India’s Big Government

by Vivek Kaul

  The Bangla singer Nachiketa has a fantastic song defining a babu; it’s called Aami Sorkari Karmochari (I am a government employee). Those who do not understand Bangla can listen to the Hindi version of the song by the same singer. It’s called Main Mulazim Hoon Sarkari. I guess a better song has not been written stereotyping the government in India since when this song came out, sometime in the 1990s.

  Now, to get back to the topic at hand. So we have some sort of a definition in place of who a babu is. It is not perfect, but I hope you get the drift, dear reader.

  And how many babus does the central government employ? The Seventh Pay Commission Report, which was released in November 2015, had some data which will surprise you on this front. As on January 1, 2014, the central government employed a total of 33.02 lakh individuals, against a sanctioned strength of 40.49 lakh.

  Of the 33.02 lakh employees, 9.8 lakh were employed by the Ministry of Home Affairs. These primarily include individuals working for the central paramilitary forces like the Central Reserve Police Force (CRPF), the Border Security Force (BSF), etc. The Railways employed another 13.16 lakh. The Defence Forces employed 3.98 lakh in civilian positions. And the Postal Department employed 1.98 lakh.

  There is some controversy here though. The data obtained by the Seventh Pay Commission puts the number of employees working for India Post at 1.98 lakh. But the Expenditure Budget for 2014 puts the number at 4.6 lakh. And data from the Directorate General of Employment and Training (DGET) suggests that the number of postal employees was at 2.09 lakh.

  In fact, the same variation is seen when it comes to the number of people employed in defence in civilian positions. The Expenditure Budget for 2014 suggests 34,813; the DGET, 3.75 lakh; and the data obtained by the Seventh Pay Commission puts it at 3.98 lakh. For the sake of this analysis, we will stick to the figures that the Seventh Pay Commission has mentioned.

  If we were to leave out those employed by the Railways, India Post, the Ministry of Home Affairs and those working in defence in civilian positions, the central government employs a little over 4 lakh people, and that is clearly not huge in a country of more than 120 crore people.

  Also, people working for the central paramilitary forces and even defence in civilian positions clearly cannot be considered to be babus in the strictest sense of the term.

  The India Post employees could possibly be considered as babus. If we add their numbers, then we get 6.08 lakh central government employees who can be labelled as babus. While the Railways employees are not exactly known for their efficient manner of working, yet the railways is an essential service and people are needed to run it.

  As the Seventh Pay Commission report points out: “In fact, the number of personnel working in the Secretariat of ministries/departments, after excluding independent/statutory entities, and attached and subordinate offices, will add up to less than thirty thousand. The ‘core’ of the government, so to say, is actually very small for the Government of India, taken as a whole.”

  While it is not easy to compare one government with another, the Seventh Pay Commission does make an attempt to do just that. As the report points out:

  Available literature indicates that the size of the non-postal civilian workforce for the US Federal Government in the year 2012 was 21.3 lakh. This includes civilians working in US defence establishments. The corresponding [number of] persons in position in India for the Central Government in 2014 was 17.96 lakh. The total number of federal/ Central Government personnel per lakh of population in India and the US works out to 139 and 668, respectively.

  What this clearly tells us is that the Indian government is not big at the central government level, at least. There is a “concentration of personnel in a handful of departments”, like the Home Ministry and the Railways Ministry. The Department of Revenue is other big employer, the Pay Commission report points out.

  Also, we need to take into account the number of individuals working for the CPSEs as well. As per the Public Sector Enterprises Survey of 2014-2015, the number of employees working for the public sector enterprises as of March 31, 2015 stood at 12.91 lakh. Interestingly, the number had come down from 16.14 lakh during 2006-2007, a fall of 20 per cent.

  The state governments, on the whole, employ another 72.2 lakh individuals.24

  Hence, the Indian government is not big when it comes to the number of people it employs. It is big in the number of things it tries to do, and hence, in the process, it messes up other important things. This is a theme we shall explore throughout this book.

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  The question is: How did it all start? How did the government of India come around to the idea that it has to get involved with virtually everything? How did the government become what we now refer to as the mai-baap sarkar?

  The conventional answer to this is that India’s first Prime Minister, Jawaharlal Nehru, was enamoured by socialism, and this led to the Indian government trying to ensure that it was present in all kinds of businesses.

  Conventional answers are not always wrong. But there is a little bit more to this answer than just Nehru and his socialism. In 1944, India’s leading businessmen, the likes of JRD Tata, GD Birla, John Mathai, Purshotam Das Thakurdas, Kasturbhai Lalabhai and AD Shroff, met in Bombay (now Mumbai).

  The meeting ended up in what came to be known as the Bombay Plan. As Gurcharan Das writes in India Unbound—From Independence to the Global Information Age: “The Bombay Plan argued for rapid and self-reliant industrialisation. Although the industrialists recognised the need for foreign capital and technology, they wanted it to be under strict control of the state.”25

  This wasn’t surprising, given that India had first been under the rule of the British East India Company and then the British Crown. Given this, the industrialists’ distrust of foreign capital was but natural. Also, these industrialists wanted foreign ownership to be prohibited in important areas, like banking, insurance, aviation and power. In case foreign companies were already present in a particular sector, they wanted them to be nationalised.26

  After Independence, India saw various sectors becoming nationalised. In 1953, private airlines were nationalised. In 1956, insurance companies were nationalised. And in 1969 and 1980, banks were nationalised.

  The industrialists who came up with the Bombay Plan were essentially willing to cede to state control in many areas of business. As Das writes: “Even more disastrous was their acceptance of a vast area of state control—in fixing prices, limiting dividends, controlling foreign trade and foreign exchange, in licensing production, and in allocating capital goods and distributing consumer goods. Without realising it, the Indian capitalists had dug their [own] graves.”

  What would have happened if the industrialists hadn’t come up with the Bombay Plan? Would the government of India, especially when it came to business, have been as all-encompassing as it eventually turned out to be? Alas, we will never have an answer to this question. Nevertheless, this will continue to remain an interesting counterfactual which scholars may work on in the days to come.

  But what we do know is that, rather ironically, Indian industrialists were the first ones to offer the option of Big Government to the Indian government. And then along came Prasanta Chandra Mahalanobis.

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  Mahalanobis was the Honorary Statistical Adviser to the government of India. Despite this rather nondescript title, he had an extraordinary influence on Nehru.

  Mahalanobis came up with the scientific input-output model of the Indian economy. What was this model all about? As Sanjeev Sanyal writes in The Indian Renaissance—India’s Rise After a Thousand Years of Decline: “It was a static mathematical model in which the economy took [in] the raw materials and spat out finished goods. All that needed to be done was to collect statistics and then coordinate the supply of inputs through a system of government control and licensing.”27

  This put the public sector, or the government-owned companies, at the heart of the economic system that evolved. A
s Sanyal writes: “The private sector was tolerated but strictly held in check by industrial licence, while the public sector became the centrepiece of national policy.” Over and above this, a Planning Commission was also set in place. The main job of the Commission was to come up with Five-Year Plans for the country.28

  This is not to suggest for even a moment that Mahalanobis was doing what he felt like. At the end of the day, he was carrying out what Nehru wanted him to do. This becomes clear from what Shashi Tharoor writes in India—From Midnight to Millennium:29

  The road to disaster was, as usual, paved with good, even noble, intentions. In 1954, Prime Minister Nehru got the Congress Party to agree to work towards the creation of a ‘socialist pattern of society’. Within a year, his principal economic adviser, the Strangelovian PC Mahalanobis, came up with the Second Five-Year Plan. This enshrined industrial self-sufficiency as the goal, to be attained by a state-controlled public sector that would dominate the ‘commanding heights’ of the economy. The public sector would be financed by higher income, wealth and sales taxes on India’s citizenry. India would industrialise, Indians would pay for it, and the Indian government would run the show.

  Of course, Tharoor’s book was published in 1997, much before he joined the Congress Party. High taxes were a very important part of Big Government. In fact, there was a time in the early 1970s when the highest marginal rate of tax had stood at 97.75 per cent. As the then Finance Minister, Yashwantrao Chavan, said in the budget speech he made introducing the budget for 1974-1975:

  The [Direct Taxes Enquiry] Committee has expressed the view that [the] prevalence of high rates is the first and foremost reason for tax evasion, because this is what makes the evasion, in spite of attendant risks, profitable and attractive. The Committee has, accordingly, recommended that the maximum marginal rate of income tax, including surcharge, should be brought down from its present level of 97.75 per cent to 75 per cent. Simultaneously, there should be a reduction in tax rates at the middle and lower levels.

  What this meant was that if you were earning above a certain level, almost 100 per cent of your income would have been taxed. In fact, Gurcharan Das recounts a very interesting conversation that he had with Piloo Mody, a Member of Parliament from the erstwhile Swatantra Party, about JRD Tata: “He is not wealthy. All the Tata shares are in trusts…. Whatever he inherited personally, he has also put that into a trust. In any case, he pays ninety-seven per cent of his earnings [as] income tax; then, he pays wealth tax, and this takes his tax rate to over one hundred per cent. His entire income goes in taxes, and he has to sell some assets each year to live on.”

  Given such high rates of income tax, it wasn’t really surprising that many people who could decided not to pay any tax, and a huge black economy emerged over the years. Black money is essentially money which has been earned, but on which taxes have not been paid. Estimates made by the National Institute of Public Finance and Policy suggest that, by the 1980s, black money accounted for nearly one-fifth of the Indian economy (see Table 1.2).

  Table 1.2: Estimate of black money between 1975 and 1984.

  Year Estimated Amount

  (in Rs. crore) Per cent of GDP

  1975-76 9,958 to 11,870 15 to 18

  1980-81 20,362 to 23,678 18 to 21

  1983-84 31,584 to 36,784 19 to 21

  Source: Finance Ministry’s White Paper on Black Money, 2012.

  This is a problem that India is still grappling with, as we shall see in Chapter 9.

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  Also, it needs to be mentioned here that it is fashionable to criticise Nehru these days for much of what ails India. Nevertheless, it is important to remember that those were the days when the propaganda surrounding the Soviet Union was very strong. Even the Americans fell for it.

  For many years, the most widely used economics textbook all over the world was written by the American economist Paul Samuelson. Samuelson, in different editions of his textbook, maintained for a very long period of time that, in the years to come, the Soviet economy would grow bigger than that of the United States.

  As Daniel Acemoglu and James A Robinson write in Why Nations Fail – The Origins of Power, Prosperity and Poverty:30

  The most widely used university textbook in economics, written by Nobel Prize-winner Paul Samuelson, repeatedly predicted the coming economic dominance of the Soviet Union. In the 1961 edition, Samuelson predicted that Soviet national income would overtake that of the United States possibly by 1984, but probably by 1997. In the 1980 edition, there was little change in the analysis, though the two dates were delayed to 2002 and 2012.

  Of course nothing of this sort happened, and the Soviet Union broke up in December 1991. But those were the days, and the narrative framed around the success of the Soviet style of economics, driven by its Five-Year Plans, was very popular. Samuelson was not the only one to be seduced by it. In fact, an entire generation was.

  The trouble, as Acemoglu and Robinson point out, was: “In reality, what got implemented in [the] Soviet Union had little to do with the Five-Year Plans, which were frequently revised and written or simply ignored. The development of industry took place on the basis of commands by Stalin and the Politburo, who changed their minds frequently and often completely revised their previous decisions.”31

  Closer to home, Jawaharlal Nehru was also a great fan of the Soviet style of economic development. So, India had its own set of Five-Year Plans. The Second Five-Year Plan (1956-1961) put into practice the idea of economic growth driven by public sector enterprises. The idea was that the government running businesses would ensure that Indians could control their own well-being.

  As Tharoor puts it:32

  The logic behind this approach [was]… the conviction that items vital for the economic well-being of Indians must remain in Indian hands—not the hands of Indians seeking to profit from such activity, but the disinterested hands of the state, that father and mother [emphasis added] to all Indians. It was sustained by the assumption that the public sector was a good in itself; that, even if it was not efficient or productive or competitive, it employed large numbers of Indians, gave them a stake in worshipping at Nehru’s ‘new temples of modern India’…. In this kind of thinking, performance was not a relevant criterion for judging the utility of the public sector.

  The lack of a performance criterion also led to a situation where public sector enterprises were set up but never got around to producing what they were meant to. Take the case of Hindustan Fertilizers Ltd.

  Charles Wheelan talks about the company in his book Naked Economics—Undressing the Dismal Science. As he writes:33

  By 1991, the Hindustan Fertilizer Corporation had been up and running for twelve years. Every day, twelve hundred employees reported to work with the avowed goal of producing fertilizer. There was just one small complication. The plant had never actually produced any saleable fertilizer. None. Government bureaucrats ran the plant using public funds; the machinery that was installed never worked properly.

  The fertilizer factory was set up at a cost of $1.2 billion and over a period of seven years, but it produced no fertilizer. Nevertheless, there was a canteen, an accounts department and a personnel department. Apart from this, promotions, pay rises and audits also happened.34 It was totally surreal.

  Nehru’s public sector system as it evolved ensured that workers came in every day and the government kept paying their salaries. As Wheelan writes: “The entire enterprise was an industrial charade. It limped along because there was no mechanism to force it to shut down. When the government is bankrolling the business, there is no need to produce something and then sell it for more than what it cost to make [emphasis added].”35

  In fact, even in factories which produced something, productivity was horrible, to say the least. Productivity is essentially output per unit of input. Take the case of Steel Authority of India Ltd. (SAIL). The government’s main steel producer employed 2.47 lakh people to produce six million tonnes of steel in 1986.
In comparison, the Pohan Steel Company of South Korea employed just 10,000 individuals to produce 14 million tonnes, or two and half times the steel produced by SAIL, during the same year.36

  Given this, it wasn’t surprising that the public sector enterprises worked in a very inefficient way. In 1992-1993, of the 237 public sector enterprises in operation, 104 were loss incurring. The losses amounted to Rs. 4,000 crore in total.37 If we were to adjust this for the consumer price inflation that has prevailed between then and now, it amounts to a little over Rs. 19,300 crore as of March 2015.

  As mentioned earlier in the chapter, the losses of the 77 loss-incurring public sector enterprises in 2014-2015 stood at around Rs. 27,360 crore. This means that, between 1992-1993 and 2014-2015, the losses of the public sector enterprises had gone up by close to 42 per cent.

  The irony is that, unlike many other things, free India did not inherit public sector enterprises from the British when they left India in 1947. When the First Five-Year Plan was launched in 1951, there were just five public sector enterprises. Yes, you read that right—there were just five public sector enterprises in 1951! The total investments of these companies added up to just a minuscule Rs. 2.9 crore. By 1985, the number of public sector enterprises was around 200. They had a total paid-up capital of more than Rs. 17,562 crore. All of this had been contributed by the government.38

  The question to ask is: How did the number of public sector enterprises jump from five in 1951 to 200 in 1985? The Nehru-Mahalanobis model of economic growth did not have much role for private enterprise in it. One reason for this was the assumption that the private companies would have neither the money nor the risk appetite in setting up companies in sectors like steel, which would have long gestation periods. Hence, the government would have to set up public sector enterprises.