G216

MUMBAI, India-- When Mumbai Region Postmaster General A.P. Srivastava joined the postal system 27 years ago, mailmen routinely hired extra laborers tohelp carry bulging gunnysacks of letters they took all day todeliver.

Today, private-sector couriers such asFedEx Corp. and United Parcel Service Inc. have grabbed more than half the delivery business nationwide. That means this city'sthousands of postmenfinish their rounds before lunch. Mr. Srivastava, who can't fire excess staffers, spends much of his time cooking up new schemes tokeep his workers busy. He'sruled out selling onions at Mumbai post offices: too perishable. Instead, he'sconsidering marketing hair oil and shampoo.

"We have tofind new ways togenerate revenues and use excess space and staff," sighs the 52-year-old Mr. Srivastava, sipping tea at his desk piled high with files waiting for his approval. "Laying people off isn't an option."

India'svast postal service, the world'slargest, highlights a little-understood feature of this nation'seconomic transformation. While Indiaoften draws criticism for its failure tosell its vast network of state-owned companies, the government has quietly been opening many of its agencies toblistering competition from private- sector rivals.

But as Indialets its public sector get squeezed, it faces a big dilemma: What todo with these often huge and politically connected organizations during the painful transition period where they have tobecome competitive and profitable or extinct?

Once the pride of India'scivil service, IndiaPost and its predecessor, the British East IndiaCo., controlled most maildelivery for centuries. But since a reform-minded government started allowing more competition in the 1990s, more-efficient private couriers have eaten deeply into IndiaPost'sbusiness.

Likewise, state-owned phone company Mahanagar Telephone Nigam Ltd. used tohave a monopoly on much of the phone service in India. Today it is battling with an onslaught of internationally financed competitors that have driven the quality of service up and rates down on everything from local tolong-distance tocellular service toInternet connections.

State-run airlines Air Indiaand Indian Airlines have been under attack for more than a decade and the industry has just become more competitive with six new carriers starting operations in the past two years. The banking sector is still dominated by the giant State Bank of Indiabut the country'sgrowing middle class is taking most of its business tothe high-tech private banks, such asHDFC Bank Ltd. and ICICI Bank Ltd. leaving the state banks with the least-profitable businesses and worst borrowers.

Such competition from private business is helping tochange the face of the Indian economy. The country is becoming a growing force in the global economy asreforms have unleashed the power of its one billion consumers. India's economygrew at a faster-than-expected 8.9% in the secondquarter, nearly matching China'storrid pace.

But the shift toward the private sector has been a gradual process, made necessary by the political reality faced by a succession of unstable coalition governments. Today'sCongress Party-led coalition depends on the support of communist parties, which oppose layoffs and privatizations. When the coalition first came topower in 2004 one of the first things it did was close the Disinvestment Ministry which oversaw privatizations.

In contrast, in the U.K., Margaret Thatcher -- one of the earliest promoters of privatization in her country -- was able touse her Conservative Party'sstrong control of Parliament topush though privatization. She closed down unprofitable organizations and auctioned off many of the U.K.'slargest state-owned companies in the 1980s despite violent strikes and opposition from the left.

In India, Mr. Srivastava's struggle tomodernize Mumbai'spost offices shows how efforts toreform state-run entities can be tripped up by a convoluted bureaucracy and populist politics. IndiaPost is forced tomaintain its 550,000 employees with full benefits and run a vast network of post offices, most of them unprofitable. What'smore, politicians keep IndiaPost from raising postal rates, so it loses money on almost every postcard and package it handles.

While IndiaPost runs the largest postal network in the world with more than 155,000 branches, it'salso one of the most inefficient. Each of the U.S. Postal Service's700,000 employees handles more than 15 times asmany pieces of maila year on average as IndiaPost workers. The U.S. service also makes money, reporting an operating profit of more than $1.5 billion last year, while IndiaPost lost $300 million.

The British East IndiaCo. established the first postal stations in Mumbai, the city formerly known asBombay, in 1688 and in Calcutta (now known asKolkata) in 1727. About 50 years later, it started regular service between the two cities using runners who carried spears with bells attached toward off tigers.

Mr. Srivastava fondly recalls the days when the local post office was the only place people could maila letter or package, or even make a phone call. He joined the postal system in 1979 partly because of its prestige and importance in Indian communities. In his first posting, ashead of a post office in the northern state of Uttar Pradesh, Mr. Srivastava was given membership in the best clubs, invited tojoin a local education committee and was regularly paid visits by local politicians and business leaders: high status for a 27-year-old.

During the annual rush of mailduring Diwali -- the festival of lights during which India's800 million Hindus exchange cards and gifts -- Mr. Srivastava remembers having touse every inch of floor space tosort mail, "even in my office." There was then virtually no competition. When Mr. Srivastava once discovered that a clandestine private courier was transporting mail, he called the police and had the operation shut down.

Today, there are more than 2,000 private companies delivering documents and packages in India, ranging from tiny operations with a handful of men who make around $2 a day tobig international players like FedEx. The industry generates $850 million a year in sales, according toestimates by the Express Industry Council of India, which represents private couriers. The market is so promising that in 2004 DHL Corp. decided totake over one of the leading domestic courier services for $160 million.

"The role of the post office was much more important in the lives of the people back" in the old days, says Mr. Srivastava wistfully. "Now, there are so many other opportunities that our service is not given the same respect."

Under pressure from the central government topay its way, IndiaPost has been forced totry an assortment of new businesses. The agency now sells the outsides of envelopes and mailboxes asadvertising space. For the hundreds of millions of Indians without access tocomputers, the postal service will receive, print and deliver email toits destination by hand. And for the first time in IndiaPost'slong history, its local postmenhave topick up maildirectly from homes.

The post office is even outsourcing its postmen tophone and credit- card companies, who use them toconfirm the home addresses of new customers. Mahanagar Telephone Nigam, one of IndiaPost'sclients, pays 30 rupees (about 64 cents) per confirmation. Other companies, including the Indian arms of Western Union Financial Services Inc. and General Electric Co., now pay IndiaPost commissions tosell their loans and money-transfer services. Mr. Srivastava is even renting out the century-old domed General Post Office at night for movie shoots.

In a dusty corner of the cavernous Mumbai General Post Office, at the former domestic-parcels counter, Shyam Sundar Dhini was peddling cashews, herbal medicines and aloe vera gel. A "Happy New Year" sign hung on the wall above his makeshift shop despite its being September. "I have become a salesman instead of a postman," said Mr. Dhini, a 23- year postal veteran who isn't quite sure what aloe vera gel is used for. "I know everything about letters and stamps, but nothing about sales. No one wanted this job because this is not what postmendo."

Some postmen, who are now under pressure tolearn new skills ranging from using a computer tohow toaccept mutual-fund applications, have been reluctant to adapt. "There is resistance from the staff, especially the older set," who have grumbled about the new chores, concedes Mr. Srivastava. "But if they do not do these other activities they will not have a job todo."

Still, the postal union has repeatedly threatened tostrike toblock plans toreduce the post office'slosses by redeploying its staffers on nonpostal jobs. "We will work hard, but we don't want more work," declares Arvind Y. Salvi secretary for the National Union of Postal Employees in Mumbai. Since the neighborhood postmanis the government employee closest tothe average citizen, Mr. Salvi says any government that causes them tostrike risks losing votes. Few politicians are willing totake that risk.

Postal workers also grouse that they haven't been properly trained todo the new jobs being foisted upon them or given the facilities needed tocarry out nonpostal assignments. Mr. Salvi'spost office at a busy Mumbai intersection illustrates the problem. Like most such offices in India, it'scramped and dirty and hasn't changed much for decades. Next tohis desk is a huge old safe with a skeleton key. Nearby is a roaring gas stove, which is used tomelt the plastic toseal registered letters. Following a colonial-era procedure, each registered letter is tied by hand with brown twine, which is then glued tothe envelopes with six blobs of plastic, each stamped with the official postal seal.

Two computers, delivered a year ago from the regional headquarters, sit next tothe stove, but have never been deployed because no one knows how touse them. "They called employees in one Sunday and taught us for five hours saying 'This is a computer, push this key, push that key' but that'snot enough," says Mr. Salvi. "The postmendon't even know what email is."

Motivating demoralized postal workers is tough. A mid-level manager at IndiaPost, for example, makes about $500 a month, roughly one- third the salary of a manager at an international courier in India. Rigid bureaucratic wage scales dictate salaries and restrict bonuses, making it almost impossible for the post office tooffer incentives. Mr. Srivastava says the only reward he can give hardworking postmenwho have excelled in promoting new products is a thermos bottle or a lunch box.

Meanwhile, tofend off competition from private couriers, IndiaPost is trying a tactic left over from India'ssocialist days: outlawing the competition. The agency'spolitical backers are pushing for an amendment topostal laws that would make it illegal for private carriers todeliver parcels or documents that weigh less than 300 grams. It would also make couriers pay 10% of their revenues tounderwrite IndiaPost'sexpansion into rural areas and force 100%- owned foreign companies, such asFedEx, toreduce their shareholding in local units to49%. Legislators will be debating the bill later this year.

"Customers are looking for short transit times and a high level of service and technology but these are not elements that the postal service provides," so any restrictions on couriers will hurt Indian companies says Jacques Creeten, the Mumbai-based managing director for FedEx. "Indiais not isolated in the world -- it is competing with China, Vietnam and Bangladesh and exporters need the express industry tostay competitive."

Mr. Srivastava says he doesn't need a monopoly, but argues that he can't be expected tocompete with couriers that don't have tocarry IndiaPost'shigh administrative costs and political baggage. "We didn't realize this was really going tohit us," he says, ashe signs document after document required by India'slayers of bureaucratic protocol torun his domain of more than 10,000 workers.

"Some people have still not realized."