Download Public Sector Enterprises in India: Restructuring and Growth

Public Sector Enterprises in India: Restructuring and Growth
Sushil Khanna
Abstract
With the shift to market oriented in economic policy in India, the
industrial policy that has given the commanding heights to public
sector was abandoned. This paper looks at the restructuring in
State Owned Enterprises during the last two decades to assess
their changing role in the economy.
With the partial sale of shareholding and their listing on the stock
market, SOEs have enjoyed greater autonomy, and have used it to
emerge as major investors in India and abroad.
The paper concludes that the larger and better managed SOEs
have played a key role in driving the investment and in accelerating
economic and industrial growth since 2004. What is more, they
have emerged as competitive and profitable enterprises, with bulk
of this investment financed from their own resources and still
providing large dividends to the government. Unlike in the west,
SOEs in Asia are likely to play an important role in driving
accumulation in the foreseeable future.
Introduction
The programme of reforms, economic liberalisation and deregulation since 1991 marks
a turning point in the history of modern Indian economic development. It signals a
decisive shift towards a neo-liberal strategy of development, long advocated by
multilateral institutions like the IMF and the World Bank. Whether this shift was a result
of the conditionalities imposed by these institutions when India, confronted with the
problem of acute balance of payment in 1990-91, approached them for assistance is
immaterial today. This is because over the last two decades the Indian political
economy has witnessed a strengthening of domestic lobbies that have long favoured
deregulation and privatisation.
The short paper looks at the industrial policy changes and response of SOE managers
to the new regime of liberalisation and deregulation. It traces the shifts in the policy over
the last two decades, including the period of partial listing of SOEs on the Indian stock
exchanges and the period of extensive privatisation and shift in political economy that
put an end to privatisation are briefly discussed along with the response of the SOEs to
the changing policy. Questions about the relative efficiency and performance of the
SOEs; doubts about their `strategic’ roles, and their impact on growth and stagnation in
the economy, have dominated the Indian debates for almost two decades. We revisit
them briefly. The paper responds to the suggestion that privatisation and the resultant
so called `efficiency' of resource use in the Indian economy by private firms should have
_______________________
Sushil Khanna, Indian Institute of Management Calcutta
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accelerated growth. We trace the important role State Owned Enterprises have played
in accumulation and acceleration of rate of growth in India since 2004, along with their
strategic role in acting as a countervailing force to private capital, both domestic and
foreign.
The policy governing SOEs has changed with the changing ideological disposition of the
political coalitions that came to power, specially government of the right wing Bharatiya
Janata Party (BJP) and the two UPA(United Progressive Alliance) governments that
depended on the support of the Communist party in the first regime and later other
coalition partners who were equally opposed to any large-scale privatisation of SOEs.
Though the sale of small lots of stocks of SOEs to private investors after listing them on
the Indian stock exchange has been a common feature during all regimes, it was only
during the BJP governed regime that there was a thrust to sell majority stake to private
investors. The two UPA regimes also tried to enhance the autonomy given to SOE
managers and restructure several sick or loss making SOEs, thus turning them into
profitable enterprises. Few that could not be redeemed were either shut down or their
assets (specially the land) sold to private investors.
Many Indian SOEs are today listed on the stock exchanges and account for a significant
proportion of the market capitalisation. They have become more transparent in their operations
and follow international disclosure norms. The listed SOEs have changed their governance
structures, with large number of independent directors, along with greater autonomy granted to
larger and profitable units. In addition, many loss making SOEs have restructured, and have
turned around. Simultaneously, we explore the political economy of a system that keeps many
SOEs from performing and competing with privatefirms, allowed to enter after the deregulation.
The structure of State Owned Economic Enterprises
In India, there are four categories of public enterprises, as listed below:
i.
Departmental undertakings (e.g. railways, posts and telecommunications) are an
integral part of government departments. Such bodies operate both at the central
and state government levels. They perform service-oriented, trading or
manufacturing functions and are expected to function profitably. The operating
results of these business-type undertakings are kept separately in accordance
with normal commercial principles, but are integrated with the accounts of their
parent departments for government accounting purposes. Other than the
railways and postal department(which are mammoth in scale and operations)
most other departmental undertakings are relatively small in size and economic
impact.
Such undertakings do not follow the accounting practices of the corporate sector,
but use government’s budget accounting standards, are not allowed borrow and
are financed by the treasury, and all their earnings and surplus too are deposited
into the central treasury.
ii.
Statutory corporations both at the central government level (e.g. Oil and Natural
Gas Commission, Indian Oil Corporation, and Food Corporation of India) and
state government levels (e.g. state ware housing corporations) are established
by the statutes of the respective legislatures. Many Central (federal) corporations
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are today enterprises under the Companies Act and follow commercial
accounting practices, including IFRS
iii.
Some autonomous bodies are set up as registered societies (e.g. Council of
Scientific and Industrial Research, Indian Council of Agricultural Research) under
government resolutions. They are established both at the central and state
government levels and are either substantially or partly funded by the respective
governments.
iv.
Government owned or controlled companies outnumber any other form of public
enterprises by far. These companies are established under the Companies Act in
common with companies in the private sector, and comprise companies in which
not less than 51 per cent of the paid up share capital is held by the central
government or by any state government. All follow corporate accounting and
disclosure norms, applicable to all firms, whether private or public, as laid out in
the Companies Act. For this study, we confine our study and analysis to this last
category and only to firms owned by the central government.
The Prowess Database on the Indian Corporate Sector, maintained by the Centre for
Monitoring Indian Economy (CMIE) lists about 311 Central Government Enterprises
(excluding enterprises in the financial and insurance sectors), of which about 198 are
manufacturing and services enterprises. Of these, about 41 are bankrupt private sector
enterprises taken over by the central government, and three oil firms nationalised in mid
1970s.
The CMIE data base also lists, 267 commercial enterprises owned by different state
(provincial) governments. These include state owned electricity generation and
distribution companies. Data-base also lists 37 statutory corporations and two
departmental undertakings. In contrast to the state owned enterprises and banks, the
Prowess Data base lists about 18663 private sector non – financial enterprises.
As the chart below shows, the central SOEs account for about 90-80 per cent of all SOE
assets.
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Chart I: Relative Size of Central and State SOEs
Source: Our analysis from Prowess Database, from Centre for Monitoring Indian
Economy, (CMIE), Bombay, Sept. 2011
When the economic reforms were launched in 1991, many key sectors of the economy
were dominated by mature public enterprises that had successfully expanded
production, opened up new areas of technology, substituted imports in an array of
capital goods sectors with technical competence that enhanced India's ranking in terms
of industrialisation with a large pool of trained workforce, along with technical skills
especially in chemical and manufacturing industries. It was their technical prowess that
helped the country substantially reduce its dependence on foreign technology, and
provided a pool of talented mangers and technicians who could take over the
nationalised foreign enterprises in sectors like petroleum refining, pharmaceuticals,
petrochemicals, and heavy engineering, aerospace and shipbuilding.
SOEs also included large number of loss making or underperforming enterprises,
majority of which consisted of the sick and bankrupt private firms government had taken
over in 1970s to protect jobs and reduction of industrial capacities.
Deregulation & Liberalisation and the changing role of SOEs
In the 1990s, as the policy of liberalisation and deregulation along with policies to
promote increasing integration of the Indian economy with the global economy gathered
pace, the Indian SOEs were robbed of their historic role. A `New Industrial Policy’ was
announced on 24 July 1991, opened up most sectors of the economy to private entry
and investment. Simultaneously, foreign investment was welcomed. Foreign-owned
enterprises could now hold 51 per cent or more of the voting stock in the enterprises set
up in the country. Foreign Institutional Investors (FIIs) were allowed to invest in Indian
stock exchanges and restrictions on mergers and acquisitions were abolished. The new
Industrial Policy announced that the exclusive role of the public sector was to be limited
to few strategic sectors. Along with the new industrial policy, the government decided
to review the portfolio of investment by SOEs, with the view to focus on enterprises in
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strategic, high technology sectors and on essential infrastructure. Moreover, restrictions
on the private sector in areas which had so far been exclusively reserved for state
investment were withdrawn. Simultaneously, the SOEs too were allowed to enter any
sector which was not earlier reserved for them. With the shift in the public policy
towards liberalisation and deregulation, the business environment of Indian SOEs
underwent a radical change.
The radical shift in public policy was based on an ideological shift towards market-based
reforms and neo-liberal ideology. The clamour for large scale privatisation from foreign
investors and several Indian and foreign advisors became pronounced. Privatisation
was not directly stated in the government policy announcement, but was more clearly
articulated by the spate of advisers appointed by the Indian government (see India,
1993; Bhagwati, J. and T.N.Srinivasan, 1993; and Bhandari& Goswami, 2000). In their
opinion and assumption, the SOEs were assumed to be `immensely inefficient”. These
advisers also called for renouncing any creation of new SOEs in areas where private
sectors were willing to invest. Bhagwati and Srinivasan (1993), however, insisted that
the sale of fractional equity on the stock exchange did not adequately signal to SOEs
managers that they should improve their efficiency and productivity and they favoured
`true privatisation that transfers control and management to the private sector'. The
advice of the World Bank (Seabright, P.,1993 ) and neo-liberal economists (Bhagawati
& Srinivasan, 1993; Bhandari& Goswami. 2000) was to restructure the SOEs with the
aim of complete privatisation. Yet the actual evolution of the policy faced opposition and
resistance and took many years. The policy of complete privatisation was carried out
only when a change in the government brought the right wing Bharatiya Janata Party to
power; and abandoned once it lost the election in 2004.
The sudden shift in the public policy and the business environment of state enterprises
had the potential to undermine the profitability and economic viability of most
enterprises. Citing the continuing losses from the taken over SOEs (sick or bankrupt
private firms taken over to protect jobs and output), the critics argued that the SOEs are
inefficient and use resources badly and subjecting them to market forces and
competition would help in restructuring them. In contrast, the SOE managers had for
years complained about the inordinate control exercised by the controlling ministries
and the finance ministry. Though they has separate balance sheet and accounts, the
government bureaucracy treated them only marginally differently from the departmental
undertakings.
In 1996, the Disinvestment Commission pronounced that the government has failed to
provide a level playing field to SOEs. It stated that though the private sector had been
granted full freedom to enter any industry, add capacities, enter sectors hitherto
reserved for SOEs (like telecom, generation and distribution of electricity, petroleum
extraction and refining etc.), the public sector faced several handicaps while competing
against the private enterprises. The Commission felt that despite the promise of greater
autonomy to SOEs in the policy statements, they still had to obtain multi-level and timeconsuming approval for decisions and were accountable to multiple agencies with
varying mandates. “This lack of autonomy has created a somewhat unequal playing
field for the PSUs (SOEs) in an increasingly competitive environment (India: 1997).
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In response to these suggestions, the Boards of the better SOEs were to be made
more professional and given greater powers. Soon the government announced a list
of companies that was designated as NavRatnas where the company board would
have substantial enhanced powers to undertake investments, acquire assets and
companies in India and abroad and enjoy greater autonomy. Such enterprises were
usually the better managed and profitable ones, often with a dominant position in a
sector or a branch of industries. Over the years the list of such enterprises was
expanded with graded levels of autonomy.1
In contrast to the better managed SOEs, government was impatient with the loss
making and underperforming SOEs. Though a large number of them were bankrupt
private sector enterprises, the government had largely failed to turn them around. With
greater bureaucratic control and interference, most were unable to modernise and
acquire modern technology and compete with private enterprises. Also all of them found
it impossible to shed excess workforce and restructure to lower costs and compete.
Now, in the changed environment, and with support from the government and the help
of the National Renewal Fund established to minimise the human cost of SOEs
restructuring, they were asked to seek financial viability or be shut down. The
government encouraged all the SOEs, but specially the loss-making enterprises to
reduce their workforce wherever possible through a scheme of `Voluntary
Retirement'(VRS)2. It is estimated that approximately half a million workers were
persuaded to leave their jobs during the decade of 1990s.
As competition from private enterprises increased, the SOE managers complained
about the lack of adequate autonomy to effectively compete in the marketplace. In
response to these criticisms as well as due to reversal of BJPs privatisation programme,
the Congress Party-led government appointed in 2004 a committee under Dr. Arjun
Sengupta to look at ways of granting `full managerial and commercial autonomy' to
central SOEs, with a view to enhance their ability to respond to market based
competition from private sector firms.
The committee recommended sweeping changes in the relationship between the
controlling ministry and the SOEs, since it felt that the ministry's numerous and detailed
interventions in routine operations of SOEs, was a serious erosion of their autonomy to
carry out business. It wanted all major decisions, both strategic and operational, to be
under the control of the Board of Directors where at least half the Board members would
be independent directors. In case the ministry wanted to issue any instructions to an
SOE, it should issue a `Presidential Decree' which would require the approval of the
entire cabinet. It also sought to insulate SOEs from `Parliamentary interference' that
could require SOEs to reveal commercially sensitive information that could help its
private sector competitors. It recommended a `negative list ' where the government will
have no say including decision on pricing, distribution, import/export, appointment of
dealers and agents and promotion of employees. The powers of NavRatnas to set up
1
By 2008 there were 5 Maha-Ratna's (Great-Jewels) with power to invest upto Rs. 50 bn, 16 Navratnas (New
Jewels) with power to invest upto Rs. 25 bn, and 66 Mini-Ratnas (small Jewels) with lower powers. See Indian
Department of Public Enterprises site at http://dpe.nic.in/newsite/navmini.htm
2
Unlike the private sector, VRS schemes in SOEs were entirely voluntary, with little force or coercion. Their success
depends on the attractiveness of the financial package offered to employees accepting early retirement.
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joint ventures or invest were to be enhanced. In addition it recommended sector specific
supervisory bodies to review the performances of SOEs (India, 2005).
Despite the break with the Communist parties and the formation of a new Congress led
coalition government in 2009, the policy of privatisation has not been resumed. The
government continues to sell small amount of shares in the SOEs listed on the stock
exchange, with view to raise resources to bridge its rising deficit. In recent years it has
also asked SOEs to increase the rate of dividend.
To sum up, despite strident demand from many economists and multilateral institutions,
the Indian government has found it difficult to carry out any further privatisation or
strategic sale of CSOEs. However, some SSOEs (SOEs owned by provincial
governments) have been sold in some states. The Central government has however
continued its policy of sale of shares held by the government in enterprises to mutual
funds, financial institutions, workers and public at large, but the sale (fractional equity)
have not resulted in the change of control or privatisation .
Political Economy of Reforms and Reconstitution of the CSOEs
Why did the successive governments in India fail to undertake large-scale privatisation?
Why did the BJP government fail to carry out its mandate to sell all SOEs in all
industries except units in the defence and the atomic energy sectors as Disinvestment
commission had suggested? We turn to the political economy of the reforms
programme.
Firstly, though the successive governments espoused their commitment to the reforms
and privatisation, there is overwhelming evidence that the majority of electorate were
opposed to the economic reforms in general and privatisation in particular 3.
Secondly, the governments that carried out these reforms faced resistance from trade
unions and middle class consumers, who were afraid of increased prices of goods,
services etc. Trade union power in CSOEs has been considerable, with almost all the
workers (including short term contract workers) being unionised4.
Thirdly, successive governments were defeated in elections (India had 5 governments
during 1991-1999 period) forcing the political parties to be wary of the electoral costs of
large-scale privatisation.
Fourthly, several cases of privatisation in India by the BJP invited sharp criticisms
especially when assets sold by government were re-sold by the acquiring parties at
substantially enhanced prices. Privatisation came to be associated with corruption and
sale to special interests.
Lastly, given the large weightage of SOEs in industrial assets and sales, large-scale
privatisation could result in economic dislocation, jeopardising growth. Indeed as, it
became clear to political establishment that privatisation was fraught with high risk, new
role for SOEs began to be envisaged. This was also possible due to significant change
3
For example, in Feb. 2003, a speaker from the consulting firm Deloittes noted a “growing political opposition to
privatization in emerging markets due to widespread perception that it does not serve the interests of the
population at large,…. And the perception that only special interests are served – privatisation is seen serving
oligarchic domestic and foreign interests”. India was the largest economy in the survey. (Hall, Lobina and
Motte:2005)
4
This is unlike the private sector, where an increasing casualization of workforce is accompanied with lower
unionization.
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in the governance structures and autonomy to managers, as well as substantial
improvement in the profits and growth by SOEs.
SOEs and Accumulation and Growth in the Indian Corporate Sector
To examine the question of the role of state owned enterprises in the economy, we
need to assess their impact on the growth acceleration and resource use in the Indian
economy in recent times. As mentioned above, most CSOEs were registered as
companies under the Companies Act, just like the private sector joint-stock companies.
They were however, not listed on stock exchanges and the entire equity of most SOEs
was held by Central or State governments. Like China, SOEs in India are controlled by
the Central government (CSOEs) and by the state (provincial) governments (SSOEs),
with few controlled by city municipalities. The SSOEs are controlled by respective state
(provincial) governments. However, as Chart I above has shown, SSOEs form a small
part of the total corporate sector. Hence in the Indian statistics, the CSOEs and SSOEs
are part of what is called the `corporate sector'.
As we mentioned, though few SOEs were privatised by the BJP government, the
majority have remained in the public sector. Thanks to the reforms, the better
performing CSOEs now enjoy greater autonomy, are listed on the Indian stock
exchanges and have more independent directors on board.
Have these changes made any difference to their growth and their role in the economy?
To answer this, it is important to analyse the actual performance and the changing role
of SOEs in the economy. The public sector has historically been the driver of economic
growth in the Indian economy. From the period of the Second Five Year Plan (1956),
the public sector has accounted for about 45-50 per cent of gross capital formation.
(Table 1). Despite bulk of the economy being in the private sector, it has been a minor
site of accumulation. Till 1985, private corporate sector accounted for less than 20per
cent of the total capital formation (less than 3 per cent of the GDP). Even the household
sector (that includes medium and small enterprises, largely in the unorganised sector)
till very recently accounted for 30-40 per cent of the total national investment or double
that of the private corporate sector (Table 1). In fact, in terms of savings, the bulk
comes from the household sector. Both the private corporate sector and the public
sector have had small savings, between 2-4 per cent of GDP.
The Table I also reflects the changes in the Indian savings and investment ratios during
the last two decades. The recent acceleration of the economic growth rates in India are
largely explained by rising domestic savings and investment (Mohanty & Reddy, 2010).
The domestic savings rate rose from about 18 per cent in 1980s to about 22-23 per cent
in 1990s and further to about 33 per cent since 2004. Over the entire period of
deregulation and reforms (1991-2010), the foreign savings or FDI have played a minor
role5.
But since the policy of liberalisation beginning 1991, the accumulation in the private
corporate sector has accelerated. By 1995, the private sector had overtaken both the
public sector as well as the household sector in terms of investment and capital
formation. This expansion has been entirely at the expense of the public sector so much
5
With a small current account deficit during 1992-2004, the role of foreign savings was marginal. However, since
2005, current account has widened to between 2-3 per cent of GDP, with larger FDI inflows to balance the savings
and foreign exchange gap.
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so that the capital formation has fallen from a high of 49 per cent in 1980s to about 25
per cent in the year 2000 (Table 1). Not only has the private corporate sector emerged
as an important driver of increasing accumulation, its savings too have shown a sharp
increase in the last 10 years, jumping to 8-9 per cent from about 3.5 per cent of GDP.
Table 1: Savings and GCF as per cent of Total
Year
Household Sector
Savings
(Base Year : 1999-2000)
1955-56
73,08
1960-61
58,20
1965-66
62,85
1970-71
66,52
1975-76
64,55
1980-81
69,66
1985-86
69,19
1990-91
80,60
1995-96
69,08
2000-01
91,15
(Base Year : 2004-05)
2005-06
70,04
2008-09
69,63
Private Corp Sector
GCF
Savings
GCF
41,41
27,07
29,59
41,60
33,14
37,51
27,88
40,08
30,07
47,17
9,88
14,40
10,57
10,23
7,63
8,70
10,16
11,66
20,33
16,24
17,10
22,77
16,49
15,35
14,81
14,30
23,55
18,59
39,09
21,46
34,41
34,27
22,63
25,96
39,27
35,70
Public Sector
Savings
As per cent
of Total
Total
GCF
Savings
17,04
27,41
26,58
23,25
27,82
21,64
20,64
7,74
10,60
-7,39
41,49
50,12
53,95
43,05
52,04
48,19
48,57
41,33
30,84
28,47
100
100
100
100
100
100
100
100
100
100
7,33
4,42
23,06
26,42
100
100
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Savings
and
Investment
as
Share of GDP (per
cent)
Year
1955-56
1960-61
1965-66
1970-71
1975-76
1980-81
1985-86
1990-91
1995-96
2000-01
Household Sector
Savings
8.98
6.53
8.6
9.45
10.88
12.88
13.13
18.4
16.87
21.64
GCF
5.1
3.91
4.77
6.49
6.23
6.96
6.54
9.68
8
11.4
2005-06
23.17
11.8
2008-09
22.63
12.2
Source: Central Statistical
Organisation
(CSO),
National
accounts
Statistics
Private Corp Sector
Savings
1.21
1.61
1.45
1.45
1.29
1.61
1.93
2.66
4.96
3.86
(Base Year:
2004-05)
7.49
8.44
Public Sector
Total
GCF
2.1
3.29
2.66
2.39
2.78
2.65
5.53
4.49
10.4
5.19
Savings
2.09
3.07
3.64
3.3
4.69
4
3.92
1.77
2.59
-1.75
GCF
5.1
7.23
8.7
6.71
9.78
8.94
11.4
9.98
8.2
6.88
Savings
12.29
11.21
13.68
14.21
16.86
18.49
18.98
22.82
24.42
23.74
13.47
12.71
2.42
1.44
7.91
9.4
33.08
32.5
So would it be correct to assume that the public sector in general and SOEs in particular
have little to contribute to Indian growth? Are they really as inefficient and marginal as
Bhagwati and Srinivasan have described them?
However, disaggregation of public sector savings and investment shows an interesting
picture. As table 2 shows, the SOEs (shown as non-departmental commercial
enterprises in the table) have been the major, if not the only site of public sector savings
and an important site of investment and accumulation. General public administration
has begun to incur very large and growing deficits, undermining the roe log public sector
as a whole. In absence of savings and investment by SOEs , the picture would have
been dismal.
The CSOEs in India have continued their pivotal role in the economy, and despite
opening up most sectors to private players, most industrial SOEs have continued their
growth and expansion. Contrary to the conclusion of declining savings and investment,
at least the CSOEs have improved their performance and increased their rate of
investment.
Chart II and III, show us the assets controlled by different ownership groups in the
Indian non-financial corporate sector, that is firms incorporated under the Indian
Companies Act and not engaged in the financial services. The ownership groups we
have chosen are the SOEs [both controlled by Central and state (provincial)
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governments], Business Groups (BGAs) or families whose conglomerates dominate the
private sector, non-family controlled independent forms (NBA) and the foreign controlled
firms (MNC and NRI) divided into firms controlled by multinational companies and nonresident Indians.
It is clear from the two charts that SOEs in India have kept pace with the accumulation
and investment in the private corporate sector, both in the manufacturing as well as the
services sector.
In the manufacturing sector, the SOEs assets exceed all other groups till 2006, when
the large business groups overtook the SOEs as the largest site of accumulation. What
is more significant, despite government decision to reduce budgetary support to
CSOEs, the SOEs continued accumulation at a faster pace than before. This was partly
due to increasing savings and investment rates in the economy especially from 2000-01
and increasing savings of the SOEs from internal resources (see Table 2A and B).
The increase in total assets controlled by Indian business groups (BGA) from 2007,
shows that accumulation amongst large conglomerates has accelerated. The overtaking
of SOEs in asset size, we suspect, is due to several large acquisitions by a few Indian
business groups abroad. Thus, Tatas' acquired Corus Steel in a deal valued at US $ 12
bn., and then Jaguar and Daewoo's commercial vehicle business, besides acquisitions
in Indonesia and South Africa in steel and mines. Similarly, large scale acquisitions
have been made in aluminium by the Aditya Birla group, in coal and minerals by
Vedanta and Adani groups and in telecommunications by the Bharati group. Since
2007, the outward FDI from India has matched or exceeded inward FDI. This seems to
have altered the balance between SOEs and business groups.
Of the total SOEs in the Prowess database, CSOEs (controlled by the central
government) have a dominant share. As Chart I above has shown us, about 80-90 per
cent of all SOE assets are accounted for by the 217 CSOEs. Part of the reason for the
small decline in CSOEs share (from 90 per cent to about 80 per cent) is due to the
privatisation of a few large SOEs by the BJP headed government during 2000-2003
period. As the Chart I shows, the dominant share of SOEs in chart I and II is entirely
due to the investment by the CSOEs consisting of 217 firms.
But if the assets controlled by SOEs are inefficiently used as many economists argue,
(see Bhagwati and Srinvasan: 1993, Goswami & Bhandari 2000:,Seabright, 1993) the
SOEs may actually be a drag on the Indian economy. In the absence of these or their
full-scale privatisation, the rate of growth as well as accumulation may have been faster!
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Table 2A: Public Sector Savings-by Institution
Year
Enterprises
Total
March
Public Adm.
Deptmtl.
Cos.&Corp
savings
1971
1976
1981
1986
1991
793
2519
3467
1946
-9644
272
344
237
1374
3549
397
893
1857
7539
16810
1618
4192
6135
11322
10641
1996
2001
-15815
-107467
9627
16823
38019
61377
31527
-29266
2006
-76881
18602
147234
2010
-203500
26403
188893
Source: CSO: National Accounts Statistics
88955
11796
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It not our intention here to compare the performance and efficiency between the private
and public sectors. Since CSOEs are the main players in the Indian economy, we focus
the following analysis only on them. First thing to note is that the number of such
enterprises is miniscule (only 217) compared to several thousand SOEs in China.
Secondly, they are limited in their scope and confined largely to the sectors reserved for
them by the Industrial Policy of 1956.
Table 3 below shows the profile of Central SOEs during the last 10 years. As can be
seen from the Table, the number of loss-making enterprises has fallen from 110 to 5559 and their losses have been contained at Rs. 12-14 bn. This is largely due the
financial re-structuring carried out at the recommendation of the BRPSE (Board for
Reconstruction of Public Sector Enterprises) and strengthening of their management
teams. These losses are largely confined to sick private sector firms that central
government took over and failed to turn around. It may be noted that these losses are a
mere 10-15 per cent of the profits generated by profit making SOEs.
The profit making CSOEs have shown exemplary performance during this decade.
While their capital employed has jumped 274 per cent (from Rs. 3313 bn to Rs. 9088
bn) their profits after tax have risen by 380 per cent (from Rs. 284 bn to Rs. 1084 bn)
and their dividends by 402 per cent (from Rs. 82 bn to Rs. 332 bn). What is more
significant the retained profits have increased by 827 per cent (from Rs. 65 bn to Rs.
542 bn).(table 3)
The profits are despite the price control on several commodities manufactured and sold
by CSOEs. The government has not allowed the CSOEs in the petroleum sector to
increase prices of petrol, LPG and diesel in line with the increase in price of crude oil.
Similarly, prices of fertilizer manufactured by CSOEs have been controlled to provide
subsidised inputs to farmers.
Table 4 below reflects the return on assets by CSOEs (from Prowess Database figures).
As can be seen, during the last decade, the profitability of CSOEs has substantially
improved. At about 7-8 per cent return on total assets in compares favourable with the
PAT/total asset ratio for all private firms in prowess data base, which shows private
sector
return
at
only
4.6
per
cent6.
6
This is not a very good comparison as we have taken the PAT for all 18,662 private sector firms with their assets,
without checking for data consistency, or accounting for several thousand companies whose data for 2010 was
missing. The limited point we make is that SOE returns are comparable to private sector as a whole.
13
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Table 3: India: Performance of Central State Owned Enterprises
(unit Rs. Crore = 10 million)
Particulars
No.
of
Enterprises
200001
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
operating
234
231
226
230
227
226
217
214
213
217
Capital employed
331372
389934
417160
452336
504407
585484
661338
724009
792232
908842
Turnover
458237
478731
572833
630704
744307
837295
964890
1096308
1271529
1235060
Total Income
479838
498315
548912
613706
734944
829873
970356
1102772
1309639
1264523
Net Worth
171406
225472
241846
291828
341595
397275
454134
518485
583144
653801
Profit before dep, int,
tax &EP
69287
89550
72539
127320
142554
150262
177990
195049
186836
211011
Depreciation
DRE/Prel. Exps. Witten
off
Profit before int., tax
&EP
20520
26360
28247
31251
33147
34848
33141
36668
36780
41595
-
-
905
1025
986
992
5841
5802
7661
9570
48767
63190
72539
95039
108420
114422
139008
152579
142395
159846
Interest
Profit before Tax & EP
(PBTEP)
23800
24957
23921
23835
22869
23708
27481
32126
39300
35720
24967
38233
48618
71144
85550
90714
111527
120453
103095
124126
Tax provisions
Profit of profit making
CPSE
Loss of loss making
CPSE
9314
12255
17499
22134
21662
24370
34352
40749
33828
40007
28494
36432
43316
61606
74432
76382
89581
91577
98488
108435
12841
10454
10972
8522
9003
6845
8526
10303
14621
15842
Profit making CPSEs
123
120
119
139
143
160
154
160
158
158
Loss Incurring CPSE
CPSEs
Making
no
profit/loss
110
109
105
89
73
63
61
54
55
59
1
2
2
2
-
1
1
-
-
-
Dividend
8260
8068
13769
15288
20718
22886
26819
28123
25501
33223
Dividend tax
842
8
1193
1961
2852
3215
4107
4722
4132
5151
Retained profit
6551
17902
17382
35835
41394
43435
50129
48429
54233
54220
Source: India (2011). Department of Public Enterprises, Public Enterprises Survey, 2009-10,
New Delhi
Further, we divided the sample in two groups: 1991-2000 and 2001 -2009 to explore
whether profit making CPSUs (i.e. positive PAT) are doing well in the later phase of
liberalization. To compare the means of healthy PSUs in the first decade with healthy
PSUs in the second decade of liberalization we conducted t-tests among these two
samples. We observed that the mean ROA in the second phase is 0.158 whereas the
mean ROA in the first phase was 0.075. This descriptive statistics indicate that healthy
PSUs are doing better in the later stage. Our t-tests weakly suggests that healthy PSUs
are doing better during the period 2001 -2009. However, the Mann-Whitney tests
strongly suggests (p<0.000) that healthy PSUs are doing better in the second decade of
liberalization.
Table 1 has shown us that the public sector as a whole had substantially reduced its
savings and investment in the economy. We see from the Table 2 that the CSOEs have
been the main contributors to the accumulation in the public sector. Also, as Table 3
shows, they have significantly enhanced their dividends, most which go to the central
government. Has this increased pay-out sapped their capacity to invest?
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To answer this, we use data both from the Prowess Database, which covers the entire
corporate sector (including, CSOEs, SSOEs, private sector firms) as well from the
Public Enterprises Survey (PES) of the Department of Public Enterprises, which covers
only the CSOEs (presented in Table 3). From Prowess, we estimate the change in
assets as a proxy for investment (presented in Chart IV below).
As the chart IV below shows, SOEs (including state owned enterprises) contributed
about 30 to 70 per cent of all corporate sector investment in the economy during the last
decade. This was during a period, when the overall investment rate in the economy rose
from 25 per cent to 35 per cent.
Table 3 and 5 show that the CSOEs not only maintained their level of investment, but
during the last few years accounts for increasing share of accumulation in the economy.
Their share of total gross domestic capital formation has marginally gone up from about
5 per cent to 7 per cent. In addition, they provide about Rs. 300 bn to government as
dividend. This dividend alone is twice as large as the losses of the 55 sick CSOEs.
However, it will be wrong to assume that all the CSOEs have successfully faced the
challenge of increasing competition from the private sector. The large losses by the Air
India, and the telecom firm BSNL show that many enterprises have found it difficult to
meet the competition and are incurring large losses. Both these industries have seen
excess supply and hyper competition, with declining prices that has eroded their ability
to respond.
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Table 4: Performance of Profit making
CSOEs
Year No.
PAT
Assets
ROA
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
No.
61
81
94
90
90
113
108
93
104
101
97
107
129
144
151
156
156
165
156
Rs. Million
31313.6
52109
62241.3
78596.7
109169
127030
145644
169501
189286
204627
250444
337360
405252
585202
710517
711194
849966
870126
789130
933079.9
1618688
1929549
2067073
2071479
2625275
2820184
3287010
3218296
3590629
4656301
5312023
5824538
7406480
8598367
9277345
10500000
12000000
13700000
(%)
3.36
3.22
3.23
3.8
5.27
4.84
5.16
5.16
5.88
5.7
5.38
6.35
6.96
7.9
8.26
7.67
8.09
7.25
5.76
Source: Computed from Prowess Database
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Chart IV: Share of Investment by Ownership Group
Source: Our estimates from CMIE: Prowess Database
Table 5: CSOE Investment in Total Indian Investment
Year
Gross
(GB)
Block Addition
GB
Rs. Crore
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
525301
596727
649245
715108
782668
862240
978167
1129942
34903
71426
52519
65863
67560
79563
115927
151775
to
Growth
India
GFCF
CPSEs-Inv.
GFCF
(%)
Rs. Cr
(%)
7.12
13.6
8.8
10.14
9.45
10.17
13.45
15.52
584366
687150
896774
1109160
1343843
1630513
1838499
1993347
5.97
10.39
5.86
5.94
5.03
4.88
6.31
7.61
/
Source: Our Computation from PSE Survey and National accounts
Conclusion
The period of economic reforms and shift in public policy towards market based reforms
and an end to protection and reservations provided to SOEs, along with imminent threat
of privatisation, has posed a serious challenge to SOEs in India. Increasing competition
and entry of private sector in most industries reserved for SOEs, along with liberal
imports provided impetus for reform and shift in their corporate strategy.
Opposition to full scale privatisation, shifted governments strategy of using SOEs to
generate resources by demanding enhanced dividends and listing them on the stock
markets, with small sale of equity.
On the other hand, government agreed to provide them with greater autonomy and
improve corporate governance by changing the composition of their boards and
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enhancing the powers of these boards on investment and strategic decisions. Though
these reforms were limited to better performing SOEs, they partially changed the
relationship between the ministries and the enterprises. Simultaneously, under
pressure from the communist parties on whose support the Congress party government
was dependent, limited re-structuring of sick SOEs was carried out. It helped about 40
enterprises to turn around and emerge as profitable and competitive units.
But the SOEs major role has been in supporting and expanding the industrial base in
the country. During the last decade, the rate of profitability of SOEs has doubled and is
comparable to the private sector enterprises. They account for a significant share of the
market capitalisation on the National Stock Exchange.
SOEs account for about 30 per cent of all corporate sector investment. They have kept
pace with the increasing investment rate. The CSOEs which are controlled by the
central government account for about 7 per cent of total gross capital formation in India.
The recent surge in GDP growth rates in India, is largely explained by the increasing
investment. Though the central government has found it difficult to maintain its historical
share in total investment due to its rising fiscal deficits, the SOEs have not only
maintained their share but marginally increased it.
This is quite like the picture in China, where the SOEs have been the major site of
investment and accumulation. However, unlike China, SOEs the Indian SOEs face a
policy environment that assumes that private capital is more efficient and where a large
private sector is able to successfully influence public policy in its favour, sometimes
through lobbies and on other occasions through direct bribes. The scandals in the
telecom sector under investigation are a potent example.
Despite this improved performance, it is not clear that the threat of privatisation and
outright sale to private investors is over. A lot will depend on the actual evolution of the
Indian political economy.
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