At the time of independence, India was very backward with little infrastructure, whether physical or social. There was lack of education, health facilities, inadequate infrastructure and so on. This prevented the rapid development needed to overcome the backwardness of the people.
The private sector neither had the capital nor the technology to do this. This burden fell on the public sector in a mixed economy model where it would develop the infrastructure of the economy to aid the growth of the private sector. Further, the public sector was given multiple goals — development of backward areas, to be an ideal employer, development of technology, provision of cheap infrastructure and so on. Thus, profitability was not the most important criterion.
In a mixed economy model, this creates enormous problems for the public sector’s functioning. Its goal is not maximisation of profits which is the sole criterion the private sector. When this becomes the standard of comparison between the two, PSUs are found wanting. Further, in a system which is highly corrupt, they are manipulated by both politicians and private capital, leading to large scale inefficiency.
The presence of a PSU in a sector acts as a check on the monopoly power of the private sector. Thus, since 1991, with the launch of the New Economic Policies (NEP), one of the goals has been disinvestment in PSUs and to pass on ownership to private players.
However, three questions arise. First, in a poor country, who will play the role that was assigned to the PSUs? Second, how does disinvestment help in achieving the goals they were to fulfill? How can disinvestment be done in a rational manner in a terribly corrupt system? These questions remain unanswered and the muddled policies that have been pursued have led to aggravation of inequality and persistence of poverty in a changed form. The result is rising social and political strife, and increasing instability.
PSUs’ problems have been structural since accountability has been to political and bureaucratic bosses and not the public. This has led to corruption and manipulation. Their surpluses leaked out to the private sector which has grown rapidly. So, disinvestment changes the parties who share the surplus.
To run the public sector a different kind of milieu is needed, which is not possible in a mixed economy which is also highly corrupt. Disinvestment does not change the milieu. Only privatisation does, that with strategic control going to private capital. However, that changes their goal from social responsibility to profit maximisation.
The government also loses a tool of policy since PSUs were used in an anti-cyclical way when the economic climate became adverse. Further, disinvestment has been used to curtail the fiscal deficit but it also means that capital expenditure in the budget declines by that much, and so does overall investment. Unless investment rises elsewhere, this affects long term growth.In brief, it is essential to understand the multiple roles PSUs have played in a very poor country and how that would continue with disinvestment.
(The writer has authored the Alternative Budgets for 1993-94 and 1994-95, which proposed alternative economic policies for India. Views expressed are personal.)
Arun kumar
Malcolm Adiseshiah Chair Professor, Institute of Social Sciences