Publicly held businesses are outperforming private ones under Modi’s India

Ten years ago, Narendra Modi, the chief minister of Gujarat, a business-friendly state, became India’s prime minister. His political campaign promised a substantial change in support for the private sector, with phrases like “minimum government, maximum governance” raising expectations of a laissez-faire approach and a la Thatcherism. However, a deeper look at Modi’s term in Gujarat and as Prime Minister shows a distinct story centered on the revival and domination of public-sector firms.

Modi’s Promises and Early Perceptions
During his 2014 campaign, Modi famously said, “I believe the government has no business to do business.” This phrase, along with his “minimum government, maximum governance” motto, implied that his administration would limit government intrusion while encouraging the private sector. Observers predicted a new age of deregulation and pro-market policies.

Reality vs Expectations
Contrary to predictions of a hands-off style, Modi’s administration in Gujarat was marked by extensive engagement in the turnaround of state-owned firms, particularly in the energy sector. This tendency persisted at the national level, as Modi’s government prioritized improving the performance of public-sector firms.

Public-Sector Outperformance
Under Modi’s leadership, state-owned firms have beaten India’s benchmark Sensex index for three years running. These corporations frequently traded at a higher price than their private counterparts, indicating superior performance and investor confidence.

Administrative Reform and Governance
Administrative changes have had a significant impact on the development of public-sector firms. The Modi government implemented policies emphasizing professionalism, strategic forethought, and a strong dedication to national interests. This new governance style was critical in reviving these once-powerful institutions.

Implications for the real economy
While the public sector’s outperformance is noteworthy, it raises concerns about the larger ramifications for India’s economy. The majority of these state-owned firms work in legacy industries such as fossil fuels, conventional transportation, and 20th-century capital goods. Simultaneously, private-sector investment has been low, reflecting a larger problem in the economy.

Legacy Sectors and Private Sector Anemia
India’s public-sector undertakings (PSUs) are concentrated in industries that are deemed obsolete or “sunset” sectors. Despite its effectiveness, this emphasis on legacy industries has coincided with a significant drop in private-sector investment, notably in manufacturing.

The Macroeconomic Picture
When looking at the broader economic environment, the dominance of state-owned enterprises in declining sectors and the standstill of private-sector development portray a troubling image. The liveliness of PSUs may reflect inherent flaws in the private sector’s capacity to promote development and investment.

Critiques from analysts
Analysts at Kotak Institutional Equities suggest that PSUs’ reinvestment of cash flows into their present companies may limit their potential to invest in future-proof industries. This reinvestment approach may jeopardize the long-term survival and competitiveness of these businesses.

Investment Dynamics and Constraints
One major problem is the government’s control over the profitability of public-sector enterprises. Instead of allowing these gains to flow into the larger financial system and support new, creative enterprises, the government reinvests them in the same businesses. This limitation reduces the possibilities for diverse development and innovation.

Private Sector Struggles
India’s private sector confronts severe problems, with fresh investment intentions dropping by more than 15% in 2023–24. Manufacturing has been especially heavily struck, with new bids down 40% in value terms. This downturn reflects larger challenges in the industry and the economy.

Read more: India Must Tax the Ultra-Wealthy to Close the Wealth Gap

Explaining the Decline
Several reasons contribute to the fall in private-sector investment. One important difficulty is a lack of strong local demand, which makes it difficult for private companies to justify additional expenditures. Furthermore, sluggish productivity in manufacturing implies that fresh capital is not being drawn into the industry. Business-friendly changes have also not advanced enough to promote investor confidence.

Government’s Economic Battle Plan
Throughout his two administrations, Modi’s economic plan has depended primarily on public-sector investment to create development. The government has aggressively directed family financial resources into state-controlled assets, resulting in a significant growth in government spending and national debt. This technique, although beneficial in the short term, raises concerns about its long-term viability.

Financial Sustainability Concerns
The continued increase in government investment presents enormous budgetary concerns. The long-term viability of this policy is dubious as government budgets increase spending. There is an urgent need to change to a more balanced strategy that involves strengthening the private sector.

During Narendra Modi’s term, the performance of India’s public-sector firms has improved dramatically, yet this achievement is accompanied by significant problems. The strong dependence on state-owned firms and legacy industries, coupled with dwindling private-sector investment, creates a complicated and possibly unsustainable economic environment. Long-term development and modernization in India need a strategy change that revitalizes the private sector and diversifies investment.

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