In previous articles, I have discussed the need for an examination of the role of the private sector in healthcare and internal security (see here and here). These are examples of some sectors which many would regard as obligatory functions of the government. By the same token, there are other sectors in which it would be useful to examine whether the government should have any direct role at all.

In the early years after independence, the private (non-agricultural) sector was small relative to the size of the economy at the time. While there is no doubt that a socialist ideology was at the heart of Nehru's vision for post-independence India, there was also a belief that private capital was simply not available to finance large scale projects of national importance, which were believed to be necessary. This led to a dominance of government not only in sectors that might be traditionally construed as government domain, but also in setting up corporations which many believe could well be in the private sector today.

Through the 1970s and 80s, the government continued to have a monopoly on many aspects of our lives. Even offices of private companies in those years did not look too different from government offices. Officers and clerks created, maintained and interpreted records manually in large ledger books and files. The lack of competition in the private sector, which was prevented by the license permit system, also meant that the few who had permits did not face the same competitive pressures of an open economy. Information technology, as we now know it, was non-existent in both the government and private domain.

But the 1990s turned a leaf in India's economic history, which has been well documented and widely argued about. The financial reforms triggered in 1991, and the partial dismantling of the license permit raj meant that there were many more opportunities for the private sector. In a number of sectors which were government monopolies earlier, the private sector could do more than was possible in earlier years.

The nineties saw another important change that accentuated the difference in the public perception between government and the private sector. Many in the private sector began to adapt to the information age - using information technology to increase their efficiency and thereby cut costs. Citizens could get faster and better service in several sectors - and now there was an experience which was directly comparable to what government offered - and the private sector turned out to be distinctly better in many respects.

Rising expectations

And the urban middle class, with their rising incomes, began to express their preferences in no uncertain terms. More private schools, more private hospitals, greater reliance on bottled water - more private almost everything. This sentiment among the urban middle class and the policy elites started manifesting in the political priorities of the country. Disinvestment of public sector enterprises, and opening up of hitherto government monopoly sectors to private players became common place.

For decades since independence, the government had a monopoly on telephone services. This basically meant that wait time for a new telephone connection was inexplicably long. With the privatisation of the telephone sector, and the entry of private telephone operators, not only has it become very easy to get telephone connections, but the prices in many cases are less than one tenth of what they used to be before the sector was opened up. Even the public sector telephone companies BSNL and MTNL were forced to become more competitive and efficient in order to be able to compete in the new circumstances. This unshackling of the sector, including the relative unshackling of the public sector companies in the sector, resulted in enormous gains to consumers.

And the urban middle class, with their rising incomes, began to express their preferences in no uncertain terms - more private almost everything.

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Examples such as this naturally lead citizens to compare the service quality when government was a monopoly, and when private players are allowed into a sector. But success in the telecom sector - lower prices for calls, better connections, almost no wait time to get connections, etc. - does not necessarily mean that privatisation is good for all other sectors too. Indeed, experience shows that privatisation of the provision of health care services (especially with government backed insurance), increases the moral hazard problems and drives up the overall cost of health care, even while it might increase physical access to quality health care in urban areas.

There are examples of companies in which government disinvested significant amounts of common stock. The evidence is mixed with regard to whether such disinvested companies have evolved into firms that are more responsive to consumers and competitive pressures. However, this phase of rapid change in the Indian economic framework brought about important and perceptible changes in the expectations of citizens and consumers.

As the expectations of citizens began to change, the private sector was forced to adapt, or perish. The government on the other hand has no threat of 'perishing', and hence is slow to respond to increased expectations of citizens. It would be incorrect to generalise all of government as inefficient or incapable of improvement. There have been sparks of brilliance in several isolated cases, where government officers have excelled and delivered in what is mostly a difficult political and administrative environment. But these instances of excellence were so isolated, that the overall public perception in urban areas about the quality of government has continued to deteriorate.

In America, there is systematic tracking of people's faith in government for many decades now. Highlighting the drop in public confidence in government, Prof. Joseph Nye Jr. of Harvard University, in a seminal book titled Why People Don't Trust Government written in 1997, goes on to say, "Three-quarters of Americans said they trusted the Federal government to do the right thing in 1964. Today, only a quarter do."

Unfortunately in India, we do not have a systematic measure of public confidence in government. We do not therefore know whether citizens trust government more or less today as compared to 20 years ago, except in broad anecdotal terms. In the absence of such indicators, we will need to look for proxies. When one looks at how citizens are embracing services and products offered by the private sector, it is evident that they are willing to purchase services from wherever they can get good quality reliable service. While the challenge of deciding the role of private sector is an important and sometimes contentious one, the bigger and universally applicable fact is that the government must do everything that is required to meet the changing expectations of citizens.

Bringing about change in the government in India is a task fraught with challenges. A number of actors - political and otherwise - who claim to be the biggest defenders of government, often undermine the very system they seek to protect. Every strike by trade unions leads to a deterioration in service quality to customers. Every time interest groups - both within and outside the formal government establishment - prevent government agencies from making changes to how business is usually done in a bid to meet citizen expectations, they are strengthening the case for a greater role by the private sector.

The policy elites who are keen to develop better systems for making government more responsive are often frustrated by the lack of change in the government sector. Some of them, sometimes disappointed with their own inability to fast track things in government, feel that allowing private players is an easier option to improve services for citizens. While some of the frustration at the lack of change in government is understandable, looking at private sector options without adequate deliberation and weighing consequences could have serious national implications in the years and decades ahead. Several of these decisions are path dependent and could well be impossible to change course in future.

No simple answers

The twin arguments for Nehruvian socialism that I mentioned earlier - ideological preferences and the ability of the private sector to raise capital - are both open for question in 21st century India. The government has not been able to adequately rise to the challenge of meeting higher expectations from citizens. And today, the private sector is able and ready to raise capital from the markets in India and abroad.

At the same time, the ongoing international financial crisis is a stark reminder of many things to many people. These are unusual times. These are times when even the most capitalist and free market proponents of the world see an important role for governments. It was quite interesting to see that the solution proposed by British Prime Minister Gordon Brown - to 'nationalise' banks - seemed to be the most widely accepted antidote. Even in capitalist America, with its widely held mistrust of government, the government has nearly nationalised two of the country's biggest housing finance companies, and taken substantial positions, albeit in the form of non-voting preference shares - in many of the distressed banks.

But this is not a time to look at governance challenges purely through ideological prisms, and blindly argue for either more or less government. This is a time when India needs an intelligent combination of approaches and efforts that will take us to the next level. But whatever decisions do get made, it is imperative for us to consider the likely consequences of our actions.

In the next article in this series, I will look at how governments in some other countries have responded to increased citizens expectations, and what lessons if any, these examples might have for India.