Balanced detractor

The topic of privatisation is young. There is no ancient classic treatise on this topic, and the oft-quoted definitive reference book by Vickers and Yarrow, published in 1988, is relatively recent.

Indeed, as Governor Y V Reddy writes in the foreword to Privatisation in India: Challenging the Economic Orthodoxy, in most cases, the practice of privatisation has preceded its dissection by academics.

Privatisation as an idea, though, is forever topical, and perhaps forever contentious. Beginning with Reagan and Thatcher and more recently with Koizumi in Japan, this idea remains in vogue, has passionate champions, and news of its demise is vastly premature.

This is so even in India, where the p-word is much dreaded by politicians and policymakers. It is sobering to note that half the labour force is self-employed (running private enterprises). Much of the other half is also working in the private sector.

Yet almost half of all capital stock is under the control of the public sector, and there is understandable concern that the capital is not being used efficiently enough.

This could be on account of the need to pursue multiple objectives, or the lack of management autonomy, or political interference, or all of the above. Or perhaps there is not much loss of efficiency, as observed by Professor Ram Mohan's book.

The privatisation debate really applies to the narrow domain of public enterprises. But fundamentally this debate is about seeking that optimal balance between the state and the market.

Unfortunately, the debate tends to get marred by participants taking extreme positions, overburdened by emotion and ideology. Ram Mohan's book seeks to inject a sane voice into this debate.

He sets out to explore answers to such questions: is the private sector indeed more efficient than the public sector? Has disinvestment (that magical Indian euphemism for the p-word) led to any improvement in performance? Is strategic sale rather than sale through a public offer the best option?

To answer these questions, he looked at data from the past two decades. The book arose out of Ram Mohan's doctoral work at New York University and draws upon some of his technical publications.

In evaluating the relative performance of public and private enterprises, he uses two different methods""one using purely financial ratios and the other using material input-output ratios. He has applied this technique separately to the banking sector, which is one of the unique contributions of his book.

Through various studies documented painstakingly in chapters 3 to 5, the author finds that public sector performance has not been uniformly inferior to the private sector.

There have been periods in the later part of the post-reform period, when public sector performance has been on a par with that of the private sector. He is careful to use correctives for numerous parameters that may bias his conclusions, and scrupulously lets the data, the statistics and econometrics speak for themselves.

In effect, he cautions against hastily making assumptions that private sector efficiency is inherently superior. He also warns against pursuing privatisation policy that ignores the remarkable improvement in the performance of the public sector in the latter half of the 1990s, particularly in banking.

He claims that there is a "middle path" of privatisation appropriate for developing countries like India and China, with institutional weaknesses of governance and regulation (chapter 7 and 8 are lucid on this topic). And finally, he claims that the element of competition is more important than the issue of ownership. Thus, it is conceivable that there could be a profitable coexistence of the public and private sectors, as seen currently in airlines, banking, insurance and telecom.

It's possible to quibble that the author's sample size is too small, or ask the standard counter-factual: would not the recent stellar performance of the public sector enterprises (especially banks) have been even more glorious if they were private?

Unfortunately, privatisation debates lend themselves to such Rashomonesque treatment""no matter how sound the facts and the statistics, there's always another way to look at them. Maybe this question cannot be divorced from ideology, after all.

Ram Mohan tries gallantly to be objective, but I think his subtitle gives him away. He is firmly on the side of the incrementalists, those who would hasten slowly. A must-read for those who would like to increase the quality of debate on privatisation.

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PRIVATISATION IN INDIA CHALLENGING THE ECONOMIC ORTHODOXY

TT Ram Mohan
Routledge
Price: Rs 695; Pages: xxii+218