India’s Crony Socialism and Why Congress Mukt Bharat Will Remain a Dream

The prime minister Narendra Modi in a recent interview to the Wall Street Journal said: “Actually, in any developing country in the world, both the public sector and the private sector have a very important role to play. You can’t suddenly get rid of the public sector, nor should you. “

In this column we will concentrate on the second sentence i.e. you can’t suddenly get rid of the public sector.

Let’s look at the losses of the loss making public sector units over the last twenty years. As can be seen, the losses have gone up from Rs 5,188 crore per year to Rs 27,360 crore per year. While the number of loss-making public sector enterprises came down over the years, it has started to go up again. Also, it needs to be stated here that I stopped in 1995-1996 because I couldn’t find data before that.

The public sector enterprises have lost a total of Rs 2,72,512 crore over the last twenty years. Of course, this calculation has got very little meaning given that it does not take inflation into account. If inflation were to be taken into account, we would be expressing the losses of 1995-1996, 1996-1997 and so on, by adjusting them for inflation. This would be a horribly big number.

The broader point here is that public sector enterprises have been losing money for many years now. This is a problem that has been left unaddressed by a series of governments. So, when Modi says that you cannot suddenly get rid of the public sector, what he is not taking into account is the fact that these companies have been bleeding for many many years.

In many cases, the government makes up for these losses, once the networth (i.e. assets minus liabilities) of the company has been eroded. And this money can easily be used somewhere else.

Up until, May 2014, India had an era of coalition governments. And this limited the ability of the government to do anything about these loss making companies. Each loss-making public sector enterprise comes under a ministry and what is a ministry without a few public sector enterprises under it. The current Modi government has no pressures of a coalition government.

Further, most political parties have trade unions affiliated to them and no government likes to take them on. Hence, shutting down a public sector enterprise remains difficult.

As of 2013-2014, a total of 2.5 lakh people worked for sick public sector enterprises. A public sector enterprise is considered sick if its accumulated losses at the end of a given financial year are equal to more than 50% of its average networth in the four preceding years. Of course, the number of people working for loss making public sector enterprises would be more than 2.5 lakh. But it still forms an insignificant portion of the population.

The question is why is the whole county subsidising these 2.5 lakh people? Or is this another version of sabka saath sabka vikas? The general impression is that such a waste of money, hurts only the income tax payers, who form an insignificant portion of the population and hence, the government does not bother about them.

This is incorrect. While everyone doesn’t pay income tax, people do pay indirect taxes. And by subsidizing these sick and loss making public sector enterprises, the government is essentially wasting this money. In fact, the government seems to have the same view as well.

As the Economic Survey of 2015-2016 points out: “Those paying the costs could well be the poor. They pay taxes, even if only indirect ones. And they may also have to bear the burden of paying higher prices while getting substandard goods and services from inefficient firms which should have exited, but haven’t.”
Other than this, subsidizing these losses means that the government has lesser money to spend on other things, given that it has only so much money to spend. Let’s take the case of money that the government spends on elementary education (classes I to VIII). The following table shows the money spent on elementary education between 1997-198 and 2014-2015.

If one looks at the numbers between 1997-1998 and 2004-2005, the losses of public sector enterprises were much more than India’s elementary education budget. After that, the allocation to elementary education has gone up. Nevertheless, the losses of public sector enterprises continue to remain huge. And this isn’t good.

What is more necessary, subsidizing people who work for loss making public sector enterprises or educating India’s children? Of course, educating India’s children. So, why is so much money being wasted then on loss-making public sector enterprises?

Also, it needs to be stated here that simply spending more money is not a solution to the problem. The money needs to be well spent as well. In fact, since the Right to Education became a reality in April 2010, the learning levels of India’s school children have actually gone down. (This remains another topic to be discussed on another day).

The crony socialism of continuing to run loss making public sector enterprises which was initiated by the Congress party, continues to survive. Prime minister Modi told that Wall Street Journal that public sector enterprises couldn’t be done away with suddenly.

Actually, there is nothing sudden about the entire problem. These companies have been losing money for many years. And some of them should have been shut down a long-time back. But they haven’t been. And from what he said, it is unlikely that Modi will shut them down as well.

This means that the crony socialism of the Congress will continue to thrive. Politically, Congress mukt Bharat, might become a reality, but when it comes to economics, the more things change, the more they remain the same.

At least, in India.

The column originally appeared in the Vivek Kaul Diary on June 1, 2016.