Indian economy is changing
India has come a long way since its independence from colonial rule in 1947. It began as a mixed economy where elements of capitalism and socialism coexisted with difficulty. Jawaharlal Nehru, first Prime Minister of India, was a self-proclaimed Fabian socialist who admired the Soviet Union. His daughter, Indira Gandhi, amended the constitution in 1976 and declared India a socialist country. It nationalized banks, insurance companies, mines and more.
Gandhi tied Indian industry in chains. It imposed capacity constraints, price controls, exchange controls and administrative formalities. The colonial era Indian bureaucracy now ruled the heights economy. Such measures have stifled the Indian economy, created a black market and increased bureaucratic corruption. The Soviet-inspired Bureau of Industrial Costs and Prices remains infamous to this day.
Expect an uneven rebound in MENA and Central Asia
India also adopted the Soviet five-year plans. A centralized economy emerged, with the state controlling the media and telecommunications, finance, infrastructure and energy sectors. Even in seemingly private sectors such as consumption and industry, the state has managed too many aspects of investment, production and resource allocation.
Open up the economy
In the 1980s, India took small steps towards a market economy and opened up many sectors to private competition. In 1991, the Gulf War led to a surge in oil prices, causing a balance of payments crisis. In response, India rolled back the state and liberalized its economy. The collapse of the Soviet Union that year pushed India towards a more market-oriented economy.
Over the years, state monopolies have been decimated by private companies in sectors such as aviation and telecommunications. However, India still retains a strong legacy of socialism. The government remains a major player in sectors such as energy and financial services.
After years of piecemeal reforms, the Indian government is once again unleashing bolder measures. These involve the opening of several state monopolies to private competition. They dilute state ownership in public sector units. In some cases, they sell these units to domestic or foreign buyers. In due course, professionals, not bureaucrats, will lead this sector.
The government’s bold decision privatization is because of two reasons. First, India’s public sector has proven to be notoriously inefficient and has been a burden on the taxpayer. Second, the COVID-19 pandemic has shrunk the economy and caused a decline in tax revenues. Privatization is a way for the government to balance its books.
As Shwweta Punj, Anilesh S. Mahajan and MG Arun rightly point out in India Today, the country “will have to rethink the way it sells” its public sector units for privatization to be successful. India’s record is poor. The banana peels of political opposition, bureaucratic incompetence and legal proceedings await.
Potential benefits of privatization
Yet privatization, if managed well, could bring several benefits. This will lead to more efficiently run businesses and a more vibrant economy. Once a state-controlled enterprise is privatized, it can either be overthrown by its new owner or perish. In case the business fails, it will create space for better players. Importantly, privatization could strengthen the government’s fiscal position, giving it greater freedom to invest in sectors like health and education where the Indian government has historically underinvested. In addition, privatization could increase investment opportunities in public and private markets.
Given India’s hectic nature and labyrinthine institutions, privatization is likely to lead to mixed results and uneven progress. One thing is certain, however. Privatization is inevitable and cannot be reversed. Sectors where market forces reign supreme and shareholder interests are aligned are likely to do well. State-controlled companies that prioritize political goals over shareholder value are unlikely. Likewise, sectors that have experienced frequent policy changes are unlikely to prosper.
There’s a reason savvy investors build portfolios focused on the consumer and tech sectors. Until now, companies in these sectors have operated largely without government intervention. They were given the freedom to grow and operate independently. Not surprisingly, they delivered good feedback.
The state-dominated financial services sector is also promising. Well-run private companies have a long way to go. Among the major economies, India’s financial services sector offers a unique promise. In the capitalist United States, the state has a limited presence and private actors dominate. This mature market offers few prospects for strong growth. In Communist China, state-controlled companies dominate financial services, leaving little room for the private sector. With the Indian government planning to reduce its stake in a state-controlled life insurance company, as well as sell two state-owned banks and a general insurance company, the financial services sector arguably presents a particularly important opportunity for Investors.
Just as India did well after its balance of payments crisis of 1991, the country could rebound from the COVID-19 pandemic. The taxpayer may no longer need to subsidize poorly performing state-owned enterprises that are holding the country back. On the contrary, competition in the market can attract investment, create jobs and increase growth.
The opinions expressed in this article are those of the author and do not necessarily reflect the editorial policy of Fair Observer.