THE role of the private sector in the process of Indian national development has become the focus of considerable debate in the context of the Third Plan. The early optimism which the private sector entertained, in the face of declarations of allegiance to the ‘socialist pattern of society’, was founded no doubt on the cynical belief that government did not really mean to implement what it said. The crisis that enveloped the Second Plan at its very outset was a reflection, and a final proof, of the validity of such a faith.

Since then, however, under the sheer exigencies of threatening bankruptcy, the public sector has moved into action and the planning authorities have made it plain, in no uncertain terms, that the private sector will be made to conform to the planned objectives. The era of uneasy co-existence has begun.

Whereas the issue has no doubt been joined, the skirmishes take place in a fog of imprecision concerning the nature of the conflict. This stems from some degree of intellectual sluggishness (or inability?) to define what we mean by the ‘public sector’.

Often the index of the public sector is taken to be the state ownership of the capital stock of the country. Such a view considers the conflict between the two sectors to focus on two major issues: (i) changes in the index brought about by nationalization of existing capital stock; and (ii) changes resulting from relative ownership of the marginal changes in such capital stock; this being the familiar problem about the allocation of investment between the two sectors.

Popular discussion, however, extends the concept to include the element of state control. Price-fixing, output-restriction (as in textiles and soap), import-licensing, investment control and the like are then construed as evidence of a growing public sector. Really extreme views (held in Chicago and, presumably, by the Swatantra Party) would include monetary and fiscal policies as well.

 

It is not uncommon to find an even wider concept which seeks to bring under its umbrella the phenomenon of what might be called, for want of a better name, state promotion. Thus, the extension of co-operative farming under state patronage and the spread of community development projects are regarded as instances of an overall design by the state to invade the sanctuary of the private sector.

Clearly, therefore, to seek to measure the role of the public sector in the economic life of a country is a task incapable of achievement. It is reminiscent indeed of the problem in political philosophy of trying to determine the degree of freedom in a society. Fortunately, however, we can delimit our task with an easy conscience. A large segment of the public debate happens to converge itself on certain themes.

The principal theme is undoubtedly concerned with the allocation of investment between the two sectors. To be sure, the focus is yet more narrow: the share of the private sector in the investment in the organized industrial sector (inclusive of oil mining) seems to exercise a compelling fascination.

This is both interesting and inevitable. The process of growth throws up several opportunities for profitable investment. The largest plums, however, are to be found in the ‘modern’ industrial sector. Powerful industrial groups, therefore, want as large a share of such investment as they can push the state into giving them. It is of little importance to them what the level of private investment is in other sectors, such as agriculture. It would thus be ironical indeed for them were private investment in agriculture to be increased at the expense of private investment in industry: the sight of numerous atomistic farmers feverishly putting up bunds on their farms is something both very different from, and far less alluring than, the securing of licences to put up textile mills or fertilizer factories!

It is quite logical, therefore, for these industrial groups to strive for a larger share in industrial investment. It is equally logical for them to ensure that the press, which for the most part reflects the interests of its owners, as Prime Minister Nehru seems to have discovered recently, focuses the debate on this issue. Hence the controversy, in ‘public opinion’, centres round the problem of industrial investment although its share in the total investment, at estimated current levels, cannot possibly exceed the range of 20-25 per cent in the next five years.

 

The allocation of investment in industry between the two sectors is supposed to be governed by the Industrial Policy Resolution of 1956. This document lays down two criteria for the balkanization of the investment opportunities: (i) ‘the adoption of the socialist pattern of society as the national objective’; and (ii) ‘the need for planned and rapid development.’ Before the reader can pause to ask which of these criteria is to be adopted in the event of their conflict, he is reassured that ‘after considering all aspects of the problem in consultation with the Planning Commission’ (what more could one want?), industries have been classified into three categories.

Schedule A industries will be the prerogative of the state from the viewpoint of investment; Schedule B will witness an increasing share of public investment; the rest will be wide open to private enterprise. Then follows the delightful rider: ‘It should also be remembered that it is always open to the state to undertake any type of industrial production.’

What does not emerge clearly from the document, and what has become increasingly obvious, is that whereas the former ideological criterion implies (axiomatically in India) an increased share of the public sector in industrial investment, the latter economic criterion may not. The need for putting up the famous infrastructure or social overhead capital, which the private sector neglects through lack of profit inducement, makes out a case for increased public investment only in the early stages of the developmental process.

 

In India, of course, it would be foolish to suggest that we have reached that stage. However, we may do so with the next two plans. It is going to be specially difficult to put up such a case for the majority of the Schedule A and B industries.

In view of this it seems that the state has chosen to argue the case for public investment in such industries along somewhat different lines. The bottleneck, it suggests, is not the lack of profit motive. The difficulty is that these industries really ‘require investment on a scale which only the state, in the present circumstances could provide.’

This is probably true of a large number of the very heavy industries which demand huge chunks of investment. But there have been instances, in coal mining, oil exploration and alloy steel, where neither the lack of profit motive nor the lack of finance were bottlenecks and where private initiative to invest was frustrated by the element of rigidity introduced by the policy of scheduling industries. What has been annoying in these cited cases (although it has no predictive value) is that the public sector was relatively tardy in these particular fields and the requisite investment failed to materialise.

These instance, where the state has found the economic basis for its policy exposed to be absent, have given the impression that the state may in fact be pursuing a policy inspired mainly by ideological motives, thus accentuating the uneasiness of the co-existence. However, there does not seem to be an adequate basis for saying that the bulk of the policy is so motivated; the instances we have cited certainly do not add up to a frontal attack of this nature.

 

The problem arises because of the scheduling. It is extremely difficult to set down a list of industries where you can forecast that the private sector won’t be able or willing to invest. You are bound to be proved wrong! This is exactly what has happened; with the ensuing scare that the state policy is dominated by ideological considerations.

Of course this is not true of the bulk of the area covered by the two Schedules. The instances of such frustration of private initiative are few. But there are already straws in the wind and Prime Minister Nehru feels himself called upon to ask the private sector to be content with the fields they have been assigned and not cast hungry eyes upon the two sacrosanct Schedules. Perhaps the future may see the conflict emerge at a more serious level.

Such tendencies as there may be for the state to increase the share of the public sector on ideological grounds can, however, be expected to be held in check to some extent by quite influential people. For example, it is not realized adequately that the Finance Ministry, which must find the necessary resources, has a vested interest in letting the private sector obtain as large a share of investment as ideological preconceptions will permit. The reason for this is somewhat technical but easy to grasp.

What is important from the viewpoint of planning for growth, without inflation, is that the investment necessary to achieve the desired rate of growth of income is matched by the savings generated from the increased income. But this is an overall balance condition applying to total investment and savings.

Unfortunately, the real world is somewhat more complicated than this. What we want, ideally, is that such a balance should hold for the private and public sectors separately. Where, however, the public sector requires an increasing share of investment, we almost inevitably find that the overall balance will be founded on net savings by the private sector equal in magnitude to net investment by the public sector. Financially this means that the state would have to borrow the net amount from the private sector or from the Reserve Bank. The latter is the infamous system of deficit finance.

 

Now, as our analysis shows, there is nothing seriously wrong with deficit financing; since we have matched saving and investment, deficit financing emerges as a matter of financial detail. In India, however, for some reason (probably no more profound that Professor Shenoy’s vigorous suspension of belief in the validity of this argument) deficit financing draws to itself attention far out of proportion to its importance. In view of this it would be a rash Finance Minister who permitted such financing on a large scale.

The result is that the Finance Ministry would like to put all its weight behind an increased role for the private sector. There does not seem to be any merit in raising funds from the private sector to invest in the public sector when the former is willing to plough its profits back into the requisite investment.

Perhaps this was the reason why the recent FICCI Seminar on the Third Plan stressed the importance of a larger share for the private sector if the plan target were to be set at a high level. Either one resorts to deficit financing (unthinkable beyond a defined maximum), or one sets one’s sights lower.

There is, thus, a fairly powerful case for retaining the public investment at the necessary minimum and to eliminate the ideological considerations from intruding into the picture. We should expect the Finance Ministry officials to continue plugging this line until it has had some effect. There is a necessity, however, to see that this is understood at a wider level so that the conflict between (an archaic) ideology and the need for rapid development is clearly appreciated.

A fairly sound economic case can therefore be made for the adoption of a flexible state policy on industrial investment, the objective of which should be to keep the public investment at the lowest requisite amount. We must now dispose off some specious arguments against investment by the public sector which have gained currency since the disastrous experience at the beginning of the Second Plan.

 

Thus, it has been argued, the governmental policy has accentuated the complementarity between private and public investment. The former invests primarily in end-use industries, the latter largely in the ‘basic’ supply industries. In such an event, if the two sectors get out of line, the economy can come to a standstill. The experience in the early part of the Second Plan is referred to in this context.

All this is neat and pretty. It was ironical that the private sector at the time claimed to have ‘overfulfilled the Plan’. Such stepping out of line, which the state policy of import-licensing and investment control tolerated, was bound to lead to the unhappy phenomenon of accentuating the excess capacity in the economy. But it is illogical to claim that this can be remedied by letting the private sector invest more in Schedule A and B industries.

The cause of the crisis had nothing to do with the sectoral allocation of investment in industry. The lesson to be learnt from the crisis in India’s balance of payments is merely that to let capacity increase in industries to an extent where no foreign exchange is left over to import the inputs to use such capacity is to waste the nation’s scarcest resources; capital and foreign exchange.

Similarly, it is claimed that the public sector suffers from traces of sluggishness which make it dangerous to leave the basic industries to it when the private sector is agreeable to investing in them. The Second Plan experience is again easy to draw upon to substantiate such an argument.

Several key projects which were meant to be completed by the end of the Second Plan are now known to be scheduled for completion towards the end of the Third Plan. Most of these key projects were in the machine-making sector which is now generally acknowledged to be crucial for developmental strategy in our context. These are the heavy machinery and foundry forge projects, the heavy machine tools works, the heavy structural workshop, the heavy electrical equipment project and the alloy and tool steel project.

 

Here again, it is easy to conjure up visions of public sector inefficiency and red tape to account for such slackness in the implementation of the public sector projects. One could think of all kinds of sophisticated arguments to account for this; files moving between states and the Centre; committees recurrently debating the pros and cons of alternative projects while bright civil servants and their economists prepare learned notes on the relative merits of the surplus criterion and the net value added criterion; political wrangles over the geographical location of projects; and so on.

There is no doubt that a lot of this kind of thing is going on. It is inevitable. But it does not really account for the sorry spectacle of key projects going up at slow speed. Once again, the key to the problem is mainly in the bad foreign exchange planning which characterized the early Second Plan years. The private sector was allowed to use up a considerable amount of foreign exchange and the prices of equipment were underestimated. Both these reasons meant that the public sector investment, which was heavily dependent on foreign exchange, had to go slow until our frantic efforts to secure more aid yielded results.

 

In fact, if one examines the investment figures for the public sector up to date, there is hardly any discrepancy between the planned and the actual levels. No case, therefore, can be argued for the private sector on the ground of relatively less sluggishness in the implementation of the allotted schemes.

To be sure, even if government adopted a changed, flexible policy towards the allocation problem in industrial investment, it would be folly to believe that the share of the private sector could increase substantially in the near future.

The main reason for this, though technical, is not difficult to appreciate. Several projects in the public sector, as we have seen, will be in a stage of incomplete work-in-progress when the Second Plan terminates. To complete them, we shall need to invest substantial amounts which will take up a large segment of the investment allotted to the industrial sector. Further, since extensions are usually cheaper than the building of new units, it will be advantageous to let the public sector expand rather than to let the private sector enter the field in certain cases. On both these counts, the amount that can be left to be invested by the private sector over the Third Plan cannot be really larger than that suggested in recent discussions – at around 40 per cent.

 

The emphasis on heavy industry in industrial investment, which is likely to intensify over the next decade, is also likely to bias the share of the investment towards the public sector for another technical reason. The bulk of the aid received from the communist countries is specifically geared to the public sector. These countries also happen to be rather good at heavy industry.

It follows, therefore, that the nature of the conditions attached to the use of the foreign aid will lead to a dominance of the public sector in industrial investment. This, in fact, is the state’s trump card. It is a solid economic reason for the state to assume a sizeable role in industrial investment in the next Plan.

The need for heavy industry, the course of Second Plan investment and the receipt of foreign aid to be spent in the public sector and best spent on heavy industry: all these factors combine to give a strong bias to public sector industrial investment for the Third Plan.

Since there is no reason to believe that these forces will cease to operate during the Fourth Plan, we may expect a purely economic justification for the continued dominance of industrial investment by the public sector over the next decade. Interestingly enough, therefore, although the need for investing in overhead capital (which justified the growing share of the public sector in industrial investment in the earlier plans) is no longer so dominant, the growth of the public sector in this field now depends on the case for heavy industry. Certain strategic factors make it necessary that practically all of heavy industry should be undertaken by the state.

The conflict between an ideology and the growing share of public investment in industry is likely to erupt in a major form only after a decade or more when investment in heavy industry will yield place, relatively, to investment in consumer goods industries which are the major playground of private enterprise. We will then need to think again. What does a ‘socialist pattern of society’ imply? Is it to stand for the adoption of uneconomic policies or for an intelligent adaptation of the system so as to make that system compatible with the need for growth.

Perhaps the state will reconcile itself to a lower share in industrial investment if it appreciates the immense scope it has in the fields of education and health. By a curious economic convention, we have come to regard such expenditures, except where they involve fixed investment as ‘current outlays’, as something that is different from investment. But surely, these are as productive of real income as any machines or dams that may be put up. The crucial importance of primary education cannot be overstated. The transformation of the countryside will also involve considerable such outlays.

Need the state worry about a diminishing role in the next two or three decades when such formidable tasks await solution?

 

* Reproduced from ‘Two Sectors’, Seminar 6, February 1960, pp. 24-27.