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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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.