The rusty frame of Indian state capitalism


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‘Laissez-faire is over,’ declared then-French president Nicolas Sarkozy in the throes of the 2008 global financial crisis. With the Anglo-American model of deregulated capitalism discredited, attention turned to the large emerging economies that appeared to have escaped the crisis surprisingly unscathed. For a brief moment India, China and Brazil seemed to offer up powerful alternative models of state capitalism: widespread state intervention in the economy, albeit increasingly twinned with market competition.

Though billionaire ‘Bollygarchs’ and their private conglomerates attract the lion’s share of scholarly and media attention, state-capital relations in India are underpinned by a far less glamorous set of firms. Traditional instruments of state capitalism have survived three decades of stuttering liberalization: large public sector undertakings (PSUs) still prevail in crucial sectors such as energy, while public sector banks (PSBs) dominate the financial system. Does a coherent Indian model of state capitalism exist, in which governments strategically deploy state owned enterprises to advance the nation’s long-term developmental interests? Or are PSUs a dangerous source of inefficiency and corruption, as their many critics allege?

In the following essay, we suggest that the relationship between the state leadership and its PSUs is more complex and dynamic than either of these verdicts suggests. The economic reform era has brought significant changes to the PSU sector, but these changes have been shaped more by pragmatic ad hocism than ideology or coherent strategy. During the boom years after 2003, liberalization stalled. Instead a form of adaptive state capitalism briefly flourished, in which select PSUs competed with private rivals on a far-from-level playing field. Even in the good times, though, the long-term developmental potential of PSUs was undercut by a tendency to treat state owned firms as an asset class. Especially during economic downturns, they often act as a mere short-term rainy-day fund for the government of the day.

Up until the 1990s, there existed a broad, though increasingly fraying, political consensus that the Indian state should directly control large parts of the industrial economy through its PSUs. These companies were regarded not just as part of India’s capital base, but vital providers of inputs for the industrial economy – even if many of the largest, such as Coal India and the National Thermal Power Corporation (NTPC), owed their origins to the politicized ferment of the Indira Gandhi era rather than the Nehruvian vision of central state planning. With many PSUs booking mounting losses, though, India by 1991 had become the textbook illustration of state capitalism’s vulnerabilities, from incompetence to corrupt rent-seeking.

Governments after 1991 initiated a gradual rollback from ‘sick’ enterprises that progressively shifted the onus of state intervention from industry to infrastructure and finance. The Vajpayee administration of the late 1990s in particular brought an ideological commitment to private enterprise. A dedicated Ministry of Disinvestment pushed through ‘strategic sales’ of several major PSUs, such as Bharat Aluminium (BALCO) in 2001 and Maruti in 2002, though large-scale privatizations remained politically difficult. In retrospect this marked the high noon of Anglo-American-style liberalization in the Indian public sector.


This ideological commitment was not sustained. The number of central PSUs plateaued in the 1990s and 2000s, but subsequently began to rise again, from 213 operating in 2008 to 249 by 2019. In the years of liberalization up to 2014, PSUs still accounted on average for more than 20 per cent of GDP. Private firms now outcompete state owned incumbents in industry and manufacturing, but PSUs remain pre-eminent in sectors such as energy, electricity, and natural resource extraction and processing. Among the seven Indian firms to make the Fortune Global 500 list of the world’s largest corporations by revenue in the 2018-19 financial year, four were government-controlled: Indian Oil Corporation, Oil and Natural Gas Corporation, State Bank of India, and Bharat Petroleum Corporation Limited (BPCL, since slated for privatization).

Control over the financial system remains one of the most resilient instruments of state capitalism in India. Public sector banks (PSBs) continue to account for over 80 per cent of all debt issued in the country. As demonetization and government financial inclusion schemes have helped to spread bank accounts, hundreds of millions of Indians’ savings are now bound up in these banks. In contrast to the reliance on big finance found in the West or the role of foreign capital in Latin America, India’s state-directed development schemes have been funded in large part by drawing on small domestic depositors.


This overall continuity masked substantial changes, some of which hinted at a more agile if not strategic vision of state capitalism. In most sectors state owned enterprises have been exposed to an element of competition from the market, though they retain pronounced asymmetric advantages. Many central PSUs accordingly underwent significant transformations in their management and operating ethos. The largest firms – Maharatnas (‘great jewels’), overwhelmingly in the natural resource and utilities sectors – were granted greater managerial autonomy under revitalized boards. A total of 45 have been listed on the Bombay Stock Exchange; though this decision was motivated more by the desire to raise financial resources than good governance objectives, the entry of minority shareholder voices has helped to push a stronger emphasis on a single bottom line of profitability in place of the manifold social and economic objectives that PSUs juggled in the past.

During the period of rapid economic growth from 2003 to 2010, entrepreneurial bureaucrats in some of these firms succeeded in leveraging their political connections and control over lucrative resources to secure operational and financial space for themselves – a mode that one of us has elsewhere called ‘adaptive state capitalism’.1 The electricity major NTPC managed to use its considerable market share and central networks to secure robust guarantees for payments from struggling subnational utilities, for example, even while branching out into new upstream fuel projects to secure greater independence from other state owned siblings. Its capital and cheap thermal power were crucial in under-girding the government’s ambitious renewable energy schemes, working hand in glove with the new Solar Energy Corporation of India. A similarly creative approach to PSUs in the infrastructure and energy sectors underpinned the famed ‘Gujarat model’, more associated with pro-business policymaking. Streamlined and corporatized PSUs spearheaded the state’s celebrated electricity reforms, though they enjoyed rather less consistent success in hydrocarbon exploration, and then-Chief Minister Narendra Modi touted this experience with managerial reforms as an ideal ‘third option’ between privatization and the status quo.2


Yet there were always strict limits to this autonomy. NTPC was unusual, created in 1975 with the blessings of the World Bank, a robust technical staff, and a relatively blank slate. Even so, it has bailed out underperforming projects, taking over Enron’s abandoned power station in Dabhol, Maharashtra. The fate of other PSUs was still more ambivalent. Coal India was also formed in 1975, but instead was expected to ingest hundreds of small private companies and contribute to community development for its enormous labour force. In the 2000s, it scaled back its non-mining welfare activities and began to take financial discipline more seriously, not least under pressure from high-profile minority shareholders after its listing in 2010. Behind the scenes, too, an effective privatization of many functions was discreetly taking place: almost two-thirds of the company’s overall production now involves private subcontractors in some form. At the same time, its putatively enlarged autonomy was eroded by the firm’s embeddedness in regional political economies of rent extraction and welfarist claim-making. Despite these linkages, the firm has consistently lacked real control over coal prices and has proved unable to resist the recent government push to auction off mines and end its effective monopoly.


Outside the lucrative resource and utilities sectors, customer-facing PSUs have fared far worse. Burdened with bloated payrolls and poor customer services, the national carrier Air India and the telecoms firm Bharat Sanchar Nigam Ltd have slumped to enormous financial losses in the face of fierce competition from private entrants. Public sector enterprises under the control of subnational governments continue to play a similarly crucial role in frontline service delivery in everything from water and electricity distribution to road transport and liquor sales. Especially prone to mismanagement and populist political interference, their large payrolls and underpriced outputs drain away scarce resources from overstretched state government budgets that could otherwise be invested in health or education.3 The reinvention of state capitalism proceeded on a haphazard firm-by-firm basis, and no state owned enterprise could guarantee sustained autonomy from its political masters – least of all from the influence of state capitals.


From 2003 to 2010, the new state activism helped to power meteoric economic growth rates. PSUs played a useful role in the pell-mell mobilization of resources that fuelled a historic surge of investment in infrastructure. Still more crucial were the PSBs in directing an extraordinary expansion of credit towards favoured sectors, notably infrastructure, encouraged by a set of new state owned finance institutions. India’s resilience in the face of the 2008 global financial crisis owed much to the second surge of resources provided through this state dominated system. The Maharatna PSUs were among the huge firms, both public and private, that rode high on the stock markets thanks to strong demand for natural resources and infrastructural goods.

Yet this proved a brittle solution. In the wake of multiple scandals and the fragility of the world economy, export and investment growth started to sputter. Weakening demand and slowing infrastructure licensing coupled with rising interest rates to reveal that many of India’s largest private conglomerates were dangerously over-leveraged. This debt in turn sat on the balance sheets of PSBs in the form of non-performing assets, simultaneously impairing public and private sector investment. Though Ashish Gupta of Credit Suisse had raised the alert about this twin balance-sheet problem as early as 2012, attempts to recapitalize the banking system and tighten bankruptcy provisions have been slow to bring fruit. Well before the Covid-19 pandemic, then, Indian state capitalism had run up against the limits of sustainability.


Almost three decades after liberalization, the Indian state’s philosophy has come full circle back to PSU retrenchment, but for very different reasons. It is clear that as the financial position of the government of India has deteriorated over the last half-decade, monetizing state assets has become an important tool to raise resources. The erstwhile Department of Divestment has been tellingly renamed the Department of Investments and Public Asset Management (DIPAM). PSUs can now realistically be considered an asset class of the Indian state. While the government may not be acting as an optimizing asset manager in the traditional financial sense, it is clear that it has become more creative in using PSUs to fill the revenue and fiscal shortcomings of the Indian state. Multiple instruments exist to this end, many of which threaten the financial autonomy of PSUs. Though few of these tools are entirely new, the scale of their deployment is.

First, the state has repeatedly tapped the ability of PSUs to borrow and engage in capital expenditure as a way of avoiding additional debt on the central government’s balance sheet. Public sector banks looking to deploy capital to safe borrowers have frequently lent money to PSUs, even poor performers, secure in the sovereign guarantees that ultimately undergird these companies. Most recently, the government has tapped the National Small Savings Fund, which houses the savings of millions of middle class Indians, to channel funds to cash-strapped PSUs. At the same time, new accounting conventions have shifted a larger share of spending off-budget, notably to the Food Corporation of India and the National Highways Authority of India. As many macroeconomic observers and the CAG have pointed out, India’s true fiscal deficit and debt numbers are much higher than the modest reductions reported in the annual government budget: PSUs have been used to bolster the government’s broader borrowing profile while providing a hidden fiscal stimulus. Not surprisingly, the financial position of many of these PSUs has deteriorated dramatically in the last five years.


Given that many of the largest and most profitable PSUs are in lucrative resource sectors, which generate above-normal returns, the government has also started draining PSUs of financial resources by having them pay larger dividends. To be fair, many of these PSUs sat on their cash for almost a decade without investing it productively. This is perhaps the most ‘asset manager’-like activity of the current government, taking cash away from areas it perceives as unproductive and reallocating it through the budget. But productivity in this situation is more of a political and administrative convenience, rather than driven by notions of economic efficiency and return. The government’s willingness to force PSUs to take on additional debt suggests it is more interested in short-term resource mobilization than creating long-term national champions.

Similarly, cash-rich banks and PSUs are often used to buy out their financially struggling public sector counterparts, thereby simultaneously providing windfall financial gains to the majority owner – the Indian government – and also taking over the managerial responsibilities of lagging entities. The recent merging of various public sector banks, Power Finance Corporation’s buy-out of Rural Electrification Corporation, and ONGC’s purchase of the government stake in HPCL are all nominally transferring managerial control, while continuing the government’s ultimate ownership of these entities. This tactic extends into the financial markets. India’s largest institutional investor, the state owned Life Insurance Corporation, has intervened to supplement lacklustre demand during PSU disinvestment drives. It also generally acts as a countercyclical tool to prop up equity markets, all at the cost of its policy-holders. In this case, the thorny politics of privatization are successfully avoided by meeting fiscal targets through merely cosmetic divestment.


These examples testify that PSUs still remain powerful levers at the disposal of the Indian central government, but they demonstrate a pattern of opportunistic and contextual intervention rather than strategic deployment of state assets. Well before Covid-19, Chetan Ghate warned the Reserve Bank of India about the long-term effects of such ‘fiscal "prestidigitation" or sleight of hand’ in increasing economic volatility and putting small savers at risk.4 Worse, it short-circuited monetary policy. The RBI dropped interest rates to no avail, as debt-burdened and risk-averse banks continued to charge borrowers an increasing premium. Ghate thus warned of a ‘doom-loop’: the government’s space for further fiscal stimulus had shrunk just as it became the only option.

The crisis of the new state capitalism thus long predated Covid-19. What the pandemic has changed is the urgency of massive divestment from PSUs. Whether it is the sale of Air India and BPCL, the privatization of certain power distribution companies, or the asset monetization of high-ways and renewable energy assets, the government of India’s fiscal myopia is higher now than any time in the last few decades. Precipitated by the economic devastation and accompanying revenue shortfalls that came with the Covid-19 lockdowns, the Indian state’s multidimensional balance-sheet problem is forcing a firesale of state owned assets unprecedented in Indian history. As so often before, the retreat of the state from many areas of the economy has been driven by necessity and crisis rather than philosophical principle or political consensus.


Elsewhere in the world, the reinvention of state capitalism has been coordinated by powerful nodal agencies, such as China’s powerful holding company SASAC, created in 2003 and now arguably the largest financial entity in the world. Other states have sought to promote long-term development through activist state asset managers and investment funds, like Singapore’s GIC and Temasek. Elizabeth Thurbon has characterized the hallmark of this new state activism as the possession of a ‘developmental mindset’, a policymaking consensus on strategic and systematic interventions with long time horizons.5

Twenty-first-century state capitalism in India looks very different. No shared philosophy unites the different parts of the Indian state on the management of its still huge and diverse financial and economic assets. While the Ministry of Finance may try to impose some kinds of orthodoxy through DIPAM and other agencies, PSUs and their huge parent ministries often have quite different incentives. Nor do India’s state owned financial institutions typically act as long-term developmental capitalists, promoting systematic industrial policy or bolstering infant industries at the technological frontier. Though the Planning Commission or NITI Aayog may have put out vision documents, most of these remained wistful wishlists rather than a coherent call for action backed up with political teeth.

There is, then, no ‘Indian model’ of state capitalism. The resilience and remaking of PSUs occurred through a series of ad hoc and incremental alterations as the ideological commitment to liberalization of the 1990s waned. In the state sponsored rapid growth of the 2000s, some of these state owned enterprises used their growing financial and political clout to carve out a degree of corporate autonomy. This autonomy was a contingent and pro-cyclical concession, however, and as the country descended into a slow-burning economic crisis from 2011 their government masters once again began to exercise a heavier hand. This was neither the everyday operational meddling of the old licence-permit-quota raj nor an attempt by a new government – India’s strongest in a generation – to implement a new long-term vision for development. After the incidence of Covid-19 we have seen renewed vigour in the rhetoric of privatization, but so far the action has lagged far behind the promise. It remains to be seen if the reformist impulse originating from this moment can actually change India’s Leviathan, or whether its natural inertia will keep it in its familiar, gradualist mode of haphazard transformation.



1. Rohit Chandra, ‘Adaptive State Capitalism in the Indian Coal Industry’, PhD thesis, Harvard Kennedy School, 2018.

2. Elizabeth Chatterjee, ‘New Developmentalism and Its Discontents: State Activism in Modi’s Gujarat and India’, Development and Change: online first view (2020).

3. For a sense of the wide subnational variation in the political constraints that shape state PSUs, see Navroz Dubash, Sunila Kale, and Ranjit Bharvirkar (eds.), Mapping Power: The Political Economy of Electricity in India’s States. Oxford University Press, Delhi, 2018.

4. Reserve Bank of India, ‘Minutes of the Monetary Policy Committee Meeting June 3, 4 and 6, 2019’, press release, 20 June 2019, accessed at

5. Elizabeth Thurbon, Developmental Mindset: The Revival of Financial Activism in South Korea. Cornell University Press, Ithaca, NY, 2016.