A recent analysis of the trends in corporate profits in India by a business daily threw up a few revelations worth paying attention to. One, it showed that in FY05, six out of top 10 and 12 out of top 20 most profitable firms were PSUs; at the end of H1 of FY22, the number of such PSUs declined to three and seven, respectively.

While this underlines the emergence of a healthy competition between public and private sector firms in India it also points to the high profitability and wealth creation by PSUs, which is a double blessing since PSUs, unlike private firms, provide social services and jobs to backward classes (reservations) as part of routine operations. Taken together, this revelation highlights the continued relevance of PSUs in a long-struggling economy like India, rather than dispensing them en masse, except for a few in strategic sectors, which the government initiated in the last budget by allowing even profit-making PSUs (including banks and insurance companies) to be sold.

Two, the analysis showed that in FY05 the share of top 20 firms in total corporate profits was 55.8%, which dipped to 52% in FY11 and then went up to 72% in FY20. The pandemic saw their share dip to 62.4% in FY21 but in H1 of FY22, it was up again at 65%. This rise in concentration of profits at the top was accompanied with a disturbing trend: small and public sector firms struggled to make profits. Taken together, this revelation clearly points to an unhealthy turn in the corporate world that needs to be addressed: rising private concentration of wealth at the cost of others.

Relevance of PSUs for inclusive and robust growth

Even the neoliberal economic thinking championing free-market fundamentalism is premised on open and free competition or providing a level-playing field to all, for promoting efficiencies and innovations in the economy.

By eliminating PSUs from the playing field (which indiscriminate privatisation entails) and projecting private firms as wealth creators while branding PSUs as irrelevant, a burden on government and taxpayers (without qualifying either), competition is compromised and the playing field is skewed in favour of one at the cost of the other. Privatisation of PSUs also go against the first feature of the official Disinvestment Policy of India, which says: “Public Sector Undertakings are the wealth of the Nation and to ensure this wealth rests in the hands of the people, promote public ownership of CPSEs.”

Competition and level-playing field are further vitiated by adopting a protectionist trade policy (to save domestic firms from foreign firms) and promoting a select few private entities (cronyism) that India is witnessing in the past few years.

There is no study in India (or elsewhere in the world) which says PSUs are irrelevant or pre-dominantly loss-making and inefficient. On the contrary, there is plenty to suggest they are very critical to India’s growth, even now. Ajay Shankar, former secretary to Department of Industrial Policy and Promotion (DIPP) which helms the privatisation, and Prof Sushil Khanna, former professor at IIM-Kolkata, have argued that privatisation of PSUs, in fact, compromises India’s sovereignty and economic freedom, threatens its energy security and strategic position in a national daily a few months ago, titled “Why India must strengthen its public sector”.

They narrate how China’s state-owned enterprises (SOEs) have made it the power that it is today and also describe how India has already hurt its economic and strategic interests by neglecting its PSUs. They write: “The government’s refusal to support PSEs at critical moments has left wide gaps in key industrial capabilities. With the collapse of HMT, India is forced to import 80% of its machine tools, the bedrock of manufacturing. The undermining of the pharmaceutical PSEs like IDPL and HAL, once India’s pride, makes it dependent on active ingredients from China. The government’s reluctance to support BHEL has flooded the Indian power sector with Chinese equipment. Moreover, India is largely absent in emerging technologies like solar wafers, computer chips or EV batteries.”

They urge, “India needs to imitate China in establishing new PSUs in strategic and emerging industries, which require patient capital and greater risk”.

Earlier, Prof Khanna had published his study of relative performances of central PSUs and private sector firms in manufacturing during 2004-2014. The study concluded that central PSUs performed better than their private sector peers in a wide range of parameters: “A comparison of the performance of large private and public sector firms in the manufacturing sector shows that the CPSEs have provided higher returns on capital employed.” He said the government’s move to privatise central PSUs “is devoid of both strategic and business sense”.

Threat from rising private monopoly

Unlike India, the US and China are now fighting to break down private sector monopolies in a wide range of areas (tech, pharma, airlines etc.), particularly aimed at big firms like Google, Amazon, Facebook, Alibaba and others. European Union, Australia and India too have initiated anti-trust cases (to facilitate free competition) against some of these (Amazon and Google).

Enough literature exists on the market distortions (undermining competition and level-playing field) and consumer troubles private monopolies have caused in the US. For example, a 2017 Harvard Study said unless private monopolies were checked and dismantled“…we may find ourselves with a competitive process that benefits the few at the expense of many and a compromised regulatory framework. Start-ups, small- and mid-sized firms, and many citizens will be left to the beneficence or spite of a few powerful, but arbitrary, corporations”. The neoliberal concept of “self-correcting markets, composed of rational, self-interested market participants”, which were presented to argue for monopolies to continue unchecked, have been found to be imaginary.

The big businesses are known to “employ predatory pricing (steep discounts) strategies to capture market share, expand into new industries, and achieve market dominance”; consumers often don’t benefit from stifled competition in many markets. A new group of economists have emerged in the US to challenge the neoliberal push of the Chicago school of law and economics, called “New Brandeisians”, who strive to stem market concentration and reinvigorate democratic political participation.

Nobel laureate Joseph Stiglitz has been flagging the US’s monopoly problem for many years and arguing that growing market concentration across major industries like pharma and telecom resulted from the failure of its antitrust laws. Such concentration has led to rent-seeking (increase in wealth without creating new wealth), lower returns on investment, a stifling of innovation, and a less efficient economy. It has also caused wealth inequalities and slowed down growth.

Thus, monopoly concerns now go beyond economic efficiency or consumer welfare arguments to address the rising social and economic inequality too.

US President Joe Biden and Chinese President Xi Jinping have taken several measures and contemplate more action to reign in private monopolies. Interestingly, while the Competition Commission of India (CII), set up to ensure competition and brook no monopoly, has been probing Amazon and Google but its attention is yet to focus on the growing monopoly businesses of a few domestic businesses.

India is, in fact, witnessing two troubling developments simultaneously in the past few years.

On the one hand, the disinvestment policy has been changed to put on sale most PSUs, even if profit-making, and on the other, private monopoly interests are being actively built up. The former was done through the last year’s budget, without first gathering economic logic and evidence, consulting experts or holding public debates and scrutiny inside and outside the Parliament. The next budget should resist the temptation to issue similar top-down ‘reform’ edicts and begin a rethink on the later (building up monopolies).