It is time to stop shielding the inefficient public sector
Posted by: Uma Shashikant on Feb 13, 2017, 01.51 PM IST
By Uma Shashikant, Chairperson, Centre for Investment Education and Learning
Why do we distrust the private sector? As evidence of inefficiency stares at us, why do we still support the public sector? These questions have been elegantly analysed in Chapter 2 of the Economic Survey 2016-17 ( The Economic Vision for Precocious, Cleavaged India ). It is a joy to see that policy documents of the government have, over the years, moved away from being descriptive and data-filled to being interesting and insightful. How does this pathology impact investors?
The enhanced market orientation of India since 1991 is evident. From an economy that was closed to the world, we have opened up and are thriving quantitatively and qualitatively. The Economic Survey provides four pieces of statistics to support this argument. First, from a country that preferred import substitution and self-sufficiency for a very long time, we have now transformed into a trading nation. For a country our size that has a strong local consumption demand, we engage so much more with the world.
Second, we receive a strong inflow of global capital, despite some capital controls still being in place. Third, the share of public sector enterprises has reduced, as large private enterprises have grown in market cap, assets and profitability. Fourth, the share of government expenditure is quite low, indicating that the market rather than the government drives economic growth.
The preference for markets over government should have led to a higher trust in the efficiency of the private sector. But we have not crossed that bridge yet. In a World Value Survey of 60 countries about citizens' attitude towards the private sector, we rank 55th with Ukraine, Russia and Chile after us. We believe that the state must run businesses, dictate prices and distribution, remain a primary provider of employment and redistribute natural and financial resources. It remains an unpopular choice for the government to give up its role in these matters.
We behave differently as consumers. When strong evidence of efficiency and better service delivery is available, consumers have chosen the private sector over the public. The telecom sector is a stellar example here. Consumption patterns in travel and housing indicate a preference for the private sector over public sector. The failure of the government to provide basic facilities in education and health has led to a proliferation of private service providers, who are patronised by consumers despite high prices, uneven quality and exploitative practices.
If consumers prefer private businesses, the government should have vacated its ownership. But the government does not sell off public sector enterprises to the private sector, even where evidence of better performance is abundant. The recent Budget continues to provide for the government-run airline, hoping to turn it around; and it continues to seek capitalisation and rejuvenation of the NPA saddled PSU banking sector. We do not "privatise" our PSUs, but only resort to selling stakes in a "disinvestment" process whose objective is to mobilise some revenue for the Union Budget.
This mixed picture of a market-oriented consumers of goods and services and a popular distaste for dismantling government control of business has led to poor investment choices. Over 70% of our deposits and loans continue to be with PSU banks, amid concerns about balance sheet health and asset quality. Our retirement corpus is managed conservatively and subject to prudential guidelines that are detrimental to long-term value growth. Our insurance markets are dominated by government-owned enterprises whose products and practices are not always optimal for the investor.
From time to time, the government comes up with products that are targeted at the retail investor, sold primarily with the tag of government ownership that masks the underlying risks. When the government launches its next CPSE ETF, it can be expected that the practice of discounted pricing to entice subscription will persist. More dangerously, the performance of the earlier CPSE ETF will come under focus. The high return aided by the lower crude oil prices will not be seen as tough to replicate. Nor will the obvious sector concentration in that portfolio, erroneously perceived as large cap, be brought out. Without a shred of evidence that points to sustainable linkages between government ownership and investment return, these products will be preferentially priced and distributed, merely because the underlying businesses are PSU.
The product bouquet extends to the bond markets, where it is more entrenched. Infrastructure status is provided to businesses, only because they are owned by the government. Tax exempt status is provided to bonds, only because they are issued by PSUs. Investors are warned about every possible risk when they buy any private sector product. But products that include PSUs are positioned in the same market as benevolent and safe, as signaled by incentives and concessions that accompany their launch.
Product choices in other contexts are also skewed to favour PSUs. Sift through the list of "approved" products in which innocuous entities such as endowments, trusts, societies, and a long list of institutional investors can invest their surplus funds. They primarily hold PSU bank deposits, PSU bonds and PSU issues. PSU banks prefer not to distribute third party products issued by private entities, even if there is merit. There is no prudential reason why investment choices of the common investor should be skewed in favour of lower quality issuers, only because they are PSUs. Why should the list of bond eligible for saving capital gains tax hold only PSUs? Why should government accounts and pension payments be made only through PSU banks? Why should our housing society and our kids' school invest their corpus only with the government?
Policy action around economic reform that dismantles government ownership of business may take a long time to come, given vested interests and electoral politics. But investment choices in a free market cannot be skewed to favour PSU businesses. This level playing field is long overdue. This article appeared in Economic Times dated Feb 13, 2017, 01.51 PM IST