You are on page 1of 13


Privatization in India is still low key. Privatization for ownership transfer is limited to disinvestment
of public sector enterprises (PSEs) for raising non-inflationary resources. Privatization for shifting the
divide between public and private sector is more active. This has been accomplished by removing
barriers to entry. At the same time there is gradual withdrawal of budgetary support to PSEs resulting in
a gradual dilution of equity as enterprises tap the capital market. Simultaneously, economic
liberalization policies have emphasised a level-playing field for the public sector. Despite an obvious
policy for a redivide there is as yet no comprehensive policy on privatization. Perhaps the approach is
politically expedient. In terms of economic management and more so public sector management lack of
a comprehensive policy on privatization can result in unexpected outcomes which may not be all that
expedient. This paper analyses some of the impact of a non-policy on privatization. (JEL: F02, 061,


Privatization is "a process that aims at reducing involvement of the state or the public sector in the
nation's economic activities" in favour of the private sector.( n1) The extent and scope of the shift
depends on initial size of the public sector. The reasons are self-explanatory. Speed of shift towards
private sector is however, a policy decision. By and large, speed and size are inversely related. The
larger the public sector the slower is the shift towards the private sector. Except perhaps in the case of
the former socialist countries of Eastern Europe. Factors such as capacity of capital markets,
disinvestment and corporate governance, a high ratio of stakeholders in public sector investment,
operate to slow the process of privatization. In turn, a wide r

ange of privatization modalities emerge that do not confirm strictly to the precise traditional definition
of privatization as `ownership transfer'. India is a country with a large public sector and privatization
has been a slow process that has taken on many hues and forms. A prominent feature is the lack of a
clear cut policy on privatization.

The lack of a comprehensive policy on privatization stands out in contrast to other policy declarations
of the New Economic Policy (NEP). Perhaps the approach is politically expedient. Instead, discrete
policies on disinvestment, on public sector restructuring and on private sector participation have been
enunciated more to meet specific objectives. For example there is a policy on disinvestment which limits
selling of shares to 31 select public sector enterprises (PSEs). The objective is limited. Disinvestment is
a measure purely for meeting the fiscal deficit through non-inflationary sources. There has also been
mention of selling loss making units but, except for stray cases of sale of small enterprises there has
been no large-scale sale of PSEs.( n2) Mobilization of funds through the capital market for many of the
PSEs is yet another form of disinvestment. Here too, the compulsions are denial of government funds for
these enterprises. A more visible process of privatization is the redivide between public and private
sector through removal of barriers to entry. Private sector participation in areas earlier reserved for
public sector have now been opened to the private sector. Financial considerations have weighed heavily
in this policy also. Simultaneously the larger macro policies of tariff reductions apply to public sector
also. But there is no comprehensive policy on privatization. Only strands of policy on public enterprise
reforms have been enunciated.( n3) The sum total is non-policy. In this paper we shall analyse some of
the impact of a non-policy on privatization. This may perhaps provide insights on the effectiveness of a
non-policy in contrast to a policy.

The paper will consist of three parts. In the first part a quick survey of public sector in India will allow
the reader to capture the dimensions of our canvas of analysis. The second part will investigate into the
fiscal dimension and revenue accruals of disinvestment. Primacy of fiscal dimension assumes
importance in the context of the prime place awarded to this objective. Issues such as selection of
enterprises for disinvestment and the use of the proceeds of disinvestment will be analysed. In the third
part our focus will be directed towards the performance of PSEs. The major issue is whether the market
forces of economic liberalization without ownership transfer will be effective for enhancing the
efficiency of PSEs.


In India, there is a complex hierarchical structure which constitutes the public sector. Public sector
refers to all government activities including administration, running utilities, financial system of the
government and commercial activities of the government. The PSE is a sub-system of the public sector
system and consists of departmental enterprises and non-departmental enterprises. Although they form
part of the government financial systems, departmental enterprises have separate accounts of income and
expenditure but their surplus or deficit is merged in the accounts of the departments of Government. In
India, we have a few very large and successful departmental enterprises under Central Government e.g.,
the Indian railways, the telecommunications, the postal departments. Several state governments operate
the government printing press and the distillery for manufacture of local liquor as departmental
enterprise.( n4) Non-departmental enterprises refers to activities that are carried out by entities which are
legally separated from the government and are made to maintain a separate account of all their financial
transactions and to set them out in the form of a profit and loss account. These enterprises were set up
either under the Companies Act or under special Statutory provisions. We designate the two groups into
public sector enterprises non-departmental (PSEND) and public sector enterprises departmental (PSED)
respectively. Sometimes PSENDs are further classified into financial and non-financial public sector
enterprises. Unless specified PSENDs do not include financial institutions and insurance companies but
some financial services such as Indian Railway Finance Corp. come into this category. While public
sector activities other than enterprises are financed from the government budget, most PSENDs are not
always entirely dependent on budgetary support from the government.( n5)

Public sector in India is very large as can be seen from Table 1. The share of public sector in total
capital stock was 46.2% while value added was only 26.8% This difference between capital stock and
value-added is largely due to investments in administrative departments where the goods are more in the
nature of merit goods or social services. And partly due to inefficiencies in the public sector. The share
of PSEDs in capital stock was 13.6% while value-added was 4.0%. In the case of PSENDs the stock of
capital was 20% while value-added was 13.2%. Investments in the public sector formed 9.4% of GDP
while savings were only 1.6% leaving a savings-investment gap of -8%. In Table 1 we have also given
the savings and investment pattern as between public and private sector. Savings of both the public
sector and of the private corporate sector are low and there is a draft on household savings. While
savings in the private corporate sector have marginally increased over the six-year period they have
declined to an insignificant amount (0.2%) in the case of the public sector.

The PSENDs cover 246 central public enterprises (including 6 under construction) and about 800 state-
level public enterprises. Investment in the central public enterprises in 1993-94 was 50783 million
dollars.( n6) The major investments made in the public sector enterprises are in the capital-intensive
basic and heavy industries whereas private enterprises cater predominantly to consumer goods. Hence,
while public sector enterprises account for two-thirds of productive industrial capital their share in net
value-added is only one-third. But, the contributions of the public sector have been notable. They have
contributed to the growth of a diversified industrial base and have helped in creating strong backward
and forward linkages. The low value-added is matched by low rates of return on capital employed. In
1993-94 the public sector as a whole only earned a rate of return on capital employed of 2% while
public sector enterprises as a group only displayed marginal improvement with a rate of return of 2.78%.
( n7) The net result has been a growing dependence on the exchequer for funds. In fact, the motivating
force towards relooking at the public sector has been largely financial.

The process of breaking the public sector in India is interesting. It has not followed the traditional route
of sale or divestiture. Instead different forms of privatization have been experimented. Conceptually
privatization can be divided into three broad modalities - Ownership Transfer, Management Transfer,
Marketization. Table 2 presents the three modalities with more detailed operational dimensions.
Ownership transfer can be divided into partial and total. The table tries to bring out the numerous
options that are available under ownership transfer. Each option involves weighing between the extent of
government control and management autonomy. For example, for highly sensitive areas governments
may prefer to retain controlling interest. Control can range between 26% equity ownership as under the
Companies Act to 100% equity control and ownership. In fact, most private enterprises themselves have
less than 50% private participation. More often the so called private owners hold less than 20% equity
leading to the search for a genuine private enterprise.( n8) Equally important is the form of dilution.
There are various options open such as: i) to the general public; ii) sale to one group; iii) to workers; etc.
Management transfer may or may not involve ownership transfer and therefore, we categorise them into
total transfer and partial transfer. Here also as indicated in Table 2 a number of options are available.
Marketization, the third modality is a catch-all word which includes level-playing field for PSEs,
relaxation of entry barriers to private sector in what were once the public sector domain, providing
greater autonomy to PSEs by distancing from the government. In the tables given below we have
divided marketization into four categories. They are: i) distancing of PSEs; ii) management autonomy
for PSEs; iii) financial autonomy for PSEs; iv) effect of economic liberalization policies.

The Statement of Industrial Policy 1991 was the first basic document that outlined the strategy for
PSENDs for India. The following dimensions were enumerated in the policy.

1. Restructuring the Portfolio of Investments.

2. Restructuring the Equity (Ownership) Pattern.

3. Restructuring the Quality of Interface between the Government and the PSEs.

4. Restructuring the Boards.

5. Restructuring the Sick Enterprises.

6. Restructuring the Safety Net for Workers.

7. Restructuring the Policy Environment.

Clearly, the emphasis for PSENDs is on restructuring (or marketization vice Table 2). The current status
of the various elements of the policy are as follows. Firstly, under the Industrial Policy Statement of
1991, areas reserved for the public sector have declined sharply from 17 to 8 to 6. Secondly, a policy of
disinvestment of public enterprises initially upto 20% and later in some cases upto 49% has taken place.
Equity participation by workers is also encouraged. Disinvestment has been looked upon more as a
policy for closing the fiscal deficit rather than as a deliberate management policy of ownership transfer
to the private sector. This is also true of the partial dilution of equity in public sector financial
institutions. Thirdly, budgetary support to PSENDs are being gradually withdrawn and they are
encouraged to raise resources from the market. In the case of financial PSENDs raising resources from
the public and the market has become their important source of funding.( n9) Fourthly, Sick Industries
Companies Act (SICA) has been amended to bring sick public enterprises under the purview of the
Board of Industrial and Financial Reconstruction (BIFR). More than 138 PSENDs (1994) of both central
and state governments have been referred to BIFR. Of these 138 cases, 26 cases have been dismissed as
not sustainable, for 29 cases revival schemes have been suggested, and in two cases in central and one in
state have been declared "no longer sick".( n10) A cabinet committee has been set up to initiate action in
the closure of sick public enterprises. Fifthly, the National Renewal Fund was set up with a corpus
funding of 286 million dollars to deal with fallout of restructuring labour by way of Voluntary
Retirement Scheme (VRS). About 75,000 workers have opted for voluntary retirement under the
scheme. A major amount has been utilized in the textiles sector where sick textiles were nationalized in
the seventies to prevent unemployment. Sixthly, all PSENDs are covered by the Memorandum of
Understanding. Seventhly, PSENDs Boards have been revamped with 1\3 outside directors and
government nominee directors restricted to 1\6 or a maximum of two. Finally, the general liberalization
policies of macroeconomic variables are all equally applicable to PSENDs. This has introduced level-
playing field for public-private sectors. PSENDs are now subject to Monopolies and Restrictive Trade
Practices Act, Company taxation law, market interest rates, market pricing policies, removal of purchase
and price preferences and open entry.

Corporatization and encouraging private sector participation has been the main thrust of reforms in the
PSEDs especially in the infrastructural sector. These include telecommunications, roads and highways,
airports, road and air transport. In telecommunications two metropolitan zones viz. of New Delhi and
Bombay have been converted into separate corporations. The power sector consists of Generating and
Transmission Corporations of the central government and of Electricity Boards (both generation,
transmission and distribution) at the state level.( n11) In the case of railways a policy of partial
subcontracting of services and franchising a few routes is on the anvil. A new scheme of build-operate-
lease-transfer (BOLT) and own-your-own wagon schemes have been introduced. Postal services have
allowed private parties participating in the courier services. Private sector participation in infrastructure
is a major policy in India. The huge financial dimensions of investing in infrastructure and the urgency
of enhancing infrastructural facilities have been compelling factors towards encouraging private sector
participation. The scope for competition and the dilution of natural monopoly elements have definitely
helped in this policy of encouraging private sector participation and later privatization.

The adopted modalities of privatization in India is given in Table 3. It is clear from the table that the
policy of privatization in India is very limited. The most commonly used route of privatization is the
modality of marketization. Under this heading is included corporatization, private sector participation
and level playing field between public and private sector The process of ownership transfer is gradual
either through equity dilution or through mobilization of equity finances from the market.( n12) Thus a
gradual process of redefining the public-private divide combined with an even more gradual process of
ownership transfer sums up the privatization of PSEs in India.
The policy of gradualism is in keeping with the policy of gradualism with regard to liberalization of the
different sectors under structural adjustment. Privatization therefore still, remains a process that aims at
achieving fiscal balance by reducing involvement of the state in economic activity in a phased manner.
Major shifts have not taken place and as yet there is no move towards a comprehensive policy of
privatization.( n13) The process of ownership transfer is gradual either through equity dilution or
through mobilization of equity finances from the market. Policies that encourage private sector
participation while simultaneously discouraging fresh public investment is the main thrust of
privatization. The changing balance between public and private sector has been more in terms of
intentions rather than actuals.( n14)


The prime objective of privatization is fiscal namely mobilizing resources for the budget.
Disinvestment of PESND was first introduced in 1991-92 with the decision to disinvest in select 31
enterprises. Initially only government owned financial institutions (FIs) and mutual funds were allowed
to participate. Later the group was extended to include the public and FIIs. In Table 4 we have tabulated
the proceeds of the disinvestment so far undertaken to the normal parameters of the Budget. The table
reveals that the total amount of earnings since the start of the disinvestment works out to 3325 million
dollars as per the budget papers.( n5) In the first year of disinvestment accruals were 1215 million
dollars in 1991-92; 677 million dollars in 1992-93; 595 million dollars in 1993-94; 730 million dollars in
1994-95 and 108 million dollars in 1995-96. Obviously the amounts from disinvestment are very small
and even within the smallness there is a declining trend.

The most striking feature is the small amounts earned from divestiture both in relation to total receipts
(revenue and capital account) and to capital receipts. In 1991-92 receipts from disinvestment amounted
to 1215 million dollars which works out to 2.9% of total receipts and 7.8% of capital receipts. In 1992-
93 out of the budgeted estimates of 1208 million dollars disinvestment was able to garnish 677 million
dollars. In that year it works out to 1.77% of the total receipts and 5.42% of capital receipts. In 1993-94
the government planned for disinvestment earnings of 797 million dollars revised downwards from 1116
million dollars but the amount actually earned from disinvestment was 595 million dollars which turns
out to be 1.42% of total receipts and 3.36% of capital receipts. In 1994-95 proceeds from disinvestment
amounted to 730 million dollars which is 1.43% and 3.33% of capital receipts. In 1995-96 the
government had budgeted for 2058.82 million dollars but disinvestment has yielded 108 million dollars
which is 0.20% of total receipts and 0.54% of capital receipts The current budget hopes to mobilise 1420
million dollars from PSE disinvestment.

The negligible amounts from disinvestment are of limited consequence for closing the fiscal deficit. The
peak of disinvestment in 1991 in relation to fiscal deficit is less than 10% (8.36%). This ratio declines to
4.88% the following round, to 3.09% in the 1993-94 disinvestment finally tapering off to 0.60% in the
current financial year. Suggestions that accruals from disinvestment be deployed for retiring the public
debt is of marginal significance. Looking at disinvestment, accruals would help to retire 3.35% of
outstanding public debt in 1991 coming down to 1.45% in 1994-95 and further to 0.16% in the current
budget. The consolidated public sector deficit continues to hover around 10% of GDP.( n16)

Using the fiscal deficit or variants such as total receipts in the denominator is one way of measuring
revenue accruals from disinvestment. Perhaps, a more preferable alternative criteria for disinvestment
for resources is to conceive of public investment as a rolling concept such that if future investment rates
need to be maintained sale of PSEs should provide the corpus of funds. In this case an interesting
exercise is to get some dimension of the magnitudes of disinvestment required? Rather than taking fiscal
deficit it may be preferable to use investment in infrastructure in the denominator. As mentioned in the
last section, the policy of greenfield privatization or encouraging private sector into infrastructure
prompts this enquiry. Presuming that infrastructure and core sector investments will continue to
dominate whether in the public or private sector we can derive alternative estimates of the required
disinvestment. Assuming that a minimum of 25714 million dollars will be required on annual basis then
the amount disinvested should earn some proportion of the required investment.( n17) Investment in
PSENDs is 50783 million dollars with equity component of the central government of 15910 million
dollars (face value). Assuming an average sales realization of Rs.50 (1.42 dollars) per share on face
value we need to disinvest at least about 18108 million shares in order to meet future investment targets.
But disinvestment proceeds do not form part of the rolling public investment concept. Instead, there is a
declining trend in budgetary support towards public sector with the withdrawal of government funds to
PSENDs. In 1991-92 disinvestment revenue to internal accruals, budgetary support and extra budgetary
support to PSENDs is 16.7% but declines to 7.79% in 1992-93 to 4.58% in 1993-94 with a slight upturn
to 5.67% in 1994-95 declining steeply to 0.78% in 1995-96 (Table 4). In search of resources PSENDs
will tap the equity route more frequently resulting in gradual dilution of equity. At present the amount of
resources from outside sources is budgeted to amount to 2763 million dollars. But more obviously, the
need for investible funds for infrastructure development has been a major factor responsible for relaxing
entry barriers to private sector.( n18) An important issue that has not been given much prominence is the
ability of the market to absorb even 50% of disinvestment of PSEND and when combined with
requirements of the public sector (i.e. both PSENDs and PSEDs including FIs) the figures are enormous.

Yet another way of looking at disinvestment accruals is to compare it with the lost earnings of
government from interest and dividend foregone on its contribution to share capital and on loans. The
owner (government) having invested large amounts is entitled to receive the required dues on
disinvestment. The government in the past has borrowed to finance its expenditure both developmental
and non-developmental. Out of these borrowings 13% has gone towards financing PSEs but interest
receipts to the central government to the loan component varies between 1 % and 3%. Dividends paid by
PSEs to the central government on its share capital has been a poor 1.5%. In Table 5 we did a simple
exercise for three years estimating the foregone interest and dividend. Disinvestment is able to cover
24.53% of this loss in the first year (1991-92). In the subsequent years the coverage by disinvestment
falls to 12.10% (1992-93) and 10.68% (1993-94).

In terms of fiscal impact disinvestment has been marginal. In the case of disinvestment the amounts
earned depend to a large extent upon the market realization of the shares. A well known argument is that
the shares have been sold at a low prices and much more could have been earned by way of
disinvestment. This is a debatable subject as much depends on the method of evaluation and prevailing
market conditions.( n19) Our concern is more with the selected 31 PSENDs for disinvestment. These are
PSENDs in the core sector. Among them the more profitable both in terms of current profitability and
future potential profitability have attracted greater share dilution. This is expected although the PSEs
were bunched together to prevent undue buying of a few PSEs, investors invariably prefer good
companies that add weightage to the package. Nevertheless, policy of disinvestment for fiscal gains
results in many contradictions. Firstly, milching profitable enterprises for short term gains can in the
long run leave the government with unviable PSEs accentuating in the process the fiscal deficit by
increasing the burden on government revenues. Secondly, the selected PSENDs were originally
conceived as legally-created monopolies in the core sector. Economic liberalization policies of tariff
liberalization and removal of entry barriers have opened the flood gates of competition. For these
enterprises to face the competition a more comprehensive policy of privatization which covers the
dynamics of ownership and management transfer have to be worked out. Disinvestment to meet fiscal
needs may not be exactly the most effective way. Instead disinvestment may create problems for
management which can hurt their operational efficiency. Finally equity dilution in core and strategic
PSEND maybe in contradiction to the present policy of retaining public ownership in these enterprises.(

The persistence of a fiscal veneer for privatization is interesting. Despite the small amounts earned
from disinvestment and the poor performance at the bourses in terms of share price realization the
government has not attempted to evolve a comprehensive policy on privatization. A few guesses can be
attempted at this fiscal orientation. As a catalyst fiscal crisis can usher in paradigmatic changes.
Structural adjustment reforms is one of them. The resistance to change presumably is less during crisis
situations. But the limited amount disinvested only suggests that the fiscal crisis is perhaps not
sufficiently severe for a policy of privatization. The government prefers to maintain only a fiscal
veneer! Further, the choice of 31 profitable enterprises for disinvestment although attractive for
disinvestment and for earning resources for the fisc may in the long run be contradictory by leaving the
government with sick enterprises. Fiscal adjustments between the short and the long run show a
mismatch defeating the fiscal objective. A rational policy of privatization would view disinvestment
from a different perspective. For example, the focus may shift instead to: i) identify those enterprises
that need to be retained in the public sector, ii) assess the new areas for public investment, iii) assess the
extent of shares that need to be divested based on criteria such as natural monopoly characteristics,
strategic etc., iv) sell off the loss-making enterprises. Again, the fiscal cover for privatization as an
easier option is again difficult to accept. Criticisms on "selling the silverware" or underselling PSE
shares do not point towards a soft option. Given these doubts the fiscal veneer of privatization
combined with other measure in policy reforms of public-private redivide only suggests that in India,
the preferred route for privatization is that of "fait accompli" rather than of a deliberate policy. In which
case, the outcomes can be both costly and unpredictable.


A major thrust of economic reforms under liberalization is on enhancing efficiency in industry.

Privatization associated with ownership diversification should normally be among the package of
reforms suggested to improve productive and allocative efficiency. Productive efficiency under
privatization is based on the evidence that private firms attempt to minimise cost. The relative clarity of
objectives and the incentive structure between principal and agent of a private firm is the basis for
productive efficiency. allocative efficiency on the other hand, is dependent on competition,
privatization is complimentary to liberalization. Hence, efficiency requires a blend of competition and
ownership transfer.

Despite the fact that there is no policy of ownership transfer for efficiency the blend between public-
private sector have undergone changes due to the following: i) private sector entry, ii) gradual
disinvestment, iii) corporatization and mobilizing of equity funds from the market. At the same time the
strong emphasis on restructuring PSES towards greater management autonomy under a hard budget
constraint draws attention to the ownership versus competition debate which many critics offer.( n22)
Under the reforms programme a level playing field is being attempted to be created between public and
private enterprises. The main components of the liberalization process are: First, introducing
competition through delicensing, lowering of tariffs, foreign direct investment. At present tariffs (import
duties) have been lowered to an average of 65%. Under the General Agreement on Trade and Tariffs
(GATT) these tariffs as agreed will be reduced to an average of 30% by 1997 and later to 20% as
recommended by the Taxation Committee Reform (Chelliah Committee Report).( n23) The lowest
reduction has been on capital goods which imports direct competition to PSEs. Further the advantage of
countervailing excise duties will also be phased out. Second, by moving towards a level-playing field for
all industries including public sector enterprises in terms of: a) phasing out of subsidies, removal of
differential interest rates, b) removal of tax concessions on public sector public bonds, c) phasing out of
administered prices as also phasing out of purchase policy preferences, d) levy of corporate tax and
income tax on a regular basis.( n24) Third, foreign private investment is allowed automatically for
equity of upto 51%. This has implications for PSEs both in term of competition in the respective fields
and also for supply of capital and intermediate goods.

In this section we have attempted to measure productive efficiency in terms of the performance of
PSENDs in the manufacturing sector. Our data covers central PSEs based on the official survey of the
Department of Public Enterprise (DPE). The DPE classifies PSEs in the manufacturing sector into 13
cognate groups which includes power and mining. The grouping does not strictly match the normal
concept of manufacturing sector and requires reclassification when comparisions are made with the
private sector. Restricting the analysis to the manufacturing sector was based on the following reasons.
Firstly, most central PSEs were set up in the Second and Third Five Year Plans within the framework of
a legally created monopoly market of a restrictive trade or closed economy model. Thirty years later,
these enterprises presumably have grown up and learnt to face competition. It is therefore, revealing to
initially observe the reactions of these enterprises to competition and market forces. Secondly, these
PSEs have limited or no equity (social) dimensions. Value decisions of fulfilling social objectives are
minimum and prevents the analysis from becoming diffused. Lastly, the analysis pertains only to profit
making PSEs. Loss-making PSEs are candidates for the BIFR and their future strategy is predetermined.
We have selected all enterprises which showed positive rate of return in the last three years of 1991-92,
1992-93 and 1993-94. More current data is not available for all PSEs. This leaves out enterprises which
have fluctuating returns in these three years. Profitability is defined in the financial sense of net profit to
capital employed. and net profit to net worth.

A comparative analysis of public-private sector performance is also undertaken. Underlying this

comparision are queries such as: i) Are PSENDs capable of functioning in an open (market-oriented)
economy with the constraints of public ownership? ii) Are there ways where public ownership gets
limited and does not extend itself to sovereign considerations of social justice and equity? iii) Is the
threat of marketization and competition effective in enhancing competition? But comparisions are
misleading. PSEs and private enterprises are non-comparable categories in terms of homogeneity of
investment, product line and size. The public sector has been restricted to a few sectors where private
sector entry permit was restricted if not debarred. Further the size of investments are very large.
Comparable categories in the private sector are few. In order to overcome this problem comparable
categories within the private sector have been selected. The data is based on CMIE (CIMM) data. The
CMIE data base has certain advantages. It covers both public and private sector on a regular basis. The
data is standardised. Yet, difficulties remain and at times the exercise in making comparisions seems
valiant.( n25)


All indications are that the economy is now poised on a buoyant phase. The present uptrend in industrial
production while still reflective of past investment lags is now on a more positive trend. Comparisions
between the public and private sector shows that in terms of PAT\sales both public and private sectors
have performed more or less at the same level. But if we take profit after tax to net worth the private
sector has performed better. An interesting trend in the corporate sector is the increase in profitability
from `other income' which signifies that earnings are not from the mainstream investment. Changes in
the depreciation rules have to some extent played a role in improving profitability.
Growth in fixed capital formation shows considerable fluctuations. After a dip in 1992-93 (Table 6)
growth in fixed capital formation picks up. The fluctuating response is normal to expect in a period of
transition when all reforms have either not be completed or have yet to be activated. There are two facts
that need to be noted. The uptrend in capital formation is much higher in the private sector reflecting the
effect of greenfield privatization. Further, the decline in capital formation was sharpest in the capital
goods industry and the basic metals industry both of which have a sizeable public sector presence. The
sharper decline in public sector companies as compared to the private sector is reflective of decreasing
growth rates in these two sectors. The sharp increases in capital formation in the private sector
unfortunately is concentrated in capital work in progress. Capital work in progress expanded more than
three-fold in 1990-91 and more than doubled in 1991-92. At the same time, investment in plant and
machinery expanded only 22% in 1990-91, by 36% in 1991-92, by 55% in 1992-93 and declined by 3%
in 1993-94.( n26) The decline in productivity of capital has been steep in 1990-91. The marginal
productivity of investments saw sharp declines to 0.93 in 1992-93 but is on the rise now. On the other
hand, marginal productivity of public sector companies which showed some improvement in 1992-93
(1.19) declined sharply to 0.53 in 1993-94.

Aggregates tend to be deceptive. Instead analysis of the manufacturing sector (public-private) separately
therein of inter-industry analysis has more significance. Table 7 gives the profitability profile of
PSENDs during the reform period. The analysis was restricted to profit making central public sector
manufacturing enterprises. This includes the power sector but not other infrastructural enterprises such
as telecommunications and railways which are departmental enterprises.

The ratio of gross profit to capital employed for all PSENDs was 11.57% in 1993-94 a marginal
improvement over 1992-93. In the manufacturing PSEND the ratio was 11.63%. When we look at ratio
of net profit to capital employed for all PSENDs the ratio comes down very steeply to 2.43% in 1992-93
and further to 1.81% in 1993-94. If we table the ratio for the manufacturing sector alone it registers a
massive decline of -178.46%.. Assuming that this is due to accumulated losses of (82) enterprises such
as National Textile Corporation (NTC) and Heavy Engineering Corporation (HEC), we calculated the
ratio for profit-making PSENDs (61 in number).( n27) The net profit to capital employed in 1993-94
was 8.27%. Very clearly some sectors and some units in each sector are bearing the brunt of loss making
units. Only in the case of textiles are all the units in the red. An oft quoted variant of the intersectoral
difference is the profitability of the oil sector.( n28) A separate analysis without the oil sector is done

A possible reason for the drop in net profit to capital employed ratio as compared to gross profit maybe
due to increasing interests as PSEND's no longer enjoy the advantage of lower interest rates. According
to Centre for Monitoring Indian Economy (CMIE) the average interest costs are lower in the public
sector (9.42%) than in the private sector (13.38%).( n29) This is not strictly correct as in the CMIE study
the difference between interest rate arises due to interest stipulated and interest actually paid by the
enterprise is not adjusted for. The same study of CMIE estimated that other income i.e. revenue from
activities unrelated to the main line activity of the company, plays a remarkably important role in the
profit before tax of the public sector. The issue of other income has raised an interesting enquiry into the
efficiency of public sector enterprises. Reddy and Joshi have estimated other income deducted from
earnings to equity and find from a study of 45 enterprises that the highest return earned in 1992-93 was
0.74% whereas the lowest was in 1991-92 at -1.16%.( n30) To further examine the other income aspect
we examined the ratio of other income to operating income as one way of assessing the efficiency of
public enterprises in their specific line of operation. We looked at the aspect of other income to see if
profits of PSEND's are derived from side-line activities. Unlike Reddy & Joshi we took other income to
operating income for two years (1992-93; 1993-94). If this ratio exceeds 10% than obviously the
enterprise was not efficient in its main line of activity. From the data the following enterprises earning
large proportion of other income are: Sponge Iron (19%,24%); Kudremukh (4%,10%); NMDC
(9%,16%); Uranium Corp. (8%,10%); Nuclear Power Corp. (1%,36%); Bharat Dynamics (23%,12%);
Semi-Conductor (19%,18%); Goa Shipyard (21%,70%), Garden Reach (13,17%); Hindusthan Latex
(30%,101%); NTC (209%,1200%).

Eleven out of 65 profit making public sector earned other income, some of it disproportionately large. A
few border line cases should also be noticed. These include Bharat Heavy Electrical Ltd. (BHEL);
Neyveli Lignite; Oil & Natural Gas Commission (ONGC); Oil India; Bharat Electronincs (BEL);
Rajasthan Electronics. The aspect of other income requires further investigation and no categorical
assertions can be made now. It is possible in a few cases such as Bharat Dynamics, NTC and Semi-
Conductor other income have prevented low or negative rates of return.


As mentioned earlier intersectoral differences present a different picture of the performance of PSENDs
in the manufacturing sector. We first present the financial performance of all 13 sectors. In Table 10 the
performance of PSENDs within a smaller concise set for the manufacturing sector is given. The set
excludes the petroleum sector and within metals and manufacturing we have excluded mining which
includes coal. Power has also been removed.

Sectoral financial performance of PSENDs is made with reference to four criteria. (Table 8) They are: i)
Average of net profit to capital employed of profit-making units for three years 1991-92, 1992-93, 1993-
94; ii) Average of net profit to capital employed of all units during the same period; iii) Net profit to
capital employed for the profit making units in 1993-94; iv) Average of net profit to net worth of profit
making units. 5 sectors out of 13 cognate groups showed profits in the two digit ratio whether measured
by net profit to capital employed or net profit to net worth. They are minerals and metal, petroleum,
pharmaceuticals and chemicals, consumer goods and agro-based industries. However in accepting their
performance it is important to keep in mind: a) all these groups fall in to the category of administered
prices which makes it difficult to assess their performance; b) they are still in the monopoly segment
reserved largely for the public sector. Given these two caveats their performance in relation to
alternative opportunity is not laudable i.e. the opportunity returns on investment (average of 10%) barely
matches the prevailing bank deposit rates let alone cover banks lending rates.

The next category of performers are steel and medium engineering units whose average of net profit to
capital employed is around 8% closer to the group average of 9.5%. An interesting observation from
Table 8 is that the petroleum sector is really not the bulwark of PSEs profitability in the manufacturing
category. We have in Table 9 retabulated sector analysis by excluding out the petroleum sector. It can be
observed that NP\CE for the profitable units the average of all the 13 groupings comes down by only
one percentage point. On the other hand the impact of the petroleum sector is much more weighty when
we take all the 164 manufacturing units. We also recategorised the manufacturing sector including
petroleum and excluding mining to assess the financial performance. The percentage point comes down
by two points. It is therefore mining units that pull up this sector and among them mention should be
made of Kudremukh Iron Ore.( n31) The burden of profitability in the manufacturing is therefore shared
by all PSE in the manufacturing sector and not merely of the petroleum sector.

The losses of sick enterprises heavily pulls down the group average in steel, fertilisers, heavy
engineering, medium engineering, transportation equipment, consumer goods and agro-based industries
often bringing down the sector-average into the negative category. Within each cognate grouping only a
few are profit-making. Textiles fall in to a separate category where all the mills are sick. Restructuring of
these mills have however eluded any solution despite repeated efforts by BIFR and AAFR. In the
minerals & metals sector mining has pulled up the group average. Strictly speaking they should be
eliminated from the manufacturing category except for aluminium units.

Looking at the average net profit ratio of three years to that in 1993-94 of the profitable units shows that
there has been a decline in profits of steel, minerals and metals, pharmaceutical and chemicals,
transportation equipment, agro-based and consumer goods. On the other hand there has definitely been
an improvement often marked in the case of coal and lignite, power, petroleum, fertilisers, heavy
engineering, medium engineering. In the case of steel the losses of a few units such as Indian Iron &
Steel Co (IISCO) draws done the average. Similarly the remarkable turn-around in the fertiliser sector is
entirely due to units National Fertiliser and FACT. It is therefore difficult to predict a trend upwards or
downwards in any of the sectors.

How has the public sector performed in relation to the private sector? This is a difficult question to
answer. The main problem as mentioned is in trying to compare non-comparable categories. Hence in
making public-private sector comparisions a cautious approach is necessary. Using the CIMM data we
have reclassified the manufacturing sector into eight categories to match the classification of public
sector enterprises as given by the Dept. of Public Enterprise, Ministry of Industry. Petroleum, coal,
mining and power sectors have been left out. Heavy and medium engineering have been combined. The
comparisions are between the industry average and the profitable public enterprises in that industry. The
ratios estimated are profit after tax to networth and profit after tax to capital employed. Details are given
below in Table 10.

The table clearly reflects the difficulty of comparing unlike with unlike. In terms of industry average
even on an unweighted basis and selecting a sample from a sample study shows that industry picks up
after 1993-94 and it is really in 1994-95 that the turn-around occurs. Surprisingly the profitable PSENDs
have done better than the industry average confirming our earlier analysis that a few enterprises pull up
the average. Yet another observable feature is the lag in performance between the industry average and
that of the PSENDs. The lag maybe due to the delay in reporting the results.

Taking the financial ratios into account we can tentatively on the basis of three year-period data surmise
that in a competitive environment with a level-playing field the existing public sector enterprises require
major restructuring including privatization and ownership transfer. Taking all the evidence together the
response of PSENDs to the reforms programme is still tentative. Despite the limited number of years
since the structural adjustment reforms were introduced more attention needs to be paid to the following
aspects. Firstly, the performance of the so called profitable manufacturing PSENDs ranges from
moderate to poor. Even the so-called "profitable" petroleum sector returns are modest despite the fact
this is a price-created monopoly market. Secondly, within each cognate group there are only a few
enterprises earning positive returns. Thirdly, in the strict technical sense, all units are in the competitive
market segment and can no longer enjoy the luxury of officially created monopoly markets. If this trend
persists they will have to take a more aggressive strategy.

Competition has played a contributory role for many PSENDs egging them to restructure their
enterprises within the given constraints of public accountability. Of interest is the strategic intentions of
these enterprises in response to changing market conditions. All the star public sector enterprises like
Steel Authority of India (SAIL), BHEL, Hindusthan Machine Tools (HMT), BEL, Hindusthan
Aeronautical Ltd (HAL), Bharat Earth Movers Ltd (BEML) have drawn plans to adjust to an open
economy (Table 11). Most public sector enterprises have drawn up future strategies for diversification
with efforts at globalization especially through joint ventures with international companies. SAIL has
also shown interest in diversification into a new field. Obviously these are the initial responses to the
reforms programme. In many cases intentions need yet to be put into operation. Perhaps more than
anything else the government needs to draw up a policy of intervention and support, besides a rational
policy of privatization. What is observable is the threat of competition in its embryonic stage needs to
be sustained with greater management flexibility. The issue is whether these PSENDs who have
responded through initial plans of restructuring and diversification can sustain their operations on a
profitable manner in an open competitive economy without the support of government intervention? Of
course, in large industries where economies of scale prevail the imperfections of international
competition invariably necessitate government intervention whether in the form of tariff protection or in
terms of soft intervention such as economic diplomacy.( n32) Of more direct concern is whether these
enterprises can function as commercial entities without the encumbrance of social objectives and
accountability that government ownership enforces? The question is whether competition is enough or is
it necessary to allow for privatization with greater managerial autonomy? Furthermore, should the
process of privatization be an outright sale or gradual dilution of "testing the water policy?" Even here
is it possible to consider different levels of privatization or government control?

Comparing the profitable PSENDs with their equivalent private sector may perhaps be more revealing.
In Table 12 we have taken the profitable PSENDs and their equivalent private sector enterprise and
tabulated the financial performance for the last five years.

Performance of comparable private sector enterprises as can be noted from Table 12 has been uniformily
better except in the case of steel. In this sector in the initial stage the private enterprise TISCO did better
than the PSE SAIL. Later from 1993 the trend is reversed. This maybe due to the changed product mix
due to deregulation of prices. Equally interesting is the way BHEL has picked to perform closely with its
comparable Indian category Kirloskar Electric Co. In this category both Widia India and Asea Brown
Boveri have done better than the other two. Their performance has also been evenly good. In the metals
and petrochemicals sectors the private sector have performed better. There have however, been years
when performance of both public and private enterprises are comparable. This may have been due to
exogenous factors such as change in administered pricing to deregulation, reduction in tariffs or impact
of general industrial growth rate. A financial analysis however needs to be supplemented by an analysis
that will explain the existence of slack or X-inefficiencies prevalent in the two groups.( n33) A
suggestion often put forward that industries where economies of scale operate and there are increasing
returns to scale such as the petrochemicals industry resort to tariff protection (non-distortionary) maybe
more realistic than purely free trade situation. The possible reversion to infant industry protection may
be self-defeating. Instead,a programmed sequencing of privatization where the PSEs are first privatized
in terms of ownership transfer and then allowed to face international competition through tariff
reduction could be preferred option. This is a route implemented in Malaysia and S. Korea. In cases of
heavy public investments the extent of government ownership pattern assumes significance. What is
required is equity participation by the government without the onus of sovereign responsibilities that
result in multiple objectives and non-commercial orientation for PSENDs.

Finally, the emergent paradigm for the nineties is clearly oriented towards market functioning under
state-supervision. It signifies a departure from the state-controlled and regulated paradigm of the last
four decades that prevailed over many economies. The changing dimensions of `public' and `private'
come into sharper focus and prompts a sequencing pattern more in tune with structural adjustment along
the following lines:

A) Privatize all manufacturing, trading, and financial sectors.

B) Privatize and regulate in infrastructural facilities allowing for both public and private sector units.

C) Reallocate public sector investment to soft infrastructure development, strategic sectors, and if
necessary, retain them in hard infrastructure for a limited period of time.


A non-policy on privatization as it prevails now in India has its impact not necessarily favourable. In
this paper we looked at the different forms of privatization that have been put into effect. Firstly,
disinvestment for mobilizing non-inflationary resources has had only a marginal impact. Both the
amounts disinvested and the sale earnings are marginal whether we looked at it in relation to fiscal
deficit, total debt, or as a rolling fund for future investments. Alternatively, privatization may be sought
more for the possible efficiency forces that it may generate in the prevailing public sector enterprises.
Here again the present policy of covert privatization through gradual dilution of equity does leave the
present PSE management with less teeth than merited by competitive conditions. In order to use the
weapon of privatization for efficiency it is necessary to plan the areas open to competition and those
that have traces of natural monopoly where government control may still be required. Such planning is
part of a policy on privatization. While a non-policy of privatization may be politically expedient the
gains from a comprehensive policy on privatization may outweigh the political gains.