Themes > Economic Briefs
What would be the Impact of the Ongoing
Programme
of Privatisation on Domestic Investment, Industrial Concentration,
Technological Self-Reliance and Economic Growth?
What Alternative
Measures can we think of for Increasing the Efficiency of the Public
Sector?
The term privatisation, in as much as it refers
to the sale of public assets to the private sector, inadequately reflects
the shift in surplus generating capacity and influence over economic
activity from the State to the private sector. The so-called "retreat
of the State", includes the sale of equity in government held companies
to private agents, the curtailment of public investment in the manufacturing
and infrastructural areas and the opening up of areas largely reserved
for the public sector to private investment. This can have a number
of extremely damaging consequences.
To start with, public expenditure has played a crucial role in both post-Independence episodes of rapid growth in industrial output and investment - that during the first decade and a half after the launch of planned development, and the second during the 1980s. While in the first period State expenditure was diverted in substantial part to capital formation, with gross capital formation in the public sector rising by over 13.5 per cent per annum in real terms, in the second period it was not so much capital formation but the current expenditure of the government that provided the stimulus for growth, with capital formation rising at less than 6 per cent per annum in real terms. That is, while in the first period the State sustained demand for the private sector both directly (through capital formation) and indirectly (through income generation), it was the latter role that proved more crucial in the second period. Inasmuch as the retreat of the State reduces its surplus generating abilities and therefore its current and capital expenditures, the stimulus it offers to private sector growth is undermined - the immediate impact of which would be a reduction in private investment as well.
It could, however, be argued that privatisation involving the sale of public sector assets, increases the "revenues" of the government and therefore helps sustain its expenditure while reducing reliance on deficit financing. But such a policy is not feasible in all areas, but rather in those where public sector profitability is high (like oil). That is privatisation aimed at revenue generation undermines the revenue earning capacity of the State in the medium term, since the process involves the divestment of the more profitable sections of the public sector and can, therefore, hardly be defended on such grounds.
Second, the process of privatisation may necessitate indefensible concessions for ensuring investment in crucial areas. A typical instance is the power sector, where in its rush to woo foreign investors the government is guaranteeing a rate of return of 16 per cent in dollar terms. That is, independent of the prices at which foreign investors value their capital investment, the State is providing a sovereign guarantee of a relatively high return protected against exchange fluctuations. This obviously provides an incentive to import capital equipment at inflated costs. According to available figures, the Enron Corporation's project to build a power plant in Maharashtra under this scheme involves a capital cost of Rs.45,000 per KW, which is more than twice the cost provided for in Eighth Plan estimates for power generation based on coal-based plants. If returns of such inflated capital costs are protected, the State rather than retreating is being forced to intervene in favour of private investors at the expense of existing public sector producers and of course capital goods producers. A guaranteed return on foreign investment would encourage imports of over-invoiced capital equipment, denuding domestic suppliers, especially of power equipment, of orders and forcing them to abandon all attempts at indigenous technology generation.
Finally, privatisation is likely to be accompanied by processes of concentration and centralisation. Concentration because it would be the larger units that would be in a position to bid away the more profitable segments of the capital intensive industries in the public sector. And centralisation in as much as the "retreat of the State" through concessions to the private sector, and through massive reductions in the duties on imports, adversely affects the transfer of resources to state governments as part of the revenue sharing arrangement in India's quasi- federal system. In the budget for 1993/94 for example resource transfers to the states are slated to increase by only 3.5 per cent relative to the previous year's budget estimate, as compared with 12.9 per cent in the budget for 1992/93 and 12.5 per cent in 1991/92. With the states being faced with the cost increases associated with a series of administered price hikes that preceded the budget, this would essentially mean that their ability to intervene in a meaningful way in the development process and contribute to an improvement in standards of living would be limited.
To start with, public expenditure has played a crucial role in both post-Independence episodes of rapid growth in industrial output and investment - that during the first decade and a half after the launch of planned development, and the second during the 1980s. While in the first period State expenditure was diverted in substantial part to capital formation, with gross capital formation in the public sector rising by over 13.5 per cent per annum in real terms, in the second period it was not so much capital formation but the current expenditure of the government that provided the stimulus for growth, with capital formation rising at less than 6 per cent per annum in real terms. That is, while in the first period the State sustained demand for the private sector both directly (through capital formation) and indirectly (through income generation), it was the latter role that proved more crucial in the second period. Inasmuch as the retreat of the State reduces its surplus generating abilities and therefore its current and capital expenditures, the stimulus it offers to private sector growth is undermined - the immediate impact of which would be a reduction in private investment as well.
It could, however, be argued that privatisation involving the sale of public sector assets, increases the "revenues" of the government and therefore helps sustain its expenditure while reducing reliance on deficit financing. But such a policy is not feasible in all areas, but rather in those where public sector profitability is high (like oil). That is privatisation aimed at revenue generation undermines the revenue earning capacity of the State in the medium term, since the process involves the divestment of the more profitable sections of the public sector and can, therefore, hardly be defended on such grounds.
Second, the process of privatisation may necessitate indefensible concessions for ensuring investment in crucial areas. A typical instance is the power sector, where in its rush to woo foreign investors the government is guaranteeing a rate of return of 16 per cent in dollar terms. That is, independent of the prices at which foreign investors value their capital investment, the State is providing a sovereign guarantee of a relatively high return protected against exchange fluctuations. This obviously provides an incentive to import capital equipment at inflated costs. According to available figures, the Enron Corporation's project to build a power plant in Maharashtra under this scheme involves a capital cost of Rs.45,000 per KW, which is more than twice the cost provided for in Eighth Plan estimates for power generation based on coal-based plants. If returns of such inflated capital costs are protected, the State rather than retreating is being forced to intervene in favour of private investors at the expense of existing public sector producers and of course capital goods producers. A guaranteed return on foreign investment would encourage imports of over-invoiced capital equipment, denuding domestic suppliers, especially of power equipment, of orders and forcing them to abandon all attempts at indigenous technology generation.
Finally, privatisation is likely to be accompanied by processes of concentration and centralisation. Concentration because it would be the larger units that would be in a position to bid away the more profitable segments of the capital intensive industries in the public sector. And centralisation in as much as the "retreat of the State" through concessions to the private sector, and through massive reductions in the duties on imports, adversely affects the transfer of resources to state governments as part of the revenue sharing arrangement in India's quasi- federal system. In the budget for 1993/94 for example resource transfers to the states are slated to increase by only 3.5 per cent relative to the previous year's budget estimate, as compared with 12.9 per cent in the budget for 1992/93 and 12.5 per cent in 1991/92. With the states being faced with the cost increases associated with a series of administered price hikes that preceded the budget, this would essentially mean that their ability to intervene in a meaningful way in the development process and contribute to an improvement in standards of living would be limited.
© MACROSCAN 2002