job. Many of these public sector undertakings are not justified on two key economic grounds.

The first is efficiency.

We have seen how companies that were privatised during the Atal Bihari Vajpayee government managed to register a much faster growth post privatisation.

That the private sector is more efficient compared to the public sector is a well-accepted fact.

Therefore, why should there be any justification for having public funds being diverted into these public sector undertakings when they could be used to provide better healthcare facilities to the rural poor?

Telecom is an excellent example of the efficiency of the private sector with three private players and a recently revised public sector entity.

Would India have had the cheapest data charges in the world in the absence of these private players? Definitely not.

In fact, without these players, the penetration of telecom services itself would have been low, which in turn would have impacted India’s IT success.

If people and politicians still need evidence in support of privatisation, then they must closely track the likely revival of Air India under their rightful owner, the Tatas.

But efficiency is just one criterion to support privatisation.

The other is opportunity costs. Take the example of banking. A capital infusion of Rs 6 lakh crore if instead was spent on education or even healthcare, it would have likely added to our overall human capital.

Instead, the money was spent to recapitalise banks after reckless lending in late 2000s — partly due to excessive political influence in day-to-day lending decisions of the bank — aka ‘North Block banking’.

Therefore, not just Rs 6 lakh crore had to be spent on fresh capital infusion but a substantial part of the equity of these banks was destroyed due to lack of proper management of these institutions.

For the of sake comparison, Rs 6 lakh crore is greater than the budgets of Swachh Bharat or the Jal Jeevan Mission. This illustrates how much of taxpayer funds are utilised to pay for these public sector undertakings — some of which exist only to provide a ‘sarkari naukri’ to friends and relatives.

The inefficient use of capital by these firms also means frequent losses and bailouts — which in turn hampers the growth prospects of the Indian economy.

This again results in lower revenue mobilisation through taxation and further acts as a fiscal squeeze.

So, even when these public sector units or PSUs do turn profitable, their deployment of capital is not as good as the private sector, and consequently the government makes less taxes to be able to spend on public welfare.

Despite all these facts being well accepted, central public sector units or CPSUs have deployed a total capital of Rs 20 lakh crore — capital which could have been better deployed by the private sector, including the MSMEs (micro, small and medium enterprises).

It is, therefore, important to seek accountability for the taxpayer funds that have been historically spent on CPSUs.

The problem of inefficient capital deployment is not unique to just CPSUs but the problem is just as pervasive at the state level.

While the Centre controls 389 PSUs out of which 255 are operating, the state governments have a combined total of 1,451 PSUs of which 330 do not even operate.

Kerala has the highest operational PSUs at 121 followed by Karnataka at 94. Uttar Pradesh has the highest number of non-working PSUs at 46. Bihar, on the other hand has 44 non-working PSUs while it has 30 working PSUs.

It is, therefore, natural to question why taxpayer funds which are to be used for public welfare have been used for running hotels, airlines and condom factories.

Needless to say, that the quality of our governance has suffered as the quality of our public health and education continues to lag while on law and order we continue to have little state capacity.

Barring the recent Air India privatisation, even the Union government has moved slowly on the privatisation agenda while rest of the political class ignores the need to fix our fiscal priorities.

After all, as there is no such thing as public money — but there is only taxpayer money.

Perhaps, the real minority in India is the taxpayer but our politicians are not interested in cultivation of this minority as their vote bank. Perhaps, in our country, the only business of a government is to be in business.

The authors thank Mukesh Kumar, JNU, for help in collating the data regarding the number of state and central PSUs from the latest Finance Commission reports.

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