Public in the private

The story of the relationship between state and private enterprise needs a rewrite.

Updated: January 16, 2014 8:37 pm
Our contemporary moment seems fraught with both possibility and anxiety. A new social contract will be institutionalised in the next couple of years. Reuters Our contemporary moment seems fraught with both possibility and anxiety. A new social contract will be institutionalised in the next couple of years. Reuters

The story of the relationship between state and private enterprise needs a rewrite

Our contemporary moment seems fraught with both possibility and anxiety. A new social contract will be institutionalised in the next couple of years. But we don’t know the shape of this contract. Learning by doing, compromising to get a workable consensus are, to some extent, inevitable. But we are in the midst of defining new relationships between public and private that will require us to return to a new framework.

In 1991, a simple framework became a guiding template for a renegotiation between the public and the private sector. The private sector was to be freed, its productive and competitive energies were to be unleashed. The gains from the resulting growth would not just trickle down, they would also provide resources for the state to help citizens who could not, in their current circumstances, participate in the gains of growth. The basic idea, only imperfectly realised, was not on the wrong track. But it turned out to be a limiting template in several ways.

First, our understanding of the relationship between the state and private enterprise turned out to be too simplistic. This was partly because the fascination with the private sector did not come from a story about its virtues; it came as a negative reaction to state failure. Since the public sector was full of vice, as it were, the opposite, namely the private sector, must be full of virtue. This sensibility underwrote the great reforms of the period: ending the licence permit raj, greater integration with the global economy. But it neglected key issues in the relationship between public and private. First, there was the question of an appropriate regulatory structure. As the recent Delhi High Court judgment allowing for government audit of private telecom companies has reminded us, the issue of an interface between the state and private companies is more complex than a pure ownership story would suggest. In the United States, these kinds of audits of private utility companies, for instance, are routine and far more invasive than in India. Much of the debate over public and private in India is based on a simplistic conception of ownership: private, therefore exempt; public, therefore accountable. Yet the issue of accountability is now based not on ownership, but function. If you are a private monopoly in utilities, the fact that you are private is neither here nor there: your costing will have to be audited.

Public-private partnerships have been a success in areas like infrastructure; they have been oversold in other areas, like education. But if 50 per cent of government expenditure is routed through these partnerships, it will be hard to make the argument that this expenditure should be exempt from public accountability. The public-private debate will now have to move to a whole new level of sophistication. To use a phrase central to the reforms process, instead of a pitched battle between public and private, both will have to be “unbundled”. Rather than thinking of the private as always a default substitute for public failure, we will have to carefully think about what institutional form is likely to succeed under what conditions. As the Delhi High Court noted, the real issue is going to be whether both sides learn sensible norms appropriate to this regulation, or whether this ends in a combat of mutual suspicion. The danger is that much of the rhetoric, from both companies and political parties, increases risks of the latter.
The second aspect of the liberalisation story was that we ignored the costing of negative externalities that impinge on the public-private relationship. The environment is a classic case, where we are producing a near irretrievable disaster. Unfortunately, this message is still not getting through. So you have both spectacles in progress. On one hand, there is the government, trying to speed up clearances. On the other hand, the regulatory framework is multiplying, with the Supreme Court mandating the creation of state-level environmental regulators just last week. Again, will we get a new social contract or the logjams of mutual suspicion?

You can run a similar story across every sector. Our laws on social regulation bear the marks of mutual suspicion rather than reasonable agreement. Our debate on taxation is taking a similar turn. There are two issues. The first is the institutional architecture, centred on simplicity and ease of enforcement. As the fiscal deficit got worse, the tax authorities got even more licence to be arbitrary, leading to the same argument: is taxation about reasonably justified mutual obligations or is it doomed to be an extreme contest between arbitrariness on one hand and evasion on the other?

But most fundamentally, the issue of fairness has come up again. Whining about tax burdens is inevitable. Unfortunately, the debate has got complicated because we do not have a clear public-private framework. So, on one hand, there are several irrational subsidies. On the other hand, the things most capitalist states provide — health, education, water, in many cases, transport and even security — are available through private provision.

What is the public-private interface in these sectors? In education, we ended up with a regime that neither rejuvenated public institutions, nor unleashed the full advantages of the private. Accountability in healthcare will be the next frontier issue in politics. But a deeper issue is this. While we need to strengthen the state in so many ways, there is no short cut around it. At the same time, the cost of an extraordinary privatisation of services may be undermining the willingness to support the state. It is one thing for the state to have a taxation debate in a context where it could assure the middle classes that there is a reasonably priced, good quality university they could access. It is another to do it in a context where anxiety over how much you will have to pay for health or education wrecks the system.

A similar argument could be made for another place where we have got the public-private mix wrong. Labour regulation, in some areas, impeded formalisation and job creation. Yet it would be easier to argue for different labour laws if there was some other, effective social protection.
We grasped correctly that corruption had stripped away trust across the board. It corroded the legitimacy of every institution, making solutions harder. Both growth and justice were casualties. But are we ready for a more sophisticated negotiation on the balance between public and private? To paraphrase Vivekanada, we have arisen, we are awake. But we still need to decide whether this revolution will get the public-private relationship right.

The writer is president, Centre for Policy Research, Delhi, and a
contributing editor for ‘The Indian Express’
express@expressindia.com

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  1. S
    sana
    Jan 15, 2014 at 10:19 am
    A really excellent article. AAP says they are neither left nor right - just have corruption and people at the core of all the decisions they take. This article too is about getting this balance right - lets hope AAP manages it. Others are not even trying!!
    Reply
  2. J
    Jai Hind
    Jan 16, 2014 at 2:04 am
    Brilliant piece as always Mr. Mehta. Wish we could have more like you in our public discourses. The shrillness is stifling in most cases. But I guess these are the signs of our times. We will get over them. Public has always thought the private is rotten and vice versa. Our experience of last twenty years has left us with a mixed feeling. Because if the government is corrupt the private has been feeding it. While all of us agree on governmental reforms, we urgently require better corporate culture in our industry to take it out of the family! In a sense our polity and business are so alike. All are family enterprises.
    Reply
  3. J
    Jai Hind
    Jan 16, 2014 at 2:05 am
    I don't know where AAP comes into this!! Our insistence on trivializing our debates is phenomenal
    Reply
  4. J
    Jai Hind
    Jan 16, 2014 at 2:12 am
    Neither of my two comments finds mention here!! Wonder what moderation is all about!
    Reply
  5. J
    Jai Pande
    Jan 15, 2014 at 1:55 pm
    It is a very well written article. The job of the government is governance. The rules governing the public sector and the private sector have to be equitable, logically defensible. They are not so today. In labour laws, in education, in health, in most sectors regulatory systems need a holistic review to weed out anomalies creating unacceptable incongruities in our economy.The ideas need action plan and follow up by thought leaders,for making the indian economy healthy.
    Reply
  6. C
    Concerned Citizen
    Jan 15, 2014 at 5:30 am
    Instead of imposing arbitrariness and micro level interference on the Private Sector, the Government should provide a level playing field in each and every sector that is not a Public Sector monopoly.However, all such sectors must be subject to effective macro level regulation. Secondly, the regulatory network must be beefed up with the best talent available, so that you do not have a Reliance-like situation at every turn. Thirdly, where Govt seeks private partition through the PSU disinvestment route, it must professionalise the management of such PSUs and not interfere in their management, except in terms of clearly enunciated policy. Lastly, Govt must stop cross-subsidising economic activity and let each sector stand on its own - with direct relief being provided where necessary.
    Reply
  7. S
    Sajad Padder
    Jan 15, 2014 at 5:17 am
    In the 1990’s after thewidespread perception that the license raj system is more in harmony with corruption,LPG model was adopted in India. Over the years corruption has not reduced butincreased, instead. So what is the way out? As Mehta sir has rightly put it, thepublic-private partnership needs a serious thought in Indian context. The mechanismsof supervision and regulation need to be put in place where the scope forevasion and confusion is minimum.
    Reply
  8. H
    H.K. Satija
    Jan 15, 2014 at 8:34 am
    I fully agree much of the debate over public and private in India is based on a simplistic conception of ownership: private, therefore exempt; public, therefore accountable. Yet the issue of accountability is now based not on ownership, but function. If you are a private monopoly in utilities, the fact that you are private is neither here nor there: your costing will have to be audited. I feel G.O.I. has every right to conduct ABC (average business cost) audit of any profitable organization to avoid monopolistic situations of exploitation when it comes to general welfare of Indian citizens.
    Reply
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