The new economic policy and privatization in India

SYMPOSIUM

The N e w Economic Policy and Privatization in India GEETA GOURI

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, 053)

I. INTRODUCTION Privatization is "a process that aims at reducing involvement of the state or the public sector in the n a t i o n ' s e c o n o m i c activities" in f a v o u r o f the private sector. 1 T h e extent and s c o p e o f the shift d e p e n d s on initial size o f the public sector. T h e reasons are selfexplanatory. S p e e d o f shift t o w a r d s private sector is h o w e v e r , a p o l i c y decision. B y and large, speed and size are inversely related.The larger the public sector the s l o w e r is the shift t o w a r d s the private sector. E x c e p t p e r h a p s in the case o f the f o r m e r socialist countries o f E a s t e r n Europe. Factors such as c a p a c i t y o f capital markets, disinvestm e n t and corporate g o v e r n a n c e , a h i g h ratio o f stakeholders in public sector Dr. Geeta Gauri * Dy.General Manager (Faculty), Jawaharlal Nehru Institute for Development Banking,Gachi Bawli, Hyderabad500019, INDIA; Tel:040-300060; Fax: 040-300062. Journal of Asian Economies, Vol. 8. No. 3, 1997 pp. 455-479 ISSN: 1049-0078

Copyright O 1997 by JAI Press Inc. All rights of reproduction in any form reserved.

455

456

JOURNAL OF ASIAN ECONOMICS 8(3), 1997

investment, operate to slow the process of privatization. In turn, a wide range 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. 2 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. 3 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.

II. THE PUBLIC SECTOR DOMAIN IN INDIA AND PRIVATIZATION

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 govem-

Policy and Privatization in India

457

ment 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 govemment printing press and the distillery for manufacture of local liquor as departmental enterprise. 4 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 govemment budget, most PSENDs are not always entirely dependent on budgetary support from the government. 5 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 b e t w e e n capital stock and v a l u e - a d d e d 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.

TABLE I. Public Sector in the Indian Economy

Public Sector

Share in net capital stock end March (1992) percent

Share in gross value added in 1990-1993 (Average) percent

Saving as percent o f GOP

Investments as percent o f GOP

AdministrativeDept

12.6

9.3

-2.2

1.9

Departmental Entp.

13.6

4.0

0.7

2.0

Non-departmental Entp

20.0

13.2

3.1

6.2

Public sector

46.2

26.8

1.6

9.4

Private sector

53.8

73.2

14.21

Total 100.0 100.0 21.8 23.8 Source: EconomicSurvey-1994-95 Governmentoflndia& KBLMathur.,ManagementoflndianEconomy. OECF. Japan.May 1995

458

JOURNAL OF ASIAN ECONOMICS 8(3), 1997

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. 6 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%. 7 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 foll o w e d the traditional route o f 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

TABLE 2. Modalities of Privatization

OwnershipTransfer Total Divestment

ManagementTransfer Total transfer

Partial Transfer

private sector

Partial Divestmerit general public

subcontract

control on the basis of share holding

general public reprivatization

workers joint ventures

leasing franchising

joint ventures changed structure of the Board

rolling privatization

mandating

Marketization Distancingfrom the govt--MOU freedomof -pricing -investment -hiring financialautonomy liberalization& deregulation of entry corporatization

Policy and Privatization in India

459

enterprise. 8 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 dist a n c i n g f r o m the g o v e r n m e n t . In the tables given b e l o w we have d i v i d e d 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. 2. 3. 4. 5. 6. 7.

Restructuring the Restructuring the Restructuring the Restructuring the Restructuring the Restructuring the Restructuring the

Portfolio of Investments. Equity (Ownership) Pattern. Qualify of Interface between the Government and the PSEs. Boards. Sick Enterprises. Safety Net for Workers. Policy Environment.

Clearly, the emphasis for PSENDs is on restructuring (or marketization vide 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. 9 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". 10 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

460

JOURNAL OF ASIAN ECONOMICS 8(3), 1997

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 1L3 outside directors and government nominee directors restricted to 1\6 or a maximum of two. Finally, the general liberalization policies of macro-economic variables are all equally applicable to PSENDs. This has introduced levelplaying 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. 11 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. 12 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 takeneolace and as yet there is no move towards a comprehensive policy of privatization. ! ~ The process of ownership transfer is gradual either through equity dilution or through mobilization of equity finances from the market. Policies that encourage

461

Policy and Privatization in India TABLE 3. Modalities of Privatization in India Total Divestment

Partial Divestment

A. First Modality of privatization-Ownership Transfer Total sale of public sector enterprises mainly in the state government enterprises e.g. Hyderabad Allwyn, Mangalore Chemical and Fertilisers. Some of the sick units are now being considered for sale. An unsuccessful case of privatization is that of Indian Iron and Steel Company

Joint dilution of equity initially upto 20 percent to financial institutions as a basis for meeting the fiscal deficit.

Public sector enterprises are now permitted to enter the market and enhance their equity capital e.g. The Indian Petrochemicals Corp., Industrial Development Bank of India, Industrial Finance Corporation, State Bank of India. Joint ownership e.g. Maruti Suzuki, Gujarat Ambuja. The pattern is to have 26 per foreign equity collaboration and over time become joint ventures.

Leasing and Franchising

Sub-contracting

Professional Management

B. Second Modality of privatization- Management Transfer Sub-contracting of services such as catering and security in all public sector enterprises

Equipment leasing is being considered by some of the public sector enterprises but this is more of a fiscal device.

Sub-contracting of labourintensive manufacturing processes

Leasing and franchising are the modalities being adopted in telecommunications and railways. The BOLT modus is being introduced with regard to wagons.

Distancing

Management Autonomy

Changed participation of Board of Director both as a deliberate policy and as an outcome of equity dilution.

Financial Autonomy

Economic LiberalizationPolicy Fall Out

C. Second Modality of privatization- Management: Distancing through MOU's. All central PSE's and FIs have signed MOUs

Administrative flexibility with regard to pricing as administered pricing is gradually phased out.

Tapping the capital market for fresh financial sources both debt and equity. In cases where equity instruments are used this leads to equity dilution.

Economic Liberalization, Deregulation and shifting the public-private divide.

(continued)

462

JOURNAL OF ASIAN ECONOMICS 8(3), 1997 T A B L E 3. (Continued)

Economic LiberalizationPolicy Fall Out

Distancing

Management Autonomy

Financial Autonomy

No more subsidies and grants from the central budget.

Voluntary Retirement Scheme offered to some 70,000 workers.

FI's tapping the market for new sources of fund -both debt and equity.

Private sector participation in power mainly in generation; in air transport; road transport. Private sector participation in both value-added and basic services; Private sector participation in the construction of roads, bridges, highways and ports Entry of private banks including foreign banks

No access to directed credit at lower interest rates

Restructuring with diversification and new investment strategies although the process and final approval still requires the approval of the concerned ministry. Restructuring of FI's to meet international capital adequacy and income provisioning norms

Corporatization of two divisions of the telecom department into separate metropolitan corps. Corporatization of ONGC, IDBI, IFCI either through a new statutory company or a unit under the general Companies Act.

All legal, tax and tariff structures applicable to both public and private sector.

p r i v a t e s e c t o r p a r t i c i p a t i o n while s i m u l t a n e o u s l y d i s c o u r a g i n g fresh p u b l i c investm e n t is the m a i n thrust o f privatization. T h e c h a n g i n g b a l a n c e b e t w e e n public a n d private sector has b e e n m o r e in terms o f intentions rather than actuals. 14

III. PRIVATIZATION

AND THE FISCAL DIMENSION

T h e p r i m e objective o f privatization is fiscal n a m e l y m o b i l i z i n g r e s o u r c e s for the budget. D i s i n v e s t m e n t o f P E S N D w a s first i n t r o d u c e d in 1991-92 with the decision to disinvest in select 31 enterprises. Initially o n l y g o v e r n m e n t o w n e d financial institutions (FIs) and m u t u a l funds w e r e a l l o w e d to participate. L a t e r the g r o u p w a s e x t e n d e d to include the public and FIIs. In Table 4 w e h a v e tabulated the p r o c e e d s o f the d i s i n v e s t m e n t so far u n d e r t a k e n to the n o r m a l p a r a m e t e r s o f the Budget. T h e table

Policy and Privatization in India

463

TABLE 4. The Budget and Disinvestment Disinvestment

1991-92

1992-93

1993-94

1994-95

1995-96

$1215m

$677m

$595m

$730m

$108m

Disinvestment as % of Total receipts

2.9

1.77

1.42

1.43

0.20

Disinvestment as % of capital receipts

7.88

5.42

3.36

3.33

0.54

Disinvestment as % of fiscal deficit

8,36

4,88

3.09

3.97

0.60

Disinvestment as a % of outstanding public debt

3.35

1.89

1.1

1.45

0.16

16.07

7,79

4.58

5.67

0.78

Disinvestment of PSEs

Disinvestment as a % of Internal Accruals & Extra Budgetary Support for PSENDs Source: BudgetPapers, Governmentof India.

reveals that the total amount of earnings since the start of the disinvestment works out to 3325 million dollars as per the budget papers.15 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 govemment 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 fur-

464

JOURNAL OF ASIAN ECONOMICS 8(3), 1997

ther to 0.16% in the current budget. The consolidated public sector deficit continues to hover around 10% of GDP. 16 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. 17 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. 18 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 nondevelopmental. 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

Policy and Privatization in India

465

TABLE 5. Disinvestment Accruals to Foregone Interest and Dividends Disinvestment Accruals

1991-92

1992-93

1993-94

Interest Receipts ($ million) (as a percent of loans in that year)

1268 3.53%

360 1.09%

355.36 1.02%

Dividend Paid: % of equity capital Adjusted for 13% interest on loans ($ million)

1.50% 4667

1.52% 4293.3

1.82% 4503

Adjusted for 10% dividend on equity capital ($ million)

1828

1794

1775

6447.5 12.10%

6633.36 10.68%

Combined Foregone Earnings ($ million) 7763 Disinvestment: % of earnings foregone 24,53% Source: Public Enterprise Survey., Departmentof PublicEnterprise.

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. 19 Our concem 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. 21 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

466

JOURNAL OF ASIAN ECONOMICS 8(3), 1997

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 veneert 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 offthe 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.

IV. COMPETITION, PRIVATIZATION AND PERFORMANCE OF PSES 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. 22 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 rec-

Policy and Privatization in India

467

ommended by the Taxation Committee Reform (Chelliah Committee Report). 23 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. 24 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

468

J O U R N A L OF A S I A N E C O N O M I C S 8(3), 1997

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. 25

V. I N D I C A T O R S O F E F F I C I E N C Y : P U B L I C AND PRIVATE ENTERPRISES 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 PATksales 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. 26 The decline in pro-

TABLE 6. Macro Comparisions between Public & Private Sectors Public Sector 1991-92

1992-93

Private Sector 1993-94

1991-92

1992-93

1993-94

PAT/Sales

2.16

1.95

2.37

4.36

3.99

3.72

Return on NW

4.26

4.20

5.20

17.00

16.17

12.87

Inc. in Output/ Invest

0.76

1.19

0.53

1.33

0.93

1.10

Growth in Fixed CF 63.1 -32.8 5.2 66.0 -8.8 30.1 Source: Centrefor MonitoringIndianEconomy.,The Indian Corporate Sector., Bombay, 1995. *overthe previousyear

Policy and Privatization in India

469

ductivity 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 199394 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 take 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

TABLE 7. Profitability of Public Sector Enterprises 1. a. No. of operating enterprises b. No. of operating entp in the mfg

sector 2. a. Capital employed in all PSEs ($ million) b. Capital employed in Mfg PSEs ($ million) 3. a. Ratio of gross profit to capital employed PSEs b. Ratio of gross profit to capital employed Mfg PSEs 4. a. Interest in PSEs ($ million). b. Interest in Mfg PSEs ($ million)

1990-91

1991-92

1992-93

1993-94

236

237

239

240

147 (62%)

147 (62%)

163 (68%)

164 (68%0

40834

471964

48380

50783

31769

36824

31852

38763

10.86% .. 3040 ..

11.59% 11.63%

11.39% 11.50%

11.57% 11.63%

3869

3722

3791

3478

2482

2434

5. a. Ratio of Net Profit to capital

employed

2.33%

b. In all Mfg PSEs

..

c. In profit making PSEs

..

6. a. No. of profit making enterprises b. No. of profit making Mfg PSEs 7. a. No of loss making b. No of loss making Mfg.

123

2.00%

2.43%

1.81%

-9.76%

-25.91%

- 178.46%

9.79% 133

8.83% 131

8.27% 132

64

65

65

61

111

102

104

103

82

82

103

Sounce: Various issues of Survey of Public Enterprises, 1991-92, 1992-93, 1993-94, 1994-95. Dept of Public Enterprises, New Delhi Note: Percentages in parenthesis are to the total PSEs. Further, the figures have been recalculated from the individual balance-sheets given out by DPE as their aggregate do not tally.

470

JOURNAL OF ASIAN ECONOMICS 8(3), 1997

calculated the ratio for profit-making PSENDs (61 in number). 27 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. 28 A separate analysis without the oil sector is done later. 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%). 29 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%. 30 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 SemiConductor other income have prevented low or negative rates of return. VI. S E C T O R A L P E R F O R M A N C E ANALYSIS 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 sec-

Policy and Privatization in India

471

tor 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 TABLE 8. Performance of PSEND sector-wise-1993-94

Sector

No of units

No. of Profitable units

Average of 3 years of NP~CE of profitable units

Average of 3 years of all units

NP~CE 1993-94

NPkNet worth 1993-94

Steel Minerals & Metal (Aluminium) Coal & Lignite Power Petroleum Fertilisers Pharmaceuticals &

9 13 2 9 4 12 8

4 7 2 6 4 12 2

8.59 12.45 1.98 5.10 3.47 13.61 4.8

-0.64

5.68

3.24 4.26 1.16 13.07 - 19.49

7.62 11.61 7.85 19.06 19.15

6.60 3.73 6.0 15.90 1.70

Chemicals

21 15

6 4

12.59 5.75

-0.49 - 18.07

9.58 8.86

2.49 2.29

24

10

8.62

- 1.2

14.19

12.16

12 19

5 2

6.13 10.89

-5.7 -1046.16

15.23 -535.11

5.92 9.8

4 14 164

1 . 61

-3.74

6.87 44.00 1.81

10.20 -6.94

Heavy Engineering

13.5

Medium

Engineering Transportation Equipment Consumer goods Agro-based Industries

Textiles Total

.

18.75 . 8.52

. -82.59

Source." Dept of Public Enterprise, Government of India Public Enterprise Survey 1991-92, 1992-93, 1993-94, 1994-95.

472

JOURNAL OF ASIAN ECONOMICS 8(3), 1997

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. 31 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, m e d i u m 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 turnaround 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 noncomparable 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

TABLE 9. Reclassified performance of PSEND in the manufacturing sector

Total Excludingpetroleumsector Taking only manufacturing sector*

Average of three years NP~CE in profitable units

Average of three years of NP~CE in all units

9.22 8.09

.. 0.84

7.29

2.47

Note: * (i.e. leaving out coal, power, minerals (except aluminium) including petroleum). Source: Ibid

473

Policy and Privatization in lndia

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.

TABLE 10. Comparative Performance of PSEs in the manufacturing sector (Net profitLNet worth; Net Profit\Capital Employed) Sector PATVVW PAT~CE

Average of Profitable PSENDs

Industry Average 90-91

91-92

92-93

93-94

94-95

90-91

91-92

92-93

93-94

94-95

Steel

2.5 0.84

6.5 1.84

3.6 1.53

5.76 2.23

13.18 5.36

6.52 4.5 500.31 4 units 2.41

30.77 9.96

12.37 5.51

15.8 5.86 2 units

Metals

4.40 0.60

6.69 2.48

5.51 1.74

7.64 1.46

14.55 7.95

3.28 2.86 7 units

11.30 8.88

9.40 7.45

6.92 7.42

10.81 5.91 3 units

Chemicals Pharm.

12.0 4.47

14.45 5.12

15.86 6.21

16.46 7.85

17.41 9.68

25.81 3 units

12.15 18.41

13.32 3.48

8.19 5.67

6.76 1 unit

Fertilisers

5.55 2.37

10.01 4.56

9.94 6.07

10.38 5.74

19.63 11.78

5.10 7.11 2 units

8.86 6.85

6.82 5.93

17.65 16.57

15.07 13.27 1 units

15.9 2 6.76

12.75 5.14

13.11 5.81

11.51 7.93

16.44 10.58

7.05 17.74 10 units

19.68 9.47

12.9 7.13

8.51 4.57

3.63 1.94 3 units

9 9.22

9.16 3.96

-0.44 -0.18

12.37 6.09

20.52 12.77

2.97 6.05 4 units

19.03 6.48

16.73 7.02

16.06 8.06

1.86 1.02 1 unit

Agro Pdts

15.0 9 9.08

17.68 10.06

12.42 6.31

9.40 5.60

16.36 11.56

13.78 12.30 1 unit

12.13 11.71

19.26 18.69

20.26 20.26

NA

Consumer goods

15.4 4 5.35

12.11 3.97

12.47 4.93

4.24 1.99

16.22 9.66

16.54 14.15 2 units

11.68 9.72

9.88 9.64

10.45 8.38

NA

Textiles

11.5 3 10.6 3

7.72 2.93

4.74 0.54

11.59 5.93

12.11 6.43

Sectoral Average

11.2 0 5.48

10.78 8.57 4.45 3 .66

9.92 4.98

19.35 9.53

8.8 11.31

74.45 10.49

14.87 8.66

12.55 9.55

9.19 5.79

13.31

Engineering Transportation Equipment

Source: Ibid.

18.3

8.00

474

JOURNAL OF ASIAN ECONOMICS 8(3), 1997

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 turnaround 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. 32 Of more direct concern is whether these enterprises can function as commercial entities without the e n c u m b r a n c e of social objectives and accountability that government ownership enforces? The question is whether competition is enough or is it necessary

475

Policy and Privatization in India TABLE 11. Strategic Response of Some Public Sector Enterprises Enterprise

Current Business

Future Strategies

Bharat Electronics Ltd

Electronic-Defence

Image Intensifiers-joint venture with Delft Instruments; R&D projects-joint ventures with Ericcson Radio Systems; semiconductors-joint venture with Elcot; SGS Thomsons

Hindusthan Machine Tools

Machine tools, CNC lathes, tractor, watches

Electronics, Telecommunication systems and software; overseas manufacturing unit at Dubai; turnkey overseas projects like Railways and Mechnotronics.

Hindusthan Aeronautics Ltd.

Defence, Aeronautics

Sub-contract supply of air-frame and other parts to aerospace industries, manufacture of civil jets and space research

Indian Telephone Industries

Telecommunications

Joint ventures with Equatorial Statcom Ltd., for manufacture of earth station; overseas joint ventures for telephone exchange at Singapore; new products such as satellite rural network with ISRO; research projects with IISC; new telecorn products with C-DoT

Bharat Earth Movers Limited

Earthmovers

New products of world-class for export market, setting up of overseas joint ventures for exports.

Steel Authority of India Ltd.

Steel

Possible diversification to shipping insurance.

Source." a) M. Shiva Kumar., "Delicensingthe Public Sector Units".,The Chartered Accountant., March 1994.,b) variousissues of The Economic Times and Annual Reports.

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-inefficien-

476

J O U R N A L O F A S I A N E C O N O M I C S 8(3), 1997

TABLE 12. Comparision of select Public and Private Enterprises PATXNW PAIXCE

1991

1992

1993

1994

1995

5.16 2.54 11.24 6.27

7.28 3.38 12.98 5.94

7.88 3.44 6.00 2.61

9.47 3.54 7.16 3.15

16.71 6.50 9.83 4.40

0.03 0.02 4.85 2.20 3.08 3.52 6.72 9.20

0.18 0.13 3.84 1.42 25.25 15.20 15.89 9.21

0.37 0.28 8.12 3.16 20.67 13.69 17.42 9.20

2.95 2.36 8.75 3.81 17.87 13.70 11.10 7.93

.. .. 14.81 7.90 19.64 15.73 16.66 12.21

8.22 2.97 10.66 6.39

7.60 2.31 4.72 2.36

13.70 5.02 12.31 6.56

7.00 3.17 13.28 8.39

.. .. 14.00 11.10

6.04 4.48 4.17 2.63 14.31 3.58 13.58 9.73

6.90 5.21 10.83 8.50 18.34 4.95 15.11 11.15

0.68 0.52 12.97 11.35 8.90 2.38 15.81 10.00

2.85 2.36 32.45 30.79 -2.35 -0.90 19.09 10.86

15.07 13.27

4.41 2.53 11.61 6.91 38.31 21.77 48.70 21.77 14.77 5.82 22.27 13.05 18.91 13.06

15.79 6.92 13.51 7.27 25.76 19.48 15.15 14.78 13.95 5.98 20.38 10.65 25.18 18.21

12.72 5.60 17.73 9.42 10.31 8.08 11.33 10.71 12.82 6.79 17.71 10.03 19.76 17.16

11.99 5.58 16.63 9.05 9.16 7.45 29.93 21.56 9.71 7.13 18.84 12.36 23.71 21.97

Steel

SAIL (PSE) TISCO (pvt.) Metals

Balco (PSE) Nalco (PSE) Hindalco (pvt.) Indian Alum. (Pvt.) Chemicals

IPCL (PSE) Reliance (Pvt.) Fertilisers

FACT (PSE) NFL (PSE) Gujarat Narmada Fertilisers (Pvt.) Zuari Agro Chem (Pvt.)

15.61 8.98 29.54 16.47

Engineering

BHEL (PSE) Balmer Lawrie (PSE) L&T (Pvt.) Textool (Pvt.) Kirloskar Electric Co. (Pvt.) Widia India (Pvt) (December) Asea Brown Boveri (Pvt.) (December)

11.34 6.08 .. 15.17 13.27 24.29 21.67 100.00 7.32

Source: CIMMData Base., Centrefor Monitoring Indian Econom3~

cies prevalent

i n t h e t w o g r o u p s . 33 A s u g g e s t i o n

where economies

often put forward

that industries

of scale operate and there are increasing returns to scale such as the

Policy and Privatization in India

477

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) B) C)

Privatize all manufacturing, trading, and financial sectorg. Privatize and regulate in infrastructural facilities allowing for both public and private sector units. Reallocate public sector investment to soft infrastructure development, strategic sectors, and if necessary, retain them in hard infrastructure for a limited period of time.

VII. CONCLUSIONS 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 ofprivatization 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 ofprivatization may be politically expedient the gains from a comprehensive policy on privatization may outweigh the political gains. NOTES 1. This broader definition was first popularised in the Asia-Pacific Development Centre (APDC) study on privatization which studied privatization in six countries of the region and came to the conclusion that a broader definition is more widely used. see Geeta Gouri ed., (1991).

478

J O U R N A L OF A S I A N E C O N O M I C S 8(3), 1997

2. The only exception is the disinvestment upto 49% in the case of Maruti Suzuki an automobile manufacturing unit. 3. For example there is no reference to privatization in the Plan Document or Industrial Policy Statement. In fact, the lack of a policy on privatization has been regarded by the IMF as one one of the determinants of the incomplete agenda of liberalization policies in India. Chopra A.,Collyns C., et al., (1995) 4. India is a federal republic with a central government and several state governments. States have their own legislative bodies with rule and procedures on the running of their PSEs. 5. The normal practice is to consider PSEs non-departmental under the central government to be those listed by the Department of Public Enterprises, Ministry of Industry in their Annual Survey. The survey has a separate section on financial institutions (excluding public sector banks) but this category does not form part of the main section in the survey. 6. We have used current prices and converted them at the prevailing exchange rate. 7. Government of India., Economic Survey-1995-96, New Delhi. 8. This has lead to the demand for privatization of the private sector. 9. The process of equity dilution is however a lengthy process requiring prior clearance of the government. In the case of departmental enterprises the first step is corporatization. 10. Ibid., (Economic Survey-1995-96). 11. The central power corporations are the National Thermal Power Corporation., Nuclear Fuel Corp., North-East Power Generating Corp., National Transmission Corp., and of course the state grids. The emphasis is more on private sector power generation projects. 12. Reddy (1992) in his pioneering study on privatization labels them as greenfield privatization and cold privatization. Greenfield privatization is the acronym for policies that encourage private sector participation while simultaneously do not encourage fresh public sector investment. This is true of telecoms, power, road transport and building or roads, bridges etc. Greenfield privatization is also in vogue in the area of education and health which in India had both public and private institutions. The total balance between public and private sector is however, changing quickly and there are large investment needs that need to be addressed. Cold privatization refers to the level-playing policies vis-b~-vis public and private enterprises by allowing market forces to operate. 13. The Common Minimum Programme of the present government talks in terms of retaining public sector in core and strategic areas, without defining either core or strategy. Presumably PSEs that do not fall into this category presumably may be privatized. The modality of privatization will be worked out by a special committee on disinvestment. 14. For example, although a lot of private enterprises have declared their intentions of participating in power generation or telecom services very little has got translated into projects. 15. Budget Papers., Government of India. 16. Op.cit. 17. We assumed a linear trend and plotted incremental increases in investment in core and infrastructure to arrive at the figure. 18. The policy of private sector participation in power and telecom have been shaped both by the limited availability of public funds while the form of entry has been used as a means for raising resources for the government or its concerned departments. 19. One estimate places the revenue lost due to under valuation as 3567 million dollars in 1991-92 and 31.42 million dollars in 1992-93. Swati Kamal (1995). 20. Although the government has not defined core and strategic industries but indications are that most of the 31 selected PSE's would fall into this category, ibid. 21. Although the government has not defined core and strategic industries but indications are that most of the 31 selected PSE's would fall into this category. 22. Yarrow (1988). Kay (1986). 23. GATT (1992) 24. PSE's were subject to taxes but often income-tax authorities did not insist upon formalities being observed.

Policy and Privatization in India

479

25. CMIE (1995) 26. Ibid. 27. National Textile Corp., (NTC) is a group consisting of sick textile mills of the private sector taken over by the government. Heavy Engineering Corp., (HEC) always made losses as the planned market growth for heavy equipment did not materialise to match HEC's capacity utilization. 28. Studies on PSEs in India have distinguished between the oil sector and the rest. The oil sector consisting of exploratory activities refineries and marketing of petroleum products enjoy a protected market wherein administered pricing ensures profitability. 29. CMIE (1995) 30. Reddy & Joshi (1994) 31. At one point Kudremukh was considered a lost case of weak project appraisal. The remarkable turnaround is noteworthy. 32. This more in line with the Krugman thesis that under conditions of imperfect competition protection may be necessary. 33. In this connection the Government of India has set up a high powered committee to find the right criteria to be used to measure financial performance and the validity of such indicators where performance are not related to factors under the control of PSEs such as administered price schemes. Often gross profit is preferred to net profit. The Insitute of Chartered Accountants has suggested the simple cash flow statement to be the main disclosure. The Chartered Accountant., Vol xiv, No 7. Jan. 1996.

REFERENCES Ahluwalia, I. J. 1994. New Economic Policy: Reform of Public Sector Enterprises and Privatization in India. New Delhi: Memeo paper. Centre for Monitoring Indian Economy (CMIE). 1955. The Indian Corporate Sector. Bombay. Chopra A., Collyns C., Hemming R., Chu W., & Fratzcher O. 1995. India: "Economic Reform and Growth." Occasional paper No. 134. Washington: IME Demirigic-Kunt A. & Levine R. 1994. "The Financial System and Public Enterprise Reform." Policy Research Working Paper (1319) Washington: World Bank. GATT. Trade Policy Review: India (Vol I & 11). Geneva. Gouri G. (Ed) 1991. Privatization and Public Enterprises: The Asia-Pacific Experience. New Delhi: Oxford & IBH. Government of India. 1995-96. Economy Survey. New Delhi. Government of India. Budget Papers. New Delhi. Kamal S,. 1995. "The Politics of Disinvestment." The Economic Times. New Delhi. Thompson, K. J. & Thompson, D. J. 1986. "Privatization: A Policy in Search of a Rationale." The Economic Journal. Vol. 96, 18-32. Venugopal Reddy. Y. 1992. Privatization-Approaches, problems and Issues. New Delhi: Galgotia. Venugopal Reddy. Y. & Joshi S. 1994. Public Enterprises and Budget Linkage. Mussorie: Workshop on New Economic Policy. Vickers J. & Yarrow G. 1988. Privatization: An Economic Analysis. Boston: MIT Press.

Received March 1996; Revised March 1997