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Why India doesn't trust its private sector
Illustration: Jayachandran/Mint
4 min read . Updated: 07 Feb 2017, 01:54 AM IST Livemint
Excessive government intervention and uncertain regulatory environment have affected outcomes in the market
The Indian economy has made enormous progress since the 1991 economic reforms. All political formations in power have taken this process forward. The latest Economic Survey, in its second chapter, "The Economic Vision For Precocious, Cleavaged India", has beautifully mapped some the developments in the Indian economy. For instance, India's trade to gross domestic product (GDP) ratio has doubled to reach 53% over the last decade ending 2012 and is higher than that in China. The flow of foreign direct investment has also picked up significantly in recent times and the contribution of the private sector has increased over the years. However, the latter's failure to gain the trust of Indian society has been an enduring problem.
The survey has made a sharp observation in this context: "All states, all societies, have some ambivalence towards the private sector. After all, the basic objective of private enterprises—maximizing profits—does not always coincide with broader social concerns, such as the public's sense of fairness. But the ambivalence in India seems greater than elsewhere." It further added: "It appears that India has distinctly anti-market beliefs relative to others, even compared to peers with similarly low initial GDP per capita levels."
India's ambivalence towards the private sector should be cause for concern as it can affect economic growth in the medium to long run. There is enough evidence to point to the vectors of concern. For example, there is notable resistance in the political establishment to privatizing public sector companies, and several sections of society expect the state to take more responsibility. Since this can prove to be a serious bottleneck, it is important to examine why—despite visible gains from economic reforms—India is still not certain about the role of the private sector. There could be three broad reasons.
First is the legacy of the pre-reform era when the private sector was seen with suspicion and the government wanted to control practically every part of the economy. There were controls on production and profit was a bad word. As the survey also notes, industrial licensing meant that the incumbents were seen as benefiting. Even though India has opened up the economy, economic reforms have been half-hearted at best. Businesses close to the ruling establishment are still seen to be gaining, though steps have been taken in the last few years to bring more transparency. Also, the government has been fairly reluctant in creating more space for the private sector—often fearing political backlash. This is one of the reasons why privatization has been slow. Montek Singh Ahluwalia has appropriately described the Indian situation as having "a strong consensus for weak reforms". Excessive government intervention and uncertain regulatory environment have affected outcomes in the marketplace.
Second, India's experience with the private sector has also been fairly mixed so far. On the one hand, sectors where private participation is allowed have made significant progress. On the other hand, there have been governance issues which have dented confidence. The private sector is seen by many as excessively driven by self-interest without adequately acknowledging the interest of other stakeholders, including consumers. India's telecom sector is an example. While penetration has increased significantly over the years with extremely competitive tariffs, the quality of service has left much to be desired. Further, high-profile cases where promoters are seen to be gaming the system have not helped.
Third, the state has not been able to create the necessary capacity in the system required for the smooth functioning of the private sector. For instance, according to the World Bank's ease of doing business ranking, India has one of the lowest rankings in enforcing contracts. The inability to enforce contracts or delays in the process affects outcomes in the private sector. Regulatory gaps and lack of clarity in rules in some areas and the excessive compliance burden in others affect the smooth functioning of the private sector.
India will need to overcome these challenges to be able to grow at higher rates in the long run. For this, the government will have to work on multiple fronts. It will first have to create more space for the private sector and allow the markets to function. This will, among other things, lead to more efficient allocation of resources. Simultaneously, the government will need to build capabilities to be able to intervene if markets fail. It will also need to create a regulatory environment where consumer interests are well protected.
But the private sector must also do more, especially on the governance front. For an example of what a failure to do so can cause, one need only look to the US and the populist backlash catalysed by the sentiment that government and business interests no longer coincide with those of the broader society.
Should the private sector play a greater role in India? Tell us at views@livemint.com