Home / Opinion / Online-views /  PSUs: Return to commanding heights

Last week in an interview given to Wall Street Journal on the eve of the second anniversary of the National Democratic Alliance (NDA), Prime Minister Narendra Modi said, “In any developing country in the world, both the public sector and the private sector have a very important role to play. You can’t suddenly get rid of the public sector, nor should you."

The PM’s response to a pointed nudge on the need for faster privatization of public sector undertakings (PSUs) is revealing. It formalizes a shift in thinking within the government—a return to the commanding heights for the public sector. Yes, those batting for big ticket reforms will baulk, but it is a fact that this NDA (unlike the one led by Atal Bihari Vajpayee) no longer subscribes to the theory of disbanding the public sector.

There have been enough signals from various members of the Union cabinet over the last two years to suggest that a recalibration is underway.

With the public sector back in the limelight once again, the wheel seems to have turned full circle.

In some ways this is ironic. It comes in the midst of allegations of a purge of Nehruvian contributions to the economic and political history of modern India by the NDA. Actually, it was India’s first Prime Minister Jawaharlal Nehru, inspired by the then Soviet Union-pioneered model of state sponsored growth, who mooted the idea of placing the government—and within it the state-owned and state-run PSUs—as the commanding heights of the Indian economy.

It was documented in the Industrial Policy Resolution of 1956 and found articulation in the benchmark Second Five Year Plan. Till the beginning of the 1980s, the PSUs continued to be the commanding heights even though the economy chugged along at what Professor Raj Krishna disparagingly referred to as the “Hindu rate of growth".

However, beginning with Indira Gandhi’s last stint in power, the government commenced a rethink. This process accelerated under Rajiv Gandhi, after he took over as PM following the assassination of Indira Gandhi.

In 1987, he spun off the two telecom circles, Delhi and Mumbai, and created Mahanagar Telephone Nigam Ltd. The idea was that it would be a kind of PSU bereft of bureaucratic control and hence better placed to exploit the emerging potential in telecoms (another story it never went according to plan).

At the same time, budgetary support from the Union government began to be scaled back. In a clever trick, the government freed PSUs to borrow from the markets (this was defined as IEBR or internal and extra-budgetary resources), thereby reducing budgetary support without really cutting back on the size of funding.

In his aborted budget of 1990, finance minister Yashwant Sinha proposed the next step—divestment of government stakes in PSUs. This idea was, of course, productionized by the next government formed by the Congress under the leadership of P.V. Narasimha Rao and with Manmohan Singh as the finance minister. Full blown privatization was a still a political no-no; but eventually over time resistance was worn down.

More recently, governments have struggled to find takers for PSU stock and finance ministers have been reluctant to offload at prices below potential.

You can’t really blame them. The great hope, from the mid-1980s, was that the private sector would step up to the plate, once the shackles on the economy were loosened. They did, but performed way below par.

Given their inherent aversion to risk—after having cut their teeth in an insular economy and dependent on political handouts—the private sector took to investments only in secure segments promising quick returns. As competition increased, especially from foreign companies, their appetite for risk further diminished. The 2008 global economic crisis and the coming apart of the crony capitalism model dealt a body blow to private sector enthusiasm.

The NDA was quick to figure that the economy they inherited—it’s not just that it had holes, but it was also becoming vulnerable to waves of disruption like the share economy—was not one conducive to reviving private investment. Their response was to push government initiatives, especially in infrastructure, into top gear.

At the same time, in the banking sector, it has moved in tandem with the Reserve Bank of India to strengthen governance by extending greater autonomy to state-owned banks; and more recently it has signalled a consolidation under the State Bank of India. Indeed cementing the space of PSU banks, but combined with a corporate makeover to reduce bureaucratic/political intervention.

A similar thrust of public investment had launched the take off of the Indian economy in the first decade of the Millennium. But missing from this equation is global growth—the Indian economy had hung onto its coat tails to power itself to an unprecedented phase of economic growth, almost touching double digits. By all accounts, it looks like the move has injected some life into the economy, though too soon to provide a clear prognosis.

Regardless, the point is that going forward the Indian public sector, redefined and recast considerably, will be a key part of the business lexicon of India for some time to come.

Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics. His Twitter handle is @capitalcalculus.

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