Does the government have any business to be in business?

Depending on the circumstance, governments play a larger or a smaller role in the economy, direct or indirect. No markets function without regulation and contract enforcement. Regulation and contract enforcement are provided by the state

Economy, Indian Economy, Markets
Liberalisation involved the removal of licensing and the requirement to get clearance from the Monopolies and Restrictive Trade Practices Commission. Representational image: iStock

Recently, Prime Minister Narendra Modi discovered the virtues of the private sector and asserted they play a big role in national life and the service of humanity. Industrialists tweeted their gratitude. Newspapers wrote editorials urging the private sector to live up to the expectations held up by the prime minister. That set the stage for the return of that old nostrum, the government has no business to be in business, which had gone into quiet retirement ever since ideology shed its neat division into black and white, only to strut the stage in all the glorious billion hues a modern OLED display is capable of.

Even people who have professional claim to be at least half-witted have started parroting this bit of mindless blabber.

But before we examine the emptiness of the proposition that business and government are and should be mutually exclusive, let us note that Modi’s discovery of the private sector is even less original than the discovery of America was in its time. When, in 1492, Columbus made landfall on an island in the Bahamas, located midway between Cuba and Florida, America had been populated for thousands of years, by the descendants of those who had crossed the land bridge connecting Alaska to a Eurasian extremity now in Russia’s far east. That land bridge was submerged when the last ice age ended some 12,000 years ago, and ocean levels rose as the ice melted, and, today, we have the Bering Strait in its place. And the Vikings had forayed to North America long before Columbus set out to discover a western route to India in the east, making use of the still nascent insight that the earth is round, rather than flat.

The Indian government has championed the private sector since Nehru’s time. Nehru did put up a rhetoric of socialism and talked of the state occupying the commanding heights of the economy, true. But that was because Nehru wanted commanding heights for the economy and India’s private sector was too feeble or timid or both to do much uphill climbing. Nehru set up development financial institutions, the likes of ICICI and IFCI, to mop up the public’s savings, via the banks that channelled bank deposits to these institutions, which made long-term loans, rather than the short-term working capital that banks provide. The government made the bonds issued by DFIs eligible to be counted as part of the share of total lending that the banks were mandated to give the government, via the Statutory Liquidity Ratio. Thus, Nehruvian socialism made long-term debt capital available to the private sector.

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In 1963, the Unit Trust of India was set up by the Nehru government, to allow individual savings to be mediated as equity capital to private industry. High levels of protection from imports gave Indian private industry a captive market for whatever they produced.

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The government invested to build the infrastructure private industry just was too small to attempt, and also a capital goods industry. In the process of such investment, the government put purchasing power in the hands of a lot of people, so that they could spend on what private industry produced. It is easy to badmouth Nehru as a socialist who held Indian capitalists back. In his time, he provided them with power, roads and machine tools produced in the public sector, long-term debt capital and some bit of equity capital, a captive market for India’s fledgling capitalists and money in the hands of a growing middle class for it to splurge on what the private sector produced.

Nehru also supplied industry with trained engineers and managers, with his stress on higher education, technical education and specialised institutions such as the Indian Institutes of Technology and the Indian Institutes of Management.

These are only the facts. But what matters is what people believe, and people believe what they are told time and again by all and sundry. Socialism was a nice narrative for the Congress to uphold, when Independent India industrialised in the midst of grinding poverty, enormous expectations from the people and a vocal Left opposition calling the government Tata-Birla-ki-Sarkar. Subsequently, when Nehruvianism became old-fashioned and the control permit raj had degraded into an extortion racket for the benefit of the neta-babu nexus and its cronies among industrialists, socialist became a term of abuse. People then heard the abuse hurled around by all kinds of people.

Liberalisation began with Rajiv Gandhi assuming the premiership, seeking to take India to the 21st century and promoting a new information technology industry. Yes, he did try to use the public sector to build a new telecom industry, and a semiconductor industry and a government-led centre to advance computing. But the major companies Rajiv Gandhi’s policies promoted in these new sunrise sectors were all in the private sector: HCL, TCS, Infosys, Wipro survive and thrive today.

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Then came liberalisation, the removal of licensing and the requirement to get clearance from the Monopolies and Restrictive Trade Practices Commission. Would it be anti-national to suggest that these measures were taken to promote the private sector rather than the public sector? When foreign institutional investors were allowed to invest in the stock market and the market regulator given statutory authority, was the goal to repress the private sector? When oil exploration was thrown open to the private sector, did it display distrust of private enterprise? When the United Progressive Alliance  government contracted out hundreds of public-private-partnership projects such as the Delhi and Mumbai airport modernisation programmes, when policy promoted the growth of world beating telecom companies, was the private sector being reviled? Only to be salvaged, revived and patted on the back by the present government, to the eternal and grovelling gratitude of the private sector?

Let us examine if business and government move in non-overlapping orbits anywhere in the world, to live up to the ideal of the government having no business to be in business. In the wake of the pandemic, governments came out with fiscal and monetary support to the tune of 13% of global GDP, to salvage businesses and offer people social security. The shining citadel of free market capitalism, the United States, stumped up a $3 trillion (a trillion is one lakh crore) fiscal package last year, and is now topping it off with another $1.9 billion. Most of it goes to businesses, small and big. Every major flag carrier in every advanced country has received billions of dollars of subsidy. Of course, governments have no business to be in business.

Similar rescue operations took place during and in the aftermath of the 2007-09 financial crisis. The US government took over, and later privatised, General Motors and Chrysler, gave equity support to most banks. The US Fed, the European Central Bank and the Bank of England have bought hundreds of billions of dollars worth of bonds issued by private companies. Many European lenders today limp around only because their governments bailed them out. Presumably for pleasure — after all, governments have no business to be in business.

OK, so governments do have a role in the lives of businesses when they are at risk of dying. But what about during normal times? Anyone whose idea of industry has progressed from that vision of giant, interlocking mechanical sprockets in which Charlie Chaplin got squished and squeezed in Modern Times knows that the highest value is derived from intellectual property. How is intellectual property created and protected?

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Sound schools produce inquisitive, creative minds. Universities train them and put them to work on advancing the frontiers of knowledge. All this is funded, for the most part, by the state. It is on this elevated substratum of knowledge that private sector R&D builds its little castles of glory. Even those private edifices are financed by the state, through generous tax breaks for R&D expenditure. Ha! — snorts the libertarian. If the government gives a tax break, it should count as reduced extortion, not as financing. To assess this argument, we should ask, why does anyone pay tax at all, why does the government have the right to collect tax?

The government so organises society that it is possible to conduct business and make profits. It maintains law and order (imagine what prosperity would result, if all the world were like some Indian states regularly in the news for rapes, a lynching here and an ‘encounter killing’ there).

The government secures and maintains the nation, so that national policies can be created for the benefit of domestic companies, whether import duties, non-tariff barriers or subsidies. It strives to (sometimes, it signally does not) produce social cohesion — no business could flourish in Rwanda or Democratic Republic of Congo in the ‘Nineties, or Syria after 2011, when popular attention was rivetted on finishing off the neighbours conceived as cockroaches and termites or on escaping such terminal pest control measures. It regulates business for fair competition, fair access to capital. The government provides or supervises private provision of physical and social infrastructure. All these services cost money and the government recovers the cost as tax. Tax is the price of averting anarchy.

To get back to the intellectual property story, the government creates and maintains the legal framework for creating and protecting intellectual property rights. Patents are filed not with the local sethji, whose business is unalloyed business, but with the patent office, an arm of the government. Patent disputes are settled by the courts, whose job is certainly not to be in business.

Well, OK, let us restrict the government’s business exclusion to ownership. Why should governments own businesses, why not just leave it to the private sector? Ideally, yes. But very few things in the real world match the ideal. Does Modi or any Indian imagine that any Indian private sector company would be able to do what Indian Space Research Organisation or Bhabha Atomic Research Centre does? Why does India retain these entities? Why does the Modi government want to retain state ownership in some strategic sectors? Because India’s private sector capacity has not matured to a level where the national economy would have certain critical capabilities even if the state restricted itself to providing little more than law, regulation and incentives.

At the end of the Second World War, a quarter of industrial capital in the US was under state ownership. And all of private industry was under state control, contributing to the war effort. Depending on the circumstance, governments play a larger or a smaller role in the economy, direct or indirect. No markets function without regulation and contract enforcement. Regulation and contract enforcement are provided by the state.

Ultimately, business is just one part of humanity’s collective being. There are other spheres of endeavour, such as music, dance, painting, cinema and other aesthetic pursuits, physical excellence, and striving to achieve a balance within society among individuals and between society and nature. Advance in all these spheres of endeavour also advances business. The state is what allowed primitive humans to evolve civilisation. It conditions and facilitates human existence and progress. To pooh-pooh its relevance in any sector of collective life is to advertise ignorance.

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