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.

YearTotal losses of loss making PSEs (in Rs crore)Number of loss making  PSEs
Source: Public Sector Enterprises Surveys


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.


YearMoney spent on elementary education (in Rs crore)Total losses of loss making PSEs in Rs crore)
Note: The numbers from 2008-2009 onwards are actual numbers. The numbers before that are revised estimates


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.

Flipkart, Air India and the Crony Socialism of Narendra Modi

flipkartNews-reports published in several newspapers last week revealed that the ecommerce company, Flipkart, had postponed the joining date of fresh MBAs it had recruited from the various IIMs, to December, later this year. The MBAs were supposed to join the company in June 2016. In order, to compensate them for the late joining Flipkart will pay the MBAs an extra joining bonus of Rs 1.5 lakh each.

These are clear signs of trouble at the company. In fact, one of the first things the information technology companies had done after the dotocom and telecom crash of 2000-2001, was to postpone the joining date of the fresh engineers it had recruited. The joining dates kept getting postponed and in several cases went beyond one year.

A friend of mine got so fed up waiting to join that he ended up joining the Indian Navy.

The news-reports on Flipkart further suggested that the company is facing funding issues and has had to cut costs to keep itself going. The question is why are Flipkart and many other Indian ecommerce companies, having funding issues?

In late January, earlier this year, I had written a column (not on Equitymaster), in which I had called Indian ecommerce a Ponzi scheme. After the post was published, I got solidly trolled on the social media. People said, I did not understand technology. Honestly, I don’t understand technology, even though I am a BSc in Maths and Computer Science, and have an MBA in Information Systems. But that part of my education I have more or less forgotten.

I don’t understand technology, but I do understand a very basic point—in order to survive, businesses need to make money. And almost all of the Indian ecommerce companies don’t make any money. If you look at their financial results (currently available only as on March 31, 2015), their losses have grown at a faster rate than their revenue. What sort of a business model is that?

Take the case of Zomato, a company which basically delivers food at your doorstep. The latest numbers of this company are available because 47% of it is owned by Info Edge, a stock market listed firm.

For the financial year ending March 31, 2016, the losses of Zomato shot up by 262% to Rs 492.3 crore. It had reported a loss of Rs 136 crore for the year ending March 31, 2015. The revenue of the company went by around 91.3% to Rs 184.97 crore. The revenue for the year ending March 31, 2015, was at Rs 96.7 crore.

So, the losses of Zomato went up by 262%, when its revenue went up 91.3%. What sort of business model is this, where the losses of the company go up at a much faster rate than its revenue? Of course, I don’t understand information technology.

The Indian ecommerce companies have adopted a discount model in order to lure customers. This means selling products at a loss in order to build a customer base. And this has made their operating structure very similar to that of a Ponzi scheme.

A Ponzi scheme is essentially a financial fraud in which investment is solicited by offering very high returns. The investment of the first lot of investors is redeemed by using the money brought in by the second lot. The investment of the second lot of investors is redeemed by using the money brought in by the third lot and so on.

The scheme continues up until the money being brought in by the new investors is greater than the money being redeemed to the old investors. The moment the money that needs to be redeemed becomes greater than the fresh money coming in, the scheme collapses.

How does this apply in case of Indian ecommerce companies? Up until now the ecommerce companies have managed to survive because of private equity, venture capitalists and hedge fund investors, bringing in fresh money into the company at regular intervals. This fresh money being brought in essentially funds the huge losses that these companies make, in order to drive up their revenues.

This money seems to have dried up or is coming in more slowly than it was in the past. And this has put many Indian ecommerce companies in trouble. Some of them have had to cut down their operations. And some others like Flipkart have had to postpone joining dates of MBAs they have recruited, in order to control costs.
And this brings us back to the oldest business lesson—businesses need to make money, in order to survive. Businesses which don’t make money for an extended period of time, don’t survive. They shutdown. That is how it is.

Of course, there is a corollary to this rule. There are businesses which can keep running, even if they don’t make money. They can keep making losses. This is only possible if they happen to be owned by the government of India.

Take the case of the government operated airline Air India (Okay, I know I am sounding like a broken record here, if you know what that means, in the MP3 era). The airline has made losses of Rs 34,689.7 crore between 2010-2011 and 2015-2016, and is still running.

Or take the case of Hindustan Photo Films, the fourth largest loss making public sector enterprise. The company has accumulated losses of Rs 7,794.51 crore between 2010-2011 and 2014-2015. As the table shows, the losses of the company have been going up over the years.

Hindustan Photo Films Manufacturing Company
YearLosses(in Rs crore)
Total losses7794.51
Source: Public Sector Enterprises Surveys

This is sheer waste of money. The money can be better spent on many other things like primary education, health, roads, railways, ports, and so on. There isn’t exactly a shortage of things that the government of India needs to spend on. And it isn’t exactly going around loaded with money. In this scenario, it needs to be careful with where and on what it spends its money on. Hence, the last thing it should be doing is subsidising losses of public sector enterprises which have been perpetually losing money.

The prime minister Narendra Modi in a recent interview to the Wall Street Journal said: “You can’t suddenly get rid of the public sector, nor should you.” Well, that doesn’t mean that the government continues to run loss making companies like Air India and Hindustan Photo Films. Further, Modi has been governing for more than two years now, and if he still continues to run companies like Air India and Hindustan Photo Films, it clearly tells us that he has no intention of shutting them down.

The Congress led United Progressive Alliance practiced crony capitalism (the mess at public sector banks is a clear evidence of that) as well as crony socialism (by continuing to fund loss making public sector enterprises). While Modi, to his credit, has gotten rid of crony capitalism, he continues with crony socialism.

While, we may be able to have a Congress mukt Bharat in politics, it seems difficult to have that scenario when it comes to economics. Indeed, that is a big tragedy.

The column originally appeared in the Vivek Kaul Diary on May 30, 2016