In the pre-Independence period, India’s biggest, most successful and path breaking manufacturing capacities were almost exclusively in the private sector. Private entrepreneurs of Ahmedabad, Mumbai (then Bombay) Jamshedpur and Kolkata (then Calcutta) successfully took on the British industry. This was despite the overt and brazen tariff and other forms of protection afforded by the colonial government to the industry from the ‘mother country’. This spawned the well-known nationalist literature on Lancashire versus Bombay that argued that Britain had systematically and in a sustained manner worked to curb the growth of the private manufacturing capacity in India. In pre-Independence India, railways, steamships, civil aviation, electric generation and supply, insurance and banks were all owned, run and reasonably well managed by the private sector.
One would have imagined that after Independence, this globally competitive Indian private sector would be given a boost by the Government of independent India. However, the Industrial Policy Resolution of April 1948, introduced less than a year after Independence and prior to the adoption of the Constitution, divided industry into four different categories. Capacities in two of these categories, were slated to become State monopolies. IPR 1948 gave the Government the right to create public sector enterprises (PSEs) in the other two groups as well. No economic rationale was provided for this leftward lurch. It was sheer ideology that drove this decision for the Government to control the ‘commanding heights of the economy’. This was subsequently converted into law in 1951 and the reinforced by the second Industrial Policy Resolution in 1956.
One of the arguments in support of expanding ‘public sector manufacturing’ capacities in the fifties and sixties was that private entrepreneurs did not have the technological capabilities or the financial heft to undertake large scale manufacturing. This argument was perhaps wrong then and is completely untenable now. I don’t think it can be plausibly argued that public sector enterprises have been at the forefront of bringing cutting edge technology to India. On the other hand, there are several examples where the presence of public sector monopolies has stunted technology growth and prevented the import of frontline technologies by the private firms. In financial terms, it is the public sector, squeezed as it is by the government’s overall fiscal constraint, worsened by the losses generated by PSEs, that is either perpetually short of required investible resources or shy of investing them for various inexplicable reasons.
The argument about public sector serving the country’s strategic interests has also not been borne out in actual experience. Defence manufacturing, which had been a public sector monopoly for decades, could not reduce our import dependence for strategic equipment. As long ago as 1988, when I was working in the Bureau of Industrial Costs and Prices, we conducted a study that showed that the cost of manufacturing Shaktiman trucks in public sector factories was 150-200 per cent higher than in private companies. The present government should, therefore, be complimented for opening up defence production to private enterprise. It is time also to privatise the ordnance factories for achieving atmanirbharta and global competitiveness. National interest will be better served and certainly not compromised if such a reform was implemented.
Unhealthy nexus
There is a much more fundamental and structural reason for which the tenets of the 1948 and 1956 industrial policy resolutions have to be re-written. PSEs, which constitute the backbone of ‘State Capitalism’, often lead to the formation of an unhealthy nexus that seeks to serve private interests rather than pursue efficiency and profitability. This is visible at all levels of government and across all sectors of the economy in which PSEs are active. The continuous and on-going resistance to disinvestment and privatisation despite clear directions from the top political leadership, is testimony to the existence of such a nexus.
False dichotomy
Members of the nexus working in support of the PSEs try and project private entrepreneurs as working solely for profit maximisation and not necessarily serving the national interests. PSEs, on the other hand, are assumed by default, as serving the national interest. This false dichotomy has two negative outcomes. One, it generates significant mistrust between the government and private sector. This prevents the Government and private entrepreneurs working together as coalition partners in the pursuit of national interest. Without such cooperation and collaboration between the government and private sector, it will remain virtually impossible to expand India’s share in global manufacturing.
Two, managing PSEs and monitoring their performance diverts the attention of senior officials and even political leadership from the principal mandate of the government which must be to provide globally comparable infrastructure and eco-system for private enterprise to flourish and expand their share in global markets. Government attention should be largely, if not entirely, focused on policy formulation and addressing market failures where and when they occur. Line ministries, in charge of PSEs, end up devoting excessive time and resources to the running of the PSEs rather than their principal mandate of putting in place a conducive policy environment for the growth of private investment and entrepreneurship, which are surely the principal drivers of investment and economic growth.
Therefore, after 75 years of the existence of ‘State Capitalism’ it is high time to thoroughly review the basic tenets of our industrial policy and jettison the model of Government-owned and managed capacities in the manufacturing and in large parts of the services sector except for the provision of basic health and education services.
In some strategically critical sectors, actual manufacturing would be undertaken in the private sector but under close government regulation and monitoring. This is already becoming the norm. Nuclear submarines, aircraft, heavy capital equipment, specialised steel etc. are all being manufactured in the private sector under overall government supervision. This will bring the same level of efficiency, productivity and technological progress in these sectors as has been achieved by India’s private entrepreneurs across various sectors in India and in other countries as well.
For all these reasons, we have to make a paradigm shift. Performance of line ministries should be evaluated on the basis of their policy response for facilitating the growth of private enterprise. Each line ministry would have to justify the continued presence of PSEs in the specific sector. This will finally reverse the socialist legacy enshrined in the industrial policy resolutions of 1948 and 1956. That legacy is surely well past its expiry date.
(Author is former Vice-Chairman of NITI Aayog and Chairman of Pahle India Foundation).