Opinion

The Business of Doing Business

The government should not be running businesses. And yet, from Nehru to Modi, the number of Public Sector Enterprises has steadily risen.

It was no accident that upon independence, India chose the central planning model of government-led-industrialisation as the path to development. The leadership of the Congress party, top industrialists and the British government that was on its way out all agreed on one thing: the government needed to play a proactive role in the economy, and state-led industrialisation was the way to go. Lord Meghnad Desai, describing the period, writes, “The philosophy of State activism was the zeitgeist.

The Great Depression of the late 1920s and 1930s in the United States was still fresh in the minds of people, and was seen as the fault of free markets. The USSR, on the other hand, had showcased that an underdeveloped economy can transform itself in a short span of time with an active role of the state. Moreover, most of the countries that became independent around the World War II period chose a similar path.

In pursuit of state-led industrialisation, the government started taking an active part in the economy. As part of the process, many new enterprises were set up, while others were nationalised.

On the eve of the first five-year plan in 1950-51, there were only five Central Public Sector Enterprises (CPSEs). They dealt with Railways, Posts & Telegraphs, Port Trusts, Ordinance (arms and ammunition) and Aircrafts Manufacturing.

We have come a long way in about 70 years since then. According to the latest data available with the Department of Public Enterprises, as of March 31, 2018, there were a total of 339 CPSEs.

Figure: Increasing number of CPSEs over the years

Year No. of CPSEs Year No. of CPSEs
1950-51 5 2001-02 231
1955-56 21 2002-03 226
1960-61 48 2003-04 230
1965-66 74 2004-05 237
1968-69 85 2005-06 239
1973-74 122 2006-07 247
1976-77 155 2007-08 242
1980-81 185 2008-09 246
1984-84 221 2009-10 249
1986-87 226 2010-11 248
1987-88 231 2011-12 260
1995-96 239 2012-13 277
1996-97 238 2013-14 290
1997-98 236 2014-15 298
1998-99 235 2015-16 320
1999-00 232 2016-17 331
2000-01 234 2017-18 339

Source: Public Enterprise Surveys, Ministry of Heavy Industries and Public Enterprises, Government of India

As can be seen from the figure above, except for a few years in the late 1990s, there was never a period when the number of CPSEs stopped increasing. So how did we fare with the government running businesses?

Take the example of State Trading Corporation (STC), a CPSE founded in 1956, with objectives to reduce ‘private trade’, ‘canalise’ imports, assist small firms with exports, and interfere in domestic trade where there was a suspicion of ‘excessive profits’ being made. Economic historian Tirthankar Roy wrote about it thus in his latest book: “Although the expectation was that state trading would mitigate shortages, the reality was that it worsened shortages through inexperience and bureaucratic interference. For example, the Corporation was involved in the marketing of cement and baby food. These were articles in which acute and persistent shortages developed in the 1970s.”

Things under centralised planning would have been more difficult if the government had succeeded in implementing all their plans. Roy continues: “[P]oliticians in the Parliament frequently demanded to expand the Corporation’s reach and eliminate more areas from private trade. That this did not happen was probably a testimony to the Corporation’s incompetence than political wisdom.”

It is well known that in the run up to the 2014 Lok Sabha elections, BJP Prime Ministerial candidate Narendra Modi during his election speeches made the case for ‘minimum government, maximum governance’, and proclaimed that the ‘government has no business to do business.’ Candidate Modi may have been successful in establishing his classical liberal credentials with many, but PM Modi has certainly failed when it has come to living up to his words. There has been a secular increase in the number of CPSEs from the time he became Prime Minister.

There is no need for the government to be running so many businesses today. The evidence is quite clear on this – in all the sectors where the government has let private players come in, even without a level playing field, consumers have gotten access to cheaper and better-quality goods and services. And in all areas where the government has continued to play a dominant role, shortages, inefficiencies and corruption have prevailed.

It may seem that the philosophy of State activism in the economy is not the zeitgeist anymore, but at the same time it doesn’t look like we are in for a course correction anytime soon.

Why is it that the government finds it so difficult to get out of the business of business, no matter what they say in their public pronouncements? Will there ever be an end to this?

Actually, they have a foolproof system in place. When a CPSE is making losses, they say it is not a good time for sale because it won’t fetch a decent price. And when the CPSE starts to make profits, they say now that the CPSE is making profits there is no need to exit.

Indian taxpayers are just going to have to get used to it.

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About the author

Reshu Natani

Reshu Natani is currently an Associate Research Fellow
at Nayi Disha, a platform for liberal political ideas. She is also a
former social entrepreneur who studied economics and public policy at
Meghnad Desai Academy of Economics. She occasionally uses Keynes’s
aphorism about being dead in the long run to justify her nihilistic
hedonism.

About the author

Kumar Anand

Kumar Anand leads the research team at Nayi Disha in Mumbai. His research interests are in Indian economic history, history of economic thought and public choice economics.