The Hindu Business Line : Common Minimum Programme — Will politics let economics win?

The Common Minimum Programme's approach to public sector disinvestment and labour reforms is worrying. It is not clear whether the proceeds from sale of shares of PSUs will be used to create public assets which would benefit the people on a continuing basis. And for all the talk about the need for a free hire-and-fire policy to attract fresh investment and create jobs, the hardship imposed on laid-off workers cannot be dismissed.

AMONG the several measures outlined in the Common Minimum Programme (CMP) of the United Progressive Alliance (UPA), two major economic issues stand out in sharp focus — PSU divestment and labour reforms.

The most high-profile one is the disinvestment of PSUs. The Disinvestment Ministry has been abolished, as demanded vociferously by the Left. Now it is a Department under the Finance Ministry. More important, the CMP has made it clear that "strategic" and/or profit-making PSUs such as ONGC, GAIL, SAIL, NTPC, IOC, HPCL and BPCL will remain in the public sector.

So, the wholesale privatisation of these units is ruled out. The same applies to public sector banks. However, these units will be allowed to raise additional resources from the market through divestment of shares, if needed for modernisation or expansion. Presumably, it leaves the door open for sale of shares to strategic partners as well as general public, with majority ownership remaining with the government.

What is the logic behind selling shares of profit-making PSUs to the public? One possible justification is that the government will get a better price now, before more private (domestic and foreign) players come in and reduce the profit margins of the PSUs. Thus the government (and the nation) would be better off selling now than in the future. But, then, the question is: if that, in fact, is the case, the market also knows it and the market price, even today, would already reflect that.

The Government has basically two options. If a PSU is making profits under competitive conditions, the question before the Government is whether it would like to earn dividends each year indefinitely or earn a bigger, one-time sum — the present value of the future stream of profits.

Take an analogy. Suppose, you have a Reliance share whose face value is Rs 10 and you expect a 100 per cent dividend (that is Rs 10) every year. In that case, you have to decide whether you would like to have a dividend of Rs 10 each year or sell the share at the current market price of, say, Rs 300.

In a sense, it is safer to earn a steady sum each year than to get a larger, one-off amount if the chances of misusing the funds (for instance, if the shareholder is an alcoholic) are high.

So, unless one can assure that the proceeds from selling off the shares of profitable PSUs would be used to create public assets which would generate benefits to the people on a continuing basis, the sale of PSU shares just to show a lower fiscal deficit needs to be discouraged.

The CMP has emphasised the need for using such proceeds for social development. But who would undertake to enforce that discipline on the government? Then, there is the problem of fungibility of finance. Even if the sales proceeds are earmarked for social purposes, that may release budgetary funds that would otherwise have been spent for the same purpose.

The freed money can then be used for questionable government expenditure, such as paying bonuses to government employees or paying subsidies for free electricity to farmers. If the basic objective behind PSU disinvestment is to improve efficiency, the primary emphasis should be on introducing more competition. An example is the much improved performance and service by Indian Airlines after the entry of Jet Airways and Sahara.

And, next, the selling off of loss-making PSUs? The new coalition would first like these units to be turned around, preferably by bringing in a private partner. If that fails, only then would these be closed down and their assets sold off under the joint supervision of the government, management and labour. Sounds nice in theory. But there are practical problems.

A private partner would be willing to buy a loss-making unit, provided he gets a free hand in reorganising the business, including getting rid of surplus manpower. But if that is not possible, the rejuvenation process would not work. There is the further danger in delaying the process of selling off the unit.

Closing down a factory without selling its assets quickly may mean that machines would be scrap by the time those are actually sold. If the process of winding up the loss-making business and selling off its assets — including machinery and real estate — can be completed without delay, the workers can be compensated quickly with the higher sales proceeds.

Labour reforms, job guarantees

The second important issue is concerned with employment generation and labour reforms. The CMP has promised to guarantee 100 days of work to one member of each household. However laudable it may seem, any rough estimate would indicate the enormous fiscal burden involved.

One estimate goes like this. India has 190 million households. The average minimum wage across the States is around Rs 60 per day. If employment has to be provided to one worker from each household for 100 days in a year at the average minimum wage, it would mean a wage bill of Rs 1,14,000 crore per annum for all households.

Then the objective is to create durable assets by using these workers. If it is assumed that wage costs and material costs are half and half of total project costs, then material costs would be another Rs 1,14,000 crore. So, the total budgetary cost would be a staggering Rs 2,28,000 crore. This amounts to 9 per cent of India's GDP. Where is this money going to come from?

On top of this, free electricity to farmers being promised in State after State. The budgetary allocation to education has been raised to 6 per cent of GDP.

The Left partners are in favour of continuing with the oil subsidies and are even arguing for general (non-targeted) food subsidy. Can the governments at different levels raise their tax-to-GDP ratio to match these expenses?

The final "solution" may just be selling of profitable PSUs under some pretext to finance the burgeoning expenditure, especially when the target is to have a zero revenue deficit by 2009.

Regarding labour reforms or flexibility in hire and fire, the CMP emphasises the need for more discussions with industry and labour. All these may simply mean that not much headway is to be expected in this area. This is understandable in a country which has no social safety nets.

However much one may talk about the need for free hire-and-fire policy in the interest of attracting fresh investment and more overall employment generation, the hardship on laid-off workers cannot be dismissed, on both humanitarian and political grounds.

Some flexibility may, however, continue to come in the form of more contracting out of jobs, such as the contracting of catering or computer maintenance jobs in railways to outside agencies. Contract of such agencies may not be renewed if they fail to deliver. This indirectly promotes efficiency and flexibility in hiring and firing.

Some suggest that the current "jobless growth" is largely due to "growthless jobs" policy pursued in the past. The firms which have lost most are the old firms which had to continue with surplus workers.

Economic reforms have brought in more competition from cheaper imports. New firms, even in the same industry, are free to start out with lower labour intensity in production and are able to produce at lower cost.

So, the adverse impact of the absence of labour reforms falls primarily on old firms in old industries. It is mainly these firms which have become chronically unprofitable. These "sick" units were taken over by many State governments in the past which has proved to be a big drag on state finances.

Even in Left-ruled West Bengal, such units are closing down every month and many workers are losing jobs and livelihoods.

Had restructuring been undertaken earlier by cutting down surplus workers, at least the jobs of the remaining workers could have been saved. Sadly, politics wins over economics here. Can it be vastly different with the Left-backed UPA at the Centre?

(The author is Professor of Economics, Indian Institute of Management Calcutta. His e-mail: alokr@iimcal.ac.in)