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Upside down state

We seem happy to hollow out the public sector where we shouldn’t and regulate the private in harmful ways.

Written by Pratap Bhanu Mehta |
December 25, 2015 12:51:04 am
private sectors, public sectors, private public sectors, industrial production, RBI, RBI Governor Raghuram Rajan, 2009 economic crisis Much of the energy of the debate has shifted from a concern about the role of the public and private to a concern about proper regulation of the private.

The debate about reforms pivoted on one central axis. What should be the role of the public and private sectors in development? This debate is not as simple as ideological purists think. And the mere rolling back of the licence-permit raj in areas of industrial production was only a small part of this debate. Admittedly, much of the energy of the debate has shifted from a concern about the role of the public and private to a concern about proper regulation of the private. This is all for the good. But you get the sense that thinking about the role of the public and private has become extremely ad hoc.

Just take one example, in the apparent ideological moorings of this government. It should be obvious to most that this government, contrary to the myth supporters had created, does not believe in disinvestment of state-owned companies. It has no intent of meeting even the disinvestment targets it had set itself for fiscal reasons. Quite the contrary, it seems to believe that with the right bureaucratic intervention, public-sector companies can be turned around. Certainly, some companies can. But it would take a peculiar obtuseness to argue that in some areas, disinvestment cannot be a good thing. The opportunity cost in terms of finances and human capital of the state running things that are unnecessary for it to run are still huge. Yet there remains an immense 1970s-style commitment to the public sector in areas of production.

On the other hand, the two areas where you would expect the public to take a lead role, health and education, are on a galloping privatisation trajectory. Much of this is due to state failure. But a lot of the failure was almost deliberately induced to create opportunities for politically connected education entrepreneurs. Just the list of politicians who run educational institutions will point to this fact. But whatever the political-economy story, we still have a curiously schizophrenic view of the private sector’s role in this area. On the one hand, we want it to bear the load of state failure: It should perform the public sector’s role.

On the other, the private sector should bear costs and be burdened by excessive regulation. The ostensible rationale for this is the following: Normatively speaking, education is a right that should not be dependent on the ability to pay. This aspiration is correct. But how do you square that with the idea of private education, where ability to pay will determine what you can access to some degree? Our answer: We will impose more regulation, more price controls (as the All-India Council for Technical Education is now proposing), more control over selection mechanisms. So what we want is a private economy with extensive price controls? Price controls can work in some areas but as a generalised principle, a price-controlled private sector is a bit of an oxymoron — with probably moronic outcomes.

But what the state cannot get itself to honestly answer is why so many students are at the mercy of the private sector. The state is willing to put all its energies into running loss-making airlines, reviving defunct fertiliser plants. But it cannot commit itself to infusing new energy in public education, at all levels. If you destroy public university after public university, the private sector will laugh all the way to the bank. And then, in response to an outcry, we will pretend that regulation of the private sector can produce social justice. In retrospect, it is truly extraordinary how much energy, focus and moral piety has been expended on “regulating” private education in India.

Yet proportionately, so little political effort has been expended to improve public education. It is a pipe dream to think that we can build a good, equitable education system without a major revival of public universities and government schools. And a strong public system will automatically “regulate” the private system by reducing demand. But it is a sign of how warped our thinking on the public and private has become that we are happy to hollow out the public where we should not, and regulate the private in ways that are counterproductive.

The increasing confusion over the role of the public and private has many sources. Some of it is ideological mystification: We thought reform meant rolling back the state, not building it in some areas. This has become a self-fulfilling prophecy to the point where we do not recognise the potential within the public system. Some of it had to do with political economy. The whole logic of public-private partnerships was driven not entirely by the idea of efficiency gains but the creation of new forms for rent-seeking. This form of entanglement of state and capital ended up corrupting both.

Crony capitalism backed by the state delegitimised capital as well. The dividing line between an anti-corruption movement and an anti-private-sector sentiment became very thin indeed. The confidence that the Indian private sector, particularly its big players, was ready to play by anything other than crony capitalist rules has diminished. In fact, it has so diminished that RBI Governor Raghuram Rajan has to rightly give them sermons on just how low the legitimacy of capital is in India. Part of the confusion also came from a certain kind of laziness. We just assumed that wherever the state fails, the market will automatically provide the answer. Less went into thinking about the conditions under which each works. The 2009 financial crisis rightly led people to rethink regulation. But it was also used as a convenient excuse to pretend that the role of the public and private had been settled.

But the net result is a deep consensus that there is little point in having a debate around the role of the public and private, based on first principles, our recent historical experience, and the appropriateness of particular institutional forms to producing particular kinds of goods. So all the things that a public system should ideally produce — law and order, basic social rights like health and education — are increasingly privatised but with ad hominem and corrupt regulation. It is a good thing that this government ideologically does not believe in defeatism about the state. But it has done little to restore clarity on the roles of the state and the market, the public and the private.

The writer is president, Centre for Policy Research, Delhi, and contributing editor, ‘The Indian Express’

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