Privatization as an Economic Response to COVID-19 in India

Lakshya Bharadwaj

Overview and Background

The matter of economic privatization has been debated in public policy and political circles almost as long as modern economic systems have existed. Since economics and politics are inextricably linked, no economic issue can be resolved by employing merely quantitative measures. Each theoretical decision in policymaking has to be justified by citing real-world applicability. This property of economic policy begets a need for the study of political economy.

As mentioned earlier, legislators do not and should not separate society from economic principles. Theorizing in a vacuum may lead to undesirable results which are easily avoidable by getting rid of legislative naivety. More tangibly, we see economic policy at work in response to a stimulus. Throughout our history, these stimuli have presented themselves in many forms – calamities, demographic change, technological change, and most recently, a pandemic.

India struggles with COVID-19 in a time when some of the earlier hotspots of the disease have left their peaks far behind. Italy, China, and the United States are some such examples. Though the accuracy of economic data coming out of China may be questioned, it does not change the formidable challenge India faces currently of protecting its citizens both medically and financially. Sadly, choosing one of these forms of protection may end up being a temporary measure. Unless Indians have sustainable livelihoods, medical stability will not translate into overall stability.

Unlike many European and North American countries, India does not have the luxury of a reliable social security system. PM Modi’s government did announce a stimulus package worth US$265 billion on May 12, 2020, but according to economists, the effects of the package were not convincingly stimulating. As per reports, less than 1% of this package was actually spent by consumers with many who may have needed direct payments not receiving any. Overall, direct government expenditure and intervention have not produced expected results yet.

The economic quarter ending in June recorded a shrinkage of about 24% in the Indian economy. A detailed look into the same report reveals more ominous figures. An estimated 140 million jobs were lost and consumption dropped by close to 27 percent. About half of all investment expenditures disappeared as well. Despite the bleak scenario that these data convey, the economic tool of privatization still keeps hopes alive, providing a last resort of sorts for Government of India. Direct intervention has failed, and now it is time to turn to the invisible hand.

Privatization: History and Future Post-COVID-19

State-owned enterprises failing to spur economic growth is not a new phenomenon in the Indian financial scenario. Economists warned us as early as in 1996 of the misdirected efforts and unfulfilled expectations associated with Indian state-owned companies. Mehta and Trivedi published a dubious take on the future and practicality of PSEs (Public Sector Enterprise) in India[i], lamenting the disastrous 1980s that stood witness to the largely abortive attempts by the Government of India at ensuring prosperity through production. In defense of the government, however, no ruling party is free of political considerations which keep even perceptive policymakers from making the best decision.

Indian state-owned enterprises have historically suffered from high capital-output ratios owing to a wastage of the capital pumped into them by the state. There is often a mismatch between the resources appropriated for these PSEs and their contribution to the Gross Domestic Product. Easy and relatively less transparent access to government finances incentivizes the poor performance of PSEs in India. As per data from 2014, about 5 percent of the PSEs utilize less than 75 percent of their capacity, thus costing the Indian taxpayer more money that she receives benefits for[ii].

Doubtless, many industries are strategically important to the Republic of India as they are to many other nations. Defense, railways, border security, shipping, and aviation are some such industries. Unlike in the United States where defense contracts are awarded to private merchants and weaponry has been historically manufactured by private sector companies, the Indian political system does not allow for this level of “maturity” in private enterprise. It naturally follows that initial attempts at mass privatization have to be in non-strategic sectors.

With economic recovery in mind, the Finance Ministry announced in mid-May, plans to privatize certain non-strategic industries. Surprisingly, the government has also called for partial privatization in certain strategic industries with about one to four state-owned enterprises remaining in these industries. Most of these privatizations will happen in April 2021 with an aim to raise revenues for a state already beset by financial hardship due to the lockdown. Although the Modi government has displayed an increased focus on privatization compared to its predecessors, COVID-19 has led leaders to call for foreign investors and buyers more fervently.

An economically challenging time such as ours during the Coronavirus crisis virtually begs for an end to inefficient practices. Many hold that governments should favor privatization and divest their industries of state-provided resources and benefits even without a stimulus as critical and undesirable as this pandemic. There is great wisdom in this position, both political and economic. A general discussion of the positive side of privatization can be found in many treatises, but in the Indian context, the current COVID-19 scenario warrants a heavy shedding of unproductive government spending on keeping hollow economic structures afloat.

Conclusions

Covid-19 has claimed 106,490 Indian lives as per October 8 reports, with 6.9 Million Indians having been infected so far. Evidently, the public health aspect of this crisis is scary enough to bring down the morale of the citizenry. As demonstrated in this article, the economic impact of this global pandemic has added significantly to this struggle against a virus that shows no signs of going away soon. Public health measures in India have faced their fair share of criticism, but the economic decision of privatization has the potential to uplift the economy from this phase of darkness.

When the privatization plan goes into effect and state-owned enterprises are sold off to private investors, the Finance Ministry will rightfully deserve credit for ceasing inefficient practices of carrying unproductive companies. Given the recent appeals and invitations by government officials such as PM Modi himself, we can expect to see foreign investments into airlines and other industries such as space exploration.

These changes have the potential to create many jobs, fuel the local consumer economy, and drastically reduce fruitless government expenditure. Even though tragic, COVID-19 has proved to be a stimulus that is eliciting a reactionary measure India should have embraced years ago.


[i] Mehta and Trivedi, “Reshaping the Economy: Implications of Privatization in India”[1996], 1

[ii] Ram Kumar Mishra, “Role of State-Owned Enterprise in India’s Development” [2014] , OECD 17

Leave a Reply

Your email address will not be published. Required fields are marked *

Latest Articles

Our Temple of Justice

A short drive from India gate roundabout to the adjacent telemark reveals a monolithic institution regarded as the third pillar

Read More »
error: Copyright Protected