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Prime Minister Narendra Modi. Photo: Reuters
Prime Minister Narendra Modi. Photo: Reuters

PSUs: Modi should do a Thatcher

There is no economic case for spending on public sector units, even if they generate profits

When Narendra Modi assumed power in May, many in the Indian right believed India’s Margaret Thatcher moment had finally arrived. It was keenly expected that Modi would take on labour unions, stalling reform of Nehru-era public sector units (PSUs), much like how the former British Prime Minister broke the back of unions that had brought British industry to its knees.

Yet today, the absence of big-bang reforms has brought gloom to some of Modi’s fans. For one, Modi has been reluctant to battle unions stalling the privatization of monopoly Coal India Ltd. The government instead chose a meek partial dilution of its stake in the company to meet its immediate fiscal deficit target while retaining majority control.

Following this trend, reports last week indicated that the government was working on reviving loss-making PSUs by infusing capital. The move is supposedly spurred by the success of state PSUs in Gujarat that saw a dramatic turnaround in fortunes during Modi’s tenure as chief minister.

The Modi government’s approach to PSUs is in stark contrast to the privatization of state assets in Britain under Thatcher’s rule, something aimed at fostering economic efficiency by reducing the role of the state in the economy rather than simply adding revenue to the exchequer. Modi’s PSU policy, till date, makes him look closer to the previous Manmohan Singh government than the National Democratic Alliance’s relatively more reform-oriented stint under Atal Bihari Vajpayee.

Britain’s nationalized sectors in the late 1970s when Margaret Thatcher took over power, after years of Labour rule, included steel, telecom, water, power, aerospace, shipbuilding etc. that constituted almost 10% of the economy’s GDP. A major portion of Britain’s nationalized industries were sold in the decade the Iron Lady was in charge, and it was outright privatization rather than partial denationalization that was the hallmark of her disinvestment policy.

The country witnessed privatization of giants like British Airways Plc, Rolls-Royce Holding Plc, BP Plc, Cable and Wireless Plc, British Telecommunications Plc, etc., along with weakening of the powers of labour union heads. The result was a re-invigorated economy once marked by ever-widening state intervention and labour strikes that crippled production lines.

Despite the benefits of privatization, the belief that profitable PSUs add value to the economy seems to be held in many quarters even today. But like other beliefs, this does not stand rational scrutiny.

A PSU protected by favourable government controls, coming at the expense of its competition, cannot be congratulated for adding value. After all, any policy can only be gauged by the benefits it delivers to consumers. Many sluggish Indian PSUs, ranging from telecom companies like Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) to airline company Air India, have lost market share over the years for good reason.

Yet, somehow, profitable PSUs that do not strain the state exchequer are considered tolerable. It is, however, ignored that state control of credit is a much larger burden on the economy as it takes the role of capital allocation from the private capital market to the hands of bureaucrats with limited knowledge. State-owned PSUs may generate profits worth billions, but they add value only within limited bounds. For, the knowledge possessed by PSUs over credit allocation is minuscule compared with what is dispersed across millions of entrepreneurs in private capital markets.

As Friedrich Hayek noted in his famous essay The Use of Knowledge in Society: “The economic problem of society is not merely a problem of how to allocate ‘given’ resources—if ‘given’ is taken to mean given to a single mind which deliberately solves the problem set by these ‘data’ […] It is a problem of the utilization of knowledge which is not given to anyone in its entirety."

To understand the size of the problem, consider innovations under capitalism. These come from the application of credit to new lines of production, the entrepreneurial knowledge about which is dispersed among innovators present across the economy rather than on PSU boards. Thus, as the state increasingly takes over the role of credit allocator, it comes at the expense of such dispersed knowledge.

Perhaps Modi knows better than his followers who expected a Thatcher of him that reforms don’t win elections. That is also what differentiates gutsy reformers like Thatcher, who go against the tide of conventional wisdom, from the more ordinary ones.

Natural Order runs every Monday, with a libertarian take on the world of economics and finance.

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