Defending the pvt sector

Govt must strengthen the overall regulatory framework

Prime Minister Narendra Modi’s strong defence of the private sector even as he threw his weight behind the government’s agenda of privatisation has sent a clear message that the days of stealthy economic reforms are over. It’s also a refreshing change from the hesitation that had crept in after that famous jibe over “suit-boot ki sarkar”. Replying to the motion of thanks on the president’s address in the Lok Sabha on Wednesday, Mr Modi asserted that abusing wealth creators for votes was no longer acceptable, and that the bureaucracy should take the backseat in the running of factories and businesses. These are important remarks and should guide the broader approach of the government. There is no denying that the country needs wealth creators. It’s only when the private sector is allowed to flourish will jobs be created and the government will have the required resources to discharge its obligations. Redistribution cannot happen without wealth creation.

The government tried the model of public-sector dominance and excessive state control for several decades after Independence, but it did not yield desired outcomes. India moved to a higher-growth trajectory only after the economy was opened up to the private sector and greater competition in the 1990s. The prime minister’s statement should also be seen in the context of the new public sector enterprise (PSE) policy, announced in the Union Budget. Accordingly, the government will retain only a small number of PSEs in strategic sectors and the rest will be either privatised or shut down. The government will also privatise two public-sector banks in the next fiscal year. These are welcome departures from the past and will serve the country well in the long run. The data shows that most PSEs that have done well financially operate in sectors where competition is restricted. Differently put, PSEs are not able to perform when exposed to competition, which suggests that resources are not utilised efficiently. Also, the presence of the public sector tends to distort the market.

However, as the role of the private sector increases, the government will have to develop capabilities so that no private enterprise can abuse the system in the absence of a proper regulatory framework or enforcement. Citizens at large will trust the private sector only when they are convinced that the system is not gamed in favour of a select few and the legal framework does not encourage rent-seeking. Encouraging a pro-market system where the most capable entrepreneurs succeed as against the best networked is the only way to go. Potential monopolies and concentration of power in the private sector with state support will undermine trust and growth. A strong and stable regulatory environment will help attract investment, create jobs, boost output and demand, and enhance the overall wealth of the nation. Further, the government needs to invest in the judicial system for the smooth functioning of the private sector. Most importantly, steps have to be taken on improving India’s track record of enforcing contracts. This is one index on which the country has performed extremely poorly over the years and ranked 163rd in the World Bank’s Ease of Doing Business rankings.