December 03, 2023

Public Sector and Innovation

Sanjay Roy

ALMOST four decades of neoliberal regime uninterruptedly continued with an ideological posture that public sector and State owned enterprises are less efficient and need to be replaced by private players. This ideological campaign in favour of global finance was carried out with a mission to transform national wealth into privately owned assets which can be traded in financial markets and speculative gains can be derived out of that. The campaign was driven by misconceived performance assessments based on parameters which are inappropriate for publicly owned enterprises where cost structures and price conditions are differently determined in reference to private enterprises and even the goals and objective functions differ widely.

It is true that during the two decades following 1979 there had been a global spree of privatising large and medium SOEs across the advanced economies and then it subsided since the beginning of the millennium with the observations drawn from research that the performance and distribution of gains attained through privatisation are not always optimal and may hurt the common masses particularly in the cases of utilities and secondly performance of public sector largely depends on the institutional structure of respective countries instead of the nature of ownership alone. Despite ambiguity in the assessment of performance, the geography of privatisation shifted more towards the developing world since 2000 and the same arguments which have hardly been objectively founded are parroted by the mainstream media primarily to create assets for the financial markets.

One can recall that during the eve of independence when India was aiming towards getting rid of the clutches of imperialism and the Indian ruling class was at least interested in charting a path of autonomous development reducing dependence on foreign players, the idea of public sector came to the discussion in the Bombay Plan of 1944 which largely reflected the views of Indian industrialists. It was the industrialists who were largely in favour of creating infrastructure and heavy industries under public sector, primarily because these sectors involve huge start-up costs and long turnover time. They were not ready to take the burden of huge investment and high risk together with low profitability. Social mobilisation of investment under public control was used to build India’s industrial infrastructure and human capital required for the take-off in the post Independent period.

The State stepped in not only to make up the investment gap that the private sector was shirking to take charge of but also could steer high industrial growth for about one and half decade immediately after independence. It was funded by channelling consumption fund of rural India to investments for industrial growth and this squeeze of income of the rural population without any radical redistribution of rural assets particularly land had its obvious limits. Roads, ports, industries, railways, airways, universities and institutes of higher learning were all built using public money and mostly squeezed from people who only got a marginal benefit of all these developments.

The Indian ruling class could take advantage of these public infrastructures, trained engineers and managers produced by publicly funded IITs and IIMs and particularly large ones could derive huge monopoly rents through protected markets during the period of indicative planning. Also one of the major contributions of public sector in India alike many of the developing countries in the post-colonial phase is the creation of the middle class who were employed in these public enterprises and institutions. The social welfare regime of the Fordist-Keynesian era was partially actualised for a miniscule minority of workforce in countries such as India and that actually set the benchmark of standard norms of employment which helped workers in private sectors to refer to while fighting for their wages and working conditions.

Dismantling the public sector and demonising public ownership has the dual effects of negating public control over critical natural resources and of wealth created by public money and also denying the rights and entitlement of workers by dismantling the established norms of employment. Hence to put it simply it has been a deliberate attempt to convert socialised risks into privatised profits.

Currently one of the glaring facts that has been recognised as the point of worry in the capitalist world as a whole and particularly for many of the advanced economies is the slowing down of corporate investment in the recent decades. The post-pandemic recovery has been slow and persistent high unemployment even in the recovery phase in developing countries and rising inequality contributes to the low expectation of profits and dampens the ‘animal spirits’ for corporate investment. Furthermore, investments in physical productive capacities particularly for innovation have been pushed to the back seat. This is also pushing down the growth of productivity in many advanced countries and the widening gap in terms of average labour productivity between advanced and developing countries points to the fact that productivity growth suffered more in developing countries. These changes are happening in a scenario when future competition would largely be driven by innovation and that requires growing investment in research and development.

The declines of corporate investment in basic research and for ventures that are highly uncertain in terms of outcomes are precisely because of ‘shareholder capitalism’ that is guided by short termism focusing on maximising immediate shareholders’ returns. But these researches require patient capital that can bear the intermediate failures in the process of innovation and can wait for longer term gains.

Financialisation of capitalism has actually restricted its potential for investment in innovation. If private investors find scope for quick and higher returns in financial assets they would hardly be inclined to invest in researches where the outcomes are highly uncertain. In this context the capitalist State once again comes into the picture. It not only invests in basic research but also extends it to the point of commercialisation where the private players enter to make profitable fortunes. This has been the story of Apple in the US where government funded initial critical research had been commercialised by private companies. Similar is the story of pharmaceuticals, nanotechnology and biotechnology in the US where large investments are strategically made by the US government departments and institutions to push the frontier of production.

In the sphere of green technology, the US, China, Denmark and Germany have made huge investments and irrespective of the nature of the States and their ideological views all these investments are incurred by the State or State sponsored institutions. In the high risk zones of huge investment related to technological innovation it is once again the State that had to step in, invest in segments where private players actually fear to tread.

Once the outcomes are made feasible for commercialisation then the market will be created for private players and once again the socialised risks would be converted into privatised gains. In case of India, investment growth in public sector has drastically fallen compared to pre-liberalisation period. The expenditure on research and development by Indian corporates has been very low and instead of investing in enhancing productive capabilities through innovation it seems Indian corporates have chosen the easier route of sharing monopoly rents of MNCs and TNCs in exchange of making the large middle class market and the pool of low waged labour accessible to global players. In this context if we really aspire to be frontrunners in certain segments of the global market, public sector has to come up in a big way and instead of handing over the accumulated public wealth to private interests in view of mending fiscal gap through disinvestments, such resources should be channelled strategically for long term gains in enhancing productive capabilities of our country.