Industrial revival may need a brand new public sector model

With words that must be said

“Can analysis be worthwhile?"

“Is the theatre really dead?"

—The Dangling Conversation by Paul Simon

The answer is an unequivocal ‘no’; theatre is alive and thriving across the Indian landmass. But the same question asked about India’s public sector, especially public sector units (PSUs) engaged in manufacturing activity, might elicit different responses, depending on the political disposition of the person replying. As things stand, the economic situation in India may require a fresh but nuanced relook at public sector manufacturing.

This suggestion will undoubtedly be met with howls of protest. And with reason too. The record of manufacturing PSUs in India, apart from a handful of companies, is downright embarrassing.

Also Read: PSUs are running amok with grand ventures, with little regard for their capability or governance

Often, the problem lies in governance compromises. The chief executive of a large PSU took early retirement some years ago, unable to countenance the unabashed favouring of a private-sector competitor by the minister in charge, thereby depriving the PSU of its rightful revenues. Then there is the workforce angle. 

This columnist visited Ranchi in 1987 to report on police firing at Hindustan Engineering Corporation, a PSU, and found over 20,000 employees affiliated to more than 60 registered and unregistered trade unions, all at odds with the management and with each other. Surprisingly, the company continues to exist even today, despite a negative net worth.

But shifting economic winds indicate that it’s probably time to think afresh about PSU activity, though with a difference and greater control over governance and performance. Various economists in the West are also revisiting the 1980s abandonment of public sector enterprises and questioning whether the same principles should hold true after more than 40 years. Of course, there is an unavoidable proviso: the business-as-usual public sector model must be scrapped in favour of a new operating system.

Also Read: It’s time to re-evaluate the utility of public sector units

Economist Mariana Mazzucato has argued compellingly in her book, The Value of Everything, that while modern economic thought has relegated the government’s role to only fixing market failures, rather than actively creating and shaping markets, the value-creating role of the public sector has been grossly underestimated. 

In a September 2024 essay for Finance and Development published by the International Monetary Fund, she wrote: “Closed-minded perceptions of the state’s role, cuts to public sector employment, and overreliance on big consulting firms have left many governments ill-equipped to implement mission-oriented industrial policy… Industrial policy requires a competent, confident, entrepreneurial, and dynamic public sector—one equipped to take risks, experiment, and collaborate with the private sector on ambitious goals yet open to how those goals are achieved."

The operative phrase here is ‘mission-oriented industrial policy’. The Indian government’s second advance estimates show manufacturing at 14.3% of gross domestic product (GDP) in 2024-25, down perceptibly from 16.3% during 2014-15. This decline encapsulates many of the economy’s current problems, including rising unemployment and stagnation in real wages. What aggravates the problem is India’s uneven and patchy economic growth—including industrial activity—across states, with some states far over the median level and many far below.

Take the example of Bihar. The state’s manufacturing output during 2023-24, at current prices, was only ₹52,600 crore, or about 1.5% of national manufacturing output. In contrast, Odisha’s share was above 4.7%. At the other end of the spectrum, Maharashtra’s manufacturing contributed to 13.4% of national output. 

In the podcast Ideas of India, economist and Ashoka University professor Prachi Mishra cites Bihar’s example—accounting for 9% of India’s population but contributing to less than 2% of GDP—to highlight how divergences exist between states even after the efforts of 15 finance commissions, a former Planning Commission and a current Niti Aayog.

Also Read: India can leap from cost competitiveness to innovation-led manufacturing

So, ignoring rigid views that echo the economic orthodoxy of a minimal role for the state in an economy, it might be worthwhile to consider whether new public sector manufacturing units might be able to provide a balancing factor. The Public Enterprises Survey Report 2023-24, which examined the working of 272 central operating PSUs (excluding banks and insurance companies), found that while their net profit during the year had increased by over 47%, their contribution to the exchequer (various duties and taxes, dividend payouts and interest on central government loans) at ₹4.85 trillion had increased by around 6%.

There are two additional figures that explain how a new PSU could kickstart some industrial activity in Bihar. 

The first is that capital expenditure by PSUs has jumped by over 72% between 2019-20 and 2023-24, proving that state-owned companies have the capacity to invest when the private sector’s propensity to invest remains stubbornly low. Second, the report reveals that the surveyed PSUs spent ₹77,339 crore on goods and services procured from micro and small enterprises in 2023-24 under the Centre’s 2012 procurement policy; this alone could offer an opportunity for a constellation of privately-owned micro and small units to come up in Bihar.

Also Read: How a manufacturing boom could help India close the gender gap

This column is not advocating an indiscriminate investment binge in new PSUs, which might only help meet some temporary political and electoral purposes but fail to provide the sustainable economic stimulus that is needed. Investments in new PSUs need to be selective and strategic.

The author is a senior journalist and author of ‘Slip, Stitch and Stumble: The Untold Story of India’s Financial Sector Reforms’ @rajrishisinghal