Losses of socialism

The losses of public enterprises fall on the taxpayers, most of whom are not rich. The bulk of tax revenue is derived from indirect taxes and so the poor pay more

Losses of socialism
Air India is becoming an iconic story about all that is wrong with policymaking in India.

Air India is becoming an iconic story about all that is wrong with policymaking in India. This is not about the BJP. It is, at the least, trying to divest itself of Air India. But, over the years, every party which has had any part in running the government at the Centre has failed to face up to the problem of loss making public enterprises.

The origin of the preference for public ownership lies in the Great Depression, when the market economy, so dominant ideologically and empirically, failed massively. Another idea was that ‘ the commanding heights of the economy’ should be in public ownership. These were transport—railways mainly—mining, basic industries such as steel, and public utilities like gas, water, and electricity. They were natural monopolies; so, better off out of private hands. Capitalism was feared and distrusted. Profits were thought to arise from monopoly power or the cheating and exploitation of workers.

On the eve of independence, state direction of the economy was so popular that even the plan drawn up by leading industrialists—Tata, Birla, Sri Ram and others—advocated that the state should play a lead role. Immediately following independence, the industrial policy reserved some sectors where the Centre would initiate development as there were no companies to nationalise. Few of the existing companies were nationalised. One such occurrence was when Imperial Bank was made the State Bank of India. Railways were already in public hands. New units in steel were to be in the public sector. Air India, then just recently launched by JRD Tata, was nationalised.

Fast forward to today and the Soviet Union has collapsed and its economic model is a proven failure. During the 1970s, the developed economies of UK, Germany, and elsewhere, denationalised massively. Air lines owned by countries were privatised or became unsaleable due to losses. British Rail was broken up and routes were sold to private companies on franchise. Telephones used to be in public ownership which would sound bizarre to today’s generation.

India remains resistant to privatisation. Political parties are all of similar economic views. Any divestiture is suspect. Trade unions bristle at the thought of improving efficiency since that may mean redundancies. The UK went through ten years of reforms when Margaret Thatcher took radical steps to shake up the economy. The British economic philosophy of Fabianism, which had shaped Indian thinking, was abandoned in the home country

India finds it difficult to divest. Air India’s losses are gigantic. Its accounts are quite opaque, but one estimate I have seen said that its cumulative losses are Rs 500 crore and its debts Rs 550 crore, as in 2017. The CAG has criticised its accounts, but what we know is that it continues to make losses. The Centre has failed to sell because it put too many constraints on the potential buyer, such as on the ability to fire staff.

What is hard to explain to politicians is that the losses of public enterprises fall on the taxpayers, most of whom are not rich. The bulk of tax revenue is derived from indirect taxes and so the poor pay more. Every year Air India stays in public ownership, it is pick-pocketing the poor, who cannot afford to fly or pay its high salaries. It would make perfect sense to give it away for free to anyone who would take it off the government’s hands. We may not get any money, but at least we would not continue to lose.

The same goes for the PSU banks which have compounded the problem by irresponsible lending which is another huge burden on taxpayers as they have to be bailed out by public borrowing. It would make sense for someone to total up all the losses made by all the publicly owned enterprises, as well as all the debts cancelled. This may tell us how big a burden the inefficient public sector is on the poor taxpayer. If trade unions complain, one could even pay off every employee who loses their job and the country would still be better off.

It is a mistake to think that things which are solid, like machines, buildings, tools , vehicles are valuable. Very often they have no market value. During the Cold War days, we were told how the East German economy was industrialised and modern. When the Wall fell and the East and West united, there was an attempt to sell off the assets of the East German state sector by forming a single holding company Truehandsraat. Not a penny was recovered for all those assets. They were solid but valueless.

Much of India’s public sector is valueless. If you added up all their losses over the years, you would get a large number. How large ? My guess is that it would be enough to cost `15 lakh for every one of the 125 crore Indian population!

The author is a prominent economist and Labour peer.

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