CHINESE SOEs VS INDIAN PSUs: Discussing India’s Growth Story
The notion of an Asian century, held up by the two countries, was first articulated in recent times in 1988 by the Chinese leader, Deng Xiaoping, during a summit with Rajiv Gandhi, then prime minister of India at the time. The Chinese success story accompanied by the accomplishments of SOEs (State Owned Enterprises) in many countries, especially China, has reignited the interest of countries in the public sector even while pursuing a liberalised free market economy regime. The article aims to analyse the role of SOEs both socially and economically, the Chinese counterpart’s reforms, and leave the readers to think about India’s growth story.
Historical and Political Narrative in India
Historically, post-1947, India had a shaky industrial base with only a handful of state-owned factories. The weak industrial foundation, insufficient investments, limited infrastructure facilities, and a lack of skilled labourers impaired the core framework of India. These few industries were not competent enough to excel in the developing world. They needed a new and efficient policy that could pave the path for their progress. The Industrial Policy Resolution of the Second Five-Year Plan proved to be the relevant framework for public sector undertakings/companies, which were viewed as a development tool for sustainable economic progress.
Seventy years after independence, another issue to ponder over very seriously is the value a line Ministry brings to the working of its PSUs. The debate regarding the hot topic of privatisation has deep roots in the PSUs.There is a candid acknowledgement that generally PSUs are prone to ‘inefficiencies’ and ‘mismanagement’. The overarching reason behind this is bureaucratic and political interference in the working of these undertakings - not merely in policymaking but also in their day-to-day functioning.
So why is there an immediate need to talk about restructuring and investing in these PSUs?
Take the collapse of HMT, a PSU in India. Due to its demise, the government is forced to import 80% of its machine tools, the bedrock of manufacturing. Additionally, the undermining of pharmaceutical PSUs like IDPL and HAL Pharmaceuticals, once India’s pride, makes them dependent on active ingredients from China. Not investing as one should in 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 which highlights how it hurts our goal for self-sufficiency.
The Chinese Reforms
Adopted in September 1997 at the 15th Communist Party Congress, the “grasping the large and letting the small go” policy was part of a wave of industrial reforms implemented by the central government of the People's Republic of China in 1996.
The “grasping the large” component indicated that policymakers should focus on maintaining state control over the largest state-owned enterprises (which tended to be controlled by the central government). “Letting the small go” meant that the central government should relinquish control over smaller state-owned enterprises. Relinquishing control over these enterprises took various forms: giving local governments the authority to restructure the firms, privatise them, or shutting them down.
The corporate transformation had been dramatic, with state-owned firms accounting for about 50 percent of industrial output as recently as 1998, but declining to about 30 percent by 2005, continuing to fall since then. The transformation has resulted in a more efficient Chinese labour market, with improved productivity at the surviving state-owned firms and privatised state-owned firms, even growing at a faster rate than the surviving private firms. As a result, the average labour productivity of state-owned firms increased by almost 70 percent (relative to private firms in the same industry) from 1998-2007.
While the reforms were seen to stall in the 2000s, the Chinese government took on the initiative to ultimately pass the three-year action plan in 2021. The plan focused on more investment into R&D and creating more MOEs (Mixed Ownership Enterprises).
The Indian Reforms and the Way Forward
The idea of autonomy is more reasonable for a democracy like India. In 1998, under prime minister A B Vajpayee, India too embarked on public sector enterprises (PSUs) reforms with the Navratna Scheme. The large profit-making PSUs were granted autonomy in strategic and operational decisions, including investment, acquisitions, and borrowings. The Vajpayee government also encouraged these PSUs to become “global” and acquire assets and strategic minerals abroad. However, the PSUs were denied any fiscal support, rather the government insisted on taking large dividends. This is in stark contrast to China where SOEs are liberally funded to grow and become global.
Furthermore, the UPA in 2004 deepened the Navratna policy by including several more PSUs, and in an Indian version of “let go the small and weak”, set up the Board for Reconstruction of PSUs (BRPSE) to turn around or shut down loss-making companies.
Additionally, the Roongta committee report suggested many — from curbing political interference to creating professional boards to overhauling recruitment and compensation, audit and monitoring. One cannot rule out gross interference in their work which undermines their ability to achieve high efficiency, keep costs low and stay afloat in a competitive environment. Contrary to the for-profit sector, the public sector is expected to have the greater good of society at heart while keeping its bottom line in profit. It is expected to make only reasonable profits, otherwise, it must short-change either suppliers or consumers or maybe both.
The rise of more efficient PSUs can ensure the removal of oligopolies from multiple sectors such as telecom. These PSUs can not only create more jobs but also lead scientific innovation and development in the nation and provide apprenticeships and internships to the youth. Till 2007, the PSUs were the largest outward investors from India. As the private sector has cut back its investment over the last several years, PSUs have become important drivers of industrial investment. The recent initiatives such as the Production Linked Incentive Scheme for solar PV manufacturing, semiconductor manufacturing, etc. are a step in the right direction but it misses addressing the issues of the inefficient bureaucracy that runs in the functioning of these companies. While the prime minister urges the private sector to step up investment in R&D across sectors, the government should increase its own spending on it as India's gross expenditure on research and development (R&D) is one of the lowest in the world, with just $43 per capita.
Ultimately, will China offer answers to India’s PSU woes? It is clear that while global models will offer some important lessons, India must find its own answers to the PSU problem. But one thing is certain, India needs to imitate China in establishing new PSUs in strategic and emerging industries, which require patient capital and greater risks. PSUs are important strategic assets to confront a rising China, more valuable than Rafale jets or leased Russian submarines.