'Nehru had 70 PSUs, Modi 84': Professor warns India still spending big on bleeding state firms

India continues to spend enormous sums on loss-making public sector enterprises, according to Devesh Kapur, Professor of South Asian Studies at Johns Hopkins University. Kapur was speaking at a discussion on his book 'A Sixth Of Humanity: Independent India's Development Odyssey', which he has co-authored with Arvind Subramanian, former Chief Economic Advisor to the Government of India.

The professor listed three findings that surprised him during the research for the book. "We know the story of the Nehru period, public sector undertakings, how costly they were. For the first time, we put together data on all central public sector enterprises and their financials. We could not do it for the states because in many states, the accounts just do not even exist. They're that bad," Kapur said during the discussion at Q Collective, formerly known as Quorum.

Based on the data that could be assembled, Kapur said the cost of public sector enterprises was significant when measured against government borrowing. "The public sector enterprises cost between 1.5 to 2.5% of GDP in terms of the opportunity cost. So basically what we do is we have the G-Sec rate (which is the government borrowing rate) and we look at the rate of return on public sector enterprises relative to the government's borrowing rate and that we call the opportunity cost. So it was 1.5 to 2% every year for 50 years," he said.

The political scientist said the opportunity cost becomes clearer when viewed against alternative public spending. "To put it in perspective, the states could have doubled their health care expenditure if the public enterprise did not bleed as much red ink. And the central government could have spent almost 100% more in infrastructure every year over the past half-century. That was how expensive it was," he said.

Kapur said the scale of public sector expansion has not reduced over time. "But, it's not correct to believe that this infatuation with public sector enterprises is in the past," he said. "In the Nehruvian era, we set up 70 new public sector enterprises. Under Prime Minister Modi, we've set up 84."

The professor also compared capital expenditure across periods in constant prices. "In the Nehruvian era, the capital expenditure on public sector enterprises was 1 lakh crore in real 2024 rupees. In the Modi years, it's 22 lakh crores in real 2024 rupees. Of course, as a fraction of GDP, it's less because the GDP today is much more," he said.

According to Kapur, the nature of public sector enterprises has changed, but the fiscal burden continues. "And it is also the case that in the Nehruvian era, most of the enterprises that were set up were in manufacturing, whereas what has happened in the Modi era, they are in two areas basically energy and infrastructure. That's the difference but we still spend enormous amounts of money on bleeding leading public sector enterprises," he said.

Citing the telecom sector, Kapur pointed to repeated government support for state-run firms. "Between 2019 and 2023, the Indian government spent Rs 3,22,000 crores...$40 billion to rescue BSNL and MTNL. When you already have two excellent telecom private companies. And there is absolutely no way that BSNL or MTNL are going to do great things in the future," he said.

He also drew attention to the level of political scrutiny surrounding such spending. "The difference you find is - when central public sector enterprises were being set up in the Nehruvian years, there were enormous debates in parliament. When Rs 3,25,000 crores is spent, nobody objects, whether the opposition, the ruling party, it barely gets a mention," Kapur said.