Public sector capitalism


Why a minister as PSU godfather is bad news —for the economy and for the PSU

Should Ratan Tata participate in cabinet meetings when the government decides on customs tariffs on automobiles? Should Narayana Murthy argue his case in the cabinet when decisions are made about tax incentives for software companies? Should Anil Ambani bat for oil companies when there is a cabinet discussion about shifting to a single rate tariff for crude oil and petroleum products?

The answer is no. At every whiff of industrial houses lobbying for their interests, we protest. In countries where the government does allow big companies to push through their interests, we call it “crony capitalism”. To maintain a separation between the world of business and the world of politics is desirable since policy making should be shaped by the “larger common good” of the people, and not shaped by narrow interests of some companies or one industry.

While we may pat ourselves on the back at this separation between policy making and business interests in India, we are ignoring the fact that the interests of some of the biggest companies in India are, in fact, very blatantly protected by the government, even when in conflict with the interests of the larger public. Their majority shareholders sit in the most important policy making group in the country: the cabinet.

Consider this. Petroleum Minister Mani Shankar Aiyar allegedly recommended the cutting of duties on crude oil. Not because it would reduce petrol prices, but so that he could increase the profitability of oil refineries. The minister of petroleum has always represented the oil PSUs. Consequently, India’s oil policies are a messy outcome of the conflicts of interest between those of the companies and the public.

The conflict of interest is the sharpest when proposals are made to cut tariffs on petroleum products. The petroleum minister worries about the impact on profits of petroleum companies. The structure of duties on crude oil, petroleum products and polymers in India is extremely distortionary. It makes the Indian consumer pay more than consumers all over the world. In a competitive framework all these products should have an identical tariff rate, since small differences in tariffs (like 10 per cent for crude oil versus 15 per cent for petrol) generate gigantic profits for refineries. But the interests of the oil companies have prevailed over the interests of the public.

The problem is not unique to the petroleum sector. It exists for the full range of PSUs. Telecom policy is contaminated because the Department of Telecom, which is supposed to make policies which are best for the country, is the owner of BSNL and MTNL. This single issue held back India’s telecom policies for decades, until major breakthroughs were achieved in 1999 by forcibly dethroning DoT. Astronomical prices had to be paid by consumers on international telephony as long as VSNL belonged to the public sector. The problem is with us even today. Recently, the unbundling of local loops for broad band services recommended by TRAI, which was opposed by BSNL and MTNL, was rejected by Dayanadhi Maran, the IT and telecom minister.

Similarly, India has done a poor job of banking policy for decades. One major reason is the conflict of interest at the heart of the Ministry of Finance which owns 75 per cent of the Indian banking system. Even regulation by the RBI is hijacked by this consideration. Healthy banking regulation, appropriate monetary policy and sound debt management, all often play second fiddle to looking after for the interests of public sector banks.

The Ministry of Civil Aviation has historically not focused on policy issues in airlines and airports. Instead, it has enjoyed the ownership of Indian Airlines and Air India. Bureaucrats and politicians have engaged in the patronage game of doling out jobs, contracts and free tickets. In return, they have battled in cabinet for policies which have prevented the growth of aviation in India while upholding the interests of these PSUs. In the battle between the good policy and PSUs, the consumer loses as he has to pay higher fares. India loses as there is a lot less air travel. The PSUs lose as they remain inefficient. The civil aviation minister, who blocks reforms, adds nothing to his political career out of this stint at the ministry.

It is not accidental that India has bad policies and restrictive barriers against entry by private and foreign companies in these areas — banking, insurance, civil aviation, petroleum, steel, etc — where PSUs exist. In too many instances government ownership of companies becomes a means of patronage by the ruling party. The allotment of petrol pumps is an example. This creates incentives for the concerned ministries to oppose moves to reduce bureaucratic and political control over these companies.

Further, trade unions in PSUs are often very strong. The interests of the employees are in conflict with the interests of the country at large. But the unions have helped block restructuring and closure of PSUs. The lack of a good regulatory structure further supports the interests of PSUs. In the case of any monopoly, public or private, a fair and unbiased regulator should be present to protect the interests of the consumers who inevitably get hit when production or provision is monopolised by one company or a cartel. The cartel of oil companies fixes prices in the absence of a petroleum regulator.

The presence of PSUs in administrative ministries is undermining good policy making by the ministries. The conflict of interest is unlikely to go away as long as the ministries are in charge of the PSUs. Taking PSUs out of ministries will give them greater autonomy and reduce political interference. It will reduce rent-seeking by politicians and it will go a long way in rescuing policy making from the clutches of PSU interests. And, whenever there is a conflict, policies can be made in the larger interests of the country, not the “navratans”.


Ila Patnaik