Performance of Public Sector Enterprises in India: A Macro-Level Analysis

Transcription

1 Performance of Public Sector Enterprises in India: A Macro-Level Analysis Jatinder Singh* and Krishna Reddy Chittedi** The poor performance of Public Sector Enterprises (PSEs) in the 1980s made reform increasingly urgent in the context of the broader strategy of liberalization of the economy to deal with the perceived weaknesses of India s development strategy in general and PSEs in particular. In this context, this paper tries to analyze the performance of Central Public Sector Enterprises (CPSE) against the backdrop of liberalization measures introduced in the 1990s and afterward. The paper makes an assessment on the basis of some selected indicators for the period of to The findings suggest that the PSEs performance was better in all the indicators in the post-liberalization regime compared to the pre-reform period. Introduction The Public Sector Undertakings (PSUs) are considered as major instruments of state intervention in economic activities in the developing economies. These countries were facing the problem of income and regional inequality along with the low level of employment and lack of skilled manpower. Further, the major contribution to Gross Domestic Product (GDP) in developing economies comes from the agricultural sector because of the weak industrial base and absence of service sector. At the same time, the low level of savings and poor infrastructure fail to encourage private investment. Given the set-up of economic system, the state decided to come forward with a clear long-term development strategy. Thereby, the government followed a plan-led development strategy wherein the major role was given to the public sector. The objective behind the plan-led development strategy was to ensure efficient use of limited economic resources along with the social objective of growth with equity. Given the social problems and weak industrial base in the early years of independence, the state government designed some specific policies to deal with the industrial sector. The * Research Scholar, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi, India. jatindercds@gmail.com ** Research Scholar, Centre for Development Studies (CDS), Trivandrum, Kerala, India; and is the corresponding author. krishnareddy5111@gmail.com Performance 2011 IUP. of All Public Rights Sector Reserved. Enterprises in India: A Macro-Level Analysis 7

2 first Industrial Policy Resolution (IPR) in India was announced in 1948 and the state took the responsibility to develop the core industries through Public Sector Enterprises (PSEs). Furthermore, the second IPR was passed in Under this policy resolution, the public sector got a strategic role in the economy and 18 industries were reserved exclusively for PSEs. Therefore, many of these enterprises successfully expanded production, opened up new areas of technology and built up a reserve of technical competence in a number of areas. Nevertheless, after the initial concentration of public sector investment in key areas, public enterprises began to spread into all areas of economy, including non-infrastructure and non-core areas. The World Bank pointed out that PSEs accounted for one-fourth of the non-agricultural GDP and as much as 55% of the economy s (excluding households) capital stock in In the 1960s and 1970s, PSEs got much importance on the social ground. But in the early 1980s, PSEs faced serious criticism in terms of growing inefficiency (Nagaraj, 2006). These entities were inefficient on all fronts of production and generated negative surplus. After about four decades of economic planning, the government has realized that the opportunity cost of economic resources being locked up in public enterprises is quite high. These criticisms and rising fiscal imbalance forced the government to review the existing development strategy. In order to improve the performance of public enterprises, the government of India announced a new industrial policy on July 24, Under the new industrial policy, a large number of reserved sectors for PSEs have been opened up for private enterprises. Souza et al. (1999) argued that the factors like inadequate returns from investment, low production efficiency and changing global policies compelled the government to make economic reforms. Against this understanding, this study examines the impact of liberalization measures on the performance of central PSEs and also tries to compare it with that in the pre-reform period. The rest of the paper is organized as follows: the following section provides a brief review of literature related to the performance of PSEs and the relevance of the study. The next section discusses the approach of the paper along with the methodology and data sources. The succeeding section briefly reviews the various policies and programs in the post-liberalization period to improve the performance of PSEs and the next section reports and interprets the results. Review of Literature This section takes a quick look at the discussions on the issue at hand in earlier studies. Ravinder and Rupinder s (2007) study compares the pre- and post-disinvestment financial and operational performance of 15 PSEs of India that experienced partial disinvestment during the period of to The empirical evidence supports the positive effects of privatization on PSEs performance. These privatized units have significantly improved the level of profitability, sales, operational efficiency, earnings per share and dividend payments after disinvestment. Nagaraj (2006) studied the long-run performance of the public sector on the basis of some selected aspects in relation to economic aggregates, 1 World Bank (1994), Recent Economic Developments and Prospects. 8 The IUP Journal of Managerial Economics, Vol. IX, No. 3, 2011

3 mainly using National Accounts Statistics (NAS). He concluded that the public sector share steadily rose to the domestic output, even though the public sector share in domestic investment reduced to nearly half. This improvement in the performance has occurred due to a rise in the physical efficiency in electricity generation, a fall in the public sector employment and increase in the profitability of PSEs. Mishra and Lakshmi (2006) tried to analyze the performance of PSEs in the era of economic liberalization by using the primary and secondary level data. He revealed that the PSEs have performed well in the era of economic liberalization. PSEs profitability and internal resource mobilization have improved in the post-liberalization period. Jain and Yadav (2005) analyzed the financial management of the PSEs in terms of profitability by using the secondary data of 137 PSEs and primary data of 41 PSEs for the period of 1991 to The results showed that the sample PSEs have earned a satisfactory rate of return on the capital employed. The better profitability of PSEs may be the result of the liberalization policy measures taken by the government. Baijal (2002) argued that to ensure a higher level of investment with higher efficiency and productivity, complete restructuring of the economic industrial policy is required. Therefore, the reform has been undertaken with the objective of efficiency enhancement, domestic and foreign resource mobilization and to generate adequate level of competitiveness in the economy. Rath (2001) explained the rationale behind the disinvestment of PSEs. The study explains that the changing global environment and unsatisfactory performance of PSEs put new challenges and opportunities for the government to minimize the role of public sector activities. Instead of investing resources in industries, trade and business, the government developed social and economic infrastructure for facilitating the activities of the private sector. Analyzing the success of PSE reforms from 1991 to 1998, Ghuman (1999) showed that there was limited success in the first phase with regard to disinvestment and the abolition of the monopoly status of PSEs. The pace of disinvestment has improved with the setting up of Disinvestment Commission. The major restrictions in the way of reform have been the administrative ministries, employees and interest groups. Das (1997) analyzed the overall efficiency technical, allocate and scale of the public sector banks. He found a decline in the overall efficiency during This occurred because there was a decline in technical efficiency, both pure and scale. The study pointed out that the deterioration in technical efficiency was mainly on account of four nationalized banks. On the basis of existing studies, it is noticed that PSEs showed better performance in the post-reform period as compared to the pre-reform period. The better performance can be viewed in terms of rising completion that forced PSEs to improve their performance by ensuring high productivity and reducing cost of production. The process of disinvestment of PSUs has not been free of criticism. Malik (2003) argues that the Indian approach to disinvestment seems to have gone wrong, being positioned in the middle between the doctrinarian extreme on the one end and the laissez faire extreme on the other. While all political parties and economists believe in the principle of divestments/ privatization, they devise escape routes for non-implementation by taking recourse to statements such as: We agree in principle but differ in the details ; First bring in a strategic Performance of Public Sector Enterprises in India: A Macro-Level Analysis 9

4 partner and then divest ; First increase the equity base through a public offer and then divest ; It is videshi, swadeshi etc. The industry and business express their doubts about raising such huge funds to buy and acquire PSUs. The foreign investors are critical of the entire process and are often seen withdrawing from the bidding process. In essence, there is something seriously wrong in India s approach to disinvestment and implementation. Mishra et al. (1993) and Sankar et al. (1994) highlight the large differences between the amounts actually realized through disinvestment and the amounts potentially realizable under the best value method. The argument is that shares were deliberately underpriced to ensure quick disposal. In short, the criteria adopted in the selection of PSEs and the methods involved in the valuation of shares lacked the essential transparency needed to gain public confidence in the process. Arun and Nixson (2000) argue that the main aim of disinvestment has been to reduce the public sector borrowing requirement at the cost of restructuring and rationalization of PSEs in particular and the public sector in general. He expressed dissatisfaction with the disinvestment process because of alleged underpricing of shares sold, lack of transparency, limited public support for disinvestment and the absence of a common set of objectives between the Government of India and the Disinvestment Commission. Gouri (1996) has argued that the lack of a clear policy on privatization and PSE restructuring in India may favor considerations of political expediency in the short run but at the cost of sacrificing sound economic management over the longer term. The available literature pointed that: first, PSEs performed well in the post-reform period in terms of profitability, sales, operational efficiency, earnings per share, dividend payments, etc; second, factors like inadequate returns from investment, low production efficiency and changing global policies compelled the government to go for economic reforms; and third, the pace of disinvestment was slow in the first few years of reforms. With the setting up of Disinvestment Commission, the disinvestment pace has improved. Significance of the Study It is well known that the PSEs were dominant till the late 1980s. But due to the unsatisfactory performance of PSEs, the Government of India has taken some policy measures in the early 1990s, i.e., New Industrial Policy, These policy measures have been adopted to improve the performance of PSEs. This paper tries to analyze the impact of these policy measures on the performance of PSEs. Objectives of the Study Public enterprises in India operate at three levels of administration center, state, and local government. Public sector comprises administrative department (offices and other bodies of the government), departmental enterprises (railways, post and telecommunication), and non-departmental enterprises (financial and non-financial enterprises, with 51% of government equity). The scope of the paper is limited to PSEs 2 2 It includes both departmental and non-departmental enterprises. 10 The IUP Journal of Managerial Economics, Vol. IX, No. 3, 2011

5 owned and managed by the central government. In the light of this background, the present study has the following two main objectives: To make an inquiry into the various liberalization measures to improve the performance of central PSEs. To analyze the impact of the policy on CPSEs performance. Data Sources and Methodology Data Source This study collected data from various secondary sources, namely, Public Enterprises Survey (Vol. 1) by the Department of Public Enterprises; National Account Statistics by the Central Statistics Organization; Economic Survey by the Ministry of Finance; Ministry of Disinvestment, various Annual Reports; and Research and Development Statistics by the Department of Science and Technology. The period of study is broadly from to is the period of economic reforms, the period before is refered to as pre-liberalization, and after as the post-liberalization period. Methodology The analysis basically concentrated on those enterprises where the level of equity holding of the Government of India was more than 50%. To get the trend of profitability, simple percentage of profits to capital employed has been calculated over the years. Similarly, the share of PSEs in the GDP as well as the share of PSEs in the gross domestic capital formation have been calculated. In order to analyze the research and development strategy, we calculated the investment in research and development activities with respect to total sales of the industry. Furthermore, the share of internal resources mobility by central PSEs has been calculated with respect to plan outlay. Liberalization Policies in India In the pre-liberalization period, the role of PSEs in economic activities was dominant. The government provided protection to PSEs through various policy measures (like IPR [1948 and 1956], MPTP, Industrial Licensing, etc.) for their development. These protective measures did not provide any incentive to the PSUs to upgrade their technology and consequently improve productivity. As a result of this, a large number of PSEs have become economically unviable. To improve the performance of the PSEs, the government adopted some policy measures in the early 1990s under the name of Structural Adjustment Program (SAP). With the implementation of SAP, the existing industrial policy was revised to improve the performance of existing enterprises. The major policy initiatives introduced in the 1990s are listed here. Under 1991 IPR, the number of reserved industries for PSEs was reduced from 18 to 8 in 1991 and further to 3 in The focus of public sector was reduced to strategic, high-tech and essential infrastructure. The Government of India established a Board for Industrial and Financial Reconstruction (BIFR) for the investigation Performance of Public Sector Enterprises in India: A Macro-Level Analysis 11

6 of sick units. Some PSEs, chronically loss making or sick, were referred to the BIFR for revival and rehabilitation schemes 3. Further, the government encouraged PSUs to participate in capital market to raise funds for investment. In 1996, the government came up withthe Common Minimum Program (1996) 4. The object of this program was to develop professional management along with decisionmaking autonomy to make these enterprises operate in a competitive environment. In addition, the government stopped privatization of profit-making entities. In 2004, the government established the Board for Reconstruction of Public Sector Enterprises (BRPSE) to advise the government on strengthening the central PSEs and financing the PSUs, and also to suggest chronically sick units for disinvestment (or close down). As per Sick Industrial Company Act, 1985, if a company accumulated loss in any financial year equal to 50%, then it is considered as a sick unit. Once the ministry refers any PSU unit to the board, the board should make recommendations within two months. However, the government also ensured special status to the profit-making public sector entities under the name of Navratnas 5. The status of Navratnas was decided on the basis of their past performance. On July 4, 1997, the government identified nine enterprises as Navratnas, and two more were added to this list in the subsequent period. These enterprises were decided in terms of their size in relation to investment, turnover and profits in recent period. Further, to make Navrantna enterprises more competitive, the government substantially enhanced the autonomy and operational freedom of the Board of Directors. With this, these enterprises were eligible for incurring capital expenditure, entering into joint ventures, creating and winding up post below Board level. Further, the government also identified some profit-making enterprises and declared them as Miniratnas 6. With this status, these enterprises got some autonomy in decision making. Now Miniratna-I can incur capital expenditure without any government approval up to 300 cr or equal to their net worth capital, whichever is lower, and Miniratna-II can make capital expenditure up to 150 cr or up to 50% of their net-worth capital, whichever is lower. Disinvestment of PSEs The New Industrial Policy 1991 advocated the privatization of PSEs. The government appointed a committee on disinvestment in PSEs under C Rangarajan in The committee suggested that the government should reduce the equity in non-strategic 7 PSUs 3 The BIFR will decide whether sick public sector units can be effectively reconstructed or have to be closed down. 4 See Mishra et al. (2006), Economic Liberlization and Public Enterprises, p The concept of Navratnas originated in the Common Minimum Program of the United Front Government which promised to identify the PSUs having comparative advantages. 6 (a) Miniratna I: Enterprises which have been making profits continuously for the past three years and have earned a net profit of 30 cr or more in one of the three years, with positive net worth. (b) Miniratna II: These enterprises should have made profit in the past three years and should have positive net worth. 7 Except defence-related, atomic energy-related, with some exception, and railway transport, all others fall under non-strategic areas. 12 The IUP Journal of Managerial Economics, Vol. IX, No. 3, 2011

7 to 26% or even 100% open for private sector 8 and close down PSUs which cannot be revived. Subsequently, the government also set up Disinvestment Commission under G V Ramakrishna in August 1996 for deriving a long-term disinvestment program in order to modernize and upgrade the PSEs and also to ensure that disinvestment does not lead to private monopoly (Government of India, , p. 150). For disinvestment of PSUs, the government followed different methods such as Initial Public Offering (IPO), strategic sale, sale to foreigners 9, management-employment buyouts, 10 etc. In the initial phase ( to ), the government followed IPO 11 as a means to disinvestment, and strategic sales method was adopted in the later period 12. The prominent companies that have disinvested through strategic sale in the recent past include Modern Foods, BALCO, CMC, VSNL, IBM, ITDC Hotels, IPCL, Maruti Udyog Ltd., and HZL. The privatization of PSEs in India is the result of the structural adjustment program introduced in Since 1991, the government has announced many policies and programs to deal with the disinvestment policy of the public sector. In this period, the government Table 1: Disinvestment in Public Sector from to Year Target Receipts for the Years ( cr) Actual Receipts for the Years ( cr) Methodology Adopted ,500 3,038 Minority shares sold by auction method in bundles of very good, good, and average companies ,500 1,913 Shares sold separately for each company by auction method ,000 Equity of seven companies sold by open auction but proceeds received in ,000 4,843 Sale through auction method, in which NRIs and other persons were legally permitted to buy, hold or sell equity, allowed participating , Equities of four companies auctioned and Government piggy-backed on the IDBI fixed price offering for the fifth company , GDR (VSNL) in international market , GDR (MTNL) in international market 8 In the report, the committee suggested that the best method for disinvestment is by offering sale to the general public. 9 Under this strategic sales method, the buyer is not a domestic company but a foreign company. 10 Under this method, the management and employees themselves buy major stakes in the firm. 11 Under this method, the shares of public sector undertakings are sold to retail investors and institutions. The government may sell share to international market also. 12 In this method, the government sells its share to a strategic partner. As a result, the management and ownership passes to the buyers. Performance of Public Sector Enterprises in India: A Macro-Level Analysis 13

8 Table 1 (Cont.) Year Target Receipts for the Years ( cr) Actual Receipts for the Years ( cr) Methodology Adopted ,000 5,371 GDR (VSNL)/Domestic offerings with the participation of FIIs (CONCOR, GAIL). Cross purchase by three oil sector companies, i.e., GAIL, ONGC and Indian Oil Corporation ,000 1,860 GDR-GAIL, VSNL-domestic issue, BALCO restructuring, MFIL s strategic sale and others ,000 1,871 Strategic sale of BALCO, LJMC; Takeover KRL (CRL), CPCL (MRL), BRPL ,000 5,632 Strategic sale of CMC-51%, HTL-74%, VSNL- 25%, IBP-33.58%, PPL-74%, and sale by other modes: ITDC and HCI; surplus reserves: STC and MMTC ,000 3,348 Strategic sale: HZL-26%, MFIL-26%, IPCL-25% HCI, ITDC, Maruti: control premium from renunciation of rights issue, ESOP: HZL,CMC ,500 15,547 Maruti- IPO(27.5%), Jessop & Co. Ltd. (Strategic sale-72%), HZL (call option of SP-18.92%), public offers-ipcl (28.95%), CMC (26%), IBP (26%), DRDG (20%), GAIL(10%), ONGC (10%), ICI (9.2%) ,000 2,765 Offer for sale of NTPC, sale of shares to IPCL employees, etc No target fixed 1,569 Sale of MUL shares to Indian public sector financial institutions and banks and employees No target fixed No target fixed 4,181 Sale of MUL ( 2, cr) shares to public sector financial institutions, public sector banks and Indian mutual funds and sale of PGCIL ( cr) and REC ( cr) shares through offer for sale No target fixed No target fixed 23,552 ( 2, NHPC, 2, OIL and NTPC- 8, , REC , 9, NMDC) ,000 22, SJVN, EIL , Coal India 15, CR; PGCIL Total 136,300 99,738 Source: targeted disinvestment of 136,300 cr, whereas the actual received amount from disinvestment in the preference period was 99,738 cr, which is 73% of the targeted funds 14 The IUP Journal of Managerial Economics, Vol. IX, No. 3, 2011

9 from disinvestment 13 (refer Table 1). It indicates that irrespective of the series of policy initiatives dealing with public sector disinvestment, the gap between targets and actual funds from disinvestment persists. Performance of PSEs This paper is an attempt to understand the performance of PSEs in response to liberalization measures announced in the early 1990s. The performance of CPSE has been examined on the basis of certain selected indicators, namely, number of profit- and loss-making units, share of CPSEs in GDP, share of CPSEs in GDCF, profitability to total capital employed, number of employees, research and development expenditure as a percentage of the total sale. Results and Explanation Table 2 outlines the trends in the total investment and number of enterprises in various plan periods. It shows that the cumulative investment in CPSEs grew from 29 cr in five enterprises as on April 1,1951 to 538,951 cr in 246 enterprises as on March 31, This growth in investment in CPSEs includes mining, manufacturing, services, under Particulars Table 2: Growth in Investment Total Investment No. of ( cr) Enterprises 1 st Five Year Plan ( April 1, 1951) nd Five Year Plan (April 1, 1956) rd Five Year Plan (April 1, 1961) End of 3 rd Five Year Plan (March 31, 1966) 2, th Five Year Plan (April 1, 1969) 3, th Five Year Plan (April 1, 1974) 6, End of 5 th Five Year Plan (March 31, 1979) 15, th Five Year Plan (April 1, 1980) 18, th Five Year Plan (April 1, 1985) 42, End of 7 th Five Year Plan (March 31, 1990) 99, th Five Year Plan (April 1, 1992) 135, End of 8 th Five Year Plan (March 31, 1997) 213, End of 9 th Five Year Plan (March 31, 2002) 324, End of 10 th Five Year Plan (March 31, 2007) 420, End of first year of 11 th Five Year Plan (March 31, 2008) 455, End of Second year of 11 th Five Year Plan (March 31, 2009) 528, Source: Government of India ( ), Public Enterprises Survey 13 Disinvestment Commission various reports. Performance of Public Sector Enterprises in India: A Macro-Level Analysis 15

10 construction over the planning period. During the 8 th Plan, the structure of the Indian economy underwent a major change. Therefore, literature assumed priory to 8 th Plan period as the pre-reform period, and the later period as the post-reform period. Given the division of pre- and post-reform period, it is noticed that both plan investment and number of PSUs increased very rapidly in the pre-reform period as compared to the post-reform period. In the post-liberalization period, the pace of investment has become slow and the number of PSEs has started decreasing because the government has disinvested stakes in some PSEs and some of the loss-making units have been closed following the recommendation by BIFR. Percentage Share of Public Sector in Main Macroeconomic Aggregates Share of Public Sector and CPSEs in GDP on Current Prices at Factor Cost The contribution of public sector to GDP increased around 25% in Going into details, it is noticed that the share of public sector to GDP increased from 19 % in to 27.6% in and it shows downward trends in the recent period. For instance, the share of public sector declined from 27.6% in to 23% in (Figure 1). Similarly, the contribution of CPSEs to GDP increased from 12.4% in to 18.7% in , and it showed declining trends in the subsequent period. The reduction in contribution from CPSEs may be because many industries, earlier reserved for public sector are now opened for private investment. As a result, the contribution of private enterprises in GDP has increased and the share of public sector has fallen in the post-reform period. In spite of substantial policy changes, the reduction from CPSEs to GDP is negligible which suggests that these enterprises adjusted themselves in the changing scenario. As a result of this, the total GDP in India has increased. Further, the share of CPSEs in Gross Domestic Capital Formation (GDCF) has reduced faster than the corresponding deduction in the share of CPSEs in GDP. It shows that productivity of public enterprises has improved in the post-liberalization period. Share of Public Sector and CPSEs in GDCF Figure 2 shows the trends of public sector and CPSEs in GDCF during to From Figure 2, it is observed that the share of public sector in GDCF increased till and showed a sharp decline in the subsequent period. Similar trends can be noticed with regard to the share of CPSEs in GDCF during the same period. It is so because the growing inefficiency of CPSEs forced the government to reduce investment in PSEs and divert it to more efficient production activities. Further, the rising fiscal deficit in the late 1980s forced the government to redesign the existing development strategy and allowed the private sector to participate in reserved public sector. Figure 3 shows the trends of loss- and profit-making units in CPSEs during to It is observed that the number of loss-making units showed upward trends in the pre-reform period. Till , the number of loss-making units increased and then became constant for some period and started to decline rapidly in the post-2000 period. 16 The IUP Journal of Managerial Economics, Vol. IX, No. 3, 2011

11 Figure 1: Percentage Share of Public Sector GDP and CPSEs GDP to GDP on Current Prices at Factor Cost Share of PS GDP to Total GDP CPSEs Share in PSGDP Source: Central Statistics Organization (2007), National Account Statistics Figure 2: Public Sector Share and CPSEs Share in GDCF Share of PS GDP to Total GDP CPSEs Share in PSGDP Source: Central Statistics Organization (2007), National Account Statistics Performance of Public Sector Enterprises in India: A Macro-Level Analysis 17

12 Figure 3: Number of Profit- and Loss-Making CPSEs Profit-Making CPSEs (No.) Loss-Making CPSEs (No.) Source: Government of India ( ), Public Enterprises Survey To deal with the problem of loss-making units, the government established BIFR in under the provision of Sick Industrial Act, During , 74 CPSEs were referred to the BIFR. Out of them, 57 units were operating till , and 16 CPSEs were closed. Corresponding to the loss-making units, the number of profit-making units has improved over time. Figure 3 indicates that the number of profit-making units has increased from 90 in to 150 in In the same period, the loss-making units showed a sudden downfall in their number (it reduced from 100 in to 59 in ). The rising profitability of CPSEs can be attributed to the decision-making autonomy provided by the government to public sector units. Trends in retained profits and dividends are presented in Figure 4. Both retained 15 profits as well as dividends 16 of CPSEs have showed an upward movement during the period to But this rise is sharper in the post-reform period compared to the pre-reform period. Moreover, the post-2000 period showed a sudden upward movement both in dividends and retained profits. Further, by comparing Figures 3 and 4, it is easy to note that the rise in retained profits and dividends is consistent with an increase in the number of profit-making units. Thereby, one can argue that the rise in retained profits and 14 Under the 1985 Act, if any industry makes losses equal to or exceeding its net worth, then the government refers that unit to the BIFR. 15 Retained profits are the profits that are reinvested in the firm rather than being paid out to the owner of the company in dividends. 16 Dividends are the payment made by a joint stock company to its shareholder for providing capital; dividends are distribution of profits of the company. 18 The IUP Journal of Managerial Economics, Vol. IX, No. 3, 2011

13 Figure 4: Retained Profits and Dividend by CPSEs (in cr) 60,000 50,000 40,000 30,000 20,000 10, , Dividents Retained Profits Source: Government of India ( ), Public Enterprises Survey dividends are attributed to the improving profitability of PSEs. It suggests that CPSEs also improved their internal resource mobility in the recent past. Profitability is considered as an important indicator of performance for every enterprise. The objective behind 1991 reforms was to improve the competitiveness of CPSEs along with their profitability. Given the objectives of public and private enterprises, it is not possible to make a comparison between these two groups of enterprises on the basis of the same indicators of profitability 17. Figure 5 presents three types of profit ratios, namely: (1) Profit Before Tax, Dividends and Interest (PBIDT) to Employed Capital; (2) Profit Before Tax (PBT) to Employed Capital; and (3) Net Profit to Employed Capital. From Figure 5, it is observed that all types of profits have improved, except in the early two years of the 1990s. But a sudden change has been observed after , following the government s 1997 policy where profit-making enterprises got a special status under the name of Navaratna and Miniratna. With this status, the government provided more autonomy to these enterprises in decision making, and thereby, the capital employed of CPSEs has increased from 2,49,855 cr in to 6,65,124 cr in , recording a 17 For private individual, the ratio of net profit to equity capital may be appropriate, but it may not be a correct measure for CPSEs, for many reasons: (1) CPSEs usually have high depreciation cost since they have to invest not only in plant and machinery, but also in social overhead capital, for which budgetary support is required; (2) The aim of PSEs capital structure is not to maximize return on shareholder s investment, but the provision of goods and services which the market has not succeeded in supplying (Mishra et al., 2006). Therefore, for public sector, gross returns on total capital employed are a better measure of profitability. Performance of Public Sector Enterprises in India: A Macro-Level Analysis 19

14 Figure 5: Ratio of CPSEs Profit to Capital Employed % of PBDITEP to Capital Employed PBT to Capital Employed % of Net Profit to Capital Employed Source: Government of India ( ), Public Enterprises Survey Figure 6: Number of Employees in CPSEs (in lakh) Source: Government of India ( ), Public Enterprises Survey 20 The IUP Journal of Managerial Economics, Vol. IX, No. 3, 2011

15 Figure 7: Expenditure on Research and Development for PSUs R & D Intensity Source: Research and Development Statistics, Department of Science and Technology growth of 266% in the reference period. Further, net profits of CPSEs also increased by 600% from to (refer Figure 5). Employment in PSEs The number of employees in CPSEs is presented in Figure 6. From the figure, it can be seen that the number of workers in the CPSEs increased till , which then shows a downfall in the later period, except in For instance, the number of employees increased from lakh in to lakh in Contrary to these trends, the number of employees declined from lakh in to around 15 lakh in (see Figure 6). The fall in the number of employees in PSEs is a result of the voluntary retirement scheme. Under this scheme, the government provided various advantages to the employees along with full compensation with the objective of reducing overstaffing in the pre-reform period. A marginal rise in is on account of the shift of employees from the department of telecommunications to BSNL, incorporated as a corporate entity (Nagaraj, 2002). The expenditure on research and development activities is the key determinant of competitiveness of every enterprise. Figure 7 presents the research and development expenditure of PSEs. The figure shows that R&D intensity was high in the pre-reform period compared to the post-reform period. R&D expenditure is an input indicator of innovation. To measure innovation in output indicators, we need to calculate the number of patents received by these enterprises. Therefore, R&D gives only a partial picture about the innovation behavior of any firm and industry. 18 Expenditure on research and development by industry groups for PSUs. Performance of Public Sector Enterprises in India: A Macro-Level Analysis 21

16 The pattern of resource mobilization of PSEs has undergone a major change in the postreform period. In the early years of independence, CPSEs were started with complete assistance from the central government in the form of grant via equity route. In the later period, these enterprises moved to the budgetary support under which the equity or debt is allotted on the basis of project justification. With the introduction of a series of reform measures, CPSEs moved to the capital market for resource mobilization. Figure 8 presents the trends in various types of resource mobilization by CPSEs during the period to The results show that budgetary support to CPSEs declined from 50% of plan outlay in to around 1% in On the other hand, the percentage share of internal resources mobilization 19 increased from 30% in to 55% of plan outlay in This is because the CPSEs started mobilizing money via new financial instruments 20. Further, financing to working capital dramatically decreased in the postreform period. It is so because CPCEs started raising money from commercial banks and capital market to finance the working capital. Figure 8: Percentage Share of Resources Mobilization by CPSEs to Total Plan Outlay % Share of International Resources to Plan Outlay % Extra Budgetary Resources to Plan Outlay % Budgetary Support to Plan Outlay Source: Government of India ( ), Public Enterprises Survey 19 Internal resources comprise retained profits, depreciation and Deferred Revenue Expenditure (DRE) write-off. 20 New financial instruments include commercial paper, bond, public deposits, global depositary receipts and American depositary receipts. 22 The IUP Journal of Managerial Economics, Vol. IX, No. 3, 2011

17 Figure 9 analyzes the trends in sales turnover of CPSEs with respect to capital employed from to The figure indicates that the share of sales turnover to capital employed declined very sharply from to the early 1990s. But in the post , the sales turnover to capital employed showed a steady upward movement. It shows that the efficiency of employed capital increased in the post-reform period because under competitive conditions, the CPSEs were forced to use the existing capacity more effectively. Figure 9: Percentage Share of CPSEs Turnover to Capital Employed Source: Government of India ( ), Public Enterprises Survey Conclusion This paper analyzed the performance of PSEs against the backdrop of liberalization measures introduced in the early 1990s. In the early 1980s, researchers criticized the policy of the central government that provided undue protection to the PSEs. There was no linkage between the investment and performance of these enterprises. To understand the performance of PSEs, central PSEs were selected in this study. On the basis of certain selected indicators, it is noticed that PSEs performed better in the postreform period compared to the pre-reform period. The interesting point to be noticed here is that the sources of financing to CPSEs have undergone a major change in the recent period. In the early years of establishment, most of the funding to these enterprises was in the form of budgetary support. In the post-reform period, the share of budgetary support declined to around 1% and the share of internal resource mobilization increased to 55% in Further, overstaffing had also reduced with the implementation of voluntary retirement scheme. And, the profitability of PSEs showed improvement and made them raise resources internally. These findings suggest that the performance of PSEs has improved in response to the liberalization measures. Performance of Public Sector Enterprises in India: A Macro-Level Analysis 23

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