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This article is more than 2 year old.

Productivity matters: Why governments should not be in business

Mini

Production of economic goods and services is business. The governments are not very good producers of goods and services. The governments are best in making laws, regulations and maintaining law and order. Governance is their forte. The governments should therefore, as a policy, not be doing businesses.

Productivity matters: Why governments should not be in business
Production of economic goods and services is business. The governments are not very good producers of goods and services. The governments are best in making laws, regulations and maintaining law and order. Governance is their forte. The governments should therefore, as a policy, not be doing businesses.
The public sector is a mule, which is a cross between the government and the private sector. It does deliver service, but is not as efficient business as the private sector. Swayed by the transient success of communism, India also embarked on the path of socialistic pattern of society resulting in nationalisation of almost entire financial businesses and also reserving most of the infrastructure and basic goods production in the public sector. Policy overreach and some misconceived objectives resulted into a number of consumer goods also being produced in the public sector.
‘Public sector is not for making profits’. This excuse is offered many times to explain away the losses which a number of public sector entities make. ‘Public sector should be an ideal employer’. This is invoked to justify giving away large share of value added, sometimes even exceeding the entire value added, as salaries and benefit to public sector employees. Such mind-sets reflect production of goods and service as equivalent to pushing some files. Rule of business -- the value addition should be equal to or higher than the wages to be paid and the charge on the capital employed -- if not satisfied in any public sector entity should result into closer or sale off of such a business. As this would be true for most of the cases, there is justification in closing down or selling off much of the public sector.
Investment is the primary means of generating
 growth
Labour and capital being the primary factors of production; more deployment of labour and capital would lead to increase in production of goods and services. Increase in capital is increase in investment. Increase in labour supply also leads to increase in production of goods and services. Investment in producing those goods and services for which there is consumption demand leads to larger production of goods and services and consequentially growth in the GDP. Therefore, policy makers should pursue programmes to increase capital formation for those businesses which such capital investment can result in producing goods and services for which there is demand or for which demand can be created.
Investment leads to longer term increase in capacity of the economy to produce goods and services. Investment also results in consumption of those goods and services which are required for installing land, machines, technology and other goods and services. The investment therefore results in growth of GDP at the time of capital formation and subsequently in the form of additional capacity for producing goods and services. Investment is thus the best bet to increase the GDP and boosting its growth. Investment also leads to a kind of spiral effect setting off a process of investment in production capacities of the goods and services required for capital formation. When a cement plant is built, a lot of cement, steel, other construction material, machines, boilers, engineering services, financial services, site management services and security are required. Consumption of these goods and services in the capital formation of a cement plant adds to the GDP of that year. If the steel required for expansion of cement plants is not adequately available in the country, it might trigger investment in new steel plants as well. The spiral can be quite deep and long.
What manufacturing capacity does to goods in terms of production and consumption potential, infrastructure does to production of services. Infrastructure is essentially expansion of the capacity of individuals, households, companies and other firms to produce and deliver services. Construction of roads enables expansion of transportation services. Individuals can travel out of their place of residence if there is a road connecting their habitation to other parts of the World. People can watch a cricket match played at a distance from the comfort of their homes if infrastructure for delivering the images and sound from the place of play to the households get established. India has considerable infrastructure deficit. A lot of investment is needed.
Increase in supply of labour contributes to GDP when there is demand for labour
Expansion in demand for security personnel or coders or delivery boys or for that matter any other service leads to expansion of deployment of additional labour. It adds to the GDP. Most services are still labour intensive, whether travel services, or driving services or health services or education services. Therefore, there is considerable potential for gainfully employing additional workers which get added to the workforce every year. There might be reverse situation as well. More persons might be ‘employed’ in producing a good or delivering a service than the number required. If a person is taken out of such labour force and the production of goods and services does not get reduced, such a person employed is actually not employed -- such a person is not really a worker. Such a person might actually be contributing negatively to the efficient production of goods and services. Such a situation is starkly visible in agriculture in India and also in many government offices. Deployment of additional worker in a factory, farm, office and establishment which does not contribute to additional production is waste of resource. As such a person or persons do not add anything to the value added in the business, there is no additional increase in income to be shared amongst workers. It is very essential that countries do not pursue policies and programme which lead to employment of workers only for the namesake without adding any value to the goods and services produced or which leads to disproportionally lower value addition.
Productive use of labour force
There are three broad situations which indicate that the labour as the factor of production in an economy is not contributing gainfully in raising the GDP of a nation. First, some workers may not participate in the production process. Second, workers willing to participate in the production process do not get employed. Third, workers get opportunity to participate but employ their labour for much lower value addition than what their true potential can be. The first category of workers is excluded from the workforce of a country while computing workers participation rate. Those willing to work but not getting work, become part of the unemployment rate. Those willing to participate and also getting ‘employed’ but not contributing to value addition effectively are not generally measured as such but result in wages being much lower and spreading poverty.
The governments need to deal with all the three situations and adopt policy and other measures to increase workers' participation rate, reduce unemployment and encourage gainful and productive use of labour force. As workers get employed only in businesses, it is very much essential that the government works with the businessmen to improve upon availability and employability of labour.
Subhash Chandra Garg served as Economic Affairs Secretary and Finance Secretary of India. Garg, a 1983-batch IAS officer, demitted office on October 31, 2019. The former senior bureaucrat, who also served as an Executive Director in the World Bank, had prepared a note that listed major economic, financial and governance policy reforms India needs to adopt to build a $10 trillion economy by early 2030. CNBC-TV18 is publishing a series of articles based on this note. This is the second article in the series.
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