Region: Reform of Public Enterprises - Lessons from the Indian Context and Elsewhere

2005

Deepak K Srivastava

Indian public enterprises have failed to give expected financial results due to excessive social and non-commercial obligations imposed upon them. Though there exists an argument that these are public utility services, which are not guided by profit motives, it is also imperative for the public sector to make at least an operating profit to ensure its survival. Industrial Policy 1991 was a total reversal of earlier public sector policy in that it introduced liberalization and privatization into the Indian economy. The number of reserved areas for Public Sector Enterprises were reduced from 29 to 8 as per Industrial Policy 1956. In fact, Industrial Policy 1991 outlined a completely new approach to Indian public enterprises.

Critics have railed against proposals to privatize Indian public enterprises. Opinion has been split with proponents emphasizing anticipated improvements and changes in public enterprises through disinvestment or privatization, while opponents have decried the changes on the basis that such enterprises should remain the property of the state.

The Indian government has faced difficulties in undertaking full privatization because Indian public enterprises were established with a variety of social objectives, which have been the concern of various social and political pressure groups. After privatization, many objectives such as achieving a socialist pattern of society, production of essential goods, providing a model to private enterprise could no longer be expected of Indian public enterprises.

Further, the absence of effective governance mechanisms, an underdeveloped capital market, and apprehensions about job losses are some other reasons for hastening the process towards privatization.

In this context, reforms for Public Sector Enterprises such as competition, deregulation, listings in the stock market and corporatisation are feasible alternatives to full privatization. Various writers have come out in support of such reforms, providing both theoretical and empirical evidence. For example, Yarrow ('Privatization in theory and practice', Economic Policy, 2, 1986: 324-64), argues that competition and managerial accountability are more important than privatization, per se, in promoting economic efficiency. Bardhan and Roemer (articles on 'Market socialism' in Journal of Economic Perspectives, 6, 1992: 101-16 and 8(2), 1994: 177-81), argue that suitable mechanisms can be designed to insulate private actors from undue state interference, and efficiency can be achieved by corporatization, deregulation and competition, without resorting to privatization. Empirical work by Duncan and Bollard (Corporatization and Privatization: Lessons from New Zealand, Auckland: OUP, 1992) also supports the reform alternative. They document that New Zealand's corporatization efforts in the mid-1980s resulted in efficiency and financial gains in ten out of eleven enterprises studied. Work by Pinto, Belka and Krajewski ('Transforming State Enterprises in Poland', Brookings Papers on Economic Activity, 1993: 213-61) confirms that there were significant improvements in the performance of most manufacturing firms subsequent to Poland's 'big bang' reforms of January 1990 (prior to privatization), which included deregulation of prices, introduction of competition in many industries, and signaled tighter monetary and fiscal policies. Li ('The impact of economic reform on the performance of Chinese state enterprises 1980-1989', Journal of Political Economy, 105, 1997: 1080-1106) also documents marked improvements in the marginal productivity of factors and in the total factor productivity of 272 Chinese State Owned Enterprises (SOEs) over the period 1980-89 resulting from reforms initiated in 1979.

In Indian context, Sivadasan (Reforming PSE: lessons from the Indian experience, curriculum paper, Graduate School of Business, University of Chicago, 2002) investigates the impact of the public sector reform measures of partial-privatization and increased autonomy, along with the competition enhancing deregulation and liberalization policies adopted by the Indian government in the 1990s. The results of this study support the hypothesis that increased competition leads to improvements in efficiency.

China's experience of public sector reform is also worth highlighting. China has moved cautiously in its privatization efforts. It privatized only smaller SOEs, while the government has retained control over the larger ones. China has gradually introduced reforms of Public Sector Enterprises and their performance has improved as a consequence of such reforms.

Therefore, by reforming public enterprises the objectives and purposes of privatization may be fulfilled, because, once management is professionalised and placed on a new footing, similar outcomes may be achieved independent of whether ownership is private or public.

WATCHPOINT: Reforms to improve competition and managerial accountability may be better alternatives to privatization.

 

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