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There is a broad consensus across the country that India needs to address the governance deficit if it is to maintain social cohesion, improve the quality of life of its 1.21 billion people and sustain its rise as a major global power.

Addressing this deficit requires a multi-faceted process, involving political, social, economic, legal, and cultural norms and practices. Initiating such a process and then sustaining it over a prolonged period will be challenging. The political systems, not only in India but also globally, face an endemic inability in sustaining a long-term focus on critical issues. However, given the stakes, India has no option but to assign high priority to addressing the governance deficit.

One of the essential elements in the multi-faceted process of addressing the governance deficit concerns revisiting the socio-economic function of the public sector organisations at all levels of the government, and in variety of activities such as manufacturing, mining, transportation services or delivery of traditional public services such as health care, education and waste management. It also applies to administration of provident fund, pensions and implementation of government schemes.

The traditional justification for public sector organisations in India, often giving them statutory monopoly powers, is based on an assertion that public sector provision and/or production of a good or service is, by definition, more progressive than the alternatives. There is, however, neither theoretical nor empirical justification for such an assertion.

The mindset behind the above deeply ingrained assertion has often led to over-reliance on ad-hoc administrative and regulatory measures and provisions; and to setting of prices for factors of production and goods and services, which do not reflect underlying resource scarcities.

For example, there is a common consensus that water will be among the scarcest resources in the 21st century. Yet, pricing of water for industrial, commercial, residential, and agricultural uses is often grossly below the cost of producing it and without considering future scarcities. The actions of policymakers and other stakeholders (including the intelligentsia and the media) suggest that there is insufficient weight given to the proposition that zero (or substantially below cost) pricing of resources and services is ultimately more costly for the individuals and for the society as a whole than appropriate pricing, combined with mechanisms to enable low income households consume essential quantity of key goods and services.

The perverse outcome of current policies and practices is evident in many areas, such as the over-reliance on personal transport or extensive use of stand-by electricity generators by those who need reliable supply of power.

The above mindset has also led to neglect of the negative impact of currently applicable organisational and individual incentives on the quality and quantity of goods and services provision by the public sector organisations.

It is proposed that the primary socio-economic function of public sector organisations in India should be to provide good quality and quantity of service in an affordable manner with a view to reducing the market power of the alternative suppliers.

The rationale for this proposition is based on an important concept in micro-economics that the higher the responsiveness of demand to prices, the lower the market power of the supplier. If the quality and quantity of a public sector organisation is attractive to the users, it reduces the power of the alternative suppliers. Conversely, if the quality and quantity of services provided by public sector organisations is not commensurate with the costs it imposes on the rest of the society, leading users to avoid their services, then alternative providers can enjoy higher profit margins for low quality services.

There are several measures which will need to be initiated if the public sector organisations are to begin the process of performing the socio-economic function stated above.

Exposing them to competition in delivery of services or in production of goods.

Contestability in policy and regulatory changes.

Extending choice to members as far as feasible and avoiding granting mandatory monopoly powers to government service delivery organisations.

Instituting appropriate organisational incentives to ensure that organisations become more efficient and effective in performing their tasks. Modern budgeting and management information systems, along with technological adaptation, are essential for organisational effectiveness.

Restructuring the employment contract to provide appropriate incentives to individuals to perform their functions with competence and integrity.
The above will require administrative reforms, a task which has so far been neglected by the Centre as well as the States.

Even a cursory perusal of the reports of the Comptroller and Auditor General (CAG) of India on the accounts of public sector organisations, including those of public enterprises at the State levels, reveals high socio-economic costs imposed by them, contributing to the governance deficit. These reports, which often reveal the need to initiate the measures noted above, deserve much wider debate and attention than has been the case.

The experience of poor functioning Air India (and Indian Airlines), providing considerable monopoly powers to other airline service providers is well known. It is not surprising that its competitors are able to charge considerably higher than normal prices when uncertainty about Air India’s schedules become more pronounced, as was evidenced during the recent 10-day strike by its pilots. The remedy is to redefine the function of Air India along the lines suggested above, and not ad-hoc administrative measures to prevent charging of higher prices by its competitors.

Poorly functioning municipal schools, public health centres and hospitals are allowing the private sector counterparts considerable market power, which is then sought to be suppressed by dysfunctional rules regarding entry and micro-management of educational institutions. Poorly functioning public organisations reduce household welfare. This is because in addition to paying taxes and charges to support public sector providers, they also need to use the household budget to obtain the requisite services.

The above discussion strongly suggests that redefinition of the social and economic functions of public sector organisations along the lines suggested above is long overdue. It should be an essential element in the process of addressing the governance deficit. India’s social cohesion, improvements in the quality of life of its people and its emergence as a major power with significant economic depth and strategic leverage depend on it.

The writer is a professor at the
Lee Kuan Yew School of Public Policy,
National University of Singapore and can be reached at sppasher@nus.edu.sg.
Views are personal.