Empty cashier counters are pictured at a State Bank of Mysore branch on March 22, 2005 in Bangalore as bank employees across India held a one-day strike. (Photographer: Namas Bhojani/Bloomberg News)

Why Atal Bihari Vajpayee Put India’s Public Sector Under The Scalpel

Excerpt of a speech by Prime Minister Atal Bihari Vajpayee at the Conference of Chief Executives of Public Sector Enterprises, on April 1, 2000 in New Delhi.

India, along with the rest of the world, has just entered a new era of tremendous opportunities and awesome challenges. The 21st century promises new vistas of human development and economic growth.

It also demands a new mindset and a fresh approach -- towards our society, polity and economy. We must adopt a perspective that is based on pragmatism. We need to undertake a reality check so that we can better address the real issues of today and tomorrow.

Issues that directly impinge on our fundamental concern: the greatest wellbeing of the largest number of our people.

At the midnight stroke of August 15, 1947, India emerged as a free nation and the inheritor of an economy that had been designed to serve the exploitative interests of her colonial rulers. A land rich in natural resources, India barely had any manufacturing industry worth its name.

The exploitation of India during colonial rule is best exemplified by the fact that cotton grown in her fields was processed in Lancashire mills and shipped back to be sold to Indian consumers. Or, the fact that salt used for weighing down empty cargo ships while sailing from foreign shores to Indian ports, was sold at a price lower than that of salt produced in India.

In the closing years of British rule, the Indian economy was further crippled by the effects of the Second World War.

Therefore, the immediate task that faced the government of Independent India was to build a national economy, virtually from a scratch, to meet the demands and fulfil the aspirations of a free nation.

A truly daunting task made more difficult by the fact that local entrepreneurs had neither access to large funds nor the capacity to accumulate capital for major enterprises. Lack of technology was another impediment -- after all, India had missed the Industrial Revolution.

In these circumstances, government had to intervene in the form of both mobilising resources as well as setting up basic industries that came to be known as public sector enterprises.

In the early decades of our Independence, these enterprises played a significant role in the nation-building process. However, by the seventies and eighties, public sector enterprises had begun to falter.

The reasons for this are too many to be listed here. But, broadly they are:

  • inadequate competition, leading to inefficiencies;
  • inadequate accountability, making them careless about productivity and profit; and,
  • inadequate motivation, making them uneager participants in the economy.

There were systemic problems, too, and many of them still remain. For instance, it is virtually impossible to entirely separate a public sector enterprise from government. As a result, the constraints within which governments have to function are invariably replicated in the functioning of public sector enterprises.

And because public sector enterprise managements are constantly under pressure to conform to guidelines and rules, many of which are entirely irrelevant and dampen both initiative and enthusiasm, often inaction appears to be a better option than to act and face unfair consequences.

I would be amiss if I do not mention that political parties in power contributed to the decline of public sector units, too, by using them as fast breeders of jobs, instead of making them sustainable, competitive and fruitful players in the national economy.

Political expediency of the moment was allowed to prevail over the future viability of public sector units and the employment security of their employees.

It would also be relevant to mention, if only to ensure that the same mistakes are not repeated in future, that the monopoly environment enforced by previous governments in the guise of helping public sector units actually had a debilitating impact on them. Cumbersome procedures that formed the backbone of the pre-liberalisation licence-permit-quota raj helped only to worsen matters.

Trade unionism that focused less on workers’ responsibilities and more on their rights, as well as a certain brand of union politics whose success depended on crippling strikes, also had a long-term effect in the form of declining productivity and falling profits.

No doubt these are harsh truths. But unless we face them, we will never learn any lesson from our past.

I may also add that these experiences are not unique to India. Countries in the West with huge public sector enterprises that ranged from railways to telecommunications to mining to public transport faced the same problems. They have been able to overcome them because they dared to face the truth.

Since the late eighties, however, things have begun to change -- both in India and abroad. The wave of economic liberalisation in countries across the world has not only swept away the age of monopoly for state enterprises but also swept in the conversion of public sector units into private enterprises.

World over the experience has been that privatisation has led to increased efficiency and higher profits that have not only benefited the new private owners of these enterprises but also their employees.

Yet another global experience is that of liberalisation sweeping away those public sector enterprises that had refused to shake off their lethargy, thus making themselves untenable and losing their relevance.

In India, compared to other countries, we have been less hasty in ending monopolies and privatising public sector enterprises. And this for good reasons, too. After all, we did not have a safety net in position, nor did we have a welfare system that was adequate to meet the problems of blanket privatisation that often leads to redundancy and re-deployment of the workforce. Also, private sector’s access to capital still remains limited, although it has increased by leaps and bounds in the last one decade.

After more than a decade of economic reforms, and now that we have entered the 21st century as a country economically much stronger than she was at the time of Independence, we should take a hard look at the public sector. Along with your cooperation, we need to prepare public sector enterprises to meet the challenges of the new era of global economy driven by market forces.

What are the facts? Of the 235 operating public sector enterprises, more than 100 are loss-incurring units.

In a third of public sector enterprises, capacity utilisation is less than 50 percent. Despite government infusing capital, strengthening management structures and giving public sector enterprises greater autonomy, returns are yet to be commensurate with inputs.

The total investment in Central Public Sector Units is more than Rs 2,30,000 crore. In 1998-99, the total profits of all Central Public Sector Units was Rs 19,743 crore and the net profit was Rs 13,235 crore with a net dividend of Rs.4,932 crore.

No less worrisome is the fact that public sector enterprises’ contribution to public debt is estimated at a third of the total internal debt of the union government.

These facts and figures are hardly encouraging and should cause concern -- to both management and employees of public sector enterprises. The results do not reflect government’s efforts to keep public sector enterprises going.

My message to the Chief Executives of Public Sector Enterprises gathered here today is simple: You have to arrest these worrisome trends and ensure purposeful functioning as well as higher profitability of your respective enterprises.

There is no dearth of opportunities -- indeed, in many ways you have greater opportunities than the private sector, to score better results. You have to concentrate, and concentrate now, on technological upgradation, improved manufacturing methods and expanded market penetration. In an economy increasingly driven by competition, you have to be successful competitors.

The system of performance contracting, or MOU, has been a significant step in the direction of improving the performance of public sector enterprises and separating management control from ownership. Government, you must remember, lays down macro level policy.

The task of day to day operation is left entirely to you, you are required to deliver; we are here to assist.

Government’s policy towards the public sector is clear and unambiguous. We will strengthen the capability of our public sector, give greater managerial autonomy, foster technological upgradation for enabling them to effectively meet the new challenges of globalisation and increased competition.

To those who unthinkingly criticise our disinvestment policy, I have this to say: Ours is a well thought out strategy to revitalise the public sector by bringing in competition, granting greater operational flexibility, reducing surplus manpower and upgrading technology.

We are not here to indulge in distress sale; our actions in the last two years are ample testimony to our commitment towards making the public sector viable and sustainable.

Retrieved from the official archive for Former Prime Ministers Of India.