Why Is the Government Manufacturing Condoms?

An extract from Vivek Kaul’s India’s Big Government: The Intrusive State and How It’s Hurting Us.

Representative image of Reuters. Credit: Reuters

Representative image of Reuters. Credit: Reuters

Let’s get back to the loss-incurring companies. One argument that is often made is that the government cannot be looking to make a profit all the time. As a senior editor of a digital publication put it to me once, the government makes Nirodh condoms so that it can distribute it [them] to those who need it. Hence, it needs a company like HLL Lifecare to make condoms.

This, I think, is a silly argument. Why can’t the government just buy condoms over the counter from private companies that make condoms? I am sure, given the huge size of the order, the government would get a very competitive price. Condoms aren’t exactly missiles that the government needs to make them on its own. It doesn’t have to run a separate company to do so. Just because the government has to deliver something to the citizens of the country doesn’t mean that it needs to produce it as well.

Furthermore, the company that makes condoms for the government, HLL Lifecare, comes under the Ministry of Health and Family Welfare. India is facing a huge number of issues when it comes to health.

As Jean Drèze and Amartya Sen write in An Uncertain Glory—India and Its Contradictions:

A particularly telling illustration relates to child immunisation. There is very little public awareness of the fact that India’s immunisation rates are among the lowest in the world…. Except for the BCG vaccine, India’s immunisation rates are uniformly lower than the corresponding estimates for every other South Asian country, including Nepal…. In contrast, Bangladesh has achieved immunisation rates of around 95 per cent for each vaccine.

Shouldn’t the Ministry of Health and Family Welfare be tackling these kinds of issues rather than making condoms?

Let’s take another look at the top ten loss-incurring public sector enterprises. The top four loss-incurring companies, which are responsible for the bulk of the losses, operate in sectors in which they have competition from the private sector.

The fourth largest loss-incurring firm happens to be Hindustan Photo Films and Manufacturing Company. The question is: Why is the government still running a photo film company? The photo film was killed first by the digital camera and then by the mobile phone. Actually, the company doesn’t make photo films any more. During 2012-2013 (the latest annual report that I could find), the total production of the company had stood at Rs. 3.6 crore. The sales had stood at Rs. 3.7 crore. Now imagine who in their right minds would run a company with sales of under Rs. 4 crore and which ends up with losses of more than Rs. 1,500 crore, as it did during the course of 2012-2013.

Vivek Kaul <em>India’s Big Government—The Intrusive State and How It is Hurting Us</em> Equitymaster Agora Research, 2017

Vivek Kaul
India’s Big Government—The Intrusive State and How It is Hurting Us
Equitymaster Agora Research, 2017

The third largest loss-incurring company was MTNL. It provides telecom services in Delhi and Mumbai. In both cities, there are many other telecom service providers which provide these services. So why should the government continue to be in such a business and lose close to Rs. 3,000 crore in just a single year?

As far as Bharat Sanchar Nigam Ltd. (BSNL) is concerned, an argument is often made that the company provides telecom services in many areas where private players don’t. I personally don’t know how valid this argument is. Nevertheless, it still doesn’t justify the company losing more than Rs. 8,200 crore in a single year.

Imagine what this extra Rs. 8,200 crore could do to the budget of the Department of Health and Family Welfare (under the Ministry of Health and Family Welfare), which currently stands at around Rs. 37,062 crore.

Every rupee that goes towards sustaining these companies is taken away from some other area. Take the case of agriculture. After the budget for 2016-2017 was presented in late February 2016, the government made a big song and dance about the budget being a farmer’s budget.

But what it really did was essentially change the way it accounts for things. The economist Ashok Gulati explained this in a column in The Financial Express in March 2016. The Department of Agriculture, Co-operation and Farmers’ Welfare spent Rs. 15,809 crore in 2015-2016. The allocation for 2016-2017 has been increased to Rs. 35,983 crore. This is a jump of a whopping 127 per cent. Or so it seems.

But there was an accounting trick that the government used here. A jump of Rs. 15,000 crore in allocation is primarily because of the different allocation of subsidies on the short-term credit to farmers, which needs to be paid to banks. This allocation came under the Department of Financial Services earlier, and has been moved into the budget of the Department of Agriculture only in the 2016-2017 budget.

After we adjust for this new allocation, the actual jump in money being spent on agriculture and farmers is around 33 per cent more. The point being that even more ‘real’ money could have been allocated to agriculture and farmers if the government wasn’t continuing to finance the losses of its public sector enterprises.

Getting back to BSNL and MTNL, given that the government wants to continue owning these companies, it should appoint outsiders with extensive experience in telecommunications as the Chief Executives of these companies and give them a free hand in cutting their losses. The nation cannot continue to lose such a massive amount of money, which could be better utilised somewhere else.

Also, it needs to be pointed out here that the loss-incurring public sector enterprises could be used to generate revenue for the government in another way. As the Economic Survey for 2015-2016 points out: “Most public sector firms occupy relatively large tracts of land in desirable locations. Parts of this land can be converted into land banks and made into vehicles for promoting the ‘Make in India’ and Smart City campaigns. If the land is in dense urban areas, it could be used to develop eco-systems to nurture start-ups, and if located in smaller towns and cities, it could be used to develop sites for industrial clusters.”

In fact, the government first needs to get the public sector enterprises to do a proper inventory of the total area of land that they own. This land then needs to be gradually sold and the money thus generated can go into an infrastructure fund, which could be used to build physical infrastructure like roads, bridges, railways, ports, etc.

Vivek Kaul. Courtesy: Equitymasters

Vivek Kaul. Courtesy: Equitymasters

While the Modi government has talked about this (given that it is a part of the Economic Survey), no concrete steps have been taken until now. One reason for this is perhaps the fact that Modi had revived a few state-level public sector enterprises when he was the Chief Minister of Gujarat. And he perhaps believes that he can repeat the same at the national level as well.

But, more than two years down the line, this doesn’t seem to be the case. Over the years, there seems to have been a general reluctance on the part of the government to privatise public sector units, i.e., sell out on them, lock, stock and barrel.

In fact, genuine privatisation (where the government sells out a substantial share of the company and does not continue to manage it; this is referred to as strategic sale in government terminology) has generated very little revenue for the government over the years.

It is worth pointing out here that, of the total of the Rs. 1.9 lakh crore revenue that the government had generated through the disinvest- ment route between 1991 and late 2015, only Rs. 6,344 crore has come through the strategic sale of equity. And this happened between 1999 and 2004, when Atal Bihari Vajpayee was Prime Minister and Arun Shourie the Disinvestment Minister.

I think another major reason that only minor genuine privatisation seems to have taken place lies in the fact that every government has to accommodate many leaders as ministers. This has especially been true since the 1990s, when coalition governments became the norm in India.

After all, how good is a minister with no public sector enterprises under him? Take the case of the Civil Aviation Minister. How much value would he have with Air India not continuing to be government owned? Or how much value would the Telecom Minister have without MTNL and BSNL, the two government-owned telecom companies?

Ministers are known to use the public sector enterprises for their personal use. Hence, understandably, there is a resistance at the level of the ministers in the government as well as bureaucrats to the entire idea of genuine privatisation. While Modi’s government is also a coalition government, the BJP has the numbers to run the government on its own. Hence, it is not really dependent on its coalition partners, unlike almost every government before it was since 1989.

Furthermore, there is always the fear of employee trade unions, which tend to punch much above their weight. As the Economic Survey of 2015-2016 points out: “In many cases where public sector firms need to be privatised, the problems of exit arise because of opposition from existing managers’ or employees’ interests.”

This explains why the government continues to run loss-incurring public sector enterprises when it should be concentrating on so many other things that need its more immediate attention.

Excerpted with permission from India’s Big Government: The Intrusive State and How It’s Hurting Us, Vivek Kaul, Equitymaster Agora Research.

Vivek Kaul is an author and a columnist based in Mumbai. This is his fourth book.

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  • PSU saver

    The writer is poorly informed, HLL Lifecare Ltd is a PSU which is manufacturer of premium condom brand of Moods. It has businesses across several spectrum and consultancy areas in healtcare. MoHFW or its officers are not involved in HLL on a daily basis. Hence, MoHFW is free to look into other issues at hand. Where is the problem if Govt. purchases the condoms from a PSU? HLL Lifecare Ltd. is doing well across several areas of healthcare and not just in manufacturing condoms.

  • Arun

    This argument is pretty valid from a profitability point of view. Absolutely agree that it is crazy from the kind of numbers it’s presenting. But there is something it doesn’t address and in fact, cursorily dismisses – government employment. When a public sector enterprise produces products worth Rs. 3.6 cr and has sales worth Rs. 3.7 cr but runs into loss of Rs. 1400 cr, it is obvious that that money is going into the salaries and benefits of its employees. Club these non-performing entities together and that’s basically thousands, maybe even millions of jobs. At a time when the country’s private sector across segments like IT (and even traditional media) are engaging in massive cost-cutting and lay-offs, government employment is crucial. Its security presents the opportunity of social mobility and since government employees basically form a very important segment of the great Indian middle class, it is what fuels our economy. A clerk at a PSU will be able to take the risk of buying a house worth several times his annual income because he has the certainty of his job being secure. But even a mid-level manager in IT would think thrice before doing so. And while we glorify the private sector, let us remember the problem of income disparity. Five top execs, in say a Wipro, taking a relatively minor pay cut would mean the same as cutting hundreds of jobs in that company. Plus there’s the question of reservation. I don’t need to tell The Wire why reservation is still important. The worst affected if non-performing PSUs are shut down are largely those from caste-groups such as ST/SC, who then due to corporate caste prejudice (a very stark and ignored reality) would not find any employment. JOBS run a country, not profit. And unless we figure a sustainable way to keep those government jobs while making PSUs profitable, we are heading for a disaster unlike no other in the country’s history. And this is coming from a GC candidate working in an MNC with no family employed in the government – meaning my opinion is largely objective. It would be great to get a reply from Vivek Kaul about the issue of government employment.