Q.1 Why should underdeveloped countries have a Public Sector ?
The need for the public sector lies in the following reasons:
i) In an economy where income, resources, and political power are unevenly
distributed priorities of development cannot be left entirely to the market.
ii) Self reliant development in underdeveloped countries
is not possible without state intervention in the economy.
iii) Public Control on natural resources is essential in
an underdeveloped economy.
iv) Concentration of wealth, resources and power has adverse
social consequences.
iv) Public monopolies are preferable to private monopolies.
vi) Without large scale units which have an institutional support it
is not possible for a developing nation to withstand the power of
international cartels and multinational corporations.
vii) Pioneer in the industry.
i) In an economy where income, resource and political power distribution is skewed, priorities of development cannot be left to the market.
Where the distortions of income, resources and political power has been uneven, as in Latin America, the World Bank and IMF induced reliance on market economy has led to disastrous consequences. As a famous U.S. economist, Paul Streeten has said,
"Perhaps the most serious problems arise ..not from market failure but from market success.. if the signals propagated by the market are based on a very unequal distribution of land, other assets, and income, it is market success in responding to these signals that causes trouble."
What Streeten is trying to convey is simply that if purchasing power is concentrated in the hands of only a small percentage of the population, all investment and production decisions are likely to be taken, under the market system, according to the wishes and desires of this small section of the population, even at the cost of ravaging the ecology ruining the countryside and pauperising the people. In a country like India, where thousands of children go blind for lack of vitamin A and their parents, due to illiteracy, do not know about this and even if they know, are too poor to buy the vitamins, how long can these people peacefully coexist with those who want scarce foreign exchange to be diverted to the latest in entertainment electronics? Can the market decide what should be given priority, and even if it does, what would be the result of such an arbitration by the market?
ii) Self reliant development in underdeveloped countries is
not possible without State intervention in the economy.
When we look at the history of development in all countries,
which have developed after the second world war we find that strong
government intervention together with a protected domestic market have
been at the base of success. Let us take the so called Asian Tigers, Japan
and South Korea. In both these countries there was strong and purposeful
state intervention. In fact in South Korea, even today, there is no freedom
to import technology; technology import is allowed in selected
directions, and only where there is a strong back-up support of indigenous
Research and Development to absorb, adapt and improve the technology. South
Korea did switch over to the export promotion strategy but the South Korean
economy continues to be a highly regulated regime even today. The South
Korean regime has set target export markets and products for which the
entire country has gone all out, under a highly authoritarian regime. South
Korea has renationalised the electric power generation industry. The examples
of Hongkong and Singapore are frivolous; they are small island (or city)
states which are strategically located and developed as centres of trade.
Can a nation of 850 million, the size of a sub continent, abandon the path
of self reliance and become a mere trading country?
iii) Public Control on natural resources.
The natural resources of a nation are limited and have to meet the needs not only of the present generation but also of future generations. Unless care is taken there can be an ecological disaster due to practices like savage mining. In fact, it is well known that before nationalisation of the Coal industry, the private owners of Coal mines destroyed the most valuable coking coal resources of the country by unscientific mining, so that much of these valuable resources have been lost to the nation and its future generations. Secondly, for the sake of self reliance nations may need to develop and exploit their poor resources even if doing so is a loss making proposition. For example, the copper ore in India is inferior and it is more costly to exploit this relatively poor ore than to import copper from countries that have rich ore. But it is necessary to prevent a situation where we become totally dependent on imports through a trade that is controlled by a cartel.
iv) Concentration of wealth and power is socially undesirable.
In a poor country there is a problem of shortage of capital and the private sector cannot mobilise large quantities of capital. Also, on the limited amount of capital there are a large number of demands. Society or public interest and not individual interest should decide the priorities of investment. Let us assume that the entire industry in India is controlled by 20 large business houses as in Pakistan. They may not be able to provide all the capital they need; but public resources would go to help them through Financial institutions like IDBI,ICICI,UTI etc. This would gradually lead to continuous concentration of wealth, and of economic power, so that eventually they would be able to manipulate and take over political power to serve only their limited interests, and not the interests of the people. That is why the founding fathers of the Indian Constitution had in the directive principles of state policy in the Constitution of India stated that policies of the Government should ensure that there is no concentration of wealth. If these 20 large business houses happen to be MNCs then we can say that the country is a ‘COLONY WITHOUT PHYSICAL OCCUPATION’. In India the process has already started, and we need to stop it.
v) Public monopolies are preferable to private monopolies
In areas where production or services for reasons of technology
or investment are under monopoly conditions, it is better to have public
ownership of such enterprises. Price of the commodity, investment decisions
and regulation can be under social control in the public sector. These
are very critical concerns in a monopolistic situation. There can be other
considerations which override commercial considerations. For example,
the role of Railways as a pillar of national unity overrides all other
considerations, and has to be of paramount concern Above all, there is
social control over public monopolies.
iv) Without large scale units which have an institutional support it is not possible for a nation to withstand the power of an international cartel of multinational corporations.
Today, fifty multinationals account for over one third of all international investment. The turnover of even one single company like Exxon of USA in 1984 was larger than the GDP of most Third World countries. According to UNCTC estimates world-wide sales of the foreign affiliates of MNCs in 1989 were $ 4.4 trillion compared to world exports of $42.5 trillion (including world exports of commercial services and excluding inter firm trade) the ratio of sales to exports being 1.8. Inter-firm trade between MNCs account for over 25% of trade world-wide. Thus through the twin processes of concentration and centralisation of capital, the MNCs grow larger, and exercise considerable oligopolistic power over products, prices and technology. And as was the experience of Chile, the MNCs could influence the politics of killing a democratically elected President. If these powerful companies have to be dealt with then a nation should have large units that can give them competition, through the economies of scale, within the country and minimise the exploitation of its people by the MNCs. For example, only after the Indian Oil Corporation and Oil & Natural Gas Commission (ONGC) were set up and they became large organisations was it possible to give the MNCs, then operating in the oil sector, stiff competition. Unable to withstand the competition the MNCs Burmah Shell, Stanvac and Caltex preferred to be nationalised rather than make further investments.
vii) Pioneers in the industry.
Public Sector has had to play a pioneering role in particular industries where there were uncertainties and in fact there is a need to generate information for other potential investors and/or business for other enterprises. For example, the Indian Tourism Development Corporation (ITDC) has had to open up numerous tourist destinations in India (including Delhi’s first five star hotel) for increasing tourism. Since these new destinations took time to develop the costs incurred could not always make the investments worth while but it gave information and encouragement to other investors and to several feeder enterprises.
The public sector has also been a pioneer in technology. It is the IPCLs, BHELs and HALs that have placed high technology at a premium. The public funded Atomic energy and Space research have placed India on the map of frontier technologies. It is a matter of record that public sector has invested in whatever little research and development that has taken place in India. Private sector and the multinationals have by and large used the concessions given for research and development for establishing test facilities and the like. Multinationals have usually operated in areas that are profitable or provide super profits, if they happen to be in areas of high technology that is just coincidental and not as a matter of policy or design.
Q. 2 Why and how was Public Sector set
up in India?
The Public Sector was set up in India, for the following reasons:
i) Where the private sector did not have the capital to invest
i.e., capital intensive units.
ii) Where besides capital intensity and skill intensity the gestation
period in realising the projects were large.
iii) Where Government did not want to nationalise
a trade, and yet social needs required the setting up of a Government corporation
( the setting up of the Food Corporation of India to ensure a public distribution
system, and food procurement to stabilise prices and distribution).
iv) Where the multinationals were using their cartel strength
to the disadvantage of national interest as in the case of the oil industry
and the manufacture of power generation equipment.
v) Where due to gross inefficiency and/or plunder by the private
sector the industry began to stagnate and had to be taken over and nationalised
as was the case with the Coal industry or industrial units became sick
and had to be taken over and nationalised to prevent large scale unemployment
in cases like NTC mills and several other unit s in West Bengal.
The debate.
The creation of the public sector in recognition of the above needs was initiated after twenty years of intensive debate which started during the freedom struggle in 1935. All sections of the people participated in the debate. Netaji Subash Chandra Bose appointed a National Planning Committee which was chaired by Pandit Jawaharlal Nehru. It held 77 meetings between Sept. 17, 1938 and July 9,1946 (and Nehru was present in 76). The committee drew its inspiration from the KarachiCongress of 1931. The committee stated,
"State shall control key industries and services, mineral resources, railways, water ways, shipping and other means of transport... the general indication of Congress policy is of vital importance and applies not only to pubic utilities but to large scale industries and enterprises which are likely to be of monopolistic character...a legitimate extension of the principle would be to apply it to all large scale enterprises...it is clear our plan must proceed on this basis and even if the state does not own such enterprises, it must regulate and control them in the public interest."
Indian industrialists like J R D Tata, Sriram, Lalbhai, G.D.Birla etc. formulated a Bombay Plan which sought the establishment of a large public sector and the stepping up of public investment. They did however put a proviso and advised the State to hand over its enterprises after a time to the private sector as far as possible, and even in residual state owned enterprises, private management was suggested as a possibility. This proviso was not acceptable to the proponents of the Gandhian Plan and the then Congress party and Shri Jawaharlal Nehru.
The Awadi session of the Congress party held in January 1955 unambiguously declared that,
" to further the objectives stated in the Preamble and Directive Principles of State Policy of the Constitution of India planning should take place with a view to establishment of a socialistic pattern of society, where the principle means of production are under social ownership or control."
Finally, after a great deal of debate the lines of advance were decided during the Second Five Year Plan. Today, it is Nehru and the Gandhians who have been thrown into the dustbin and the authors of the Bombay plan are thanking the World Bank-IMF for making their dreams come true. Repeating, the ideology of Pakistan. Pakistan’s economic policy throughout had an explicit bias towards private enterprises. Pakistan’s Industrial Development Corporation’s task was to promote industrial enterprises and then transfer them to the private sector. A coalition of landlords, bureaucrats and military top brass enriched themselves at the expense of the people.
The national consensus
The basic philosophy for industrialisation was based on a national consensus and was adopted by the nation through this Resolution of the Lok Sabha
" the basic criterion for determining the lines of advance must not be private profit but social gain, and that the pattern of development and structure of socio-economic relations should be so planned that they result not only in appreciable increase in national income and employment but also in greater equality in incomes and wealth. Major decisions regarding production, distribution, consumption and investment, and in fact all significant socio-economic relationship must be made by agencies informed by social purpose."
The people’s sacrifice
The book value of the capital invested in the Central Public Sector
Enterprises (PSEs) is, as per the Public Sector Enterprises Survey, Rs
1,13,234 Crores. But the replacement value of the PSEs assets, taken at
current prices, would easily be over a hundred times this investment. For
a population of 85 Crores this works out to an asset ownership of over
Rs. one lakh per head. That is every single Indian owns assets of over
Rs. one lakh in the Central Public Sector Enterprises. Considering that
over half the population lives below the poverty line, measured in nutritional
terms of 2250 calories per head per day, it implies that the starving millions
have made great sacrifices by making such investments in the
interest of future generations.
Q.3 Who owns the private sector and what is the rate of growth of the private sector?
Public ownership, private management
Essentially, the private sector is publicly owned and privately managed. The rate of growth given below also indicates the concentration of wealth in violation of the directive principles of State Policy in the Constitution of India.
The value of equity held by the family group as a percentage of the total paid up capital is 3.5 % in Tata’s empire; 1.8 % in Birla’s empire; 6.6% in Mafatlal’s empire; 7.1 % in Singhania’s empire and 0.5 % in the empire of Shri Rams. The funding of investments made by these Houses is done primarily through long term loans obtained from, and equity contributed by public financial institutions (FIs) like IDBI, ICICI, IFCI, UTI, LIC, GIC etc. The financial institutions frequently hold more than 40 % of the equity of the companies managed by these houses.For example , the share of the FIs in a few large firms is TELCO 41.60 %, TISCO 47.58 %, Modi Rubber 50.41 %, Mahindra & Mahindra 47.40 %, L&T 40.79 %, JK Industries 39.22%, Kirloskar Oil 38.52 %.
Yet, the sector is marked by a high degree of concentration i.e., a small number of large size companies enjoying a dominant position and the trend is towards further concentration of economic power, especially by the few Houses in the Indian private corporate sector. The Gini coefficient of concentration has increased from 0.56 in 1969-70 to 0.65 in 1981-82 to 0.74 in 1987-88.
Extraordinary growth
While the above applies to the inequitable distribution of income in the country, the concentration of wealth and of assets is even more glaring. Between 1950-51 and 90-91 the growth of assets of Birlas was 12,986 % ; that of Tatas 5,627 % ; Singhanias 21,095 % ; Thapars 25,228 % ; Mafatlals 8,012 % ; Shri Ram 6,549 % ; Kirloskar 32,401 % ; Mahindras 72,976 % (Starred question No.207 Rajya Sabha on 10.9.91) - an incredible rate of growth in an economy whose growth was always restricted to what Raj Krishna described as the ‘Hindu rate of growth’ - a growth rate of 3 % ! Is this inspite of or because of the much abused licence permit raj ?
Increasing foreign control
Another characteristic of the private sector is the extent of foreign control over the Indian private corporate sector. The extent of control by foreign controlled companies has been on the increase. The percentage of capital employed in ‘foreign controlled companies’ stood at 25.86 percent at the end of March 1961. At the end of March 1965 the ratio had climbed up to 30.57 percent. (defined as the ratio between the total capital employed in branches of foreign companies and what the Reserve Bank calls ‘foreign-controlled rupee companies’ (FCRCs) and the capital employed in the entire private corporate sector. In the data given above, financial companies are excluded from both the numerator and the denominator) . The share of profits of FCRCs to the total Private and Public limited companies increased from 24.09 % in 1980-91 to 30.66 % in 1987-88. (In order to get a complete understanding of the extent of foreign control it is important to examine the technological control also but enough data is not available to do so). Royalty and Technical fees went up from Rs. 47.6 Crores in 1977-78 to Rs. 391.3 in 1985-86 to Rs. 497.3 Crores in 1988-89.This was the situation when regulations like FERA were in force. What will the degree of such control under the new economic policy is not difficult to estimate. With foreign capital holding entering the public sector who will control the commanding heights of the economy, is the question. The social control of the economy will pass into foreign hands.
It is important to realise and recognise that even cremation grounds,
or drinking water supply etc. can be made into companies and asked to pursue
commercial objectives. This would mean that public services would be available
only to those who can pay and pay high prices, in other words reserved
only for the elite.
Q.4 How do the private and public sector compare?
Global perspective
The United Nations Conference on Trade and Development (UNCTAD)’s report ‘Trade and Development Report, 1992’ has analysed the 500 largest industrial corporations (other than of the United States) on the fortune list of 1990, (49 were PEs -15 from developing countries) accounting for more than 10 per cent of the total sales, assets and employment of the 500 firms. Table 1givesa comparison of profitability. It shows that the average profitability of the public sector enterprises in the developing countries was much higher than the that of the private sector in the developed countries in all the sectors except one. The ranking of the sectors according to profitability was roughly similar for public and private firms; the two exceptions are electronics, where profitability was highest for private enterprises and lowest for public enterprises, and petroleum refining, where public ownership is particularly strong; here the profitability of public enterprises exceeded that of the private ones by more than two thirds.
The Indian experience
n The Net profit of profit making enterprises in 1990-91 was Rs.5431.42
Crores (Gross profit Rs.11,358 Crores) against a loss of Rs.3063.68
Crores (one third of this is contributed by "sick enterprises", taken over
from the private sector) (PSE survey)
n Out of 1016 companies in the private sector with an aggregate net
profit of Rs. 2976.4 (Gross profit 6615.2 Crores) in 1990-91 227 companies
alone contributed to 82.6 % of these profits. (Economic Times 29.6.92)
n In terms of exports the share of public sector was 21.80 % and together
with the small scale sector it was 49.75 %.(PSE survey and Economic survey)
n The contribution of the Public Sector to the exchequer in 1990-91
was Rs. 1,300 Crores by way of corporate tax and in all the contribution
was Rs. 19,466 Crores. (PSE Survey)
n The contribution of public sector in terms of Corporate Tax to total
tax collected is 59.63 %, in terms of Excise duty 53.42 %, in terms of
Customs duty 40.63 %. In the eighties most of the ‘Blue chip’ companies
in the private sector were ZERO tax liability companies, however now the
1016 companies had paid a tax of Rs. 1088.1 Crores and 79.5 % of this was
contributed by 227 companies.
n Employment generation in mining, manufacturing, electricity generation
etc. and construction in the Public and Private sectors in 1971, 1981 and
1988 are given in Table 2(as per RBI report on Currency and Finance 1991-92
Vol. II p.19)
Table 2
Employment in private and public sector
(in thousands)
Year
Public Sector Private
Sector
1971
2466
4489
1981
4188
5879
1988
4869
4578
(It can be noticed that between 1971 and 1988, while employment in the Public Sector increased by 97% that in the private sector was stagnant and in fact declined after 1981)
· With disinvestment and privatisation of the public sector,
the Constitutional guarantee of social reservation of jobs for SC/ST and
Backward Classes cannot be enforced in the PSEs.
· Even in terms of industrial relations the number of work stoppages
in 1987 were 396 against 1121 in the private sector, and mandays lost were
3 million against 24 million in the private sector. Even if only
the manufacturing sector is compared, the public sector fares better.
· According to the National Accounts Statistics, 1993, recently
released by the Central Statistical Organisation, public sector enterprises
- Both departmental and non-departmental - contributed 15.1 percent
of the Gross Domestic Savings in the country in 1991-92. By contrast, the
private corporate sector contributed only 8.1 percent of the total Gross
Domestic savings in India in 1991-92. The contribution to GDP of the public
sector enterprises in 1991-92 was 17.7 percent. The comparable data for
the private sector are not available, but the contribution of the "registered"
manufacturing sector to the GDP in 1991-92 was only 11.1 percent.
Deliberate dis-information.
On Nov.11, 1991 the Finance Minister Shri Manmohan Singh made
a submission to the World Bank and IMF. He stated,
"India’s severely constrained budgetary circumstances create both the
need and opportunity for rationalising the scope of the public sector activity
and for placing greater reliance on the private sector for resource mobilisation."
His arguments were based on misrepresentation of facts regarding the public sector. Shri R. Nagaraj’s study -‘Macroeconomic Impact of public sector enterprises’ (EPW-Jan 16-23,1993) shows (i) relatively little increase in their (PSE) overall deficit compared to the sharp deterioration of the gross deficit and (ii) a steep decline in their (PSE) budgetary dependence. While PSEs, internal resources in financing their investments increased distinctly, the same for the private corporate sector declined and (iii) the observed improvement in resource generation and profitability appear to hold even after excluding contributions of the petroleum sector."
Private sector profits or bank write-offs?
It is pertinent to note that according to the Banking Development Report in 1990-91. Almost 75% of all sanctions and disbursement cumulative upto 31.3.91 were to the private sector. The public sector received only 15 %, and in that context let us examine the bad debts of the Banks. At an individual bank level an example would be illustrative. As per the information furnished to the Reserve Bank of India by the Corporation Bank out of 100 top borrowal accounts (from the private sector) as many as 28 accounts had furnished securities whose value was less than the loans outstanding and 10 accounts had no securities at all. If these accounts are added up the outstandings would be a whopping Rs. 9 Crores against a net profit of Rs.4.50 declared by the bank for the year ending March1989. Another 24 borrowal accounts aggregating Rs. 6.27 Crores had no security to fall back upon and Rs. 6 Crores had to be written off. If this is the state of affairs
Indigenous manufacture Vs. Packaging
Hindustan Photofilms is the only indigenous organisation that manufactures photo sensitive material such as Medical X-ray Films, Bromide Paper and Cine Positive (B & W). The manufacturing process is a capital intensive chemical process. The unit was set up as part of the quest for self reliance. However, under the new economic and industrial policy imports of jumbo films have been delicenced and slitting and confectioning has been granted the status of an industrial unit. Slitting & Confectioning activity with imported Jumbo films is merely a packaging activity. The policy of delicensing and placing manufacturing and packaging on the same footing has serious and detrimental impact. What is valid for Hindustan Photofilms is also valid for the pharmaceutical companies. While IDPL and HAL manufacture drugs many of the multinationals import intermediates.
Question of Credit.
In the capital goods industry even if the Indian manufacturing units are technically and commercially competitive, they are not in a position to provide credits. Unfortunately, the Government turns a blind eye to the fact that the public sector units are forced to give back end credits by most Government organisations like State Electricity Boards maintaining large outstandings. But it is the ability to give credits before placement of orders that get the orders. Multinationals backed by their national banks and governments are able to provide an unfair competition by being able to offer suppliers credit.
Besides, credit there is also a problem of the World Bank forcing specifications that are tailor made for the multinationals and against the indigenous manufacturers. Another device is to insist on a back-to-back tie up with a multinational collaborator who then dictates terms such as insisting on the high value added sub assemblies and components being purchased on a propriety basis at very high prices. A pertinent question that needs to be asked is does the World Bank have more expertise in the specifications or choice of equipment that the experts of a Third World country who in any case have to maintain and operate the equipment. projects and enormously increased their costs."
Under the liberalisation programmes all the restrictions on the
private sector are being removed but none of the above mentioned restrictions
are even being diluted for the public sector. The public sector has not
had any capital restructuring nor have there been any extensive write offs.
On the contrary, the Government has directed the public sector to
undertake a task in the overall national interest, at a price at which
no enterprise would have been interested ,since losses would be inevitable.
(like several projects executed in Iraq). The losses and interest
on the loans advanced by the Government have been carried forward instead
of being written off. And now, the Government has withdrawn budgetary support.
Thus, PSEs are being starved of funds from both the financial institutions
and the Government. Also, the Public Sector has to obey every law be it
tax law or labour law whereas there are many violations of laws by
the private sector (e.g., bribery at home and abroad to secure better access
to markets or obtain government contracts, foreign exchange violations,
violation of labour laws particularly those relating to wages, safe
working conditions, restrictions regarding environmental protection and
the like).
Q.5 What are the consequences of separating
the word ‘Public’ from the word ‘Enterprise’
in an underdeveloped country?
What is efficiency?
It must be borne in mind that an enterprise with monopoly power can
improve its profitability without any improvement in technical efficiency
merely by recourse to the expedient of raising prices. This signifies that
any exhortation to public enterprises to become more commercial minded,
or setting of profit targets, must be treated with scepticism. It
is imperative to distinguish between the pursuit of ‘technical efficiency’
of a firm and the concern for allocating resources amongst
the varying demands in society. The problem of resource allocation
is a political issue particularly in a society that is based on extreme
inequalities. Resource allocation requires the optimal distribution
of whatever output is available. This requires effective planning.
Isolating the public sector from the planning process would essentially
mean abandoning equitable distribution of resources and the process
of self reliance.
It is sheer naivety (or committed ideology of the World Bank
and its camp followers) to pretend that it will always be possible to optimise
the allocation of resources as long as it is possible to improve
the technical efficiency of individual enterprises; that privatisation
of the public sector would achieve this, in a whole hearted
manner because according to this school of thought privatisation
is a necessary condition for achieving profit maximisation.
Would it be correct to leave it to the Chief Executives
of enterprise dealing with Coal, Oil, Electricity, Railways to decide the
fate of their enterprise and their customers, unmindful of the implications
on various sections of society and on the impact on inflation or export
competitiveness of Indian goods?
UNCTAD’s assessment.: The UNCTAD’s Trade &
Development report ’92 states, "..... there is much merit
in looking at the stream of output (value added) instead of profits to
assess performance, since what matters is the total amount of value added
generated by a given level of investment, rather than its distribution
between labour and capital. Such a measure regards excessive employment
and/or wage bill in a PE as a problem only if it reduces output generated
by existing capacity.
When the performance of PEs is assessed by using efficiency measures,
the widespread notion that PEs are inherently poor performers is refuted
by the evidence. There are a number of outstanding examples of efficient
PEs in many parts of the World, and public enterprises are not always less
efficient than private ones. A recent review of the available evidence
on efficiency has concluded,"(t)here is no evidence of a statistically
satisfactory kind to suggest that public enterprises in less developed
countries (LDCs) have a lower level of technical efficiency than private
firms operating at the same scale of operation."
The macro economic linkage
In the event of the inevitable conflict between ‘commercial dictates’ and that of the ‘logic of long term planning’ would the ‘public’ or the ‘enterprise’ dimension prevail ?
In the Indian context three-fifth of the total value of goods and services sold are in the public sector (i.e., one sixteenth of the nation’s GNP) and one forth of the labour force in the organised sector is in the public sector. It is fairly self evident that the sheer size of the public sector prevents its isolation from government control over the macro economy. Any attempt by Government to alter the size or growth rate of the output of public enterprise necessarily implies strategic macro economic changes and any attempt to alter the growth rate and size of the plan implies strategic changes for public enterprises. Public interest requires that the government should bend the public sector in directions compatible with its objective with respect to the economy as a whole.
The double standards
Finally, to quote E.F.Schumacher (author of ‘Small is Beautiful’),
"After many generations of capitalistic working for profits, it means assuming a heavy psychological burden if one attempts to run State enterprises without profits. People are used to looking on ‘profitable’ as indicating efficiency. It is impossible to convince the private enterprise community (which does not particularly wish to be convinced in any case) that the absence of profit in public enterprises means anything but inefficiency. The nationalised enterprises are somehow expected (a) never to charge more than the cost of production and (b) to show a substantial profit at the end of the year. To insist on (a) and then bemoan the fact that (b) does not materialise has emerged as the perfect tactic to discredit public enterprises."
Q.6 Is it true that the Public Sector is loss
making and therefore inefficient?
Do the allegations hold.
According to the UNCTAD Trade and Development Report 1992
"a study of Indian manufacturing over 1960-1975 found that total factor productivity increased in the PE sector but remained, unchanged in private enterprises. A study for the fertiliser industry also found that productivity performance in the most efficient PEs was comparable with the best private enterprises, and that while all measures of productivity fell between 1969 and 1977 in both public and private enterprises, the decline was greater in the latter".
Hiten Bhaya (former, Member Planning Commission - ‘Management Efficiency in the Private and Public Sectors’) states
"On the basis of the available evidence over the period 1981-82 to 1985-86, it is safe to conclude that, barring the burden of fixed capital over which the public sector managements have no control, and despite higher wages, and administered prices over which the management has no control either, public sector management efficiency is in no way inferior to the private sector."
Amiyo Bagchi has brought out (Public Sector Industry and The Political Economy of Development - Occasional Paper No 119) that,
When we take into account the fact that in most public enterprises the ratio of equity to capital is rather low, and then many of them operate in sectors in which there are large fluctuations in demand leading to unpredictable revenue losses, it is not surprising that many public sector enterprises run at a loss. These losses impede their investment plans and often hold up needed modernisation programmes, since generally speaking , a loss making enterprise is considered guilty until it is proved innocent."
Considering the size and the complexity of the public sector there is bound to be some measure of both inefficiency and corruption. But, these are in proportion to what prevails in the politics of the country. These evils can and should be corrected but not ‘by throwing out the baby with the bath water’.
Causes for losses
There is no correlation between public ownership and inefficiency or losses. There could be many reasons for losses.
i) Supply of goods and
services below costs.
ii) Inadequate orders.
iii) Lack of timely modernisation.
iv) Failure on the supply side.
v) Managerial inefficiency.
vi) Need to meet social obligations.
i) Supply of goods and services below costs.
This is quite in order in a poor country where
people cannot afford essential goods and services. For example, while the
Delhi Transport Corporation had got the highest productivity award for
three years it was incurring losses by supplying services below costs.
The electricity boards supply electricity to the agricultural sector and
the domestic sector below costs thus incurring a loss of Rs.5889 Cores
and Rs.1565 Crores respectively in the two sectors respectively during
the year 1992-93(Economic Survey 1992-93).
i) Inadequate orders.
Many undertakings were set up in anticipation of certain developments.
For example, the Heavy Engineering Corporation (HEC) was set up in order
to provide the equipment required for setting up steel plants with a capacity
of 1 million tonnes per year. But the requisite orders were never placed
due to a) inadequate investment in the steel sector and b) imports. Similarly,
the Mining and Allied Machinery (MAMC) was set up for meeting the needs
of underground mines. Shipyards suffered because Government encouraged
the import of ships even though indigenous ship building capacity has been
idle. In 1977 the Government initiated a new scheme called
SAFAUNS which entailed subsidised credits, to Indian ship owners, to the
tune of Rs. 50 Crores and guarantees worth an equal amount or even more
for buying ships from foreign shipyards, which were in acute recession.
Today, a similar exercise is being done with electric power generation
equipment. While the recession of the foreign manufacturers is being resolved,
BHEL is being driven to sickness.
iii) Lack of timely modernisation.
When plants become old they have to be modernised. Indecision
to modernise the fertiliser units led to their sickness. An examination
conducted by the employees organisations indicates that with
an investment of Rs. 410 Crores, in the existing plants an additional 11.31
lakh tonnes per year of fertiliser (9.31 lakh tonnes of Urea and 2 lakh
tonnes of Nitrogenous phosphates) can be obtained. And if this work
is entrusted to a consortium of Indian industrial units, it can be
realised in 24 months. As against this, grassroots plants set up denovo
would cost about Rs. 2262 Crores and take about 40 months to productionise.
This strategy of modernisation through a consortium of Indian industry
would (i) minimise capital investment, foreign exchange, fertiliser
subsidy and ii) optimise the utilisation of existing technological, manufacturing
and process capability available in the country.
iv) Failure on the supply side.
Several fertiliser units have been shut down and restarted due
to power cuts. (It must be recognised that unlike in the engineering
industry; in a fertiliser plant power failure even
for a minute causes a loss of about three days of production).
v) Managerial inefficiency.
Several committees starting with the Krishna Menon committee
in the fifties to the L.K. Jha committee in the eighties have examined
the problem and made valuable recommendations but vested interests
have not allowed the implementaion of these recommendations.
vi) Need to meet social obligations.
The UNCTAD Trade and Development report 1992
states,
" poverty alleviation by generating employment in PEs has often been
a priority. PEs in developing countries (as well as in socialist economies)
have often provided a social security network. Wages for unskilled
workers often provided workers in the public sector are typically higher
than in the private sector, public employees have better access to health
insurance and old age pension, and frequently benefit from education and
housing grants and even from subsidised holidays and entertainment. ....providing
essential consumption goods and intermediate inputs at a low price has
also been a major motivation. Many Governments in developing countries
have found it more practicable to do this through PEs than schemes involving
taxation, subsidies and other type of government spending. Heavy involvement
of the public sector in wage goods and intermediate input industries has
been a cornerstone of the industrialisation strategy in many developing
countries. Considerable support has been given to the private sector through
provision of subsidised intermediate inputs.
The problem of ‘sick’ PSEs.
Since the Sick Industrial Companies Act (SICA) was amended to cover PSEs all the PSEs irrespective of the cause of their sickness (as discussed above) were referred to BIFR. Let us first examine the manner in which BIFR deals with sick industrial companies in the private sector. It draws up a techno-economic viability scheme, identifies the role of the promoter, ensures promoter’s responsibility to put in at least 30 % of the fresh funds as envisaged in the rehabilitation scheme; changes the management if promoter has no resources or is adjudged to be incompetent; arranges relief and concessions of administrative and financial nature from State and Central governments entailing substantial tax concessions and also from the banks and financial institutions, etc.; mergers a sick unit with a healthy industrial company as a means of rehabilitation. In the case of public sector all the information on the causes of sickness and the resources to rectify the situation are at the command of the promoter - in this case the Government of India. The validity of referring PSEs to BIFR is therefore questionable.
Lack of a clear cut policy.
In the case of the Central PSEs, Government of India is the promoter, policy maker for the banks and financial institutions and has the responsibilities of a Government. It is a matter of regret that inspite of this the Government of India has no definite policy towards the ‘sick’ PSEs. The Employees Organisations (AITUC-BMS-CITU-HMS-INTUC-NCOA-JAF-CC) had in a joint letter addressed to the Union Finance Minister raised the following questions: a) Would the Government write off all non-plan loans together with the interest accumulated on them and as for plan loans would the Government agree to a measure of relief e.g., conversion of a part of the plan loan to equity and balance as zero interest debentures; b) Would the Government be willing to write off the irregularities in the working capital given by the Banks etc.?; c) In regard to fresh funds required for rehabilitation, say for upgradation of technology, modernisation, balancing equipment, diversification etc., what would the Government’s attitude be?; d) Will Government as a matter of policy direct the Financial institutions not to discriminate between private and public sector in the matter of financing rehabilitation schemes?; e) Will Government undertake a survey of the possibilities for adopting this measure and enforce it where ever feasible?; f) What is the policy of the State and Central Governments on the question of surplus land held by ‘sick’ PSEs?; and finally g) What is Government of India’s policy towards alternative management and ownership structures other than privatisation?
Bias in favour of foreign investments.
What is most painful is that even in the revival of sick units
the bias seems to in favour of inviting foreign investments. In fact the
Rangarajan committee has specifically suggested that
"assistance of foreign merchant bankers may be useful when foreign
collaborations or investments have to be examined including BIFR cases".
The Omkar Goswami Committee on Industrial Sickness and Corporate
Restructuring has stated,
" There is a strong case for having SICA override FERA. Getting
SICA outside FERA will encourage foreign investors to take-over potentially
viable sick companies and, if nothing else, raise the market price and
bid value of these otherwise poorly utilised Industrial assets. If its
is generally agreed that getting foreign exchange and foreign equity is
in India’s national interest, then getting such funds to revitalise hitherto
moribund companies must likewise be in the national interest."
The scheme suggested by the Goswami Committee is i) declare
a company ‘sick’ if it makes a default of 180 days in interest repayment
irrespective of its net worth or current profits, ii) make reference to
BIFR voluntary. Either, fast mergers and take-overs or liquidation through
five ‘fast track’ tribunals and iii) amend both FERA and the Urban Land
Ceiling Act to enable SICA to override them. Any company having a
180 day default on interest payment can be declared sick . It could
then be taken over by an MNC, valuable land sold and unit revived and all
this without bringing in any money by way of investments.
Q.7 Is there an objective situation that
has made the ruling party change its perception regarding foreign investment?
Why the Volte face?
The social character of the private sector and its consequences
were well understood by the Congress party. Twenty six years back on foreign
investments the All India Congress Committee held ( AICC Economic review,
Sept 15, 1967):
"the burden of repatriation of foreign business investments on India’s
balance of payments has been continuously increasing... the payments on
account of royalties and fees have also gone up... In case of profits too
the burden has been increasing. The overall burden of private foreign investments
on our balance of payments has more than doubled between 1953 and 1961...
As a matter of fact it is one of the important factors contributing to
foreign exchange crisis. A major portion of the export earnings will have
to be diverted towards the payment of dividends on foreign capital and
its repatriation. Not only that, we will be required to pay dividends at
higher rates even after the foreign exchange component of the original
capital contribution is fully repatriated. This is because a large part
of the dividends has to be paid on the reinvested profits earned by foreign
companies in India. This is nothing but a return on the use of our own
resources which leaks out of the economy every year. Thus, the long-term
economic cost of private foreign investments in terms of mounting and persistent
pressure on our balance of payment tends to be exorbitant.... Thus, private
foreign investments cannot be looked upon as a source of foreign exchange
resources. In this direction their contribution is negative for the last
so many years. The growth of private foreign investments is mainly based
on reinvestment of profits and investment in kind which means that foreign
investments have not been instrumental in easing the foreign exchange situation
in the country while they contribute to a considerable extent towards its
deterioration."
Two and a half decades later the same ruling party wants foreign investments even in areas like breakfast foods, soft drinks, washing machines etc., consumer products required for elitist consumption and that too on any terms.
The Finance Minister in Part A of his 1992-93 budget speech said,
"Concern is sometimes expressed that the policy of welcoming foreign investment will hurt Indian industry and may jeopardise our sovereignty. These fears are misplaced. We must not remain permanent captives of a fear of the East India Company, as if nothing has changed in the past 300 years ! India as a nation is capable of dealing with foreign investors on its own terms. Indian industry has come of age and is now ready to enter a phase where it can both compete with foreign investment, and also co-operate with it. "
Is the fear of East India Company baseless ?
At the macro economic global level there is nothing to suggest that there is a change in the last 300 years. As the ILO documentation suggest,
" Today, the net positive flow has been reversed. Taking into account - loans, aid, repayments of interest and capital - the southern hemisphere is now transferring at least $ 20 billion a year to the northern hemisphere. And if we were to also take into account the effective transfer of resources implied in the reduced prices paid by the industrialised nations for the developing world’s raw materials, then the annual flow from the poor to the rich might be as much as $ 60 billion each year."
Transfers from the South to the North is done through i) Decline in terms of trade ii) International debt servicing charges iii) Annual interest iv) Profit and dividend transfers on direct foreign investments v) Transfer pricing and vi) Brain drain. (Some estimates even suggest a transfer of $ 750 billion - a third of the GDP of the entire South)
The experience of Philippines, Latin America and sub Saharan Africa who obeyed, the World Bank-IMF, also suggest that nothing has changed over the last 300 years.
In India, the rate of industrial production growth became negative in 1991-92 and has generally been stagnant in 1992-93. The current account deficit on balance of payments which was contained to $ 2.8 billion in 1991-92, increased to $ 5 billion in 1992-93. The Finance Minister has spoken of the need for, " extraordinary external financing" of the order of $ 2 to 3 billion annually for the next few years, over and above net long term flow of external aid to the tune of $ 2 billion annually. As of September 1992, India’s total external debt (as calculated by the RBI) came to a staggering $ 87 billion, as against $ 20 billion at the end of December 1980.
The questions that beg for answers are a) what is the objective
change in the situation that justifies this reversal and abject surrender?
and b) are these solutions going to aggravate the malady rather that cure
it?
Q.8 What is the ideology of the World Bank
/ IMF?
THE WORLD BANK: The World Bank or International Bank for Reconstruction and Development (IBRD) founded in 1945, was one of the key financial institutions set up at the Bretton Woods Conference, which laid the basis for the post war international economic order dominated by the United States. Originally involved with financing the reconstruction of war-ravaged Europe under the Marshal Plan, in the 1950’s the Bank shifted to funding development projects in the Third World. Although the Bank has over 135 member countries, most of them from the Third World, it is dominated by the United States, which , as the holder of the largest capital subscription, controls over 20 percent of the total voting power in the institution and appoints the President of the Bank. Backed by the capital subscriptions of member countries, the Bank raises the bulk of its funds by borrowing on the world private capital markets. These funds are parcelled out to members as long-term loans for specific projects at below market rates of interest.
Affiliated to the World bank are two other agencies, the International Development Association (IDA) and the International Finance Corporation (IFC).
Established in 1960, the IDA specialises in lending at concessional (interest free) terms to about 50 Third World countries where GNP falls below an established "poverty level". Funds for IDA operations come from appropriations of the governments of the industrialised and OPEC countries. The largest contributor, is the United States, which also holds over 20 percent of the voting power.
The fact that the World Bank is an organisation dedicated to create
profits for its principle share holders and works not for the development
of the people of the World, but for the shareholders (the rich nations)
and for its staffers is more than evident from the following facts:
· for every tax payers dollar invested in the World Bank
by UK Government, UK companies receive $1.85 in procurement contracts to
carry out World bank work. French companies $ 1.82, USA $ 1.80, Germany
$ 1.51, Japan 1.01 - source Treasury Secretary Lloyd Bentsen’s testimony
to the US Congress.
· The World bank’s administrative Budget was $ 1.1 Billion in
1993 and its profits $ 1.1 Billion.
· In 1992 , UK contractors and consultants received $ 285 million
in fees from the Bank"s IDA. Bangladesh’s (one of the World’s poorest countries)
received as loan $ 253 million. Whereas Bangladesh has to repay the loan
the contractors and consultants from UK do not. Switzerland , then not
even a Bank member, received more than Sri Lank and Philippines (source:
Global Exchange)
· Between 1980 and 1989 some 33 African Countries received 241
structural adjustment loans from the World Bank. During the same period:
· GDP per capita in those countries fell 1.1 % a year.
· Per capita food production experienced a steady decline.
· Real value of minimum wages dropped by over 25 %
· Government Expenditure on education fell from $ 11 to $ 7
billion.
· Number of poor rose 17 % from 184 million in ’85 to 216 in
’90.
The International Finance Corporation, founded in 1956, is specifically greared to promoting the private sector in Third World economies by extending credits for private capital ventures, buying shares in such ventures, or identifying and bringing investment opportunities and qualified investors. Thirty-seven percent of voting power in IFC is wielded by the United States.
THE IMF : The International Monetary Fund was founded at the same Bretton Woods Conference that set up the World Bank. That is why the World bank and IMF are often referred to as the ‘Bretton Wood Twins’ and form the financial pillars of the capitalist world system. Dedicated to the expansion of international trade and to monetary convertibility and stability the IMF is composed of over 138 member countries. The fund is also dominated by the United States which has over 20 percent of the Voting power.
The Bank and the Fund have a close working relationship. While the IMF provides medium-term (one to three year) credits to bridge shortfalls of foreign exchange created by negative swings in a country’s balance of payments, the Bank offers long term (5 to 20 years) loans for development projects. The two organisations jointly head "Consultative Groups", like the "Aid India Consortium", of bilateral and multilateral donors that monitor the economic performance of individual Third World countries. By tradition, IMF is headed by a European.
In the context of the ‘debt trap’ IMF wields tremendous power over the economies of the debt-strapped Third World governments. In order to borrow more than its established quota, a member government has to agree to certain conditions of economic performance required by the IMF. Typically, these ‘stabilisation programmes’ and ‘structural adjustment programmes’ involve currency devaluation, cuts in government spending, privatisation of the public sector, wage controls, removal of barriers to foreign investment and external trade and etc.
The ideology of the World Bank and IMF is based on compelling the developing countries to adopt ‘Outward (or export)-Oriented Growth Strategies’ which the World Bank/IMF explains, (World Economic Outlook May, 1993 - IMF)
"the basic feature of an outward-oriented strategy is that trade and industrial policies do not discriminate between production for the domestic market and export, or between purchases of domestic and foreign goods... lowering trade barriers, removing disincentives to export, and implementing currency convertibility...dismantling the administrative system associated with import licences, selective credit policies and foreign exchange controls.. the primary role of monetary and fiscal policies is to stabilise the macro-economics environment in which private decisions are made and to release resources from the public sector that could be used more productively by the private sector... successful market economies are characterised at least to some extent by "creative destruction" whereby new firms better able to exploit new technologies and improve managerial efficiency replace existing less efficient enterprises...when unemployment increases, and if real wages do not adjust rapidly, a small group of employed may be able to bargain for higher wages and prevent the reemployment of those who lose their jobs.....policies such as minimum wages can create distortions in labour market, they often have the perverse result of increasing structural unemployment....."
What is NEW about the new economic policy?
It would be obvious from this the above brief narration of the
IMF/World Bank objectives that the policies being followed by the
Government of India since 1991 are NOT NEW but are in fact
WORLD BANK/IMF economic policies. These policies have
been evolved by the Group of 7 nations which are the richest nations of
the world. They want to ensure that the third world or under developed
countries remain captive markets for the industries of their countries
particularly in the high value added and high profit consumer items. In
order to pay for such purchases the Third World countries should orient
their economy towards exports of primary products, or at the very best
very simple manufactures or inter transfers of MNC products. That is, the
Third World countries should essentially be the suppliers of cheap labour
intensive items, agricultural products and minerals. There should be no
self reliant economies in the under developed countries and the marginal
industrial activities that may exist in the under developed countries should
be owned by the Multinationals or the local elite in a manner that they
always remain subservient to the Multinationals. The unemployed should
be pitted against the employed, a lassie faire labour market should prevail
and for that it would become imperative to go in for a wage freeze and
if that is not politically possible then union bashing, free exit
policy, hire and fire type contractual employment would be the alternatives.
Shri Ashok Desai Chief Economic Adviser to the Government of
India stated this quite clearly in a seminar organised by ILO,
" the aim should be to replace legal protection of employment
by contractual obligation to make separation payments. For this all laws
preventing closure should be repealed, and replaced by a law creating a
prior charge for a minimum level of workers’ compensation and b) the protection
against dismissal embodied in the Industrial Disputes Act should be replaced
by a contractual obligation to make separation payments".
Q.9 What are the reforms being made in the Public
Sector?
The reforms (better called the instruments of surrender of national sovereignty and of the policy of self reliance ) are :
i) De-industrialisation and closure of as many industries
as possible under the guise of a ‘safety net’ for those currently employed.
ii) Disinvestment of the equity of the Public Sector enterprises
and their privatisation (without discriminating between domestic and foreign
capital)
iii) Gifting the public sector to the MNCs under the guise of swapping
part of the external debt for the equity of public sector enterprises.
iv) Deregulation of all industries and services which are in
the national interest and foster self reliant development, as well
as concerning welfare and labour.
The process of surrender to the World Bank-IMF has been accomplished in two phases. The first phase was liberalisation that was initiated during the eighties when the base was laid by delinking industrialisation from the planning process.
Delinking from the planning process.
The effect of diluting the planning process was clearly felt in the growth of manufacturing sector. In answer to this state of affairs came the policy of import liberalisation ironically justified on the plea of increasing exports.
The shift in the industrial processes in favour of elitist consumption and reliance on imports can be understood from this study (Kartik Rai - ‘ The Indian Economy in Adversity and Debt’ Social Scientist 224-225).
"The growth in the index of manufacturing industrial production which is a barometer of the expansion in the possibilities of productive accumulation is quite revealing. The growth rate figures for different periods are summarised in the table 3.
These figures indicate that after 15 years of rapid industrial expansion in the ’50s and the early ’60s, there was a dramatic decline in the rate of manufacturing growth during the next 15 years.
Table 3:
Growth - rates in the index of manufacturing industrial production.
(Annual Average Compound rates)
1951 - 65 7.8
%
1980 - 81 to 1984 - 85 5.7 %
1965 - 70 3.3
%
1984 - 85 to 1989 - 90 8.8 %
1970 - 71 to 1980 - 81
4.05 %
(Note : The figures upto 1970 have 1960 as base, the figures for the seventies have 1970 as base and the figures for the eighties have 1980-81 as base. These figures are from various issues of Economic Survey & Report on Currency & Finance)".
The improvement in Industrial production during the last five year period has been phoney, and partly a result of statistical jugglery by leaving out of the index many industries which were showing a decline in production, and partly related to the growth of import intensive industries like the Maruti car and other consumer durable goods required for elitist consumption.
Process of de-industrialisation and recolonisation:
Operation ‘Phase one’
Unwanted imports.
An inquiry would establish that the purchase of Westland Helicopters, collaboration of BHEL with Siemens, extensive orders at significantly higher than world prices to Snamprogetti in the Fertiliser industry, and several examples of bilateral aid projects in the power and coal industry, steel modernisation based on imports instead of indigenous supplies are examples of a steady process of de-industrialisation initiated from the mid eighties, including liberal imports of technology and permission to import capital goods as part of equity. The import of capital goods by Maruti even when HMT was able to provide capital goods at competitive prices is an illustrative example.
Imports to meet elitist consumption.
The remarkable aspect of this policy of import liberalisation
was that it was not necessarily tied to a larger export effort; its immediate
thrust was towards producing luxury goods, for the domestic market.
This can be noticed from the fact that in the first year of this policy
1985-86 itself there was a dramatic increase in the trade deficit. In subsequent
years this did not come down as a percentage of the GDP, which means that
the actual deficit kept widening and this at a time when the ONGC had productionised
the ‘Bombay High’ oil field and there was in fact a reduction in the oil
import bill. What is worth noticing is that the main head under which imports
expanded most rapidly between 1984-85 and 1989-90 was
"machinery and transport equipment". The increase in imports under this
head between 1984-85 and 89-90 as a proportion of the total increase in
imports between these two dates was as high as 34 %, The share of machinery
in total inputs increased from 17.7 % to 23.9 % in 1989-90. If the imports
of pearls, precious and semi-precious stones essentially for re-exporting
after certain value addition are excluded, then the share of the increase
in the import value of machinery and transport equipment in total
imports comes to 41.7 %. In other words, over two fifths of the increase
in our import value was on account of machinery and transport equipment
which either belonged to the category of equipment that could be
produced within India or to service the `elite’ market . On
the other hand, already built up manufacturing and technological capability
was under-utilised. Nor was modern or sophisticated technology imported.
Technology and equipment for modernisation were sought to be separately
acquired by those whose capacity was rendered under-utilised.
Operation ‘Phase Two ‘
The logic of TINA (there is no alternative)
Before launching operation phase two, India was pushed into a situation where it had to physically transport the pledged gold instead of having the RBI lockers sealed by the creditors. The media built up a hysteria that there is no alternative to the policies being adopted, if chaos and complete economic collapse is to be avoided.
The Western media has always been building up the theory of TINA. Twenty Seven years ago, this was precisely the assessment of the New York Times - April 18,1966.
" Much of what is happening now is the result of steady pressure from the United States and the International Bank for Reconstruction and Development, which for the last year have been urging a substantial freeing of the Indian Economy and a greater scope for private enterprise... The United States pressure, in particular, has been highly effective here because the United States provides by far the biggest part of the foreign exchange needed to finance India’s development and keep the wheels of Industry turning... Call them" strings" call them "conditionalities" or whatever one likes, India has little choice now but to agree to many of the terms that United States, through the World Bank, is putting on its aid. For India simply has nowhere else to turn."
In fact the multinationals understood that the political will to surrender was only a function of time as is illustrated by this remark of the Siemens AG Vice President, in the context of the BHEL -SIEMENS technical collaboration agreement . (Business Standard Calcutta Oct. 21,1981)
We are optimistic about the outcome of the proposed agreement ....Political decisions take a long time. Siemens has the patience and can wait for a final decision."
Changing tracks.
In this operation ‘Phase Two’, the doors of the economy have been thrown wide open and the rupee has been made to float. The consequences of this are very clear. For forty years we had followed an industrial policy of Import substitution and now the entire emphasis is to make the economy Export (or outward) oriented. But two aspects are wilfully ignored. First, the demand in the Western World is not growing. Secondly, the Western World is switching over to high-tech production which is capital intensive and where India cannot compete; and where we can, the Western World imposes quota restrictions as is the case with garment exports to USA. The basic strategy is to dampen domestic demand in India. The rationale given for following the World Bank and IMF conditionalities is the so called success of the ‘East Asian Tigers’. If India is to be compared it has to be with large countries like Brazil, Argentina, and Mexico in Latin America all of which have suffered enormously after following policies recommended by the World Bank and IMF.
As a consequence the trade deficit and the debt have kept on increasing
as given below in Table 4.
Table 4
Trade Deficit
(Figures in Crores)
Import
Export Trade
Deficit
1980-81
6,576 12,544
- 5,968
1985-86
11,578 21,164
- 9,586
1988-89
20,646 34,202
- 13,556
1990-91
32,553 43,193
- 10,640
By 1990-91 the cumulative trade deficit went up to Rs.95,828 Crores. The decline in deficit in 1990-91 was due to the import compression policy followed by the Government of India during the preceding years.
Initiating de-industrialisation.
It is essential to remember that the bulk of the Capital goods and intermediate goods industries are in the public sector. According to the World Bank study on Indian Capital Goods industry
"the capital goods sector now accounts for 16 % of India’s total industrial output, 26% of the gross value added and 19 % of manufacturing output. In 1984-85, India achieved a self-sufficiency rate of 88% in capital goods, having produced capital goods valued at Rs. 173 billion (US$ 13 billion) compared to domestic consumption of Rs. 197 billion (US$15 billion equivalent."
Today, almost a decade later this process of self reliance is being reversed and that too in an extremely short time. Between 1991-92 and 1992-93 the growth of imports of capital goods was 25.7%. Imports went up from Rs. 11,114.36 Crores in 1991-92 to Rs. 13,976.91 Crores in 1992-93 and imports under the ‘export promotion capital goods scheme’ went up by 508.3% from Rs. 376 Crores to Rs. 2701 Crores.
The World Bank-IMF have certainly understood how to ensure
a) that the Indian public sector which has become technologically and
commercially competitive is not allowed to become a competitor for the
multinationals and
b) how to ensure the Indian market for the recession hit multinationals.
The strategy is simple: put a tight squeeze on the fiscal deficit under
5 % GDP, insist on denial of budgetary support to the public sector in
order to make them dependent on suppliers credit, and offer credits for
supply of imported equipment which would starve the indigenous equipment
manufacturers of orders for supply of machinery. The automatic reduction
of public investment together with import liberalisation and a reduction
of customs duties would do the required job for the World Bank and IMF.
Since the capital goods sector of the public sector cannot mobilise suppliers
credits of a high order, they cannot get the orders. Consequently they
would become sick and since their shares are to be bought and sold in the
stock market they can be picked up either directly or through front end
operators. The revival can be then ensured by transferring all labour
intensive, repetitive and hazardous operations to India.
Thus the public sector units which can today build power houses,
refineries or fertiliser plants etc., from concept to commissioning,
would tomorrow become mere ancillaries to MNCs. Reliance on suppliers credits
to the tune of Rs. 5,922 Crores in 92-93 in the energy sector implies
that Rs. 5,922 Crores worth of equipment in the energy sector would be
reserved for imports even if the Indian industry is competitive, since
bulk of the suppliers to this sector are public sector units which just
cannot provide that order of suppliers credits. .And as if
that is not enough the Rangarajan Committee has recommended i) debt-equity
swap ii) equity participation for collaborations ii) involvement of foreign
merchant bankers in PSEs investment decisions.
Can BHEL survive the onslaught? - A case study.
BHEL is one amongst fifteen similar enterprises in the world, the other fourteen belonging to the most economically advanced countries. The World Bank evaluated BHEL and the environment in which it functions. Given below are a few selected extracts from World Bank reports
" BHEL is one of the most efficient enterprises in the industrial sector. The Effective Protection rate (EPR) for its heavy power equipment is close to ZERO the implications being that the transformation process for these products is on par with international standards for efficiency. (Report No. 7294-IN(1988) page 15).
"Although one might expect, based on tariff schedules for inputs and outputs, an average positive effective protection of about 40 % for capital goods, there are many instances where the domestic industry is negatively protected. " (Report No. 7895-IN(1989) page XVII) and
" The physical infrastructure puts Indian producers at a disadvantage compared to international competition. Disadvantages include high material costs, particularly due to structure of tariffs and taxes, relatively high financial costs due to high inventories reflecting, inter alia, difficulties in obtaining raw materials." (Report No. 7895-IN(1989) page XVIII).
None of the companies in the business of power equipment manufacturing have been able to survive without a protected domestic market and Government support for exports by way of bilateral aid packages. The Government of India expects BHEL to survive without any such support. Unlike the case of BHEL’s competitors from the developed countries India cannot give extensive aid packages in the form of buyer credit facilities. Even the domestic market is largely pre-empted by bilateral aid tied to purchases from the aid-giving countries, and by inviting direct foreign investors to invest with the freedom to import equipment. Because of inadequate domestic investments in the power sector, new power projects are increasingly financed by aid packages, and where bilateral aid is involved, BHEL does not even get an opportunity to compete. Besides this the bilateral aid projects have proved to be at least 40 percent costlier than multilateral aid projects where international competitive bidding is compulsory. For example, Rihand I - 2x500 MW (imported sets based on bilateral aid) cost Rs. 16,660 per Kw, whereas BHEL sets Singrauli II - 2x500 MW cost Rs. 7,248 per Kw; similarly, the imported sets Ramagundam I- 3x200 MW and Talcher I 2x500 MW cost Rs. 9,568 per Kw and Rs. 14,040 per Kw respectively as against BHEL sets Singrauli I 5x200 MW and Chadrapura V & VI - 2x500MW cost Rs. 4,471 per Kw and Rs. 9,020 per Kw respectively.
What is even worse is that foreign investors are being asked to undercut BHEL by setting up power plants with imported equipment being part of the equity. A rate of return of 16 % is being guaranteed in foreign exchange protecting the equity and the profits against exchange variations. Power projects like those based on Gas Turbines are being estimated to cost Rs. 4 Crores against Rs.1.5 to 2 Crores that indigenous suppliers could provide. Similarly, imported coal based thermal plants are being estimated at Rs. 8 Crores as against Rs. 3.5 Crores that they should actually cost. Thus the foreign investor gets not the 16% return on investment that has been promised but 32 to 40 % guaranteed return on investment by over-valuation of the imported equipment,. This is an open invitation to loot, and this loot would be in addition to the process of de-industrialisation of the country.
Hitherto unheard of concessions are being made. An example is the proposal of ABB-NTPC joint venture in setting up power plants. It is something like a collaboration between a thief and the police or to be more charitable between an invigilator and an examinee. Would a Swedish power utility set up a similar joint venture with ABB? The role of an utility is to prepare specifications, ensure that only the most optimal equipment is installed and that the best price is obtained not only on the original plant but also in respect of after sales services and spares. On the other hand an equipment manufacturer would ensure that specifications are tailored to the equipment it makes, push in as much equipment as possible at the highest cost obtainable and extract the maximum possible in after sales and spares. The interests of both are just not reconcilable. It is correct for the consumers to own equity in a manufacturing facility and protect their interests but not vice versa.
Officers of the Central Electricity Authority represented by CENTRAL
WATER & POWER ENGINEERING SERVICES (GROUP A) ASSOCIATION (CWPESA) the
State Electricity Boards represented by ALL INDIA POWER ENGINEERS FEDERATION
(AIPEF) the PSU officers represented by the NATIONAL CONFEDERATION
OF OFFICERS’ ASSOCIATIONS OF CENTRAL PUBLIC SECTOR UNDERTAKINGS (NCOA)
and the Officers of BHEL, NTPC, NHPC FEDERATION OF BHEL EXECUTIVES
ASSOCIATION (FOBEA); CORPORATE EXECUTIVES ASSOCIATION OF NTPC ( CEAN
); OFFICERS’ ASSOCIATION OF N.H.P.C. wrote to the Prime Minister
on 13.10.1993.
"We are of the considered opinion that the policies being
pursued by the Govt. of India have an exogenous origin
and their motivation is not transparent. The policies
do not resolve the basic problem of the industry which is supply
of electric power without recovery of costs or a subsidy and thus
inhibiting capital mobilisation for a self sustaining growth. While this
problem is being ignored the problem of inadequacy of investable funds
is sought to be resolved through inviting private national and trans-national
capital for very high capital intensive addition to generation and
transmission. And, that too on very unreasonable and humiliating conditions
which are neither sound as financial propositions or as engineering propositions.
We apprehend that the long term consequences of such a strategy would be
i) Increased losses to State Electricity Boards and
Government Corporations.
ii) Substantial material damage to indigenous investment in capital,
employment and skills.
iii) Increased tariff resulting in uncompetitive industrial and
agricultural production. This would lead the country to a debt trap besides
fueling domestic inflation. To the best of our knowledge there has been
no serious study of the long term implications on the economy and exports
as a consequence of the terms and conditions that have been agreed to for
inviting private and direct foreign investments nor has there been a technical
evaluation of the consequences of guaranteeing base load conditions to
what the world over are technically designed to be peaking units.
iv) More tensions in the Centre-State relationship.
v) The legality of giving concessions to private and foreign
investments while denying them to public investments is open to questioning.
What is distinctly visible is the concern for and support and subsidy to the recession hit multi-nationals and a short term gain for a few private Indian interests."
The President of the Federation of BHEL Executives Associations Shri K.S.N.Raju wrote to the Prime Minister stating,
" It is most unfortunate that the Govt. of India has no clear policy perspective regarding the future of BHEL. According to news paper reports, the V Krishnamurthy committee on disinvestment of Public Sector had recommended that each unit of BHEL be allowed to have major equity tie ups with multinationals - Hardwar with SIEMENS, Bhopal with GEC ALSTHOM, Hyderabad with GE, Tiruchi with ABB. The rationale given was that there was a dominant role of a particular MNC in a particular unit of BHEL and because of such a technological dependence equity participation on exclusive basis should be allowed. While Shri P.A.Thungon then Minister for Heavy Industries Govt. of India denied in the Parliament that there was a proposal to dismember BHEL , the Chairman of GEC ALSTHOM has been talking to the press about how his company intends to restructure BHEL after acquiring the BHEL Bhopal unit and how his company has reconciled itself to their rival SIEMENS acquiring BHEL Hardwar. We who have struggled to build BHEL are at least entitled to know where the truth lies. The logic that BHEL units have very distinct tie ups with particular multinationals is proved incorrect from the table below.
TABLE
MYTH OF BHEL’s DEPENDENCE ON MULTINATIONALS
Table shows the share of BHEL’s current business
based on the earlier collaborations.
BHEL UNITS GE
ABB SIEMENS GEC
UNTIED/
ALSTHOM OTHERS
BHOPAL
1.7 1.9
7.8
10.0 78.6
HYDERABAD 29.0 1.2
23.4
1.6 44.8
BANGALORE 2.0 32.9
23.0
nil 42.4
HARDWAR nil
nil 58.2
nil 41.8
TIRUCHI
nil 70.5 nil
nil 29.5
Most of the collaborations have since expired (particularly in
Tiruchi )and there is no dominance of any individual multinational. Tiruchi
manufactures boilers which is a mature technology where further developments
can be made in India. In fact BHEL has the actual experience with India’s
high ash coal which is unique in the world. In the area of Turbines BHEL
has enormous technological capability with rich experience of British,
German, Russian and Czech technologies. Again these are mature technologies
where there is no extraordinary obsolescence. BHEL has already paid and
obtained technology for upto 1000 MW thermal power unit.
What is valid for BHEL would be valid for most of the public sector capital goods industry, and even for many private sector units like Larsen and Tubro.
Making domestic investments redundant.
When the Government of India had focused on self reliance in the Oil sector, it had encouraged the capital goods units ( BHEL, Burn Standard, Mazagaon Docks, Hindustan Shipyard etc.) to invest in the manufacture of ‘on shore’ and ‘off shore’ drilling rig equipment. In the case of onshore rigs the non-replacement of rigs from 1975 to 1981 led to the bunching of requirement for 42 rigs and, in view of the urgency, 12 rigs were imported in one year. In Dec. 89 permission was given to import second hand rigs, again under the pretext of urgency. It was then observed that this would be the last of the imports and that ONGC and the capital goods units would work out the demand supply pattern for the next five years. After, 1991 all attempts at self reliance were given up. The catch words are global competition, free imports, charter hiring etc. and in addition ONGC’s budget was cut by half and oil prospecting is now being opened to the multinationals to provide a market for the recession hit capital goods industrial units of the West. The Indian capital goods industry is left to lick its wounds and de-industrialise.
Unfair competition - dumping.
In Part B of the Budget speech of 92-93 the Finance Minister said,
" I want to reassure Honorable members that they need have no fear that the process of reducing duties will lead to the de-industrialisation of India."
And yet, the facts speak out. Tariff reduction without careful evaluation of the consequences has created a situation where almost all the products of process industrial units, be they petrochemical units like IPCL or fertiliser units like FACT, have been subject to unfair competition by way of dumping. An example would illustrate the point: the fertiliser DAP was sold by U.S. multinationals in the Indian market at a price (cost and freight basis) of $ 166 per tonne, whereas the price at which these MNCs were selling to the farmers of U.S.A. was $240 per tonne, the cost of raw material at international prices was $ 186 for making a tonne of DAP. The government neither created a mechanism to expeditiously deal with complaints of dumping nor did they take steps to ensure that the cost of inputs (both capital and materials) as well as domestic taxes were such that the domestic manufacturers were not at a disadvantage.
Disinvestment
Perhaps nothing can illustrate the loot of the country better than the policy of disinvestment. Disinvestment was undertaken not because there was an objective evaluation of the need for doing so but as per para 20 of the agreement between the World Bank and the Government of India.
The CAG report.
The Report of the Comptroller and Auditor General of India (No.14 of 1993 for year ending 31 March, 1992) can be summed up as follows (CAG findings are given in italics):
· The disinvestment exercise was not preceded by adequate preparatory
study. No efforts were made to generate enthusiasm among financial institutions/mutual
funds about PSE shares to encourage good response
· Some PSEs like SAIL/IPCL were included against the advice
of these PSEs/Administrative ministries resulting in under realisation
of share value in respect of shares disinvested in the PSEs.
· The method of sale of shares of PSEs in bundles had the effect
of depressing the value realisation of "very good/good" PSEs shares as
a result of clubbing together with "average" PSEs. The disinvestment of
shares of Cochin Refineries and Andrew Yule which were listed on the stock
exchange was contrary to Government decision.
· Making bundles before fixation of reserve prices of shares
of PSEs resulted in failure to contain the value of each bundle to around
Rs. 5 Crores as approved by the Government. There was also appreciable
variation in the value of bundles ranging between Rs. 8.61 Crores to Rs.
12.91 Crores. By quoting rates of bundles below Rs. 5 Crores the financial
institutions/mutual funds made advantageous gains at the cost of the exchequer
· Despite being aware that the financial institutions/mutual
funds would be able to purchase shares only around Rs. 2000 - 2500 crores
in the first phase of disinvestment in December 1991, the Government offered
shares whose value on the basis of reserve prices was around Rs. 8000 crores
i.e., far in excess of the perceived invisible resources with the mutual
funds/institutions.
Bimal Jalan has pointed out (India’s Economic Crisis- The way out ahead pp.77)
"Despite the impressive growth of capital markets in India in the 1980s the total capital issues raised in 1989-90 were Rs. 2610 Crores of which equity and preference capital was only Rs. 504 Crores. Total capital raised in a whole year (inclusive of debentures) was thus only 1.1 percent of the assets of PSEs."
Even the secondary capital market does not have adequate depth,
and its magnitude in terms of capacity to absorb additional equity issues
cannot be measured by the stock market turnover which was Rs.29,385
Crores in 89-90, Rs.36,012 Crores in 90-91 and an unusual figure (for obvious
reasons of the security scam) of Rs.71,777 Crores in 91-92. If one discounts
the turnover arising from the speculative purchases/sales in the market
with a view to making capital gains, the capacity of the secondary market
to absorb new equity would be a very small percentage of the total turnover.
But this is quite inadequate even to have taken a correctly priced 8 %
disinvestment that the Government had undertaken. The question is: does
the Indian stock market have the capacity to absorb such a large amount
of disinvested shares of the public sector enterprises? If not , would
the Multinationals, by whatever methods, succeed in acquiring the equity
of public sector enterprises? The securities scam and the wholesale involvement
of the multinational banks is a strong pointer in this direction.
· Tenders received in the first phase of disinvestment were
non-competitive. 72.61 % of the bids received has only one bidder. Out
of 406 bundles sold, 289 bundles were single bids representing 71 % of
the total bundles sold. In 16 bundles test checked at random in Audit the
extent of variation in prices of PSEs shares in bundles accepted with reference
to the original prices fixed in the first phase of disinvestment in Dec.
91 amounted to Rs. 10061.04 lakhs
· Reserve prices were reduced ranging from between 21.95 % to
86.67 %. In 24 out of 31 cases reduction in valuation was above 50 %. The
reduction in original price resulted in under-realisation of share value
to the extent of Rs. 3442 Crores.
In fact there are problems even with the reserve prices. The paid up capital of most enterprises does not in any way reflect the current market value of the assets of PSEs such as steel plants, fertiliser units, petroleum companies, large capital goods industrial units and etc. The current value of the assets of such enterprises can be estimated by estimating the cost of creating equivalent capacity at current prices. For example, the Steel Authority of India (SAIL) had a paid up capital of Rs.3985.89 Crores. The cost of Durgapur steel plant modernisation for adding 1 million tonnes is about Rs. 2600 Crores or ISSCO modernisation for 1.8 million tonnes is estimated at about Rs. 6520 Crores. On that basis it would be reasonable to estimate the replacement cost or current asset worth of SAIL, which produces over 8 million tonnes of steel, at Rs. 30,000 Crores or more. This would be only the direct production assets and would exclude the townships, other real estate and facilities like schools and hospitals etc. BHEL which has a paid up capital of about Rs 244 Crores would have productive assets worth ten times that amount.. The paid up capital of the Oil companies BPCL and HPCL are a mere Rs. 50 and Rs. 63.84 Crores respectively. The real estate with some of the public sector units is extraordinary, for example , the real estate with Rashtriya Chemicals and Fertilisers (RCF) would be worth more than Rs. 10,000 Crores at current prices.
· In the second phase of disinvestment also the tenders received
were uncompetitive. There was also unequal bidding power. Four out of 19
bidders contributed 68 % of the total bids received.
· Non incorporation of claw back provision in the terms and
conditions of sale resulted in Government not being able to realise a part
of the huge profits made/likely to be made by the buyers in after sales
of shares.
To argue that the sale of PSE shares was made to mutual funds owned by the Government and any windfall profits gained by subsequent selling in the market will only be to nationalised institutions is absurd. The assets of the Public Sector Enterprises belong to all the citizens of India but the profits gained by mutual funds belong only to the investors in the mutual funds. When the Narsimhan Committee’s (on reforms in the financial sector) recommendations are implemented and the financial institutions are denationalised the gains would go into a few private hands, and allied foreign interests.
· Offloading of shares after purchase by some institutions otherwise than through the normal stack exchange was violation of Government policy and the terms and conditions of the sales.
The Janakiraman committee report on the securities scam has clearly established that certain bids made by mutual funds was on the basis of back to back transactions with certain bidders. Allahabad Bank was in fact buying the shares on behalf of City Bank and that Harshad Mehta was buying through the United Commercial Bank. The fraud involved is patent.
· Disinvestment served only to contain the fiscal deficit.
If the only motivation was to reduce the fiscal deficit the Government
could have mopped up the retained profits of the PSEs (the profits
less the dividend declared by the profit making enterprises in 1990-91
were Rs. 5167 Crores) instead of disinvestment. And this would have been
without any detriment to future earnings. It is strange that the public
sector is being asked to build up reserves by way of retained profits while
its very narrow equity is being sold below the market rate, virtually gifting
the assets and reserves to the new owners.
Gifting the public sector to the MNCs?
It is obvious that the sale of public sector shares inspite of the inadequacy of the capital market would do two things i) it would result in uncompetitive bidding and depressing the prices and ii) enable foreign investors to pick up valuable assets of the Indian people at a throw away price.
To ensure that the MNCs take over the public sector the Rangarajan
Committee has recommended,
" disinvestment of government equity could be tailored to an informed
process of management of external debt. By allowing PSEs to swap the entire
or a portion of their outstanding external debt with lenders for an equity
stake at negotiated prices, the twin benefit of reduction in debt service
obligations to the country as well as to the enterprise concerned
and a better debt equity gearing for the equity may be achieved."
What are the implications? Borrowings from foreign commercial banks went up from a meagre $ 331 million in 1980 to over $ 12,000 million by the end of Rajiv Gandhi’s Prime Ministership. A large part of this commercial borrowing was transacted through profitable public sector units such as the oil companies, RCF, BHEL to name a few. These PSEs had to contract these borrowings not to finance their own needs for imported equipment, raw material etc., but to shore up the exchange balance of the Government of India and support the thoughtless import liberalisation programme introduced then. . The cost of setting up a unit equivalent to BHEL would be about Rs. 20,000 to Rs. 25,000 Crores. The equity and free reserves are only about Rs. 1000 Crores and its outstanding foreign debt is 1.7 times the equity and reserves. Thus, a Rs. 20,000 Crore BHEL would go for a mere Rs. 1000 Crores. In Latin America, the commercial banks sell their debts to multinationals. The multinational competitors of the public sector units then swap the debt for equity either directly or by conversion into domestic currency and purchase the shares in the open market either directly or through a front agency. The same could happen with suppliers credit being swapped for equity as happened in Turkey. Another concern is that since the government does not reimburse the exchange variation due to devaluation and partial convertibility, the public sector units would have to bear the entire burden and go into losses as a consequence and thereby reduce their share value in the market.
As if this would not be enough to gift the public sector the Rangarajan committee has recommended,
"the same rules as are applicable to NRIs and foreign investors to buy the equity in private industry may be extended to the foreign investors to buy shares in public enterprises. The question of reserving a portion of the government share holding proposed to be disinvested in favour of foreign institutional investors may be considered when the role of Financial institutions expands in the Indian capital market.". The committee further recommends, " It may be desirable to allow share holding by technical collaborations in public enterprises on a preferential basis as a part of modernisation and expansion."
Thus every conceivable devise is being recommended by the Rangarajan committee to ensure that the Public Sector and the commanding heights of the economy is in the hands of the MNCs.
Deregulation
Deregulation also involves decanalisation. Essential mass consumption goods like edible oils are left to the private trade, which is well known for over and under invoicing, is socially undesirable.
Under deregulation, all controls are sought to be removed even if it means acute redundancy of the investments made by a poor nation, as well as redundancy of labour currently employed.
Liberalisation by the violation of law-a case study of Indian Airlines.
The airlines business is extremely capital intensive and both the equipment and fuel require precious foreign exchange. On a passenger kilometre basis air transport is the costliest mode of transport and besides an airline it requires a vast Infrastructure which is also capital intensive. In operations the variable costs are a small fraction of the fixed costs and there is no finished goods inventory.
A small section of privileged people, (in 1950 this population was 0.02% of the total Indian population and today this percentage has reduced to 0.01%, if repeat passengers are taken into account i.e., same person travelling more than once then this percentage would be less than 0.005%) yet politically, economically and in every other way powerful and articulate are the customers of the domestic airlines. In addition foreign tourists use the airlines and it is expected they would enrich the country by bringing in foreign exchange.
In April 1990, the Government of India had amended the civil aviation policy and introduced the policy ‘open skies’ thereby it deliberately created confusion and introduced adhocism in Civil Aviation operations. Air Taxies were deliberately and wilfully allowed to operate as scheduled airlines in gross violation of the law, foreign airlines have been allowed to operate on domestic routes through benami and front organisations, policy pronouncements have been made that foreign equity would be allowed in these benami organisations.
Blatant violation of the law: DGCA can not give permission for scheduled operations. The permits are issued only for non-scheduled operations". The Air Transport Inquiry Committee 1950, headed by Justice G.S.Rajyadakha has stated the conditions that must prevail in the matter of competitions between non scheduled operators and scheduled airlines. "
"no non-scheduled operator shall carry out any charters on the routes or between the points which are served by regular scheduled services, we do not think that the scheduled airlines could have any serious ground for complaint. It is only in the terrain not served by scheduled services that a non-scheduled operator has any right to function."
This is what would be understood by any right thinking person, what is more is that there is a specific monopoly for running scheduled airlines only to Indian Airlines, under Schedule 18 of the Air Corporation Act 1953. But the Government wants the people to believe that the law has not been deliberately and criminally violated merely because scheduled air operators are not allowed to published a time-table even though they are publishing a schedule of flights. But the consequence of this kind of adhocism has been i) Demoralisation of the Indian Airlines management and staff 2) Uncertainty regarding the future of the airline leading to indecision in all long term matters. These consequences have already translated themselves into Indian Airlines has making losses since the introduction of the policy, after a sustained record of profits and a proven track record of its ability to contribute to the development of the airlines and the Civil Aviation industry from its internal funds. All this was done to create a situation of fait accompli and bring pressure on the Parliament to enact the repeal Bill as a ‘there being no alternative’ situation.
The Government of India has introduced in the Parliament a Bill
THE AIR CORPORATION (TRANSFER OF UNDERTAKING AND REPEAL) BILL, 1992.
The statement of objects and reasons are misleading. It is stated that,
"In the fast developing international air-transport industry, mobilisation
of progressively larger funds becomes necessary for all airlines. To meet
their growth requirements, Indian Airlines and Air India, both constituted
under the Air Corporation Act 1993 need to tap the capital market for equity
funds rather than depend solely on budgetary support form the Government
as envisaged under the Act". In the entire history of both the airlines
they have at every stage been keeping up with the requirements of the international
air transport. They have been acquiring the latest state of art equipment
not only for the aircrafts but for all support facilities such as ground
support facilities, communications facilities and computerisation facilities
as well as simulators for training of all their personnel. There is neither
a need for budgetary support nor for seeking funds from the capital
market.
Q.10 Who will pay the price for these reforms?
Verdict of the Permanent People’s Tribunal.
The Permanent People’s Tribunal held in Berlin, September 26 to 29, 1988 on the policies of the International Monetary Fund and the World Bank has noted,
" The enforced privatisation and disinvestiture programme by the IMF and the World Bank have already increased unemployment and will do so in the future on an even larger scale. The programs can only result in a massive take over of the most productive economic sectors by multinational companies. The basis for economic planning by Third World governments will thus be increasingly undermined."
The testimony of the victims at the Tribunal showed these effects in more graphic terms. Cuts in real income are mostly imposed on people already living close to the brink of survival. Austerity measures strike ordinary working people with particular force. In Mexico, a 70 % increase in open unemployment, concentrated largely among younger workers, occurred between 1981-84. The Sao Paulo construction industry employed less than half as many workers in 1984 as in 1978, and at lower wages. In Argentina unemployment increased by 58 % between 1983 and 1985. Higher malnutrition and infant mortality necessarily ensued. In Brazil infant mortality rose by 12 % between 1982 and 1984.
The Tribunal ‘s Verdict was:
1. The World Bank and IMF are in breach of the Charter of the United
Nations.
2. The World Bank and IMF are in breach of their own constitution in
that they have not contributed to the promotion and maintenance of high
levels of employment and real income nor to the development of the productive
resources of all members as primary objective of economic policy.
3. The World Bank has been negligent in that it has made loans without
properly examining the needs of the debtor nations, nor has it considered
fully the ability of the debtor nations to repay such loans. The structural
adjustment policy of the World Bank/IMF caused growing net transfer of
resources from indebted countries to creditor countries. Consequently,
lives and living standards in indebted countries have deteriorated.
4. Considering the political and economic conditions generated, the
repudiation of debt can be justified by the "defence of necessity" which
is accepted by the International Courts as a valid defence when payment
of financial obligations would gravely impair the living standards of a
nation’s population, as in the case with all Third World countries.
The poor and the under privileged shall pay
Undoubtedly the highest price will be paid by the rural poor and weaker sections. By and large all services to rural areas be they supply of electricity, petroleum products, telephones or bus services or even banking are loss making for the obvious reasons that the clientele is less, long lead distances and poor non peak off take. If the exact size of the loss to the public sector, not covered by any subsidy, due to all the services to rural areas is worked out the role of the public sector would be correctly understood. What would happen once the public sector is liquidated is that all services to rural areas would be withdrawn unless the services are subsidised and simultaneously the services rendered to the urban elite and upmarket would be reinforced. Let us examine these propositions by taking specific sectors.
The Fuel and Energy sector.
Almost 40 % of the investment in the public sector is in the energy sector, that is in coal, petroleum and power. These are, in a developing economy, not strictly commercial enterprises but rather a requisite to further development. Withdrawal of budgetary support together with disinvestment of equity; unreasonable pressure for generating internal resources, and recourse to borrowing on commercial rates through bonds and debentures would certainly distort development priorities. Considerations like balanced regional development or distribution of the benefits of development to the weaker sections would become entirely impossible.
Both coal and power sector are loss making sectors but is it possible to increased the administered price of coal or power overnight and leave them to market forces? Any increase in power tariffs, without careful planning of the consequences would besides increasing the input costs in industry and agriculture with all its consequences would have many more unintended consequences like making the village poor revert to kerosene or vegetable oil for lighting. Besides reverting to a primitive mode a much more serious consequence would be that this would lead to massive imports and consequently put unbearable pressure on the balance of payments.
In such vital sectors as universal intermediates and energy, the strategy of disinvestment without any protection in regard to who can corner the shares would make vital economic sectors vulnerable to being hijacked by vested interests (both Indian or foreign).
The question of health and food security
The public sector has been used as an instrument of policy in providing food and health security for the nation. For example, Indian Drugs and Pharmaceuticals Ltd. (IDPL) and Hindustan Antibiotics were required to produce bulk drugs and essential drugs instead of easily marketable and high profit "formulations" and simple remedies like cough syrups, vitamins and even cosmetics where the profit rate are much higher. Before IDPL and Hindustan Antibiotics (HAL) were created, drug prices were amongst the highest in India. With the following policies i) IDPL and HAL providing the bulk drugs ii) enactment of the Indian Patent Act and iii) regulations such as drug price control etc. it was possible to make India one of the cheapest drug price. Few realise that Hindustan Photo-films that makes X-ray films is part of the health security. If all these measures are reversed, as is being sought to be done today what will happen to the health security of an impoverished country where the Government is constantly cutting down the health budget? Similarly food security is provided by the following policies i) the Food Corporation of India, ii) priority lending by the public sector banks and subsidies on fertilisers and iii) the indigenous manufacture of fertiliser. (It would be worth pointing out that the `sick’ PSE - PDIL is one of the few fertiliser catalyst manufacturers in the world. If this unit is closed and for some reason of war or peace India cannot import catalysts the entire manufacture of fertiliser in India will come to a grinding halt). Here again most of these measures are being reversed. Of what value would our political independence be if we cannot ensure food and health security to our people?
UNCTAD’s conclusions
The UNCTAD Trade and Development Report 1992 concludes,
"Public Enterprise reforms under structural adjustment programme has frequently not been aimed at obtaining a sustained improvement in efficiency. Initially, the programmes concentrated on improving short term financial performance, often through price increases. More recently, they have been geared towards reducing the size of the PE sector. Adjustment policies have often failed to deal with the underlying social and distributional problems which PEs are designed to address. Moreover, they have also frequently failed to achieve the results sought.
Success in cutting the relative size of the PE sector in developing countries has been very limited. Divestiture has often consisted of selling profitable, small and medium size enterprises rather than large unprofitable ones - something which generates few social problems and hence meets with little political resistance but which does not provide much relief if any to the budget. The evidence on the budgetary impact of PE reform is inconclusive. In a few countries cuts in subsidies to PEs had an immediate positive impact on public finances; elsewhere the enterprises reacted by accumulating arrears to or by over borrowing from other PEs. Profitability has improved only in some of the countries undertaking structural adjustment programmes for example in Africa an improvement was achieved only in 8 out of 18 countries under World Bank supported programmes, while in 2 countries there was a deterioration. Moreover where financial results improved this was frequently achieved by monopoly price increases rather than better management. However, staff reductions, which were part of most PE reform programmes , also appear to have contributed to short term financial improvements in some countries.
In a country like India subject to the centrifugal
forces of linguistic and minority interests and where a rapidly
expanding educated and socially conscious population have growing
expectations we need to unite and safeguard its integrity. In this political
context we need to ask what role will market forces play and
what are the limits to the application of the logic of competitiveness,
and the market determination of priorities. The examples of the former
Soviet Union, Yugoslavia and Czechoslovakia show that this logic only leads
to the dismemberment of nations.
The net impact of all these policies will be that the commanding heights
of the economy will pass on to the multinationals with the Indian elite
as their servile brokers. All this will result in India becoming a NEOCOLONY.
Thus after forty seven years we are going from being an ex-colony to a
more developed colony. What we are witnessing is the resurrection of the
East India Company, without any resistance, without a shot being fired,
without the presence of an occupation force. Is it meaningful then to carry
on the logic of the World Bank and IMF?
.