Private sector, national interest

The economic argument for the government to retain ownership of commercial enterprises is very weak. But can an argument of strategic necessity be used to keep the government in the business of doing business? So, for example, if and when, India signs a deal for fighter aircraft to be made in India, must the public sector Hindustan Aeronautics Ltd be the sole local partner for any original equipment manufacturer to protect strategic interests? On evidence, the answer is no.

Traditionally, two sectors more than others have been viewed as strategic by the government in India. The first is defence and the second is natural resources (oil, coal and other minerals). And both are dominated by large public sector undertakings (PSUs). It is perfectly reasonable for the government to define these as strategic sectors — without defence equipment, borders are not secure, without resources there is no basis for economic growth. Remarkably though, these are the two sectors in which India is the most dependent on imports. India is the largest importer of defence equipment/arms in the world, importing around 80 per cent of its requirement. More than half of India’s trade deficit is the result of its dependence on foreign oil, gold, coal and other minerals. In a crisis, India would have little control over supplies. Therefore, in what is one more irony in India’s public policy regime, the country’s vulnerability is the highest in sectors deemed to be of the greatest strategic importance. 

The problem lies in equating the logic of strategic sector to government ownership. Some countries do it. In China, government companies still dominate defence and natural resources (and indeed several non-strategic sectors as well). In the US and most other advanced western economies, government does not own large defence companies or large oil companies. India’s reality is that the state has limited capacity and public enterprises do not have the autonomy, the financial resources and the managerial skills to be world class. India’s strength is the dynamism and nimbleness of its private sector entrepreneurs. In this, India is more like the US and other advanced economies than it is like China.

It’s time for India to rethink its current preferences. The government would argue that it has already opened up defence to the private sector, including FDI and that it has liberalised at least some of the resources sector, including oil and coal (which is more stop than start). However, the presence of large PSUs in these sectors is a deterrent for the private sector. The fact is that there isn’t always a level playing field. For one, the government, often chooses to favour PSUs through what is known as the nomination process. This means that PSUs need not participate in any bidding/auction process which the private sector players must do. Second, for bureaucrats it is less controversial to do business with PSUs because there are likely to be no (or much fewer) allegations of wrongdoing. Third, despite the unfavourable outcomes from PSUs, the government has an active preference for keeping lucrative PSUs under its control (that they are lucrative is only because the government gives assured business) which can then be used for non-commercial considerations, like providing subsidised products to consumers, preferential development of certain regions or doling out jobs.

 

If the government genuinely wants to attract large amounts of private investment in strategic sectors, it has to level the playing field, either by completely exiting PSUs (unlikely to happen) or by reducing its stake in PSUs to 49 per cent so that these function as independent board-managed companies with significant government ownership. Even without PSUs, the government will always retain huge influence on any businesses that operate in these sectors. In defence, the government is the sole buyer of arms/equipment and any exports would require a government nod. In resources, the government will always be the ultimate owner of what lies underground and can charge royalties and taxes and demand revenue sharing. Of course, the government must ensure that there is competition in the private sector. The US has several large private defence companies including Boeing, Lockheed Martin, General Dynamics, United Technologies and so on. That way it is not dependent on one supplier. In some sectors that tend towards natural monopoly, import competition can be used to keep the businesses honest. And, of course, procurement process or resource allocation processes must be transparent.

For the US, these private sector companies also provide their government with huge strategic leverage in the realm of foreign affairs. India’s private sector can do the same. The potential is huge. A partnership between government and the private sector is in strategic and national interest.
The author is chief economist, Vedanta


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