Disinvestment and government spending dilemma: How smart government can be in a neoliberal world?

Disinvestment has been a main source of revenue mobilisation by the central government in the previous years. As of the last Union Budget, the government plans to raise Rs 1.75 lakh crore through disinvestment out of which Rs 1 lakh crore should come from selling government stake in Public Sector Banks and financial institutions and Rs 75 crore should come from the receipts of Central Public Sector Enterprises stakes.

In many cases VRS and privatisation go hand in hand. For instance, the VRS announcement of Bharat Aluminium Company (BALCO) in 2001 to recent VRS announcements of employees in Indian Railways and BSNL in 2020 are some explicit examples. Quite often, these schemes act as channels to offload workers before the ownership is moved to private sector. According to the current plans, a substantial part of Indian Railways would be managed by the private sector by 2023 (Vinoj and Ritika, 2020).

The increasing privatisation including the outsourcing of public services to private hands by and large occur as a tool for enhanced public sector efficiency. But in most of these cases, which are often termed as ‘state failures’, one should not ignore that the state was trying to do something much more difficult than what many private businesses do. It is not merely the efficiency argument nor accumulation of profit the mandate behind the very establishment of public sector enterprises. Rather it was to foster the essential development goals such as building infrastructure capacity, delivery of public services at an affordable rate and nation building. Moreover, the efficiency arguments do not hold true as market failures and bankruptcies of private sector firms are not rare events in India.

These cases relating not only to Indian scenario as it happens all around the globe irrespective of the nature of government and stage of development. How many of us know touch pad of our mobile phones, global positioning technologies and Google’s search algorithm, etc are the products of public-funded research. The company, which was supposed to provide security protection in the London Olympics, was massively failed and therefore the British Army was called for. The examples do not end here. ISRO provides its low-cost technology to manufacture Lithium-Ion Battery (LIB) to private players, which is expected to transform the automobile industry. Product level information on the capital goods sector in India shows that it was one public sector firm (BHEL) used to dominate in terms of size of production and more importantly product diversification and forward and backward linkages. The point I try to make here is that much needed mission-oriented investments in production, infrastructure and technological innovations by and large are public funded and profits are privatised.

As of 2017-18, top 12 corporate NPAs cost exchequer twice as much as the total farm loan waivers in India. Privatisation of Public Sector Banks and financial institutions may now provide a case for profit run banks. But who will appropriate the profits and who carried the burden of loss and Non-Performing Assets? It was public money the loss-making banks got recapitalised. Yet another important issue in privatisation and disinvestment of public sector enterprises are lower valuation of assets. The raging controversy in the beginning of 2000s regarding the privatisation of two hotels Airport Centaur and Juhu Centaur are striking examples. It was later found that the assets were highly undervalued, and the disinvestment was done through single bidder transaction. Moreover, both hotels were profit-making entities till the government decided to privatise.

The disinvestment channel of revenue mobilisation is the result of non-confidence of the government in its role. Scholars including Mariana Mazzucato talks about the role of the state in promoting the catching up process as an entrepreneurial risk taker of the first resort than more passive facilitator of the last resort.

Role of state

State has played an active role in the ‘hotbeds’ of innovation and entrepreneurship as we see in San Jose, California. Silicon Valley example shows the state not only facilitates the knowledge economy, but actively creates it with a bold vision and targeted investment (Mariana Mazzucato, the Entrepreneurial State, 2014). Often, we have to learn from examples of public sector funding ends up than merely fixing market failures. The role of state should be that of a risk-taking one. However, some of the experiences from the recent past show the scenario of a system failure rather than the market failure.

Think why Apple was able to have such a vast amount of public investments that boosted the iPhone and iPad revolution? It has received substantial public funding in the initial stage itself. Remember without these publicly funded ideas, there would not have been an option to surf even! The example set by ‘Apple’ raises the questions that challenge the practices of the role of the State. In the absence of government support, private sectors will hesitate to undertake certain economic activities especially the research and development (R&D). The gross R&D spending in India is notably below 1% of GDP, but at the same time a major chunk of the R&D activities in India are carried out by central and state governments, public sector companies and research institutes, which are essentially public-funded (as of 2018).

The very visible hand of state has to act smart in the challenging times and to set example with substantial state-funded research. Therefore, it is important to reflect upon how quick and smart the government can behave with its better strategies of innovation, public funding of technologies rather than being non-confident in playing its role in an elegant way.

The role of the state should not be seen in a parasitic relationship between the public and private sectors where one party always does the necessary investments and the other appropriates the returns. It must go hand in hand where both the risk and reward are fairly shared. Instead of selling the public assets, coordination and collaboration through effective joint ventures between the public and private sectors will prompt the private sector to carry out activities they would not have done in isolation.

(The writer is is a Doctoral Fellow at ISEC, Bengaluru. Currently working as Assistant Professor at Christ (Deemed to be) University, NCR)