The public sector contributes about a quarter of India’s domestic output and employs about 19 million people, both in the centre and the states. Bulk of this output, mostly in industry and services, is contributed by close to 250 public sector enterprises, owned and managed by the Central Government. Besides, there are 1,100 state level public enterprises that are relatively small in size, largely intended to meet social welfare objectives and to secure resources from public sector banks and develop financial institutions. While, the contribution of these publicly owned and managed enterprises, to national development has been widely acknowledged, their poor financial return has been a matter of concern.
The process of privatisation was initiated in 1991-92 with the sale of minority stakes in some PSUs, primarily to raise resources to bridge the fiscal deficit. In order to raise resources and encourage wider public participation, a part of the Government’s shareholding in the public sector was offered to public investment institutions, financial institutions, general public and workers.
The disinvestment policy of 1991 aimed to focus public sector investment on strategic, high-tech and essential infrastructure. Boards of public sector companies were made more professional and performance improvement was sought, by providing greater autonomy and accountability. PSUs, which were chronically sick and unlikely to be turned around were referred to the Board for Industrial and Financial Reconstruction (BIFR) and social security mechanisms were created to protect the interests of workers. The disinvestment process of the early 1990s came to an abrupt halt following the collapse of the stock markets. Since, the stock markets remained subdued for much of the 1990s, the disinvestment targets were largely unmet. After a change in the Government in 1996, although there was a rethink on the disinvestment policy, there was no reversal in policy. The Disinvestment Commission constituted during this period recommended: Restructuring and reorganising of PSUs before disinvestment, Strengthening of PSUs, which were performing well and Utilisation of disinvestment proceeds for restructuring of PSUs.
The Disinvestment Commission’s recommendations led to some prominent profit making PSUs being declared as “Navratnas” or jewels. These PSUs were granted greater managerial and financial autonomy. However, the process of disinvestment did not pick up as share prices remained largely subdued due to a series of irregularities in the financial markets.
After the NDA government came to power in 1998, the disinvestment process took a new turn with substantial portions of equity in select PSUs sold to strategic partners – marking a transfer of managerial control to private enterprises. The primary focus was on improving efficiency and productivity of PSUs, although much of the disinvestment proceeds were eventually used to bridge the fiscal deficit.
A separate ministry was created and sales were organised through auctions and bids to avoid interference of respective ministries and bypass the stock markets, which continued to be sluggish. Every effort was made to ensure transparency at all stages of the disinvestment process, to avoid controversy and allegations of corruption, usually associated with such sales.
Disinvestment in public sector undertakings:
| Year | Target (Rs. Crore) | Proceeds (Rs. Crore) |
| 1991-92 | 2,500 | 3,038 |
| 1992-93 | 2,500 | 1,913 |
| 1993-94 | 3,500 | - |
| 1994-95 | 4,000 | 4,843 |
| 1995-96 | 7,000 | 362 |
| 1996-97 | 5,000 | 380 |
| 1997-98 | 4,800 | 902 |
| 1998-99 | 5,000 | 5,371 |
| 1999-00 | 10,000 | 1,860 |
| 2000-01 | 10,000 | 1,871 |
| 2001-02 | 12,000 | 5,632# |
| 2002-03 | 12,000 | 3,348 |
| 2003-04 | 14,500 | 15,547 |
| # Figures inclusive of amount realised by way of control premium, dividend/ dividend tax and transfer of surplus cash reserves prior to disinvestment etc. Source: Ministry of Disinvestment | ||
In the context of corporate governance and efficiency of use of resources in a socialist economy, PSUs are unlikely to be efficient because of soft budget constraints whereby firms do not go bankrupt for their poor performance, primarily because they can restructure their contracts to hide their inefficiency. Managers’ efficiency objectives may also come in conflict with political interference in operational matters, to meet narrow political goals. Even in market economies, large firms of strategic importance may well be protected, to avoid significant systemic risks.
In principle, natural public monopolies such as railways, highways, water, sewage etc. where competition is weak or absent and payback periods are longer – increasing risk and uncertainty for contracting parties – public ownership should prevail. On the other hand, industries driven by rapid changes in technology such as telecom and consumer goods industries should be privatized to meet the twin objectives of financing the fiscal deficit and achieve efficiency and productivity gains. Financially unviable and loss making PSUs should be substantially restructured or closed down with a fair share of the proceeds being offered as compensation to workers.
One of the possible reform measures, practiced in countries like Japan, involves reduction of government holding in PSUs to less than 50 per cent by transferring shares to mutually complementary firms, tied around a public sector bank or financial institution. For example, interlocking of equity holding among steel, coal and electricity firms or petroleum exploration, refining and petrochemical complexes. Such a measure would eliminate both procedural audit as well as regular political interference.
To ensure public accountability, managers may be asked to demonstrate efficiency of resource use. In addition, there could be a specified timeline for budgetary support or government guarantee for loans. Banks would have the incentive to monitor the performance of PSUs because they would have substantial equity and loans at stake.
