Financial Daily from THE HINDU group of publications
Saturday, Feb 02, 2002
Reservation in the private sector -- Great value proposition, but...
INDIA'S 193 million households have a long list of unfulfilled dreams. Expanded economic opportunities and higher incomes are at the top of the list. Their per capita annual income is about $460, higher than that of 41 countries. But there are more poor households in India than in all of Africa, Asia and Central America. The modal or most frequently observed income is less than $100, which makes most Indian households poorer than those in Angola, Burundi and Congo. If reservation of jobs in the private sector would lead to a handsome increase in modal incomes and to the fulfilment of many economic aspirations, we should legislate as soon as possible.
Raising modal incomes and lowering disparity or variance have been important policy objectives. Large borrowings, high direct and indirect tax rates until recently, nationalisation of private enterprises, and investments in the public sector have constituted such policy. Investments in the public sector have yielded useful results. Where breadwinners derive incomes from the public sector, the per capita income is over $1,200. More important, the mode is over $500. Households that derive incomes from the public sector are likely to be at least five times better off than other households. The public sector comprises corporate undertakings and non-corporate departments of the Central and State governments; it provides incomes to about 10 per cent of the households.
India's private sector constitutes the remainder of the economy. It provides employment and incomes to about 90 per cent of the households. Where breadwinners work in the private sector, the annual per capita income is about $380, below the national mean. More important, their mode is less than $90. Households that participate in the private sector's economic activities are among the poorest and have the lowest purchasing power, but they account for 74 per cent of total personal final consumption.
In contrast, households that derive incomes from the public sector (10 per cent of the total) account for 26 per cent of total personal final consumption. The private sector is the net-net source of more than 97 per cent of savings and taxes that support investments in public infrastructure and the public sector's services. An example of net-net accounting: If a public sector employee is paid $100, but pays $35 as tax, the net-net receipt is $65 from the private sector.
It may be argued from above that the Indian private sector fuels and hauls the total economy. It contributes more to the national economy through consumption and taxes than that justified by the modal income it earns. It is, therefore, not surprising that the private sector is not the first choice of more than 98 per cent of employment seekers. The public sector is the first choice.
The public sector is associated with employment security, a reliable safety net and handsome post-retirement benefits. On a net-net basis, lifetime incomes and benefits from the public sector overwhelm incomes and benefits that can be earned in the private sector. Employment in the private sector and self-employment are residual opportunities for about 88 per cent of employment seekers. It is surprising that the private sector has been evaluated by the President, Mr K. R. Narayanan, to be such an ideal employer that employment in it could be made available to the socio-economically weak through a process of reservation, even if voluntarily. There is little need to reserve economic space for the socio-economically weak as they are at the core of the private sector.
The private sector is a dismal ideal that offers scanty incomes, no employment security, no safety nets, and little post-retirement benefits. The public sector is, indeed, India's ideal employer, and all of it could be reserved for the socio-economically weak. Perhaps, it could be expanded.
The private sector would benefit as a supplier of services to households that derive incomes from the public sector. Modal incomes would rise across the economy, and spur consumption and tax revenues. The private sector would be happy to welcome consumption by its new customers. It always has, and in every part of the world.
Customers and their purchasing power have been the principal foundations of economic activity since the time one human began to produce goods and services for others, and then derive the value of such focussed effort either through barter or through outright sale. Barter and sale enabled ordinary households specialise in some useful activity and then derive value from other households that specialised in some other useful activities. Each specialist household derived as much value as could be produced and, more important, as much value offered by other households. The prosperity of every specialist household was derived from the number of households it served and their aggregate purchasing power.
The private sector pursues opportunities in every segment of the national economy and the global economy. It is responsible to itself; it ignores any opportunity that offers no profits. It is an optimiser; it sets prices as high or as low as allowed by its customers and competition. It knows its risks and is aware that other producers could dislodge it by cutting prices. Yet, it wishes that more of its customers would have high incomes and be more prosperous.
The private sector prefers an economy where nine households earn $1,000 each and one household earns $6,000 to another where nine households earn $500 each and one household earns $10,500. Though both economies have an average household income of $1,500, the first economy is attractive because of higher mode and lower variance than the second economy.
High modal incomes and low variance have a favourable impact on the private sector. The private sector's economic architecture is based on purchases and consumption by numerous customers, sales revenues based on prices set by the market and profits determined by volumes and its conscientious control over costs. It spends little time in distinguishing one customer from another. If reservation of employment in the private sector would raise modal incomes, the private sector would endorse it wholeheartedly. The private sector's DNA is made up of the win-win double helix. The private sector depends on expanding spirals of prosperity.
Thin, shiny skin
Despite its DNA, the private sector in India is the most miserable part of the total economy. It is the refuge of people who fail to qualify for jobs in the public sector. These people employ themselves in the lunchbox delivery system of Mumbai and such other grimy, poor jobs.
The Indian economy could be classified into the corporate public sector undertakings, non-corporate government departments, the corporate private sector, and the unincorporated private sector. Modal household incomes of breadwinners in the four classes follow exactly the order in which the classes are presented. India's best paying jobs measured by their mode are in the corporate public sector.
Modal household incomes of breadwinners in India's corporate private sector are ahead of those in its unincorporated twin, but trail the non-corporate government departments. Many employees in the corporate private sector would welcome both nationalisation and reservation in order to earn higher and more secure incomes. Some companies in the corporate private sector may not endorse reservation though they employ the socio-economically weak in very large numbers. They have accomplished much. They have generated new jobs and new competence. They serve the global product markets with vigour. Yet, they are the thin but shiny skin of the private sector. There are not too many jobs in the corporate private sector that could make a difference to the socio-economy.
Piercing the skin
The reservation of jobs even up to 100 per cent in the corporate private sector is not difficult to achieve. The will to legislate reservation is all that is needed. The abolition of the system of privy purses and the nationalisation of banks were achieved with ease and earnestness and through democratic means. The idea of reservation is not new too. Sitaram Kesri, as leader of the Congress, was earnest about reservation in the private sector.
Goldman Sachs, an investment bank, was a partnership for long and had toyed for years with the idea of incorporating itself through a public offering of stock. The analysis of the merits was nerve wracking until the partners ended the tension by going public. Afghanistan's Taliban known for its faith in monotheism and dislike for idolatry ended some tension by demolishing the statue of the Buddha at Bamiyan.
It is unlikely that reservation of jobs in the private sector would lead to a rise in modal incomes. But there would be tension until we legislate and find out if the results are favourable. We should legislate reservation as soon as possible, but the legislation should extend to the private sector in its entirety. Any delay could intensify the tension and affect investments because customers and their prospective modal incomes guide the private sector.
(The author is a financial analyst.)
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