Government Failure, Private Sector Rescue

When economic reforms began 15 years ago, I expected a new division of labour, with the public sector and private sector each focusing on what it did best. The government, I believed, would focus on law and justice, a second green revolution, and better infrastructure. The private sector, I thought, would boost manufacturing and services. That is what happened in Korea, Taiwan and Singapore.

But not in India. The private sector has done more than expected. India’s software industry is world class. Indian manufacturing has finally become competitive: exports have grown by over 30% annually for three years. Indian companies are making foreign acquisitions galore and becoming MNCs—Tata Steel, Bharat Forge, Tata Motors and Ranbaxy are a few examples.

However, the government  has failed miserably in the new division of labour. Corruption and callousness have worsened. Criminals have flocked in hundreds into central and state legislatures, and into Cabinets. The courts are unable to convict any resourceful person beyond appeals. Harshad Mehta and Narasimha Rao died of old age before their cases ended.

Agricultural stagnation is a serious problem. India has started importing wheat rather than exporting it. And infrastructure, despite significant improvement, lags well behind that in comparable countries.

How, then, has India managed record economic growth in the recent years? Because the private sector has taken on many traditional government roles, and saved the situation.

Power was long a state monopoly, and State Electricity Boards were bankrupt when reforms began in 1991. They sought refuge in Independent Power Producers like Enron, but these degenerated into a fiasco. How then did India produce enough power for record economic growth?

Well, old power stations improved their load factor. But the main reason is that corporations decided they could not rely on government supplies, and set up 20,000 MW of captive power. By taking on a role originally performed by the government, industry flourished.

Consider ports. Traditionally, cargo was handled inefficiently at government-owned major ports. The loading time was ten times longer than in Singapore, and ships waited up to 25 days to unload. Today, loading and waiting time has been slashed because corporations, Indian and foreign, have been allowed to set up container terminals in major ports, transforming efficiency. Meanwhile Gujarat has facilitated the development of 40 minor ports, mainly privately owned, and other states are following suit. Captive ports of large corporations have revolutionised the cargo scene. Reliance’s port handles more cargo than any major port save Vishakapatnam.

Telecom is the biggest and best example of the private sector taking on the traditional government role with success. In the 1980s, you had to wait for up to seven years for a government-supplied phone. Private competition today gets you a connection instantly. India is adding five million cellphone subscribers per month, and its telecom rates are the lowest in the world.

Corporations are now modernising Mumbai and Delhi airports, and will spread to other airports. Private companies are now building several toll roads. The government developed the idea deficiency payments for roads, with the contract going to the bidder requiring the lowest toll subsidy. But now some bidders are willing to pay a fee rather than demand subsidies.

the second green revolution is being energized by the private sector, not the public sector. Reliance has led the charge into rural areas in Punjab with a farm-to-fork operation—managing the chain from seeds and crops to processing and hypermarket sales.  ITC is rapidly expanding its e-choupals, computerised kiosks for farm information and for buying produce. The Mahindras, Tatas and Shrirams are setting up rural supermarkets. Triveni, a sugar group, pays cane dues directly in farm bank accounts, and issues debit cards so that farmers can travel without cash to markets, a boon in gangster-ridden Uttar Pradesh.  These companies provide quality seeds and saplings to farmers, with guaranteed buy-back at an assured price. Thus the companies perform a price guarantee function that the government once pioneered through grain mandis.

These initiatives cover only a small part of the country. But they are producing islands of dynamism in an otherwise stagnant lake.

In this manner, corporations have plugged the gap created by the public sector’s failure in its traditional role.  But in the key area of law and justice, this does not seem possible. I suspect that competitive bidding for policing, tied to performance indicators, would actually improve outcomes. But the entire power of politicians flows from their control of the police and administration, typically for illegitimate ends, and they oppose any reform of a corrupt, moribund system.

The only quick justice in India comes from Maoist groups, who in many districts hold their own courts, pronounce verdicts and impose penalties on the spot. That is not the privatisation I favor. But it seems to be the only one we will get.

What do you think?