State Vs Market

The Policy of Privatization

Subhonil Chaudhuri

With the introduction of globalization in India in 1991, the policy of handing over state-owned enterprises to private parties was adopted. Over the last twenty five years or so, this privatization has proceeded at two levels. Firstly, various state-owned large industrial units or companies have been sold out to private buyers. Secondly, the role of the state in the provision of various services, e.g. electricity, water etc, which was earlier in the hands of the state, has been curbed and permission has been granted to private enterprises for their delivery.

One important debate that has engaged economic theorists is that of state versus market, the main point being whether the key to development is a command economy such as that of the Soviet Union or whether the sole reliance should be placed on a free-market economy. This debate is a very old one. Particularly those who stood in support of socialism time and again argued that a free-market economy would lead to a total disaster for the people. People know that a complete free-market economy can never exist in reality. The responsibility of setting the legal framework within which the market would operate should lie with the state, and the advocates of the market want the role of the state to remain confined to it. According to them, the state should play no role in the marketing and supply of commodities.

Free-market economists advance some arguments in order to downgrade the role of the state in the economy. First of all, they think that complete freedom of the market maximizes social welfare. The reason is that in a free market, buyers as well as sellers are all after their own well being. This urge for individual well being on the part of all would lead to everybody's welfare. If the state comes to meddle in the process, some people would be better off at the expense of others, which is not at all a desirable state of affairs. Hence the state should keep miles away from the market. Evidently this theory, which believes in the equality of the market, is not at all concerned with the inequality existing in the society. Yet according to it, an intervention by the state in the economy in order to reduce the prevailing inequality would be harmful in the final analysis. But the state, going out of the pale of theory, intervenes against inequality in a real socio-political context, and this intervention benefits the poorer sections. An example is the NREGP, the implementation of which has benefited a significant number of people and has ensured that they can get two square meals a day.

But barring the extreme right-wing followers of mainstream economics, there are many that agree that the state has some role to play in a market economy. What these theorists particularly opine is that the market cannot always work properly, and in many cases, it fails. For example, let us assume that the dregs coming out of a factory find their way into a nearby river and harm the people dependent on the fish of it. But this loss cannot be compensated for if the future of these fishermen is left only to the market, because it is not the dregs, but the factory-made commodities that are bought and sold in the market. This makes it impossible for the market to determine the prices of these dregs. In this case the role of the state is essential. The state can impose taxes on the factory and compensate the fishermen. But no theory belonging to mainstream economics admit the necessity of production of marketable commodities or provision of services by the state. What is admitted is only the importance of the state in matters of health and education.

In case of a poor country like India, the state has, in the past, played important roles in he economy. This is mainly due to two reasons. This history of India's pre-independence period has proved how the free-market economy brings disaster to man. Before independence, India's economy was a free-market economy in the real sense of the term. Consequently, the struggle for freedom contained within itself an anti-free market orientation. After independence, the stunted growth of capitalism in the country made the state come forward to build up capitalism, and state-owned industries came to be set up. Secondly, the message of independence not only gave the promise of freedom from foreign rule, but also gave the assurance of a new India in which the standard of living of the poorer sections would be improved. Hence the state took upon itself the task of providing the various services to the people.

There can be no denying that this Nehruvian policy of post-independence India had many weaknesses. It is not possible to dwell at length on this subject within the space of this essay. Yet it can be said that no proper effort was made to impose taxes on the wealthy and to increase the stock of resources. The wealthy capitalist class resorted to large-scale tax evasion. In many cases, state-owned units were protected from exposure to competition and their productivity and work efficiency did not grow properly. In the absence of proper land reform, the purchasing power of the masses remained stagnant and in consequence, the country was faced with the problem of internal market.

At the same time, the Indian bourgeoisie became stronger than before. Various groups, which had been flourishing since the Biritish period, used the Nehruvian policy to grow in wealth. Besides, quite a few new capitalists, by using their connections with ministers and leaders in various ways, came to the fore. On the other hand, the middle and upper classes became increasingly resentful about the Nehruvian economic policies, because as their coveted consumer goods remained within their reach, they began to think that their further development was impossible in the existing situation. Hence a sizeable force wanted to see their eclipse, the upshot of which was the adoption of the policy of globalization.

Mainly two arguments are advanced for handing over the state-owned enterprises to private hands. One is that the efficiency of these units is less than that of private-sector units. The second is that the state-owned enterprises are not profitable, and hence it is prudent not to increase the burden of losses and to hand them over to private entrepreneurs. No economic theory is capable of proving that the efficiency- higher profits or low production costs-of a state-owned enterprise must be less than that of a private enterprise. Technology is an essential ingredient of the production process. If the right kind of technology is employed and demand is not lacking, it becomes immaterial whether the enterprise is state-owned or is run privately. Yet it must be admitted that in many cases, state-owned enterprises, caught in political tangles, do not employ the right technology or do not import new technology at the right time. Besides, cases are not rare that state-owned enterprises are deliberately kept in a pitiable state in order to benefit private enterprises. In such cases, the problem is that of management, which may be corrected only if the political and economic intentions are good.

Secondly, private enterprises are set up with a view to profit making only, and hence they have no social commitment. But state-owned enterprises have such commitments, making them shoulder losses. But it is not taken into account that such commitments benefit many. For example, the responsibility of extending banking services to the rural areas has been taken by state-owned banks, not the private ones. As a result, profits per branch of state-owned banks may be less than the profits of private banks, but such dry accounting does not consider the fact that the rural population is benefited.

There is no doubt that quite a substantial number of state-owned enterprises run at losses. But a closer look would reveal that in most cases, profitable enterprises are handed over to private hands. The reason is simple enough. No industrialist is so stupid as to buy a losing enterprise and goes on bearing the burden of losses. That is why people have witnessed that dis-investment takes place only in cases of the most profitable companies of the state. Unprofitable enterprises either go on reeling or are subjected to closure after some time. But in the power generation sector, which naturally leads to monopoly, losing units have been successfully privatized in many cases. The Act of 2003 in particular guaranteed minimum profits to private enterprises. Private enterprises took advantage of this guarantee to earn huge profits.

In reality, it is in the nature of capital that it should seek to accumulate profits by means of investment in all economic spheres. If some spheres were sought to be kept outside the sphere of exploitation by capital, capital would attempt to penetrate these spheres too. How far it would succeed depends on the political balance of class forces. Since 1991, the working class of the country has been on the retreat and capital has become more aggressive. Hence, quite naturally, new areas have been opened to capital, natural resources of the country are being placed at the disposal of capital, and state-owned industrial enterprises are being sold at throwaway prices. These policies of privatization have to be viewed in their political-economic context, with reference to aggression by big capital. ooo
(Courtesy : Deshkal Bhabna, 20 July, 2015)

Vol. 48, No. 9, Sep 6 - 12, 2015