LIMITS OF PUBLIC SECTOR IN INDIA

Summary

Prof. Gangadhar Gadgil’s lecture, delivered in Bombay on 20 March 1979 under the auspices of the Forum of Free Enterprise, mounts a point-by-point rebuttal of the Janata Government’s case for India’s public sector, as recently summarised by Union Industry Minister George Fernandes. Gadgil opens by reproducing Fernandes’s nine claims — that the public sector should not be judged by profitability, that India would not be a front-ranker in heavy industry, nuclear or space technology without it, that it has rescued sick units, established public control over the commanding heights, decentralised industry, and looked after worker welfare — and then proceeds to test each claim against the criteria the Janata Party itself and the Planning Commission had set: post-tax return on investment, generation of investible surpluses, and capacity utilisation.

On that ground, Gadgil argues, the public sector is failing on its own stated terms. He marshals official figures — a fall in post-tax return from 9.7 per cent (1976-77) to 8.3 per cent (1977-78), the conversion of Rs. 239.59 crores of net profit into a Rs. 14.72 crore loss, accounting devices around depreciation rates (4.88 per cent vs. 6.06 per cent), and concessional interest of 6.25-8 per cent on government loans where no private firm could borrow — to show that public sector enterprises are ‘pampered babies’ that look profitable only because of favoured treatment. He dissects pricing policy to argue that statutory price controls bind both sectors symmetrically, and that on the visible side, public enterprises in fact enjoy monopoly pricing power, canalised imports/exports (HMT, SAIL, STC), purchase preferences, and subsidised inputs; on the invisible side, cheap land, fiscal concessions to LIC and UTI, and procurement steered by ministries.

Gadgil then turns to the social-goals argument. Capacity utilisation is poor (only 71 units at 75 per cent or more in 1977-78, against 76 the year before; 27 units below 50 per cent), key fertiliser and heavy engineering plants are dragging, Bokaro and Durgapur steel plants are under-utilised while TISCO runs above rated capacity, and BHEL’s record at Patratu and Pimpri penicillin is held up as the visible cost of public ownership. Inventories remain bloated against Tandon Committee norms. The Bureau of Public Enterprises’ five-year loss-streak definition of ‘sickness’ is shown to be so lax that an enterprise that erodes its capital in three years still escapes the label. Sustaining such units, Gadgil writes, can only be done by an entity that has unlimited powers of taxation and captive lenders — i.e., the State.

The lecture closes by widening the indictment from efficiency to politics. The public sector, Gadgil argues, has produced ‘enormous concentration of economic power in the hands of the bureaucracy and the politicians in power’, created monopolies he calls ‘Leviathans’, and — most pointedly, in a clear reference to the 1975-77 Emergency — was ‘used for creating dictatorship in this country’. If big business in the private sector poses dangers, the answer is regulation, not the multiplication of an equally dangerous state monolith; expansion of the public sector through further nationalisation, he concludes, is ‘neither in public interest nor consistent with the philosophy and goals of the Government’.

Key points

• Gadgil structures the lecture as a rebuttal of nine claims attributed to Union Industry Minister George Fernandes, treating Fernandes’s defence as the authoritative pro-public-sector case to refute.

• He turns the Janata Party’s own Statement on Economic Policy and the Sixth Five Year Plan (1978-83) against the public sector, arguing both documents set criteria — post-tax return on investment, generation of investible surpluses, agricultural and small-industry support — on which the sector is plainly failing.

• A central evidentiary move is the post-tax return on capital: 9.7 per cent (1976-77) → 8.3 per cent (1977-78); a Rs. 239.59 crore net profit in 1976-77 turning into a Rs. 14.72 crore loss in 1977-78; depreciation provisions raised from 4.88 to 6.06 per cent that he calls ‘shockingly bad accounting practice’.

• He attacks the ‘pampered babies’ thesis: public sector loans at 6.25-8 per cent (and even punitive non-plan loans at 12.5-14 per cent that remain below private market rates), purchase preferences until July 1978, canalised imports/exports through HMT, SAIL and STC, plus subsidies and invisible favours like cheap land and fiscal carve-outs for LIC and UTI.

• On capacity utilisation, he cites that only 71 units met 75 per cent capacity in 1977-78 (vs. 76 the prior year) while 27 fell below 50 per cent, and contrasts public steel plants at Bokaro and Durgapur with J.R.D. Tata’s TISCO running above rated capacity.

• He demolishes the ‘sick unit rescue’ defence: the Bureau of Public Enterprises’ five-year-loss test for sickness is too liberal, the government blocks amalgamation of sick units by big business houses, and absorbing sick units is unreasonable to expect of private firms that lack the State’s powers of taxation.

• The political critique is the rhetorical climax: public sector growth has concentrated economic power in bureaucrats and politicians, created sectoral monopolies he labels ‘Leviathans’, and — in a clear allusion to the Emergency — was ‘used for creating dictatorship in this country’.

• Final position: the bigness problem of private capital is real and warrants regulation, but cannot be solved by nationalisation; expanding the public sector through further nationalisation is incompatible with the Janata Government’s stated philosophy.