Disinvestment and Privatisation

Topics: Economics, Public sector, Public ownership Pages: 38 (10268 words) Published: January 27, 2011
Ownership reform in public sector enterprises (PSEs) initiated since 1991 has as yet been quantitatively modest. It is perhaps too early to judge the effects of these initiatives on their financial performance. While the slow pace of the reform can be perceived as an opportunity, there is perhaps merit in carefully reviewing the policy in light of economic theory, and comparative experience. As the bulk of the public investments are in industries with economies of scale and scope (with externalities that in principle invite considerable regulation), this study suggests an alternative institutional arrangement for improving PSEs’ financial performance: mutual stock holding among complementary enterprises tied around a public sector bank to minimise problems of soft budget constraint, dysfunctional legislative and bureaucratic interference, and to encourage close interaction between banks and firms to promote long term economic development.


Employing about 19 million persons, public sector currently contributes about a quarter of India’s measured domestic output. Administrative departments (including defense) account for about 2/5th of it, the rest comes from a few departmental enterprises (like railways and postal services), and a large number of varied non-departmental enterprises producing a range of goods and services. These include, close to 250 public sector enterprises (PSEs) owned and managed by the central government, mostly in industry and services (excluding the commercial banks and financial institutions). At the state level, production and distribution of electricity, and provision of passenger road transport form the principal activities under public sector, run mostly by autonomous boards and statutory corporations. Though public investment in irrigation would perhaps rank next only to electricity in most states, it is generally viewed as public service, hence counted as part of public administration. Besides, there are about 1,100 state level public enterprises (SLPEs) that are relatively small in size. While the contribution of all these varied publicly owned and managed entities to national development is widely acknowledged, their poor financial return has been a matter of enduring concern – especially since the mid-1980s when, for the first time, the central government’s revenue account turned negative – an imbalance that has persisted ever since.

In 1991, a small fraction of the equity in selected central PSEs was sold to raise resources to bridge the fiscal deficit.[1] Though quantitatively modest (as will be seen later), the ‘disinvestment’ signaled a major departure in India’s economic policy[2]. While there have been instances of sale of publicly owned enterprises as running concerns on pragmatic considerations, it is only in the last decade that such sales (and sale of limited equity) acquired the status of public policy. Table 1 summarises what successive union finance ministers have said about the policy intent in their budgetary speeches, how they wished to pursue it, and what they planned to use the proceeds for.

Such a shift in policy is in tune with the widespread move away from public ownership since it was initiated in the late 1970s in the UK, and in the early 1980s in Chile – a change that has swept the world since then. Structural adjustment lending that was initiated around the same time by the Bretton Woods institutions’ included privatisation as an integral component of the policy based lending for the economies in financial distress. Such an initiative was buttressed by the World Bank’s influential official publication, Bureaucrats in Business (1995), which was a serious indictment of how the extension of the state in provision of private goods and services resulted in serious loss of efficiency, waste and lost growth opportunities for many less developed economies.[3]

In macroeconomics, especially after the Latin American debt and inflationary crisis in...
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