by Vivek Kaul
But, over a period of time, the logic changed and went way beyond what it was originally meant to be. As Dwijendra Tripathi writes in The Oxford History of Indian Business: “As the socialistic rhetoric became shriller, public sector enterprises intruded into the consumer-oriented sectors as well, such as drugs, hotels and goods-processing industries, with the avowed objective of ensuring easier availability of vital articles of mass consumption.”39
A good example of this is Modern Food Industries, which was set up in the mid-1960s to make and sell bread. The company was finally sold by the Atal Bihari Vajpayee government to Hindustan Lever Ltd. (now Hindustan Unilever Ltd.) in January 2000.
Other than the government getting into consumer-oriented industries, it also started taking over sick private companies, in order to ensure that jobs were not lost. These were largely cotton mills.40
Close to where I live in Central Mumbai, there is the National Bicycle Corporation of India. The company was established in 1939 by the Birla Group. A few decades later, the company started to incur losses, and it was taken over by the government in 1974. It was nationalised in 1980.
Furthermore, when the British left India, a few British-owned firms continued to operate in India. But, over the years, they found it difficult to continue to operate, primarily because of the web of regulation that the Indian government had built around private enterprise. These firms were also taken over by the Indian government.
These included some of the biggest firms of the pre-Independence era, such as Andrew Yule and Co., Bird Hilgers and Co., Balmer Lawrie and Co., Jessop and Co., Braithwaite and Co., Richardson Cruddas, Mazagon Docks, Hooghly Docking and Engineering Company, and Smith Stanistreet Pharmaceuticals. As Tripathi writes: “Producing heavy and light engineering goods, transportation equipment and drugs, their continuance was considered vital for the nation-building programmes.”41
These reasons essentially ensured that the government was running all kinds of businesses. As Tripathi writes:42
In the process, the public sector emerged by the mid-1980s as a vast conglomerate of heterogeneous industries—a virtual leviathan dominating almost every major contour of the nation’s business. The wide range of products and activities of the enterprises falling in this sector included manufacturing of steel, mining of coal and minerals, extraction and refining of crude, manufacturing of heavy machinery and machine-building equipment, machine tools and instruments, heavy electronic equipment for thermal and hydel stations, transportation equipment, telecommunication equipment, ships, submarines, fertilizers, drugs and pharmaceuticals.
And there was more. “The consumer items produced by the public sector undertakings included textiles, bread, newsprint, paper, footwear and contraceptives. The public sector also operated in the area of air, sea, river and road transport, large-scale trading and construction services, and the hospitality industry…. The list would be larger if we include the banks, financial institutions, and insurance companies,” writes Tripathi.43
Given the wide array of businesses that the government chose to operate in, it isn’t surprising that it ended up creating a mess by the mid-1980s. The situation has only got worse since then. One possible explanation for this might lie in the fact that, earlier, the smartest lot used to work for the government. If you were to look at the engineers who worked for public sector enterprises throughout the 1970s, 1980s and 1990s, most of them had passed out of Regional Engineering Colleges (RECs) located in different parts of the country.i
After the economy opened up, from 1991 onwards, people started looking at other options, as the number of jobs offered by the private sector in sectors as diverse as banking and telecommunications exploded. The private sector also offered extra incentives to their best performers. The government meanwhile continued following a uniform pay scale.
As Wheelan writes: “This uniform pay scale creates a set of incentives the economists refer to as adverse selection.”44 What does the term mean in this context? The most talented professionals who had earlier worked for the government now had the option of working for the private sector, where their pay was closely linked to their productivity, unlike with the government.
On the flip side, as Wheelan puts it, “for the least talented, the incentives are just the opposite”.45 They know that working for the government would mean a fixed salary and regular increments over the years, which would not ‘really’ depend on their performance. Hence, those who have ended up working for the government over the last couple of decades were definitely not the best of the lot.
But this is more of a short-term reason. Over the longer term, other factors were at work as well. After Indira Gandhi became Prime Minister in 1966, the socialistic instincts of the government increased dramatically. In 1969, fourteen banks were nationalised. After 1969, 131 public sector enterprises were set up. The trouble was that the bureaucrats who ran the government had no experience in running businesses. The bureaucratic system which India had inherited from the British and with which it more or less continued was not trained to manage profit-making businesses.46 It still isn’t.
This reason is of immense importance, given that even though the public sector enterprises were run by trained and capable individuals in many cases, the real decision making was carried out by the bureaucrats (read as IAS officers), who had absolutely no experience in running businesses. This is something that continues to hold good even today. Having said that, there are honourable exceptions, like Jagdish Khattar, who did a fantastic job of running Maruti Suzuki Ltd.
Furthermore, as the government got into the consumer-oriented sectors, it found out that it could not compete with the much nimbler private sector companies already operating in these sectors. Take the case of Scooters India Ltd., a company set up in the early seventies, which could never really take on Bajaj Auto. The company, based out of Lucknow in Uttar Pradesh, is still around, and made a profit of a little over Rs. 11 crore in 2014-2015.
The point being made is that the government couldn’t really compete in the consumer-oriented sectors. This became even more obvious after the economy was opened up in 1991 and the private sector was allowed into many sectors it wasn’t previously allowed into. As TN Ninan writes in The Turn of the Tortoise: “The last quarter century’s experience has shown that when the private sector is asked to provide telecom services, run airlines and airports, build and run ports, undertake banking, distribute electricity and even undertake water supply, the result is usually (though not always, for there is no shortage of private banks and airlines that have failed) a substantial improvement on what the government was doing until then.”47
The fact that the government has been ready to bail out the loss-incurring public sector enterprises and that the best people don’t work for it anymore has led to a situation wherein the losses have just kept piling up. In fact, in sectors where the private sector has been allowed entry, it has flourished, and the government companies have had to take a back seat.
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As mentioned earlier, the Nehru-Mahalanobis model of growth did not have much role for private enterprise in it. It assumed that the government-led public sector enterprises would get around to producing everything, which they did. The government produced everything, from colas (the infamous Double Seven, after Coca Cola was forced out of India in 1977) to condoms (the Moods brand manufactured by HLL Lifecare, formerly known as Hindustan Latex). The only problem was that it did not go about doing so efficiently.
As Sanyal writes: “The whole approach was based on a mechanical view of the world that simply assumed away the role of private enterprise. There was no place… for the messy, organic process of risk-taking and innovation that drives economic progress.”48
This can be very well made out from the fact that, for many years, Indians had access to only two models of cars—the Ambassador and the Premier Padmini (better known as the Fiat). Even the engine of the Ambassador remained unchanged for a few decades. This lack of choice comes out
very clearly in the 1977 song Ek Akela is Shehar Main, from the movie Gharaonda, shot beautifully in what was then Bombay.
Some 3 minutes and 26 seconds into the song, there is a shot of Marine Drive. The road is full of Premier Padminis and Ambassadors. If you look carefully enough, there is actually a white Mercedes somewhere.
This image captures the lack of progress on the technological front very beautifully. As Sanyal writes: “Technology was seen as an external input that could be mandated by the mandarins of the Planning Commission rather than as a process of generation and diffusion of new ideas. Unfortunately, Mahalanobis did not appreciate the fact that all economies are evolving eco-systems that have less in common with Newtonian mechanics and more with ecological biology—mutations, symbiotic interlinkages… and the survival of the fittest.”
The Nehru-Mahalanobis model clearly did not work, and for many years the Indian economic growth was very slow. In fact, the economist Raj Krishna, who taught at the Delhi School of Economics, termed this slow growth as the ‘Hindu Rate of Growth’.
The current Vice-Chairman of NITI Aayog, Arvind Panagariya, feels that the term had its origin in an essay which was published in the February 1973 edition of the Economic & Political Weekly.49 This essay was titled ‘Some Philosophic Aspects of the Approach’ and was authored by Najinyanupi (possibly a pseudonym).
As the author writes:50
At one time, it was believed that the Hindu view of life had an answer to the problems of Western society and that, therefore, we could in this country achieve a synthesis of Western economic development and this view of life. What is not realised in this appreciation of the situation is that we have enough evidence to show that with high rates of growth, the Hindu view of life breaks down in the Indian situation itself. Thus, those areas of our country or those sections of our population whose own condition has improved at a faster than 3-4 per cent rate of growth have not been protected by the Hindu outlook from the evils and temptations of the Western way of life. The older among them have already yielded to wife swapping and the younger to delinquency and drugs.
At the other extreme, we have the evidence of the effect of the Hindu view of life on those among the West who have embraced it of late. They are the dropouts in Western society who do not have any more faith in economic development and who have voluntarily brought down their own rate of growth to the permissible range. In fact, it is because the West is in a position where it has seriously to consider a zero rate of growth that the Hindu way of life is attractive to them. To the extent we ourselves achieve a faster rate we will find this outlook getting seriously distorted. The rate of growth chosen, therefore, is the one that ideally fits in with the preservation of our traditions.
The so-called Hindu Rate of Growth averaged at around 3.5 per cent between 1950 and 1980. This was the time when countries in South-East Asia and countries like South Korea were making giant economic strides. As Tharoor writes: “Countries in South-East Asia were growing at 8 to 15 per cent, or even more. Exports of manufactured goods grew at an annual rate of 0.1 per cent until 1985; India’s share of world trade fell by four-fifths. Per capita income, with a burgeoning population and a modest increase in GDP, anchored India firmly to the bottom third of the world rankings. The public sector, however, grew in size, though not in production, to become the largest in the world outside the Communist bloc.”
It needs to be pointed out here that the Nehru-Mahalanobis model wasn’t the only economic growth model that was put forward at that point of time. There was another model which was proposed but largely ignored. This idea was influenced by Henry Ford, owner of the Ford Motor Company in the United States. In January 1914, Ford doubled the salary of his workers, so that they could buy the cars they were producing.
As Eduardo Porter writes in The Price of Everything: “Facing low worker morale and high turnover on the production line in January 1914, Henry Ford raised wages to five dollars a day, doubling at a stroke most workers’ pay…. It worked…. After the pay hike, Ford was churning out 15 per cent more cars per day with 14 per cent fewer workers.”51
The logic came from Say’s Law. This law was put forward by Jean-Baptiste Say, a French businessman who lived between 1767 and 1832. As John Kenneth Galbraith writes in A History of Economics—The Past as the Present:52
Say’s law held that out of the production of goods came an effective aggregate of demand sufficient to purchase the total supply of goods. Put in somewhat more modern terms, from the price of every product sold comes a return in wages, interest, profit or rent sufficient to buy that product. Somebody, somewhere, gets it all. And once it is gotten, there is spending up to the value of what is produced.
Say’s Law essentially states that the production of goods ensures that the workers and suppliers of these goods are paid enough for them to be able to buy all the other goods that are being produced. A pithier version of this law is “Supply creates its own demand”.
The economists CN Vakil and PR Brahmanand based their vision of the Indian economy around this. Their basic point was that India lacked capital to set up big businesses, but what it had was plenty of people. And it is these people who needed to be encouraged to get into business.
These economists essentially suggested that the people needed to be encouraged to produce wage goods, or simple consumer products, like clothes, toys, shoes, radios, bicycles, etc. As Das writes: “The low-capital, low-risk businesses would attract loads of entrepreneurs, for they would yield quick output and rapid returns on investments. Labour would produce the goods it would eventually consume with the wages it earned in producing the goods…. The idea was similar, in a sense, to that of Henry Ford, who paid his workers generously so that they could afford to buy his cheap, mass-produced cars.”53
This theory was nowhere as grand as the Nehru-Mahalanobis vision for India, and it was soon confined to the dustbins of history. What Vakil and Brahmanand proposed would have pushed investments into agriculture, agro-industry, rural infrastructure and simple consumer goods. But this would have meant no creation of the ‘new temples of modern India’.
This basic understanding of things somehow eluded Nehru and Mahalanobis, and India got what it did. While India did need public sector enterprises to carry out capital-heavy and long-gestation-period businesses, private enterprise also needed to be encouraged. With the benefit of hindsight, it can safely be said that the story that would have emerged would have been completely different. Big Government wouldn’t have been the order of the day.
i The RECs are now known as the National Institutes of Technology.
2.WE HAVE SPREAD THEM TOO WIDE AND TOO THIN
State ownership! It leads only to absurd and monstrous conclusions; state ownership means state monopoly… and that state brings only ruin and bankruptcy to all.
– BENITO MUSSOLINI
One of the first things I learnt in journalism was to think of a headline first. The idea was very simple. Given the lack of space in a newspaper, if you thought of a headline before writing, then the entire article could be written in a way which justified the headline. This would make for a smoother read than something which was all over the place.
Nevertheless, this is a technique often used even in longer forms of writing (from essays to features to books) to justify the writer’s point of view, or perhaps a bias at times. To put it bluntly, it does not take into account any point of view other than the writer’s. If there is any evidence contrary to what the writer is trying to say, it is simply ignored and left out. Nothing should come in the way of a coherent argument.
In the previous chapter, I talked about how the top ten loss-incurring public sector enterprises were responsible for 85 per cent of the total losses that the loss-incurring government companies incurred in 2014-2015. I also pointed out that 77 out of the 234 public sector enterprises incurred losses in that same year. But I did not say anything about those public sector enterprises which are actually very profitable.
&nbs
p; Take a look at Table 2.1. It shows the top 10 profit-making public sector enterprises run by the central government in 2014-2015.
Table 2.1: The top ten profit-making CPSEs during 2014-2015.
Source: Public Sector Enterprises Survey, 2014-2015.
The top 10 profit-making public sector enterprises made Rs. 78,045 crore as profits. This was close to 60 per cent of the profit made by the profit-making public sector enterprises. This was significantly more than the losses made by the top 10 loss-incurring public sector enterprises, which had stood at Rs. 23,380 crore.
How do things look if we compare the total profits with the total losses? The total profit made by the profit-making public sector enterprises in 2014-2015 stood at Rs. 1,30,363 crore. The total losses made the loss-incurring public sector enterprises stood at Rs. 27,360 crore. Hence, the total profit of the CPSEs stood at Rs. 1,03,003 crore.
Hence, on the whole, things seem to be good. If we were to look at the government as a venture capitalist or a private equity firm, then everything seems to be fine. It has laid a given number of bets, of which some seem to be working and some don’t. So why complain? Well, first and foremost, the government is not a private equity firm or a venture capitalist. Secondly, it is important to look at the profit that the public sector enterprises make in the context of the total amount of money (i.e., capital) that the government has had to invest to make this profit. Thirdly, every extra public sector enterprise that the government chooses to manage takes away attention from other important things that need more government attention than managing a public sector enterprise.
