From the time of the First Five Year plan the economic strategy was to establish public sector enterprises and let them play the dominant role in industrialising the country. These undertakings were also tasked to promote social objectives. Having dual objectives and working within the legal and administrative structure for PSU’s, resulted in underachievement of both. Most undertakings failed to generate adequate internal resources and so could not modernise facilities, expand production capacity or invest adequately in technology development. Instead of paying reasonable dividends, many had to periodically rely on tax revenues for funds.
Private sector growth till 1991 was curtailed by the licensing policy. Manufacturing was not competitive for various reasons, including the pricing of inputs being based on socialistic considerations. Demand for many manufactured products was also suppressed for socialistic considerations. In 1991, the licensing policy was abolished but very little else was done to make manufacturing competitive. The policy for foreign investments was modified and government actively sought to attract investments in manufacturing. The results have remained disappointing till now as infrastructure shortcomings and the inability to manufacture competitively have been deterrents.
When Modi was elected as Prime Minister in 2014 he started making many reforms. However, the crucial reforms required to make manufacturing competitive and really move the economy could not be implemented. The political obstacles proved very formidable. As the years passed he has consolidated his position and enjoys the trust and confidence of a large majority of the people. Productive employment has for long been the biggest requirement of the youth and the Covid pandemic highlighted the need for urgent action for more rapid growth of the economy.
The PM has now taken the long overdue decision to privatise most of the government enterprises including banks. While the speed of implementation will determine how quickly benefits flow, the reaction of investors and the stock market demonstrates that the decision has created confidence that the country’s economic growth trajectory will increase sharply. The transformation of a huge segment of industry to private management would result in these undertakings benefitting from the removal of several legal and other restrictions and compliance requirements. The new owners are likely to bring better technology and systems to ensure higher quality and productivity. There is a possibility of easier access to export markets and therefore higher volume production. Growth and better profitability will be the consequence and will open avenues for employee advancement and schemes for motivating them. Employment opportunities will multiply in the economy.
The Government would also generate very large resources from the sale of undertakings. These would be further augmented by tax revenues as the production and profits of the privatised companies grow. Most importantly the employment generation in the country would benefit due to the overall increase in industrial and economic activities. No wonder the stock market is so optimistic about the future.
Why do I call this the Maruti moment for the Modi administration? Because all that I have said above is borne out by what followed the privatisation of Maruti Udyog Limited in 1992. In FY 1993 MUL sold about 120,000 cars. This volume increased to about 1,800,000 in 2018-19. The expansion of manufacturing capacity was all from internal resources, and today Maruti has cash reserves of about Rs. 38,000 crores. This was achieved despite competition from all the leading car manufacturers of the world, who came to India after 1993. Maruti still has a 50% market share.
The Government has during this period received over Rs. 1.5 lakh crores as excise duty and GST. In addition, income tax revenues amount to nearly Rs.29,000 crores. Maruti has produced over 23 million cars and their operation and maintenance has created millions of jobs. Quality improvements, and cost reductions have enabled Maruti to export cars to over 100 countries. The global competitiveness of Maruti is evident from its ability to export cars to Japan. Maruti was listed in 2003 and the shares were issue at a price of Rs 125. The share price is now nearly Rs 8,000, leading to huge wealth creation for the share-holders. Largely due to Maruti’s growth a very robust component industry has developed in India. This supports thousands of small and medium scale manufacturers who are Tier 2 and Tier 3 vendors. Automobile component exports from India are over $ 11 billion.
This data clearly establishes the benefits of privatisation on Maruti. Performance would have been much lower if the company had remained a PSU. During this period, to the best of my knowledge, no other PSU has come even close to these levels of achievement. The nation will surely gain enormously by this policy. There are people who believe that privatisation of PSU’s means that the country is giving up its commitment to create a more equitable society and provide a decent life to the poor. In fact, privatisation will help in attaining this goal in a far more effective manner. As I have shown, Government resources will be hugely augmented and can be used to build infrastructure and provide social services like education, health and water supply. The CSR spending will increase as profits rise. Creation of productive jobs in the economy, arising from higher manufacturing activity, will further increase the ability of people to support themselves. An equitable society cannot be created by giving doles and not creating wealth.
This article is the third in the series on ‘Minimum Government, Maximum Governance’. You can read the other articles in the series here and here.
The author is chairman, Maruti Suzuki India. Views are personal.
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