Air India, PSU banks, any enterprise wasting public money should be sold off

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Updated: July 22, 2019 7:15:25 AM

With the mandate Modi has received, he must deliver on his promise of cutting govt presence in business. Air India, PSU banks, hotels—any enterprise wasting taxpayer money should be sold off.

But, agriculture remained overcrowded and underproductive, with a huge chunk of the agrarian population unable to migrate to urban jobs.

India is in a unique position. The 2019 election has ensured a stable government for the next five years and it will be a bold or foolhardy person to predict a change of party in power in 2024. Narendra Modi has the opportunity to shape India as he wishes. The vision he presents to India has to be a grand one—an inclusive, enriching vision that will make India a leader in the world.

Modi can pursue the elusive but universally desirable goal of making every Indian healthy, well educated and free of poverty. When Independence came, India was the seventh-most industrialised country (whatever the nationalist propaganda) and most advanced among colonised countries. It had a tradition of economic debate since the mid-19th century, and Subhash Chandra Bose had appointed a National Planning Committee under the leadership of Jawaharlal Nehru to plan for economic development after Independence.

In 1944, a group of leading industrialists Tata, Birla, Kasturbhai Lalbhai, along with experts like John Mathai and AD Shroff, released the Bombay Plan which laid down the tasks facing the independent government expected to take power soon. The Bombay Plan acknowledged that government would play a leading role, but urged that the consumption needs of the mass of people be given priority by the new government in framing its priorities. The Plan also emphasised health and education. But, the government of Independent India took a hard stance. Priority wasn’t to be given to consumption needs, but to building up a machine-making industry to make India technologically independent. The government was to take not just the lead, but treat private business as a junior partner if not an unwelcome one. The Soviet Union was the model for India, with low priority for agriculture, restrictions on private-sector consumption goods industry from increasing output and labour laws that discouraged building of large factories.

It was the most costly economic strategy as far as employment creation and poverty reduction were concerned. Shiny factories for machines to build machines were built. But, agriculture remained overcrowded and underproductive, with a huge chunk of the agrarian population unable to migrate to urban jobs.

India was trapped in a low-growth trajectory. The growth rate of GDP averaged 3.5% for the first 30 years. The Nehru strategy was further radicalised by Indira Gandhi who nationalised commercial banks as well as many other industries. The Green Revolution was the only positive sign. But, even then, there were no jobs for the rural poor to migrate to. Poverty remained large, with India being the top country in terms of poor people in the world.

Rajiv Gandhi’s attempt to accelerate growth by borrowing didn’t reform the structure—the economy hit the buffers in 1990, and its bankruptcy became clear. It was imperative to escape the Nehru-Gandhi strategy of a closed economy with excessive public ownership. Narasimha Rao took the risk of deviating from the Nehru-Gandhi line in economic policy. He opened up the economy, lowering tariffs and removing quirks, in the face of condemnation from economists of the day who were wedded to socialist economic policy. Inaugurating neoliberalism was a political gamble, but it proved economically transformative.
Rao’s revolution has guaranteed 30 years of moderately high income growth in the 5-10% range. Poverty has fallen to single-digit levels.

But, now, there needs to be another bold step to take India further up in the growth league. India may be the fifth-largest economy in total income, but it is 145th in terms of per capita income. The vision has to be that India will be in the top 100, if not top fifty.
To do this, Modi must take risks. He must remove all the remaining elements of the Nehru-Gandhi strategy for India to prosper. Risks imply willingness to suffer costs for benefits. It is not possible to have change that hurts no one. One must compensate the losers, but not let them stop the positive change. It involves breaking with the old culture as Rao did.
The first break should come in the public sector. It was possible in the 1950s to believe in the superiority of the public sector over private sector. India created an aristocracy of public sector employees who faced no test of efficiency or of enhancing the return to the public purse. They thrived at the cost of the poor. It was a damaging mistake.

There was an Indian way of pursuing development. India had been a trading, private-business oriented economy for centuries. Sardar Patel and Rajaji knew about the old business culture, and would have chosen a different path, but Nehru prevailed. India could have had an open economy using its abundant private sector to harness the economy. Nations of East and South East Asia such as Japan, South Korea, Taiwan performed miracles by government-business partnership. India missed the bus in its pretence of building a socialist economy.

Modi once said government has no business being in business. He has to deliver on that now. To begin with there has to be massive disinvestment. Air India, PSU Banks, hotels, shops, factories—any enterprise wasting taxpayer money should be sold off. This should be the next revolution in Indian economic policy. Modi has to erase the ill effects of Old Economics. But then the culture of reliance on public sector, government subsidies and anti-growth legislation in land, labour and commodity markets has to be repealed. The psychology of public good, private bad has to be altered.

Just think of the benefits of abandoning the Nehruvian model. It took India 20 years after 1991 to accept FDI without reservations. But its benefits have been immense. The slimming down of the public sector must be the next transformation. It will generate resources to finance be the Modi Revolution in economic policy. India will win.

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