Why Let Public Enterprises Go?

It’s just not about selling the family silver

By Dr. Rajan Katoch

The long awaited sale of Air India has renewed discussion on disinvestment and privatization. Most people think that this privatization is good, both for the Government and the airline. Keeping it running meant a drain of about Rs. 10,000 crores to the exchequer. These are funds the Government can certainly utilize better.

But there are always naysayers. Every disinvestment of a public enterprise is critiqued as “selling the family silver.” Public sector units ideally should not have to be closed or sold. Why let a public asset go? It’s bad financial management that necessitates these asset sales.

Is it really so, in all cases? To answer this, we need to go back and see why these enterprises were first set up.

Remember that the first Central Public Sector Enterprises (CPSEs) in India were set up shortly after India attained its Independence in 1947. The situation in India then was that the country had emerged from an impoverishing colonial rule, and was an underdeveloped, largely agrarian economy. Rapid economic development was seen as a national imperative to improve the living standard of the people. The then current wisdom was that this could be achieved through central economic planning and a policy emphasizing industrialization and import substitution.

However, there was limited capital available, the available scarce capital had to be well deployed. Also, there was hardly any capacity in the private sector to establish new industry. In the absence of private sector capacity at the time, public enterprises were needed. CPSEs were intended to build the industrial base, which in turn would spark growth in the economy.

The CPSE focus was further sharpened in the Second Five Year Plan. This Plan prioritized investment in capital goods, or the machines that make machines. Production of capital goods would buildup domestic capacity for manufacturing. This strategy was expected to accelerate the pace of industrialization and speed up economic growth. Consequently, a number of CPSEs came up in heavy industry, engineering goods, and areas like mining, metals, steel, energy, and telecom.

The number of CPSEs kept growing over the decades, partly due to waves of nationalization. There were only five enterprises in 1951. According to the Public Enterprises Survey for 2019–20, there were as many as 358 CPSEs in existence in 2020, of which just 256 were operational, and 84 were loss making.

Structural economic reforms were taken up in India from 1991. As part of these reforms, a wave of liberalization in industrial and trade policies took place. Only then did a review of the role of CPSEs come into the policy discourse.

CPSEs considered to be of strategic importance and those that were viable and profit making were to be continued and strengthened. For them, mechanisms for devolving greater autonomy in decision-making at the enterprise level were put in place. For others, various forms of disinvestment were considered, depending on the circumstances.

One facet of disinvestment efforts was closure of sick CPSEs. Letting CPSEs go.

During my tenure in the Department of Heavy Industry in the Government of India, I was associated with the efforts to close down some of the CPSEs that had been set up in the early post-Independence years i.e. Hindustan Machine Tools (HMT) Watches, HMT Bearings, Tungabhadra Steel Pipes Ltd. (TSPL) and Hindustan Cables Ltd. (HCL).

In each of these cases, the products of the enterprise had become obsolete or irrelevant. For example, HMT Watches once had started watch production in India and its watches were highly sought after. Post liberalization, more modern and attractive watches started to be produced in the private sector, slowly reducing the market for HMT watches. Similarly, bearings became readily available more competitively in the private sector, rendering the company HMT Bearings virtually defunct. Many engineers who had trained and worked in HMT went on to contribute to the establishment of competing private industry in similar areas. Surely that was great for the growth of engineering industries in the country.

Others had a similar story. The purpose for which TSPL had been set up was to provide equipment for construction of Tungabhadra Dam in the 1950s. That purpose had long since been fulfilled. However, TSPL continued to exist, and in the absence of outside demand for existing products, TSPL’s operations had come to a standstill. Telecom cables made by HCL were the backbone of fixed line telephony, but they had become obsolete with the shift to wireless technology. HCL found itself producing cables that no one wanted any more.

These cases illustrated what happened over time with many of the CPSEs. Their problems arose not from their failures, but from the fact that they achieved the purpose for which they were set up and sparked competing industrial development in their area of operation! This was as originally envisaged by the decision-makers in the 1950s. A vibrant private sector came up in the same areas of operation as the initial CPSEs, with the benefit of more modern technology and higher levels of efficiency.

Consequently, many of these CPSEs outlived their utility. Some became totally unviable and ceased production. Others started making losses. However, the socialistic oriented and pro-public sector policy mindset prevailing was unable to recognize that these enterprises did not need to exist any more. Instead, repeated efforts were made to restructure and revive them by infusing fresh capital.

Further, regional and local interests felt it was a setback for them if a CPSE located in their local area were to close down. The location of the CPSE very often was a matter of prestige. It was felt that the first effort should be to revive sick CPSEs rather than close them down.

Yes, in many of these cases, there were also management issues. Such issues tend to arise in public sector entities. Often, it is an inability to respond quickly to changing circumstances that contributes to the decline. Due to institutional constraints, neither could they change course easily, nor could a timely decision on winding up be taken, leading to these enterprises becoming a recurring financial burden on the owner i.e. the exchequer.

Inability and unwillingness to recognize and act on changed circumstances cost us. That could be also said for our economic policy as a whole. Even when it had become evident that our policies were not bringing about growth or poverty reduction, they were persisted with. Even when it was evident that the enterprise had fulfilled its role, that the purpose of establishing an industry in a particular sector had been achieved, the decision to withdraw from that sector could not be taken.

So the story is a little more than just that of mismanaging finances and then selling the family silver to make up. Many of these enterprises did play their assigned role in the growth of industry in India. In a logical follow up to that role, they deserved to have been disinvested long ago. Unfortunately, the prevailing political economy did not let that happen.

Better late than never!

(First published in Rising Kashmir, 9th November 2021)