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Can the Public Sector be Revived, and other Pointless Questions

The markets seem to believe that the new government would commit to the folly of trying to revive the public sector instead of just selling it off

In the ten days or so since the stock market began the Modi rally in earnest, the Sensex and the Nifty are up about 8 per cent. I've seen some stories in some publications that have invented a concept called 'Modi stocks', but these appear to be little more than an obnoxious attempt to carry forward the Kejriwal type of accusations. Looking at what is really happening in the equity markets, it seems clear that the real Modi stocks are actually PSUs. In the days that the main benchmarks have risen 8 per cent, the PSU index is up 25 per cent!

If you believe in the media and markets chatter, then the excitement in PSU stocks is because a Narendra Modi government is expected revive the PSUs. This belief is based on the fact that by and large, Gujarat state PSUs have done so during Modi's time there. The wisdom of the moment is that in Gujarat, the Modi government has chosen to make its PSUs better managed, rather than sell them off or shut them down. By the simple extrapolation that the equity markets love, the same will happen to central PSUs over the next few years.

That may or may not be true. In fact, I hope it isn't. In fact, last week I came across someone quoting Arun Shourie on this issue. Apparently, Mr. Shourie once said something to the effect that all new governments in India start off believing in two myths. One, that relations with Pakistan can be improved, and two, that the public sector can be revived. That may sound funny, but surely it's more than a joke, specially from the man who successfully ran the NDA's disinvestment ministry.

The public sector can't be reformed, period, unless you create a special minimal definition of what 'reformed' means. Some public sector units can be improved somewhat from what they are today but that doesn't mean anything. Some parts of this vast and ruinous business empire may be less defunct than the rest, but taken as a whole, the public sector will be an unconscionable sink of capital and--even more importantly--political attention. The only good reason to try and improve the performance of those PSUs that are not basket cases is to get a better price for them.

Actually, whether the public sector can be revived or not is irrelevant to the larger point, which is that the government should not be in business. Even if Air India were a very well run airlines (which, according to legend, it used to be once), the basic principle would still stand. It's useless to point out the specific reasons why Air India declined, or MTNL or BSNL or so many other basket cases did. Underlying all those reasons is the lack of incentive and accountability. Except for outright monopolies like the railways which can extract however much they like from their hapless customers, it's impossible for PSUs to compete.

Of course, it's possible that through some great miracle of good governance, Modi government is able to turn around a handful of PSUs. The point is, so what? What would have been achieved by putting in time, money and effort in doing something that will inevitably be undone at some point in the future?

The only sensible course is to ensure that the maximum value can be extracted from disposing off the public sector, whether as running businesses, or out of the physical assets of the ones that cannot be sold as viable businesses. For the last many years, this has involved the finance ministry setting an unrealistic selloff target and then scampering around at the end of the year to get whatever it could. In effect, the UPA government has approached public sector disinvestment the same way as a drug addict approaches his last sellable possessions. Regardless of the Gujarat experience, the Modi government should not commit the folly of wasting money and effort on the public sector.