Privatization and Public Regulation
Volume 17, Number 3 Article by Pradeep Banerjee September, 2005
Privatization and Public Regulation _ The Indian Experience : By Simrit Kaur, Macmillan India, 2003, pp. 276, Price: Rs. 385 (cloth). :
The Indian economic development experience in the post-independence period has been an interesting one. There can be no doubt that succeeding political scenarios have played an influential role in policy formulation and execution, and thereby, on the economy itself.
The book under review posits the question early: `Is privatisation a good public policy?' The question is of great relevance to the economic management of the country in view of the state practice of routing large-scale investments under its aegis. This goes counter to the view that it is in the best interest of all that the state focus its work on governance and be freed of running industrial investments, which it does, more often than otherwise, inefficiently. Over the years, the state has opted out of a number of units that were run by it earlier. The manner in which state run enterprises have been privatised has varied, as well as the degree to which the private sector has been permitted to play an expanded role in the economy. Thus, barring units classified as belonging to `strategic' industries, others have been progressively divested of control under the policy of privatisation. The process adopted may be transfer of ownership of a unit, transfer of management, or `marketisation'. The latter, which the authors deem `the least spectacular but quite meaningful', involves the adoption of measures such as reaching out to the capital market for infusion of finance to bolster equity capital, productivity-tied incentive schemes, and subcontracting of select production processes.
Why does a state adopt such practices? A scenario of sustained fiscal deficit, a balance of payment deficit, a plethora of loss making industrial units, or pressures initiated by aid giving institutions associated with structural reforms of an economy could induce the adoption of these practices. The modus operandi is such cases is to manage the interactions between state and enterprises, in both the public and private domains, utilising public regulations. Public regulations are essentially contracts by way of which the government can regulate the activities of an enterprise. Given the differences between enterprises in terms of state direct ownership and otherwise, these regulations record variances in impact.
This book is an attempt at tracing the Indian experience of public regulation and the process of privatisation. Thanks to the state led approach to industrialisation in the post-independence years, the role and reach of the state has been extensive and the wide range of industries in which state led investments were channelled included manufacture of steel and processing of oil to provision of hotel facilities and manufacture of bread. Some of these industries, especially steel, have come under ambivalent swings in perspective as regards privatisation. They have been categorised as `strategic' and kept out of the reach of and control by private sector capital. The state thus played a dominant role in enterprise promotion from early on.
The state then went in for changes that were of the privatisation variety. It is important to note that this process is still continuing, is debated about, and has become a slogan plank for electioneering purposes; the study is therefore of great relevance. The process of privatisation undertaken by the state is discussed against the backdrop of the role played by the state in the political economy of the country, through chosen policy measures. These have changed over time from the `commanding heights' measures of the early days to the market friendly measures during the later decades of the eighties and thereafter. The result has been the emergence of units that populate the public and the private sectors of the economy. It is not surprising that the tilt has been in favour of the former.
The first objective of the study is to discover the extent to which the public sector has been effective in `initiating the process of economic development and diversification of the industrial structure of the economy via its linkage effects with the rest of the country'. Students of the political economy of this country recognise that the emergence of units in both sectors was a consequence of the adoption of the `middle path' of development and also given the low abilities of private capital to initiate significant industrialisation of the economy.
Going along this path resulted in a significant proportion of the productive capacity being owned by the state. However, two issues that arise here are: How efficient are these productive capacities? And how competitive are these state-owned units compared to the privately owned ones? The author has undertaken an industry specific exercise in order to determine whether it is the market structure or the ownership pattern that affects efficiency, and analyses the data to arrive at the primacy of competition over ownership. The author realises however that despite these results, some of the state owned enterprises will continue to remain in the public sector, either for political reasons or because of lack of effective administrative capacity to regulate private monopolies. It is therefore necessary to develop a public regulatory mechanism incorporating performance contracts by which public sector units can be governed.
A study that focuses on the road to privatisation, which begins where public ownership ends, needs to recognise the role of the state in the process. In an early chapter on `The Economic Role of the State', the author surveys the literature and finds that this is a case of unbalanced intellectual growth, with positions swinging from unabashed support for state ownership to the opposite extreme. Opting for the middle path, Kaur holds that there are areas where state intervention has positive outcomes, as in health, infrastructure, education and social security. It is necessary to inject sufficient competition into other industries so as to turn around the performance of public enterprises and bring about a higher degree of what has been referred to as `allocative efficiency' in the economy. In conclusion to this debate, it is pointed out that it is the degree of competition, and not ownership per se, public or private, that determines efficiency. It follows that private sector may not enhance efficiency as much as privatisation via marketisation', and that the way forward for India is the creation of competitive markets.
At the ground level, this is what has been happening in the country, and divesture through offloading of equity has been of a lower magnitude than targetted. Similarly, divesture of a block of equity to the best bidder has seen emergence of road blocks in practice. Not surprisingly these have become instances of media coverage with losers and gainers going for the sound byte. If at all there have been cases of success, it provided there is sufficient competition, there is no discrepancy between private and public interests'. This theory is elaborated upon in a succeeding chapter on `Ownership, Competition and Efficiency', and its validity is tested in the Indian context. Growth patterns between public sector units operating in different market conditions indicate better performance of units functioning in competitive markets. Although the sample size used is small, this bears out the evidence of other researchers. The author thus concludes that `privatisation via change of ownership from public to has been so in areas where private sector units have been able to occupy public space. In other words, growth has occurred in areas that were earlier cordoned off from participation by private capital, such as infrastructure, aviation, and telecommunications. The presence of representatives of both sectors has also ensured reduction in monopolistic market formations. To bolster advantage to the economy, therefore, it is necessary to enhance the performance of public sector units by rethinking public regulations and making the market competitive.
The area of study taken up in this book is an important one for the management of the economy, and one that merits a lot more attention from researchers, academics and practitioners. Some errors in the text could have been avoided with more careful editing.
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