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Last Updated: Tuesday, 28 February 2006, 18:40 GMT
How not to protect the state sector

By Kaushik Basu
Professor of economics, Cornell University

An Indian postman in Rajasthan
India's postal service needs to modernise

Until a few days ago, most people did not know that there is something called the Indian Post Office Act, 1898, or, colloquially, the Postal Act.

This law makes a critical difference between a letter and a document; and gives the state-run Department of Posts (DoP) the exclusive right to carry letters.

Private couriers, like DHL, were therefore permitted to carry only documents.

But since no one quite knows where a document ends and a letter begins, private courier companies have exploited this ambiguity and begun carrying everything.

This has caused the DoP to lose ground to the private sector, with a consequent loss of revenue for the government.

To plug this breach the Indian government has come up with the suggestion for an ingenious amendment to the Postal Act.

The idea is that, henceforth, the distinction will be by weight.

If the state sector are to survive, they must do so by being efficient. Since efficiency is difficult to create by diktat, the best way to achieve this is to expose firms to competition

All letters or documents - no distinction being drawn between them - that weigh less than 500 grams will be carried exclusively by the Department of Posts, while all heavier letters will be free to be carried by anybody.

As officials of the Ministry for IT and Telecom pointed out a few days ago, this will restore a share of the market to the government and shore up its revenue; and, by making the sector above 500 grams open to free competition, it could also enable private couriers to earn substantial profits. The amendment has therefore been described as a win-win proposal.

Mindless carryover

In reality, the amendment is useful only because it illustrates so nicely exactly what should not be done. It is a good example of what is wrong with our policy vis--vis the public sector.

Some economists in India take the view that privatization is the key to economic reforms.

Indian airline
State-run Indian airline has shown considerable improvement in quality in response to an open skies policy
This view is a mindless carryover from East European nations, where production was almost entirely under state control, and so privatization had to be the linchpin of reform.

India, on the other hand, is already largely a privatized economy. We do need to privatize more, but our economy's bigger need is to clean up the messy and large bureaucratic control over the existing private sector and to open the public sector to greater competition.

What is therefore critical is that we do not protect the public sector enterprises by using the law.

If they are to survive, they must do so by being efficient. Since efficiency is difficult to create by diktat, the best way to achieve this is to expose firms to competition.

This is exactly where the amendment to the Indian Postal Act goes wrong.

Given the failure of the Indian postal system to innovate and reach out more effectively to customers, it is not surprising that the private sector has had a field day. Street corner courier firms have cropped up all over India and they are doing a tremendous job.

Instead of viewing this as an opportunity to revamp the postal system by introducing new products, and bringing in modern technology to track letters and deliver them quickly, what the law makers in India are trying to do is to use the law to create 'barriers to entry' and, by this, to protect the postal system.

The general post office in Calcutta, India
Indian postal laws are a British legacy
The government's policy should instead be to give a free hand to private courier companies, allowing them to carry anything they wish to carry, and encouraging the DoP to rise to the challenge.

It should be made clear to them that, if they fail to do so, their budget and staff will be cut down. If this is done credibly, it is likely that we will see a revived postal system.

Competitive pressures

The US Postal Service is a good example of a state-run organisation that reinvented itself in response to competition from the private sector.

Even in India, we have, in some other sectors, seen vast improvements in services caused by similar competitive pressures.

The best example of this is the Indian airline industry, where the state-run companies have shown considerable improvements in quality, in response to the open skies policy.

'What about revenue?' some may ask, since one motivation behind the suggested amendment is to generate revenue for government.

Here again we encounter an important principle of fiscal policy.

India post office board
India's state-run post offices should compete with private couriers
If government has to raise more funds, it is best to do it by the direct method of some form of taxation, instead of compelling citizens to buy an inferior service.

One can see the British government in 1898 forcing the citizens of India to use its service so as to generate revenue for itself.

But surely for our own government the reason for raising revenue is to serve the citizens; so it does not make sense to make laws to achieve the higher revenue by hurting the citizens.

Now that the Postal Act, about which we had all forgotten, has come into the domain of public discourse, the right way to deal with it is not to amend it, but, instead, to repeal the provisions which protect it from competition by fiat.

This debate is now closed. Here are a selection of your views so far.

The learned professor Kaushik Basu diminishes his credibility by having a sideswipe at the British. ('One can see the British government in 1898 forcing the citizens of India to use its service so as to generate revenue for itself') In those days India was governed by the Government of India for the people of India. No revenue, in any country including the USA, means no services. The old Indian Civil Service, run mainly by Indians, was a world standard model of efficiency. Economics,in short,are all about people numbers,and the great failure of India, from 1947 onwards in particular,is the uncontrolled growth in population. The plight of the masses in India is terrible. There is a great deal of 'cherry picking' by the private sector - it takes quite different attitudes to build up proper infrastructure.
leela joseet, UK (A Malayali from Kerala and Kuala Lumpur

Dr Basu's comparison with the United States Postal System is absolutely terrible. The USPS enforces its monopoly in many ways, including 1. "First class mail" and "ordinary mail" are reserved for the USPS, except when delivery is "extremely urgent", in which case the private courier company must charge at least $3 or twice the USPS cost, whichever is greater 2. US mail is delivered into special mailboxes without slits, which can be opened only by the USPS postman or the recipient: so private couriers have to deliver directly to the recipient or leave mail in the open Compared to this, even with the proposed weight restrictions, private couriers in India have it good. As Prof Basu should be aware, practically every country has a government-mandated monopoly on its nationalised postal system, often for very sound reasons. In India, the postal system is the only way people in remote areas have to receive letters (private companies simply will not deliver an individual letter to a village 100km from the nearest town). In effect, big-city business cross-subsidises unprofitable small-town or village business. So it is understandable to want to protect big-city profits. This was also the original motivation for the USPS monopoly mandated in the US. It is also why public transport tends to be government-run over much of the world.
Rahul Siddharthan, India

Dear Prof Basu The post office in India does much more than just deliver letters. I'm sure you know this, but I just thought I'd remind you that poor people like myself earn interest on small sums of money (less than 2 lakh Indian rupees) by depositing them in the post-office in the POMIS (Post Office Monthly Income) scheme. To me, and to many hundreds of millions like me, THIS is the most crucial reason that post offices should remain the way they are. I am no economist, but will making way for competition mean that these small rural and semi-urban area post offices will close down? If so, what will happen to people like us?
Savyasachi, India

How the Govt can even think of this kind of foolish law, just to protect a large amount of inefficient employees, and in turn enrich their own party vote-bank. It's as if they wish to play football with 15 men, to win a match. It's unfair advantage, and I strongly protest against it.
Sayan, Kolkata, INDIA

Good points, but the author ignores the reality that taxation is not a efficient revenue source and the tenuous balance between centre-state relations on fiscal matters.
Sanjay Marwah, USA

The underlying suggestion in Basu's reasoning is that competition is always good, and that state enterprises are always badly run in contrast to privately run businesses which are always efficiently run. This is not always true. What's more, state run enterprises were established to provide necessary infrastructure, and not to maximize profits. Basu is typical of economists today who are locked into their urban middle-class mindsets, and who forget the vast majority of Indians who live in dire poverty. For these people it is the services of the much maligned state sector which provides a life line, and not the slick managers of the private sector.
Rajan Gupta, India



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