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Privatisation in India
Despite the poor performance of public sector undertakings, a growing consensus to privatise them, and a transparent and effective apparatus in place, India has been remarkably slow to actually privatise. It is currently hard to get managers and politicians to go along with the privatisation of PSUs, for the private benefits accruing to them from control of these enterprises can be immense. A new privatisation scheme is proposed to undo the manager-politician nexus by putting the onus of privatisation on managers of PSUs, while using competition to restrain any giveaways.
ANIL K MAKHIJA I Introduction
This article focuses on the centrallyowned PSUs, which may account for 85 per cent of the total assets in the public sector.2 It describes their performance, the evolution of policy regarding privatisation, the successes and failures of the privatisation plan so far, and the challenges it faces. That PSUs in India have underperformed may be widely known, but it is instructive to examine the nature of the underlying problems. The stated government policy, which has been strengthened by unambiguous court rulings, has evolved to embrace privatisation fully. Moreover, a reasoned and transparent administrative apparatus for privatisation through open competitive bidding is also in place. Yet, in the decade and half of its life, the privatisation programme has made remarkably little progress. Interestingly, though labour may have added to resistance to privatisations, it seems not to have been the main obstacle. Instead, the primary culprits here may be entrenched managers and politicians, who seem happy to see privatisations elsewhere but “not in my backyard”. The article concludes with a proposal aimed at addressing this issue. The socialist experiment of PSUs did not meet expectations in India, or elsewhere in the world. PSUs have tended to perform poorly, and glaringly so when compared with firms in the private sector. Gathering steam in the 1980s, as the socialist model came to be questioned and even Russia undertook Perestroika reform, there was demand for privatisation of government-owned enterprises in many countries. Arguably, there are many benefits of privatisation: Private ownership is more efficient than stateownership; privatisation can be an important source of government revenue (over $ 1 trillion have been raised already worldwide, according to Megginson and Netter 2001); privatisation will end the ongoing subsidies to loss-making PSUs; equity from privatised PSUs can help develop local capital markets; world financial markets have matured to the point that the private sector can better finance large long-term investments; and problems of market failure such as monopoly can be better handled through regulation. No wonder, the list of countries with privatisations likely exceeds one hundred today. The official impetus for privatisation in India came as part of a broader change in policy. In response to an external debt crisis and the blessings of the International Monetary Fund (IMF), in 1991 India introduced major reforms to liberalise the economy, including plans for privatisation (though it was initially referred to as disinvestment to disassociate it with the fears of job losses and other capitalist “evils” commonly attributed to privatisation). In about the first 10 years of the programme only an average of 19.2 per cent of the equity of some 40 PSUs was sold [Gupta 2005], with no sales of a majority stake. According to the World Bank (2001), in 1999 south Asia accounted for only 4 per cent of the revenues raised through privatisation by developing countries. Though the pace picked up after that with equity sales to large block purchasers, who are called strategic partners, it has added at best only another 15 privatisations to date. Simultaneously, the number of failed privatisations, where no further attempts are ongoing is 13, including Air India, Indian Airlines, Scooters of India, and NIDC. In fact, the government has thus far barely raised half the revenue it has itself targeted from its privatisation programme. Yet, one would have predicted a much faster rate of privatisation, based on the clear evidence
The H T Parekh Finance Forum is edited and managed by Errol D’Souza, Shubhashis Gangopadhyay, Subir Gokarn, Ajay Shah and Praveen Mohanty.
rior to independence, the public sector had a minor role in the Indian economy. At the commencement of the First Five-Year Plan in 1951, there were only five public sector undertakings (PSUs), with a total investment of a mere Rs 29 crore.1 All that changed with the advent of a Nehru-led socialist model for the country, as ensconced in the Industrial Policy Resolution (IPR) of 1956. The IPR envisaged that PSUs will lead in the economic and industrial development of the nation and build the required infrastructure, under the presumption that the private sector lacked the necessary resources or the long-term investment perspective. Income redistribution, job creation, and balanced regional growth were other objectives of the IPR, besides the normal expectation of profit from business ventures. There was also a postindependence euphoria, though some would term it naïveté, about placing national economic assets in the trust of patriotic managers and workers. The public sector grew organically and was also later enlarged by the numerous nationalisations in the 1960s. By the mid-1970s, the public sector had grown to account for one-fifth of the GDP [Goyal 2000]. Growing still further, by 2001 the public sector accounted for about one-fourth of the GDP. The number of centrally-owned PSUs is now around 242, with a massive total investment of Rs 2,74,114 crore.
Economic and Political Weekly
May 20, 2006
6 7.6 11. Interestingly.0 5.20 Performance of Indian PSUs For the period 1990-91 to 1997-98. They find that the ratio of operating income to sales went up by significantly. http://divest.50 5. the PSUs had higher costs compared to private firms. and investment spending improve significantly following partial privatisation…Since improvements in operating performance are not accompanied by lay-offs.0 Notes: (i) Profit margin is measured by profits after taxes/net sales (per cent).and post-privatisation data.8 9.9 6. half of all PSUs are loss-making enterprises. a recent study by Gupta (2005) examines Indian PSUs that were privatised between 1991 and 1999. the United Front formed the Disinvestment Commission.90 6. There is also another large literature which compares the performance of stateowned enterprises with private firms. (iii) who would be allowed to buy PSUs.2 13. with managers in control while the ownercitizens do not assert their ownership rights effectively.2 9.9 9. while private firms had healthy positive margins. (ii) what Table 1: Performance of PSUs in India Panel A: Profit Margins of Manufacturing PSUs versus Private Manufacturing Firms Year PSUs Private 1990-91 1991-92 -4. this suggests the continued presence of political interference by the government in these firms. Finally.3 6.8 5.5 19.30 4. Indeed.10 -2.30 7.7 6.in. Boardman and Vining (1989) find that private sector performance is superior. while the PSUs appear to be unsuccessful in controlling their expenses. Congress initiated the programme in 1991. Source: Department of Disinvestment. there is a discernible trend among private firms to cut costs over time.” Management is definitely implicated in the underperformance of state-owned enterprises. generally higher investment levels. and lower leverage.7 4. Table 5) summarise the findings of three empirical studies that compare the financial and operating performance of newly-privatised firms against their prior performance as state-owned enterprises. according to the department of disinvestment. and to raise funds for the general exchequer. The stated purpose of the policy was to place equity across a broad base. Finally.8 14. the results support the hypothesis that partial privatisation addresses the managerial rather than the political view of inefficiency in state-owned enterprises. as well as workers in these firms. Thus. and compares performance to industry matched private firms. The situation appears to be worsening.5 11. One reason for the lower margins for PSUs seems to be their cost structure. Year Panel B: Cost Structure of Manufacturing PSUs versus Private Manufacturing Firms 1990-91 1991-92 10. (ii) Costs are given as a percentage of sales. 2006 . there are numerous case studies. In every year. An excellent example of these is the work of La Porta and Lopez de Silanes (1999) which covers the entire population of Mexican privatisations.70 -5. higher output. higher dividends. The evolution of privatisation policy since the start of economic liberalisation in 1991-92 is briefly outlined below: (1) Interim budget and budget speech.00 1997-98 -3. Note that during this period. not profit maximisation [Shleifer and Vishny 1994]. 1991-92.9 9.8 Wages/net sales PSUs 18. higher efficiency. Apparently.40 4.90 1992-93 -5.9 18. labour productivity. state-owned enterprises underperform because they are purposely pursuing other goals.7 Power and fuel/net sales PSUs 10.2 per cent of the equity on average).6 19. the evidence is surprisingly mixed on whether employment (total employees) changes as a result of privatisation. calling it disinvestment instead.1 5.0 17.00 -4. when government even avoided directly mentioning privatisation. Or. Indian PSUs involved in manufacturing yielded significantly lower profitability than private firms.30 9.3 Private 6.40 9. in all years and in all cost categories.90 1993-94 1994-95 1995-96 1996-97 -6.5 5.1 8. Gupta (2005) finds that “both the levels and the growth rates of profitability.3 8. Finally.7 8. Chandrashekhar government The GoI enunciated a policy to divest up to 20 per cent of its equity in selected PSUs to mutual funds and investment institutions in the public sector. the firms show significantly higher profitability. improve management. III Evolution of Policy and Practice It all began with the 1991 liberalisation.60 -2. Labour and left-oriented parties have managed to go along.9 6.of poor performance of PSUs and the extent of consensus to privatise them. Furthermore.9 7.1 8.90 6. there were a number of different governments in power during this period.5 so that by 2000 there were few conceptual constraints on (i) what size of equity stake to divest. But.2 12.9 Interest/net sales PSUs 8. There was also greater ideological acceptance of privatisation.3 6. consistent with worldwide challenges to the socialist economic model.1 11.4 After privatisation.3 6.7 1992-93 12. II The Performance of PSUs International Evidence Performance problems in state-owned enterprises may be inherent because they are beset with severe agency problems. Table 2 provides a listing of year by year privatisation activities. The petroleum PSUs are excluded. as can be seen in Panel A of Table 1. the poor performance of the PSUs required continuing subsidies. From Panel B of Table 1. Notably. stateowned enterprises may be run inefficiently because of poor managerial incentives [Vickers and Yarrow 1991].6 17.0 1993-94 1994-95 1995-96 1996-97 13. the manufacturing PSUs earned on average negative profit margins.9 1997-98 19. and (iv) whether or not the PSU was profitable.0 6.nic. Behind this trend lie a variety of reasons: Even as the government faced budget deficits.5 6. a situation that is likely worsened by political factors. 1948 Economic and Political Weekly May 20. the National Democratic Alliance (NDA) (Bharatiya Janata Party-led) government set up the department of disinvestment. increase resources to the enterprises. government largely divested minority shares (only 19. over time the scope of the programme has expanded to fully embrace privatisation. Arguably. there is mounting evidence that PSUs underperform when we examine pre.3 Megginson and Netter (2001. Thus. Initially.8 Private 6. attempts to stall the privatisation process through the court system – a frequently effective strategy in India – were dealt a severe blow in a landmark Supreme Court decision involving the BALCO privatisation.0 23.2 7. and now Congress has established a national investment fund for channelling privatisation revenues.6 Private 8.5 5. industries were too strategically important to let go into private hands.2 17.
and (iv) railway transport.25 per cent offer for sale). Strategic sale of BALCO.800 49. HTL – 74 per cent. through public offer-Maruti (27. Interests of workers will be fully protected through attractive Voluntary Retirement Schemes and other measures.98 2003-04 2 14.68 3689^ 151. CMC (26.92 4. and sale of hotel properties of ITDC and HCI.42 0. (3) Disinvestment Commission Recommendations: February 1997 – October 1999 The commission recommended divestment of 58 different PSUs.2 26 Realisation Rs in Crore 149.53 691.74 1912. Moreover. Later in 1992-93. to ensure better prices individual shares were auctioned separately. Jessop and Co (72 per cent Strategic Sale).18 10257. Sale through auction method.in. 1998-99 “Government has decided that in the generality of cases.07 1000 1490.26 5632.60 Minority shares sold in December 1991 and February 1992 by auction method in bundles. GDR-GAIL. and bringing down government equity in non-strategic PSUs to 26 per cent or lower. Shares sold separately for each company by auction method.25 2002-03 # 8 12. ^^^ The receipt is on account of transfer of cash reserves. IPCL (5 per cent to employees) and ONGC (0.000 1860.87 1567.000 3347. (ii) atomic energy. The GoI did not act on these recommendations. and through global depositary receipts in the international markets. Economic and Political Weekly May 20. ONGC and IOC. Source: Department of Disinvestment. CMC and VSNL.92 ^ 158. All other industries were classified as non-strategic. i e. the commission recommended strategic sales with transfer of management. dividend/dividend tax. GDR (MTNL) in international market. VSNL-domestic issue. In industries not reserved for the public sector. BALCO restructuring. Maruti: control premium from renunciation of rights issue. (4) Budget speech by Yashwant Sinha. IBP (26 per cent).48 379.000 2764.63 1153. in which other persons allowed to participate. Cross purchase by three oil sector companies. February 2001 “The government’s approach to PSUs has a threefold objective: revival of potentially viable enterprises.92 per cent call option). Source: *From Department of Disinvestment. shares to employees in HZL.in. etc.67 910.41 2004-05 2005-06 Total Note: 3 4.84 40 ^^^ 60 ^^^ 18. government stakes could be dropped to as low as 26 per cent on a case-by-case basis. (iii) armaments. (iv) atomic energy.214. 1999 Reflecting the report of the Rangarajan Committee from some six years earlier. IBP – 33. the government shareholding in public sector enterprises will be brought down to 26 per cent. By 1996-97.nic.19 Profit/Loss Loss Making Profit Making Profit Making Profit Making Loss Making All Loss Making Profit Making Profit Making Loss Making Profit Making Profit Making Profit Making 72 Loss Making Notes: ^ Including dividend and dividend tax.10 168.11 Methodology 1991-92 1992-93 1993-94 1994-95 NRIs and 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 # 5 5 8 10000 10000 12. Table 3: Privatisations with Strategic Partners in India. a 100 per cent of the equity could be divested.945 per cent). In cases of public sector enterprises involving strategic considerations. it is mainly Table 2: Chronology and Methodology of Privatisations in India. sales were open to NRIs and foreigners.58 25 74 44. 2006 1949 . PPL – 74 per cent.as Table 1 shows. and that. The interests of workers shall be protected in all cases. 1993 The committee recommended that the percentage of equity divested could be up to 49 per cent for industries reserved for the public sector.nic. 1991 to 2005 Year No of Target Transactions Receipt with Equity Sold (Rs Crore) 47 29 17 5 1 1 5 2500 2500 3500 4000 7000 5000 4800 5000 Actual Receipts (Rs Crore) 3037. put option MFIL (26 per cent).03 # Figures are inclusive of control premium. government will continue to retain majority holding. For all PSUs in non-strategic industries. IPCL (25 per cent). HCI. GAIL. 2003-04 “(D)isinvestment is not merely for mobilising revenues for the government. (v) radioactive minerals. shares of different PSUs were bundled together and sold to domestic financial institutions. and related defence industries. Rangarajan Committee. for control reasons government set a lower limit of 26 per cent of the equity.” As Table 3 shows.2 per cent). Equities of four companies auctioned GDR (VSNL) in international market.96 per cent) NTPC (5. LJMC.14 1871.5 per cent). GAIL (10.00 5371.” (5) Strategic and Non-Strategic Classification. http://divest. GDR (VSNL)/domestic offerings with the participation of FIIs (CONCOR. in some cases government’s equity stake dropped below 26 per cent. in a break from a past policy of share public offerings. Strategic industries were limited to: (i) arms. restructuring and transfer of surplus cash reserves prior to disinvestment. in exceptional cases up to 74 per cent of the equity could be divested. (2) Report of Committee on the Disinvestment of Shares in PSEs. (iii) mining of minerals for the atomic industry. 1999 to 2005 No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Name Modern Food Industries (India) (MFIL) Bharat Aluminium Co CMC HTL Lagan Jute Machinery Corporation ITDC – 19 different hotels IBP Co Videsh Sanchar Nigam Paradeep Phosphates Hindustan Zinc Maruti Udyog Indian Petrochemicals Corporation State Trading Corporation of India MMTC Jessop and Co Grand Total Per Cent of GoI Equity Sold 80 51 51 74 74 90 33. (6) Address of president K R Narayanan to joint session of Parliament. (ii) minerals and oils.00 4843. HZL (18. the government announced the classification of industries into strategic and non-strategic areas.25 per cent). ITDC. IPCL (28.500 15547. MFIL’s strategic sale. VSNL – 25 per cent. and (vi) railways. Since three-fourths majority is needed to pass certain important board resolutions. DCI (20 per cent). ammunitions. Equity of six companies sold by open auction but proceeds received in 1994-95. CPCL (MRL). BRPL Strategic sale of CMC – 51 per cent. GAIL).01 per cent) By sale of shares to public sector financial instiitutions and public sector banks 96.52 826.58 per cent. Only the following six industries were reserved for the public sector: (i) coal. (7) Budget speech by Jaswant Singh. per cent) and ONGC (9.70 775. http://divest. receipt from surplus cash reserves from STC and MMTC Strategic sale: HZL (26 per cent). closing down of those PSUs that cannot be revived.07 55 2. Takeover – KRL (CRL). ICI (9.
there is considerable scope for dislocation. and support of profitable or revivable PSUs. the Supreme Court in December 2002 handed down a landmark verdict against opponents of privatisation. and yet free the GoI of its burden of ongoing subsidies. Chinese officials plan to ultimately “securitise” state-owned enterprises. such as prime minister Vaclav Klaus whose government oversaw the Czech Republic’s mass privatisation. though they have organised some very visible large protests. health.000 state-owned enterprises. rather than the hard work of better monitoring and the creation of new value. as long as it is not their PSUs. managerial opportunities for private benefits of control are immense. though the most difficult cases. though it needs to be speeded up. There are also opportunities for providing political patronage. privatisations have been accompanied with sweeteners for labour. The fund. the non-state sector will have grown to such an extent that the privatisation of state enterprises will be a non-event. Kraaakman and Tarassova 2000]. and a growing willingness to privatise.for unlocking the productive potential of these undertakings. In controversial cases like BALCO and Modern Foods. managers and politicians may actually favour privatisation. the engine for growth has not been the state sector. believed that markets would respond spontaneously to a need for laws and regulations. One. Strong proponents of a laissez-faire philosophy. Two. This may explain the phenomenon of “reluctant privatisation”. Unlike in China. a nexus of governmentowned banks and managers in poorly performing privatised firms allowed bad loans to persist. state subsidies continue. massive self-dealing by insiders led to looting of firms. Makhija and Lehn 1997]. in a few months in 1992 the Czech Republic privatised nearly one thousand state-owned enterprises through a voucher scheme [Hingorani. In the meantime. Indeed. and particularly politicians. The situation is even more intransigent for politicians. Common to both. While privatisations may offer benefits to the population at large. While the private sector has thrived. as in Russia and the Czech Republic. In fact. that without effective monitoring of PSUs. whereby researchers are finding international evidence that after the official privatisation of state-owned enterprises governments find ways to reassert control [Bortolotti and Faccio 2004]. and politicians. Voluntary retirement schemes provide compensation of three or more years of salary for early retirement. mismanagement. under the theory that any private ownership is ultimately preferable to state-ownership. labour has discovered that they may not be adversely affected by privatisations after all. the state sector does provide an important social safety net. bought off with periodic doles of government subsidies. would generate returns that can be applied to investment in education. to expeditiously install one of the pillars of the so-called Washington Consensus. BALCO. strikes could prove to be counterproductive if superior private market alternatives are available to customers (e g. India’s case-by-case approach is arguably the correct path. However. and manipulation in a large scale Czech-style wholesale privatisation. In the BALCO case. In a challenge to the sale of a profitable PSU. such as jobs and contracts. the Indian PSUs can be privatised without jeopardy to the economy as a whole. Shares have also been offered to workers at a third of the market price to buy their nod for privatisation. With over 200 million individuals employed by stateowned enterprises. There are a number of reasons for this. it is unclear if privatisations thus far have led to significant forced declines in employment. Paying off managers. It is common knowledge. in order to curry favour with voters or to obtain kickbacks. 2006 1950 Economic and Political Weekly . however. 2005 A fund is to be established with proceeds from sales of minority shareholdings of the government in profitable PSUs. Dinic and Gupta (2005) offer empirical evidence of the significant role of politics in resisting privatisation in India. to unlock their maximum potential each firm optimally requires owners with requisite business knowledge and with sufficient holdings to make it economically worthwhile to monitor management and ensure efficiency. as in banking. to Sterlite. IV Should India Adopt Rapid Mass Privatisation? In light of the poor performance of PSUs. January 25. both countries were poorly served by western advisors that promoted a “shock therapy” approach to privatisation. the largest Russian enterprises were sold in a massively corrupt fashion to individuals that the Russian press has dubbed “kleptocrats” [Black. Since the adoption of the open door policy under Deng Xiaoping in 1978. thus failing to liquidate unprofitable firms or undertake necessary restructuring. The question then is how we can speed up the privatisation process while retaining the value benefits of a case-by-case approach. PSUs with their bloated employment rolls serve as vote banks. was an absence of the development of an infrastructure of laws and regulations prior to privatisation. In Russia. Moreover. and China. Between the extremes represented by the Czech Republic and Russia. In a sense.000 in the voluntary retirement scheme.00. where workers were eager to retire with an average payment of Rs 4. (8) National Investment Fund. V What Is Holding Up the Privatisation Programme? The prominent groups with vested interests against privatisation of PSUs are workers and their labour unions. In particular. Workers have not shown as much resistance as might have been expected. bolstered by anecdotes of egregious looting. the economy has flourished. in many cases consumers may not be sympathetic to the cause of PSU workers because they are increasingly exposed to the better services and choices offered by private providers (e g. within the privatisation package is much harder because of their larger private benefits of control. employment. China has thus far not made any significant moves to privatise some 3. may lie ahead. Though the Czech privatisation was largely clean. Finally. it may be argued that India should adopt a process of rapid mass privatisation. Most importantly. to be professionally managed by public sector financial entities. their costs are localised. China represents the other extreme approach to privatisation. where there were heightened fears. For example. the Czech Republic and Russia. without proper controls against it. In other words. The court legitimised the privatisation procedures. In the Czech Republic. and resulted in stagnant economies for most of the 1990s. managers. and for reorienting the government away from business and towards the business of governance”. one wonders if the offer of twice that amount to executives was greeted as adequate compensation.40. rival airlines to Indian Airlines). telephony). and refused to second guess the government with respect to its privatisation policy. These problems were waved away and rationalised. about half the state enterprises operate at a loss [Cao 2000]. The results proved to be disappointing in both cases. based on the privatisations that May 20. Possibly by that time.
the opposition seems surmountable at the moment. say one year. (v) Timetable: To stop the haemorrhaging of public funds and to expedite more efficient use of their assets. No 2. J and W L Megginson (1999): ‘The Financial and Operating Performance of NewlyPrivatised Firms in the 1990s’. Journal of Finance. D’Souza. and the prices at which stock would be sold to them. Cao. W L. we must admit to these realities and address them. and to bring better opportunities for the workers and managers in the PSUs. R and F Lopez-de-Silanes (1999): ‘The Benefits of Privatisation: Evidence from Mexico’. then privatisation is less likely to occur in that state. 4 The three studies are by Megginson. Gupta (2005). including workers. The five-year window will be permitted for those PSUs that may be monopolies. pp 1397-1438. April 19. pp 349-96. and invite counter proposals from domestic or foreign investors. N (2005): ‘Partial Privatisation and Firm Performance’. Working Paper No 142. say three years’ pay. Boardman. J and G Yarrow (1991): ‘Economic Perspectives on Privatisation’. Boubakri. I S and N Gupta (2005): ‘The Decision to Privatise: The Role of Political Competition and Patronage’. (iii) National investment fund: Revenue from privatisations will flow to the national investment fund. If India’s privatisation programme is to make headway. and possibly turn managers into proponents of the privatisation of their own PSUs. which was recently set up. VI A Proposal Even if everyone privately agrees that PSUs are underperforming and ought to be privatised. Goyal. (iv) Minimum VRS and other protection for workers and managers: All proposals will contain (a) a minimum. K Lehn and A K Makhija (1997): ‘Investor Behaviour in Mass Privatisation: The Case of the Czech Voucher Scheme’. Megginson. Journal of Financial Economics. though self-interest would lead to restraint in any giveaways. India. to free government resources from going into subsidies. The following scheme attempts to break up the manager-politician nexus. pp 987-1015. 44. Obviously. R Nash and M van Randenborgh (1994): ‘The Financial and Operating Performance of Newly Privatised Firms: An International Empirical Analysis’. privatisation revenues will make the nation more competitive. as workers and managers try to negotiate for their selfinterests in the basic proposal.in). However. be required to develop a “basic” privatisation proposal. It is an important component of the scheme. however. If no competing proposal appears. 114. N and J Cosset (1999): ‘The Financial and Operating Performance of Newly-Privatised Firms: Evidence from Developing Countries’. pp 1081-1110. Shleifer. Boubakri and Cosset (1999) and D’Souza and Megginson (1999). (ii) Counter privatisation proposals: The department of disinvestment would circulate the basic privatisation proposal widely. 5 See Kapur and Ramamurti (2002) for details. 53. XLIX. though they are dwarfed in size by the centrally-owned PSUs and very Economic and Political Weekly May 20.in. the largest opposition party has won a large share of seats.aspx?regionid=438. Journal of Finance. and strategic partners. at the expense of the national investment fund. Quarterly Journal of Economics. they find that there are no cases of privatisation such that the privatised PSU is located in the home state of the politician in charge of the ministry to which the PSU belongs. Kapur. Dinic. pp 321-89. W L and J M Netter (2001): ‘From State to Market: A Survey of Empirical Studies on Privatisation’. they find that a PSU is more likely to be privatised if it is located in a state where the ruling party and its allies do not face serious challenge from opposition parties. the proposal that brings in the highest assured revenue to the government will be the winning proposal under the theory that it must have put the assets of the PSU to their most productive use. EPW Email: Makhija. Managed professionally. B. then the basic proposal should be accepted. managers. 2006 1951 . and there is a window of opportunity to markedly speed up the process. 63. With some restrictions to protect workers. however. Privatisation can be an important tool to enhance the country’s competitiveness by putting the sizeable assets of PSUs to more productive use.edu Notes 1 The department of disinvestment maintains a highly informative website (http:// www. who will not feel singled out. Hingorani.nic. Competing parties may be allowed opportunities to revise their proposals. D and R Ramamurti (2002): ‘Privatisation in India: The Imperatives and Consequences of Gradualism’. Since hundreds of billions of dollars can be realised through the full privatisation of Indian PSUs. This paper also relies on recent research on privatisation in India. http://rru. Megginson. International Labour Organisation.nic. pp 1-33. S K (2000): ‘Privatisation in India’ in Gopal Joshi (ed). and Kapur and Ramamurti (2002). 2 The number of state-owned enterprises is even larger. Journal of Law and Economics. R Kraakman and A Tarassova (2000): ‘Russian Privatisation and Corporate Governance: What Went Wrong?’. References Black. Gupta. World Bank (2001): Privatisation Database. motivating managers and ministries to seriously develop basic proposals. A priori there would be no limits on the allocation of shares and their corresponding prices.occurred between fiscal years 1990 to 1995. L (2000): ‘Chinese Privatisation: Between Plan and Market’. we selectively report the findings of a few studies to illustrate the impact of privatisation on performance. Quarterly Journal of Economics. as VRS compensation at the expense of the privatised firm. It will also weaken the workermanager-politician nexus. Shifting the burden to PSUs will make it feasible for the department of disinvestment to oversee a clean and transparent process for the privatisation of the remaining two hundred plus PSUs. B and M Faccio (2004): ‘Reluctant Privatisation’. Department of Disinvestment (2006): Web site: http://divest. June. Law and Contemporary Problems. Bortolotti. and require the development of appropriate regulatory bodies. Journal of Finance. pp 1731-1808. pp 111-32. health and employment.1@osu. A. Vickers. 39. pp 13-62. 109. Moreover. FEEM Working Paper Series. to raise revenues for health and education to make the nation more competitive. few states are seriously pursuing privatisations plans. Privatising in South Asia: Minimising Negative Social Effects through Restructuring. some 941 PSUs. Stanford University. and is the source of considerable data cited here. Centre for Research on Economic Development and Policy Reform. Privatisation by Region. Stanford Law Review. the returns from this fund will be applied to improvements in education. 54. Journal of Economic Literature. July. 60. La Porta. pp 1437-67. (i) Basic privatisation proposal: The management of every PSU. As an important part. Nash and van Randenborgh (1994).worldbank. Mixed.org/ Privatisation/Region.divest. for other data and interpretation of trends in Indian privatisation. Journal of Finance. A E and A R Vining (1989): ‘Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private. University of Indiana Working Paper. 3 Out of a very large literature. this feature requires a national political consensus. and (b) a maximum re-training programme for retrenched workers and managers. Journal of Economic Perspectives. there may be some benefits countering the local adverse effects of privatisations. this proposal would seek out new owners. A and R Vishny (1994): ‘Politicians and Firms’. India faces growing international competition. in conjunction with its supervising ministry. New Delhi. 5. 52. A nationwide simultaneous privatisation programme for all PSUs will be more palatable to politicians. 32. it will take committed leadership to proclaim that the “emperor has no clothes”. Instead of plugging annual budget deficits. If. pp 995-1025. and State-Owned Enterprises’. all PSUs will be slated for privatisation within three or five years. This would bring out the reservation prices of the potential opponents to the privatisation of the PSU. particularly Dinic and Gupta (2005).
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