Mass Capital

IN 1990, SINGER YESUDAS MADE MUSIC FOR A MALAYALAM MOVIE called Nammude Naadu (Our Land), filmed under the PVR Kutty Menon banner and starring the likes of Madhu and Jayabharathi. Producer Kutty Menon, once a man of modest means from Palakkad, spared no expense and hired the best musicians and actors for his venture. The story revolved around the peaceful life of a philanthropist named Krishna Menon living in a tranquil village. The peace and quiet go for a toss after a corrupt politician and an industrialist manipulate college students for their personal gains. The clash between these forces sets the stage for the conflict and drama in the film. It had memorable songs. But the film did not do justice to the conflict and drama in Menon’s own life or his misadven­tures and colourful persona.

A tall and well-built man from Palakkad, he may not have had many resources to fall back on in his youth but he was resourceful. It was the licence-permit-quota raj era of the late 1960s. Delhi and Bombay used to be the destination for every job seeker from Kerala. Menon was hardly qualified and only had a primary education. He landed at the residence of a fellow Malayali, the immensely better qualified VK Krishna Menon. Thus began his stint as the factotum of the diplomat-turned-politician who, among other things, was partial to bespoke suits all his life. Menon worked closely with Jawaharlal Nehru and then with his daughter Indira. Kutty Menon would occasionally carry south Indian breakfast, the famed idli and dosa, to Prime Minister Indira Gandhi’s home on Safdarjung Road. He would also double up occasionally as a member of the team that did crowd control at Gandhi’s janata darbars.

After Krishna Menon’s death in 1974, Gandhi asked Kutty Menon what he planned to do with himself. For her, it was a tumultuous time with wave after wave of opposition agitations that led to the imposition of Emergency some months later. Menon, without batting an eye­lid, asked if he could be appointed as a government nominee on the board of directors of the country’s largest public sector bank (PSB), the State Bank of India (SBI). Gandhi had nation­alised India’s 14 commercial banks through an ordinance on July 19, 1969. A magnanimous Gandhi forwarded his request to then-Finance Minister YB Chavan and soon Kutty Menon found himself on the board of SBI.

The first thing he proceeded to do as SBI director was get a loan sanctioned for himself to acquire a hotel outside the Madras Central station. Nammude Naadu came years later but the loans sanctioned by SBI, not surprisingly, turned into non-performing assets (NPAs). And that was how things were ‘managed’ in public sector undertakings (PSUs) in that era.

Things got only worse in the succeeding years and decades. The babu, neta, and baniya trio held India’s economic growth to ransom for a long time from then on, proving to be the bane of ordinary citizens. It was not just the politician who made appointments a source of pelf and patronage; powerful corporate houses started playing key roles in appointments at state-owned companies.

It was in this ‘Raj’ under Indira Gandhi that the bureaucracy and the entire administrative machinery were drastically debilitated, heavily impacting the efficiency of public sector enterprises and, indeed, the overall economy. Leviathan, bloated, dysfunctional, unproductive, unprofessional, and inefficient were some of the commonly used adjectives describing the public sector of the time. Gandhi’s decision to nationalise banks, a sector known earlier for ‘class’ banking and leaving out the underprivileged masses from the banking system, was hailed politically for putting in rules and regulations to bank the poor. But over time, that very act rendered PSBs a synonym for profligacy, high inefficiency and loans driven primarily by phone calls from political bosses. Top PSB appoint­ments were also made by them, with kickbacks attached.

Under the United Progressive Alliance (UPA), even before the government shortlisted the names of candidates for public sector jobs, some of the top corporate houses associated with the particu­lar sector would approach executives who had some time left for retirement and were at the top of the ‘seniority list’. Corporate executives would then assess their keenness for the top job and suggest that they could ‘swing the deal’. Even the panel sent to the Appointments Committee of the Cabinet (ACC) would be prepared in such a way that two of the three listed candidates would be dummies. Once the ‘preferred’ executive bagged the job, he or she would repay his debt to the corporate house.

Several such ‘preferred’ officials got into key positions through this back door. In 2009, when the Congress-led UPA was in power at the Centre, the High Court of Gujarat ruled on a PIL based on an Indian Express report stating that the appointment of inde­pendent directors on the boards of PSBs was not done on merit but to favour politicians connected with Congress and its allies. The court observed: “Primary consideration of the Government not interest of the nominees or any other vested interest. We are sure that the Government will give serious thought in future so unnecessary criticism could be avoided.” The ruling was with reference to a PIL against the Manmohan Singh government ap­pointing 37 independent directors on the boards of PSBs. At least 33 of these were Congress loyalists and included five All India Congress Committee (AICC) secretaries, a vice president, and a secretary of the All India Mahila Congress and the Seva Dal.

In 2017, the Uday Kotak panel suggested that there be continu­ous assessment of the performance of independent directors on the boards of PSUs. Subsequently, a Parliamentary Standing Com­mittee on Industry headed by RCP Singh recommended in 2018 that “a scrupulous mechanism for performance evaluation of in­dependent directors has to be brought in with urgent priority”. The committee also recommended that the Department of Public En­terprises redo the eligibility conditions for independent directors. A research report by the Indian Institute of Corporate Affairs in 2019 also observed: “The selection of independent directors for PSUs has not remained independent. Instead of experienced domain experts, preference is being given to ex-IAS or recently to political affinity so the whole idea of independent directors has been vitiated.”

Despite the reports, the practice of appointing party puppets and corporate sector cronies to such posts continued. This was the case with Yogesh Aggarwal. He was the managing director of SBI who was encouraged to apply for the top position at IDBI at the last minute. The finance ministry favoured his appointment. Then, in 2017, the Central Bureau of Investigation (CBI) arrested a former chairman and three other ex-officials of IDBI Bank along with four former executives of Kingfisher Airlines in connection with the Vijay Mallya loan default case. Those sent to the slammer included Yogesh Aggarwal who was instrumental in swinging the loan to Kingfisher and the former CFO of the later defunct Kingfisher Airlines, A Raghunathan. CBI said, as chairman of IDBI, Aggarwal had approved the loans and “enhanced” the ratings while finalis­ing loans to the tune of over ₹900 crore. The agency maintained that loans were issued without due diligence, by accepting the Kingfisher brand for hypothecation, leased aircraft and guarantees from the UB Group and Mallya himself. According to the agency, ₹250 crore worth of loans given by IDBI Bank were routed through different bank accounts of Kingfisher Airlines that had stopped operations in 2012 following huge debts.

WHEN NARENDRA MODI came to power in 2014, taking over from the UPA 2 government, there was ample evidence that the rot ran deep in PSUs and that corruption and inefficiency had hollowed them out, making it imperative to clean up their management. The streamlining of PSUs began in right earnest that year with the cleaning up of management. The emphasis was pivoted on improving commercial metrics, and, thereby, enhancing the wealth effect—both for the government and the holders of PSU stock. The Department of Investment and Public Asset Management (DIPAM) was created to deal with privati­sation and set disinvestment targets during Modi’s second term. At the start of Modi’s second term, in 2019, there were big expectations from India Inc that big-ticket economic reforms, including those in labour, were in the offing. Towards the end of the term and heading into the 2024 General Election, though, there are strong indications that the Modi government may be recalibrating its plans for PSUs.

“In any developing country in the world, both the public sector and the private sector have a very important role to play. You can’t suddenly get rid of the public sector, nor should you,” Prime Minister Narendra Modi said in a recent interview to The Wall Street Journal, clearly indicating the rethink on PSUs within the government. This was not a sudden shift in the government’s position and there were enough signals over the last two years.

The irony here is that the signals of recalibration from the prime minister have come even as allegations flew thick and fast from Modi’s political rivals that the “temples of modern India”— Jawaharlal Nehru’s legacy of the public sec­tor’s unfulfilled potential, which once con­tributed heavily to the building of a modern, self-sufficient and industrialised India— were being attacked and weakened by the government. These political rivals put him repeatedly in the dock for his alleged plans of weakening public sector enterprises. In 2018, Rahul Gandhi launched a tirade against Modi, claiming that his government was making strong PSUs sick, including Hindustan Aero­nautics Limited (HAL), the aerospace major set up by his grandfather Jawaharlal Nehru. Built on WhatsApp messages and drawing room gossip, he landed up at HAL as part of his cam­paign to address current and former employ­ees, asserting that “temples of modern India” in the aerospace sector were being debilitated wantonly. “We owe you a debt, you have both the experience and expertise but this govern­ment is trying to weaken you,” he insisted. Ironically, this was the exact time when the government was unveiling big plans for HAL and for Make in India. Under Modi, HAL is now a ₹1.35 lakh crore company. And its shares have grown five times what they were in 2013 under Manmohan Singh. Its CMD CB Ananthakrishnan recently told reporters that HAL had an order book of ₹84,000 crore, with another ₹50,000 crore in the pipeline. It is all set to sell fighter aircraft to Argentina, Egypt, and the Philippines. Modi, meanwhile, flew on a HAL-made helicopter to celebrate the PSU’s triumph.

Modi’s stand reflected the new thinking in his government that it no longer subscribed to offloading government holdings in profitable PSUs in a hurry or at a discounted price.

The Nehruvian model of development was itself based on the Soviet model of state-led growth. Nehru’s model placed PSUs at the fulcrum of India’s overall economic growth. The Industrial Policy Resolution of 1956 spelt this out and the Second Five Year Plan, unlike the first which had focused on the primary sector in a predominantly agriculture-dependent new state, made rapid industrialisation the government’s priority. Given that the indus­trial economy was relatively small at the time, PSUs were man­dated to help the growth of underdeveloped sectors and regions.

Through the 1960s and 1970s and right up to the early 1980s, PSUs towered over India’s economic landscape, although, over this period, the economy grew at the sclerotic “Hindu rate of growth” as Raj Krishna had put it. By the 1980s, the Union government had be­gun contemplating the liquidation of its assets in these enterprises.

The idea of ‘scaling back’ the public sector in overall eco­nomic development goes back to the last term of Indira Gandhi. In power, her populist-welfarist politics did not allow her to fol­low her plan through. It was her son Rajiv, prime minister from 1984 to 1989, who took this forward. His grandfather had set up the first PSU in 1948, ITI or Indian Telephone Industries Ltd.

Gandhi honed in on the telecom sector. In 1987, Mahanagar Tele­phone Nigam Ltd (MTNL) was formed to cater to the Delhi and Mumbai circles. A two-pronged plan emerged—of cutting back on government funds even when allowing the PSU to borrow from the market. The idea was that PSUs would no longer func­tion under the bureaucracy’s stranglehold and thus respond aptly to the emerging demands of the sector.

In the First Five-Year Plan, there were just five Central PSUs. By 1980, the number had grown to 163. Just before Rajiv Gandhi’s assassination in 1991 and the period when India embarked on the privatisation or disinvestment drive in 1991-92, the number of PSUs was 244. Yashwant Sinha, finance minister (1990-91) to then-Prime Minister Chandra Shekhar, carried it farther in his 1990 Budget by mooting the dilution of govern­ment stakes in PSUs. Prime Minister PV Narasimha Rao, with Manmohan Singh as finance minister, amplified this in the era of economic liberalisation, globalisation and privatisation. But there were still no takers in politics for privatisation until years down the line.

The Vajpayee government (1999-2004) saw disinvestment, with a dedicated department, later a ministry, set up for the pur­pose. Privatisation as a concept became ingrained in conversa­tions around the government. VSNL, Hindustan Zinc, Balco, IPCL, Modern Foods (the government was also into making bread), and some ITDC hotels were sold. Thanks to decisions initiated then, Maruti Suzuki moved to private hands and the government exited many non-core sectors.

While downsizing and right-sizing of the bureaucracy be­came buzzwords during UPA 1, no profit-making PSUs were sold and the dedicated ministry reverted to being a mere depart­ment under a ministry. The first Manmohan Singh government mooted exiting from non-strategic sectors but held back on dis­investment. UPA 2 operated in a period of adverse market con­ditions the world over, making disinvestment difficult despite an inclination towards it. The 2008 global economic crisis com­pounded difficulties for the private sector at home. UPA 2 was too busy, embroiled in a spate of corruption scams and facing political backlash, to push through any significant reform. The decade under Manmohan Singh came to be known as the lost decade of economic opportunities, with corruption penetrating every pore and government-owned companies practically turning into cash-dispensing machines for ministers.

Of late, finding the right price to off-load government stakes in PSUs has remained difficult, especially under the adverse global eco­nomic environment. There is wariness about resorting to fire sales, selling at highly discounted prices, and facing political backlash after the sale. To add to all this, a domestic private sector accustomed to growth in an insular economic environment remains highly risk-averse and could not meet investment expectations.

The National Democratic Alliance (NDA) inherited an at-risk economy in 2014 that was incapable of pushing private sector invest­ment significantly. The preferred antidote was to increase public sec­tor capital expenditure in various sectors, especially infrastructure.

At the same time, in the banking sector, it moved in tandem with the Reserve Bank of India (RBI) to strengthen governance by extending greater autonomy to state-owned banks; and more recently it signalled a consolidation under SBI. This strengthened PSBs, but also reinvented them with a corporate work ethic that insulated them from bureaucratic/political intervention. Under Modi’s guidance and his Finance Ministers Arun Jaitley and, later, Nirmala Sitharaman, PSBs which together posted a net loss of ₹85,390 crore in 2017 moved to a profit of ₹66,439 crore in FY2022 and this is expected to touch the ₹1 lakh crore mark by the end of the fiscal. In 2019, the government announced the mega con­solidation of PSBs, beginning April 1, 2022. The Oriental Bank of Commerce and the United Bank of India were amalgamated into the Punjab National Bank, Syndicate Bank into Canara Bank, Corporation Bank into Union Bank of India, and Allahabad Bank into Indian Bank. Several subsidiary banks were merged with SBI, making it a mammoth bank of global proportions. Sitharaman’s 2021-22 Budget spelt out privatisation plans regarding IDBI Bank, two PSBs, and one general insurance company through legisla­tive changes. Two Union Budgets and nine regular Parliament sessions later, this has yet to translate into reality, clearly indicat­ing the recalibration of policy on this front.

The clearest assertion of the government’s plans, going for­ward in the current global economic context, also came during the August no-confidence motion when the prime minister openly batted for Central PSUs, and scoffed at the opposition and Rahul Gandhi for running them down. More recently, Modi hailed PSUs for the record returns to shareholders by enhancing the value of PSU stocks manifold during his government’s tenure, now popularly known as the ‘Modi Premium’.

Much of what has changed in thinking on this front is not due to something particular to India. Multiple shocks to the global economic system, from the 2008 global economic crisis to rising protectionism in the second decade of 21st century, the weakness of the global rules-based trading system, and finally China ‘cornering’ of supply chains during the Covid-19 crisis, forced the government to re-think the idea of privatisation and disinvestment. There is no country in the world with a functioning economy that doesn’t have a public sector. What matters are the relative strength and abilities of the private and public sectors. The inefficiency and corruption in India’s public sector during the last quarter of the 20th century were as much due to political circumstances as the “commanding heights” of the economy being an ideological prop, beyond any scrutiny. In the third decade of the 21stcentury, it is the private sector that has had to be bailed out repeatedly at the global level. The socialising of private sector losses even as the public sec­tor is badmouthed increasingly looks odd. The same is true for the ‘Washington Consensus’ of the early 1990s that was thought to be the magic bullet for developing-country problems. Modi comes from a far more robust pragmatic vein of thinking about these issues. And so far, he has been proved right.

Economic reformIndian economyNarendra ModiNirmala SitharamanPSUs