It has been apparent for a while now that Prime Minister Narendra Modi is not a great believer in privatization, except at the margins of the public sector universe. While half-hearted attempts were made to privatize Air India last year—which should hopefully be implemented this fiscal—Modi quite likely believes that a large and efficient state sector is important to his scheme of things.
One does not have to agree with his economic philosophy or orientation to examine whether his policies have succeeded. If you believe that we need a robust public sector presence in sectors like banking, petroleum or telecom, you need to do many things to strengthen it. But has Modi done that?
The answer has to be no. Reason: the public sector has been used to milk it of resources for budgetary, social and political needs, not strengthened. What is called disinvestment, as has been frequently pointed out, is nothing more than the sale of a minority of shares for managing budget deficits.
Over the last three years, for example, the Oil and Natural Gas Corporation (ONGC) was asked to pay cash to buy a majority stake in Hindustan Petroleum Corporation Ltd (HPCL), Power Finance Corporation for Rural Electrification Corporation, and Life Insurance Corporation of India (LIC) for IDBI Bank. A cashless share swap would have been the best way to strengthen synergies within the public sector stable, and the government, too, would have benefited in the medium term from the rising share valuations of the merged entities. Instead, it opted to weaken them financially.
LIC is playing with policyholders’ money and when it is repeatedly asked to bail out failing public sector initial public offerings, you are invariably weakening India’s biggest financial behemoth and insurer to the nation. One shudders to think what will happen if, god forbid, LIC needed a bailout some time in the future as its investments turn rancid. LIC is too big to fail or bail.
Over the last 18 months, as the need to meet disinvestment targets became urgent, such ideas ended up destroying 18-20% of the Nifty Public Sector Enterprise (PSE) index value even while the overall stock market has risen. The ONGC scrip, for example, has tanked more than 20% since it was asked to buy out HPCL in January 2018.
Public sector banks, despite carrying the biggest burden of bad loans on their books, because of mindless United Progressive Alliance-era munificence, were loaded with additional burdens such as extending Jan Dhan accounts to all households or handling the demonetization process. It is well-known that low-balance accounts are not just unprofitable but also carry an annual cost for banks.
In 2018-19, as tax revenues tanked far below the levels indicated in the budget, other public sector players, from Food Corporation of India to Nabard, were asked to borrow to finance their operations when the outlays had actually been budgeted for. To maintain a mythical fiscal deficit target of 3.4%, the final budget numbers indicate that the centre’s costs were effectively shifted to public sector units. Even though they may ultimately be compensated, there is little doubt that both the public sector and the fisc have been weakened with such dodgy fiscal management.
One of the things we misunderstood about Modi when he said that government should not be in business was to jump to the conclusion that he was a committed privatizer. While Modi will certainly privatize some loss-making units, including possibly Air India if the scheme is sufficiently attractive to investors, he clearly does not intend to privatize companies that are core to his welfarist strategies, including banks and petroleum companies.
However, even if one agrees with his goals, one cannot agree with his government’s methods. If you want to maintain a strong public sector in some spheres, the least you can do is capitalize them properly and make sure that they are run efficiently and, where needed, given direct budgetary support to get the job done.
You may want an LIC or State Bank of India to remain in the public sector forever but, in that event, you must ensure that they always have the budgetary support and capital they need for doing your job. You cannot emasculate them and then expect them to bail your budgets out.
The issue is not an ideological one about left and right, socialism and market-orientation. Whatever ideology you believe in, you must be willing to put your money where your mouth (or heart) is. You cannot expect to endlessly extract money from the goose that has so far laid golden eggs and financed your schemes at great cost to themselves.
Modi has done a lot to reduce the pressure of cronyism on banks and other PSEs, but it can be no one’s case that his policies have strengthened the parts of the public sector he wants to retain in the public domain.
Modi may not have started the trend towards eviscerating the public sector, but he hasn’t stopped the process either. Modi 2.0 needs to reverse this slide, assuming he does not now openly adopt privatization as strategy.
R. Jagannathan is editorial director, ‘Swarajya’ magazine