C&B Notes

Privatization on a Grand Scale

During his reelection campaign, Narendra Modi struck a nationalist tone.  His economic policy of privatizing India’s state-owned enterprises and industries has not aligned with this rhetoric, as the country has increasingly allowed business to function in growing free markets.

Among more than 50,000 companies analysed by consultants at McKinsey, the share of income generated by state-run firms declined from 45% to 37% between 2005 and 2017. T he shift has been more pronounced among the biggest companies.  Public-sector companies account for 11% of the profits in the benchmark BSE 500 stock market index, down from 56% 14 years ago.

Sometimes the shift from public to private dominance occurs through divestments.  The government got out of car-making in 2008, when it ceded control in Maruti-Suzuki to its Japanese joint-venture partner.  More often it lets state-controlled firms wither, as the private sector blooms.  This reflects how the government has gone about reducing its role in the market, observes Rashesh Shah, chief executive of Edelweiss, a financial firm that itself emerged from the state’s retreat from banking.  Call it privatisation by stealth.

This has been most emphatic in consumer-facing businesses.  The state duopoly which once controlled Indian telephony has been reduced to a 10% share of the market as people abandon fixed lines for mobile phones offered by frenetically competitive private providers.  Doordashan, the once-monopolistic public broadcaster, is losing the battle for attention. In 2016 Hindustan Machine Tools, which sold one in seven wrist watches in India at the turn of the century, down from nine in ten in 1990, folded.  That left the market wide open for private brands like Titan, which is controlled by Tata Group, India’s biggest conglomerate.

In politically sensitive industries such as chemicals, energy and steel, public-sector companies cling on thanks to subsidies, price caps and a profusion of other government mandates.  The state has been producing around half of India’s fertiliser for years.  But even there the state’s grip is loosening.  As recently as 2010 state-owned utilities generated nearly 80% of India’s electricity. Their share has fallen to 56%. These days just 15% of steel is smelted by the government, compared with one-third at the turn of the century.

Then there is finance.  Public-sector borrowers (and well-connected private ones) could historically count on cheap loans and cut-price policies from state-run banks and insurers.  Between 2010 and 2018 the government’s share of banking assets declined from three-quarters to two-thirds.  As it continues to shrink, so too does a critical lever used by politicians to control the activity of all business.

Indian critics of privatisation, who far outnumber its fans, point out that private companies often seem little better than state-run ones.  New telecoms providers may be cheap but service is poor, with frequent outages and dropped calls.  Messy collapses of private firms—for example Jet Airways, India’s biggest private-sector carrier, in April—leave millions of customers in the lurch.

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