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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 Khanna 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 2 Khanna 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. 3 Khanna 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 4 Khanna 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). 5 Khanna 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. 6 Khanna 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. 7 Khanna 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. 8 Khanna 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 9 Khanna 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) 10 Khanna 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! 11 Khanna 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 12 Khanna 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 Khanna 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? 14 Khanna 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. 15 Khanna 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 16 Khanna 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 17 Khanna 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. References Ahluwalia, I J. Rakesh Mohan and O. Goswami.1997, Policy reform in India, Oxford & IBH Pub.Co. New Delhi Bhagwati, J N and T N Srinivasan (1993): India's Economic Reforms, Ministry of Finance, New Delhi Bhandari L and O. Goswami, (2000), "So Many Lost Years: The Public Sector Before and After Reforms" NCAER, New Delhi Hall D., E Lobina, and Robin de la Motte (2005), "Public resistance to privatisation in water and energy", Development in Practice, Volume 15, Numbers 3 & 4. India. 2007. `White Paper on Disinvestment of Central Public Sector Enterprises' – Department of Disinvestment, New Delhi. India, 2011, Public Enterprises Survey 2009-10, DPE, New Delhi Khatua, A 2011, "Essays on Developing Economy Business Groups" doctoral dissertation, Indian Institute of Management Calcutta. Mohan, Rakesh. 2000, "Public Sector Reforms and Issues in Privatisation" in Aluwalia, Mohan and O. Goswami (ed) Policy reform in India, New Delhi. Mohanty, M and N Reddy . 2010 " Some Explorations into India's Post-Independence Growth Process, 1950/51-2002/03: The Demand Side", Economic and Political Weekly, VOL XLV No. 41 18 Khanna Seabright, P. (1993), "Infrastructure and Industrial Policy in South Asia: Achieving the Transition to a New Regulatory Environment," Washington, D.C.: World Bank (processed). 19