One of the most ambitious plans to emerge from India’s recently announced Union budget was the government’s proposal to privatize state-owned companies in the coming years. This is an important step in India’s programme of reforms to achieve long-term sustainable growth.
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As Prime Minister put it recently, the government would be less involved in the business of business, and asset monetization and privatization will empower Indian citizens, enhance India’s infrastructure, and increase economic efficiency.
Since the 1980s, many countries have gone down the privatization path. Proponents of such an agenda believe it makes companies and sectors more efficient and competitive, to the ultimate benefit of consumers.
Critics, on the other hand, argue that privatization can lead to job losses, and, in some cases, higher costs for the public.
There is no single privatization model that fits all, but we have seen many success stories in other countries that demonstrate how privatization is beneficial to the long-term growth and sustainability of companies as well as the country, and the Indian government deserves to be commended for its plan.
In Japan, the national railway system, Japanese National Railways (JNR), had been operating with big losses each year before its privatization began in 1987. This programme eventually broke the company up into six regional passenger rail companies and one freight rail company (‘JR companies’). More than three decades later, JNR’s privatization is widely viewed as a success.
The bulk of Japan’s railway network operates without a government subsidy and the fares have remained largely unchanged. Before the covid pandemic hit, all three top regional JR operators were consistently profitable. Privatization has allowed railway operators to determine their capital investment and business development plans, with many Japanese railway firms expanding their operations into other areas, including real estate, supermarkets and hotels.
Another example of the benefits of privatization is asset recycling: the government monetizes existing infrastructure assets through their sale to the private sector, and then invests the proceeds in new projects or long-term investment funds.
This is particularly important as countries around the world look to rebuild their economies after the pandemic. India has recently announced a national asset monetization pipeline to fund much-needed infrastructure and welfare schemes.
Consider the example of Australia, which has been a leader in asset recycling. The country’s asset-recycling initiative provided material top-up incentives from the federal government for state governments to re-invest asset sale proceeds in new infrastructure, and helped kick-start several major projects involving over A $15 billion of new infrastructure spending, including the Sydney Metro train project.
Australian state governments have also used asset privatization to gain long-term balance sheet stability and offset debt. CPP Investments was part of a consortium to purchase a stake in the WestConnex toll road in Sydney when the New South Wales state government sold 51% of its holding in 2018.
The sale generated A$9.3 billion in proceeds for the government, A$7 billion of which was used to seed a new long-horizon state investment fund to reduce state debt and finance projects for community services and facilities. The New South Wales state government is now looking to sell its remaining stake in WestConnex, the proceeds of which will also go into the state’s investment fund and enable future infrastructure projects needed to speed up a post-pandemic recovery.
As noted earlier, one of the biggest concerns many have with privatization is that it could lead to job losses. Different research reports over the past 20 years have shown that business restructuring exercises after privatization did initially lead to job losses.
However, once privatization plans were fully implemented, new entrants to these markets increased the demand for labour and ultimately lowered overall unemployment. By allowing the private sector to take over the heavy lifting, attract new capital and increase business efficiency, privatization also ensures that businesses are more sustainable, creating an environment where they can grow, invest and create jobs well into the future.
Another criticism of privatization is the likelihood of higher costs borne by consumers. However, privatization is often accompanied by market deregulation, which introduces market competition that results in lower prices. A case in point is the telecom deregulation done in many countries.
In Hong Kong, for instance, the government fully liberalized its telecom market in 2003 after several years of deregulation. In the first few years of deregulation, customers saved an estimated total of over US$3 billion on international calls as a result of competition. Today, Hong Kong is one of the most competitive telecom markets globally. According to the International Telecommunications Union, it offered some of the world’s most affordable mobile service plans in 2020.
India, like many countries around the world, has been hit by covid, but has shown great resilience and is rolling out an ambitious vaccination programme. Its economic recovery will be bumpy and require investment. The privatization of state-owned companies over the years could provide the funds needed to rebuild the economy and allocate money to areas of effort where it is needed most.
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- In terms of Equity, in the Large States category, Chhattisgarh has the best Delta rate on Equity indicators, this is also reflected in the performance of Chhattisgarh in the Equity Pillar where it ranks 4th. Following Chhattisgarh is Odisha ranking 2nd in Delta-Equity ranking, but ranks 17th in the Equity Pillar of PAI 2021. Telangana ranks 3rd in Delta-Equity ranking even though it is not a top performer in this Pillar in the overall PAI 2021 Index. Jharkhand (16th), Uttar Pradesh (17th) and Assam (18th) rank at the bottom with Uttar Pradesh’s performance in line with the PAI 2021 Index
- Odisha and Nagaland have shown the best year-on-year improvement under 12 Key Development indicators.
- In the 60:40 division States, the top three performers are Kerala, Goa and Tamil Nadu and, the bottom three performers are Uttar Pradesh, Jharkhand and Bihar.
- In the 90:10 division States, the top three performers were Himachal Pradesh, Sikkim and Mizoram; and, the bottom three performers are Manipur, Assam and Meghalaya.
- Among the 60:40 division States, Orissa, Chhattisgarh and Madhya Pradesh are the top three performers and Tamil Nadu, Telangana and Delhi appear as the bottom three performers.
- Among the 90:10 division States, the top three performers are Manipur, Arunachal Pradesh and Nagaland; and, the bottom three performers are Jammu and Kashmir, Uttarakhand and Himachal Pradesh
- Among the 60:40 division States, Goa, West Bengal and Delhi appear as the top three performers and Andhra Pradesh, Telangana and Bihar appear as the bottom three performers.
- Among the 90:10 division States, Mizoram, Himachal Pradesh and Tripura were the top three performers and Jammu & Kashmir, Nagaland and Arunachal Pradesh were the bottom three performers
- West Bengal, Bihar and Tamil Nadu were the top three States amongst the 60:40 division States; while Haryana, Punjab and Rajasthan appeared as the bottom three performers
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In a diverse country like India, where each State is socially, culturally, economically, and politically distinct, measuring Governance becomes increasingly tricky. The Public Affairs Index (PAI 2021) is a scientifically rigorous, data-based framework that measures the quality of governance at the Sub-national level and ranks the States and Union Territories (UTs) of India on a Composite Index (CI).
States are classified into two categories – Large and Small – using population as the criteria.
In PAI 2021, PAC defined three significant pillars that embody Governance – Growth, Equity, and Sustainability. Each of the three Pillars is circumscribed by five governance praxis Themes.
The themes include – Voice and Accountability, Government Effectiveness, Rule of Law, Regulatory Quality and Control of Corruption.
At the bottom of the pyramid, 43 component indicators are mapped to 14 Sustainable Development Goals (SDGs) that are relevant to the States and UTs.
This forms the foundation of the conceptual framework of PAI 2021. The choice of the 43 indicators that go into the calculation of the CI were dictated by the objective of uncovering the complexity and multidimensional character of development governance
The Equity Principle
The Equity Pillar of the PAI 2021 Index analyses the inclusiveness impact at the Sub-national level in the country; inclusiveness in terms of the welfare of a society that depends primarily on establishing that all people feel that they have a say in the governance and are not excluded from the mainstream policy framework.
This requires all individuals and communities, but particularly the most vulnerable, to have an opportunity to improve or maintain their wellbeing. This chapter of PAI 2021 reflects the performance of States and UTs during the pandemic and questions the governance infrastructure in the country, analysing the effectiveness of schemes and the general livelihood of the people in terms of Equity.
Growth and its Discontents
Growth in its multidimensional form encompasses the essence of access to and the availability and optimal utilisation of resources. By resources, PAI 2021 refer to human resources, infrastructure and the budgetary allocations. Capacity building of an economy cannot take place if all the key players of growth do not drive development. The multiplier effects of better health care, improved educational outcomes, increased capital accumulation and lower unemployment levels contribute magnificently in the growth and development of the States.
The Pursuit Of Sustainability
The Sustainability Pillar analyses the access to and usage of resources that has an impact on environment, economy and humankind. The Pillar subsumes two themes and uses seven indicators to measure the effectiveness of government efforts with regards to Sustainability.
The Curious Case Of The Delta
The Delta Analysis presents the results on the State performance on year-on-year improvement. The rankings are measured as the Delta value over the last five to 10 years of data available for 12 Key Development Indicators (KDI). In PAI 2021, 12 indicators across the three Pillars of Equity (five indicators), Growth (five indicators) and Sustainability (two indicators). These KDIs are the outcome indicators crucial to assess Human Development. The Performance in the Delta Analysis is then compared to the Overall PAI 2021 Index.
Key Findings:-
In the Scheme of Things
The Scheme Analysis adds an additional dimension to ranking of the States on their governance. It attempts to complement the Governance Model by trying to understand the developmental activities undertaken by State Governments in the form of schemes. It also tries to understand whether better performance of States in schemes reflect in better governance.
The Centrally Sponsored schemes that were analysed are National Health Mission (NHM), Umbrella Integrated Child Development Services scheme (ICDS), Mahatma Gandh National Rural Employment Guarantee Scheme (MGNREGS), Samagra Shiksha Abhiyan (SmSA) and MidDay Meal Scheme (MDMS).
National Health Mission (NHM)
INTEGRATED CHILD DEVELOPMENT SERVICES (ICDS)
MID- DAY MEAL SCHEME (MDMS)
SAMAGRA SHIKSHA ABHIYAN (SMSA)
MAHATMA GANDHI NATIONAL RURAL EMPLOYMENT GUARANTEE SCHEME (MGNREGS)