Lessons from the 1990s and the Road Ahead
@sunandoroy July 2000
The paper draws attention to the strengths and limitations of the PSEs and addresses the major issues which needs to be dealt with in the near future. An attempt is also made to develop an agenda for future in the light of the experience of PSEs during the first decade of economic reforms in India.
Introduction
The pubic enterprise reforms in India was initiated since the introduction of structural reforms in the early nineties. The progress of reforms in this sector has been uneven and contrary to the widely held belief a decade ago, restructuring of PSEs look much more complicated than mere privatisation in the sense of transfer of ownership. In the Indian context, the public sector reform process has centred on making the PSEs competitive and efficient by imposing a hard budget constraint on them , enhancing the market competitiveness through trade liberalisation, and by easing the resource constraint through rapid development of the financial markets. Imposing a hard budget constraint has taken the form of removal of explicit subsidisation of the PSEs. Trade liberalisation has been the sine qua non of the ongoing process of liberalisation and structural reforms in many economies. There is also a growing recognition that a strong and resilient financial system is associated with the reform process , acting as an intermediary to provide the financial requirements of the new impulses for growth. These developments in the developing world had altered the strategic positioning of the Public sector enterprises in the emerging economies. The role of internal and external incentives has assumed greater prominence in this context.
This paper takes a close look at the performance of PSEs in India during the period of economic reform and attempts to develop an agenda for future in the light of the experience of PSEs during the first few years of economic reforms . Section I of the paper discusses the salient features of the reforms in PSEs in the 1990s. Section II attempts an evaluation of the performance of PSEs in the reform era. Section III provides detailed empirical analysis of major public sector enterprises during this period. In the concluding section, the paper draws attention to the limitations of the PSEs and addresses the major issues which needs to be dealt with in the near future.
SECTION I
Salient Features of Public Enterprise Reforms in India
Since the Statement of Industrial Policy, 1991, a number of industries, which hitherto were exclusively reserved for State has been dereserved. by reorienting the regulatory framework and minimising budgetary supports. Second, growing competitiveness, whether defined in terms of price as well as export competitiveness, is the litmus test for survival in the new industrial environment. In this context, efforts have been made to restructuring of sick firms by focusing on –
- improved capacity utilisation
- instilling professional culture in management
- sharper focus in objectives and targets
- improved labour relationship
- acquisition of modern technology and
- autonomy from political pressures.
To enhance the efficiency of the public sector units, a series of reform measures have been adopted.
First, a disinvestment commission has been set up to look into the modalities of PSE restructuring. Second, in order to establish a system of rehabilitation without the government having to face excessive financial burden, the Sick Industrial Companies Act (SICA) was amended in December 1992. Greater functional autonomy has been accorded to selected PSEs. To protect the interest of workers in PSEs, a national renewal fund was established in 1992 to assist in retraining and redeployment of workers. Under the guidelines of the Disinvestment Commission, the ownership pattern of public enterprises has undergone noticeable transformation. Public enterprises which were 100 per cent Government owned enterprises are gradually moving towards diversified ownership with private equity participation, though, in most cases, the majority shareholding continues to remain with the Government. Transfer of ownership to the private sector is yet to materialise, and remains a crucial issue to be addressed in the future.
Also to reduce the fiscal strains on the Central Government, a hard budget constraint has been imposed on the public enterprises. Consequently, internal generation of the public sector enterprises
There has been a significant reorientation of the pricing policy over the last few years. As state as a producer is expected to perform a crucial social role, pricing policy of public products has been restrictive and administered. The importance of public goods to people required an equitable pricing policy where the PSEs would deviate from the profit maximising principle while charging for their products. The social gains from such a policy was through provision of essential items to the poorer sections at affordable prices. This social gain was accompanied by reduced internal resource generation making the PSEs more dependent on budgetary resources.
SECTION II
Performance of PSEs in India : An Analytical Account
Public Sector enterprises (PSEs) account a major share of investment and output in many development countries, where State has assumed a pro-active role in the development process. Over the last decade , public ownership of productive enterprises in response to market failures has come under increasing scrutiny. The dismal performance of public sector enterprises in developing countries led to a reassessment of the role of public enterprises in the development process. The critique of public enterprises in developing countries essentially relate to poor performance of public enterprises, lack of competition and the consequent drag on efficiency, distorted price signals leading to market inefficiency and over-regulation affecting productivity. In India, over the last fifty years, public sector enterprise contributed to a huge amount of investment, a large capital base, a diversified industrial structure, a degree of self reliance and widespread managerial as well as entrepreneurial talent (Reddy, 1990).However, a fair assessment of PSE performance must take into account the broad objectives behind the setting up of PSEs in India, namely,rapid economic growth through the creation of infrastructure,earning a return on investment to generate more resources for development, redistribution of income,employment generation; and promotion of balanced regional development.The objectives clearly indicate the twin goals of PSEs in terms of earning financial returns and social returns. While the financial performance of these enterprises are observable in the balance sheet and profit and loss accounts of these enterprises, the social returns of these enterprises are not identifiable so easily, as they occur not to the enterprise itself but to the rest of the economy. The evaluation of performance of public sector enterprises therefore needs to assess the financial and social returns of PSEs. Assessment of the comparative advantage of public vs private sector as producer must be guided by the composite returns from such public intervention as producer. The composite return must look beyond the traditional profitability indicators and attempt to encompass the wide range of social returns which the private sector will not be able to provide.
The Financial Performance of PSEs
The ongoing process of reforms in public enterprises has resulted in an improved performance of public sector enterprises as a whole. Net profit of PSES as per cent of capital employed rose from 2.0 per cent in 1991-92 to 4.8 per cent in 1998-99 [Public Enterprise Survey, 1998-99, Vol. I, p.21]. The performance of central PSEs during the first half of 1999-2000 (upto September, 1999) show that their net profits as percentage of capital employed stood at 2.23 per cent which was marginally higher that 2.19 per cent a year ago. The turnover to capital employed ratio has also gone up from 117.3% to 128.1%. During the first half of 1999-2000, the following sectors registered a rise in the profitability – petroleum, power, transportation services, chemicals and financial services. On the other hand steel, coal and mineral and metals registered declining profits. There has been significant improvements in the management of public enterprises.
First, the high level of inventories, which continued to saddle the PSES with avoidable costs, have come down from 86 days of cost of production as at end March 1991 to 64 days of cost of production as at end March 1999.
Second, there has been an observable improvement in the efforts of PSES to generate resources internally in the pressure of a hard budget constraint imposed by the Central Government. The internal resources generated through provisioning for depreciation, retained profits, etc. rose from 12942 crore in 1991-92 to 31301 crore in 1998-99.
Third, export earnings of public sector enterprises have also increased, especially in the form of export of services by PSEs, which rose from Rs. 9805 crore in 1992-93 to Rs 18827 crore in 1998-99.
Fourth, following the recommendation of Arjun Sengupta Committee report, the Government introduced the Memorandum of understandings(MOUs) with PSES to clarify the respective roles of PSES and Government to improve functional efficiency. In 1999-2000, 108 PSES signed MOUs with the Government.
There remain, however, areas of serious concern. One such aspect is capacity utilization. The broad pattern of capacity utilization of PSES has not shown much improvement. In 1991-92, 20 percent of PSES recorded capacity utilization below 50 per cent while 59 per cent of PSES recorded a capacity utilization above 75 per cent. In 1998-99, while 29 per cent of companies showed capacity utilization of less than 50 per cent, while around 51 per cent of companies had a capacity utilization level above 75 per cent. This indicates the lower productivity levels of PSUs in India and indicates the scope for improvements in productivity levels through reorganization and restructuring these entities. The second aspect to be addressed in the future related to the wide divergence of some ‘super performers’ in the public sector and the rest. The share of top ten profit making enterprises ( including ONGC,NTPC,IOC, MTNL, VSNL, GAIL, ,HPCL, Coal India and Neyveli Lignite) was 63.3 per cent of net profit of all profit making enterprises in 1998-99. At Rs.14254.72 crore, the net profits of the top ten PSES exceeded the net profit of all the PSUS, at Rs.13235 crore revealing the imbalances that persist in the public sector enterprises today.
Value added is a crucial index of efficiency of producing enterprises that provide economic justification of the existence of such enterprise. It is calculated as value of production less cost of direct materials consumed (power, coal and oil used as fuel have been regarded as direct materials for this purpose). In 1998-99, value added by all PSUs registered a growth of 3.91 per cent over 1997-98 through as a percentage of capital employed fell from 45.5 per cent to 43.0 per cent. In 1998-99 out of 162 public enterprises producing and selling goods, 19 enterprises (11.7 per cent of producing PSUs) recorded negative value added.
The sectoral classification of these units are presented below:
Table : PSEs with negative value added
(1997-98 and 1998-99)
(No.of units)
| Sectors | 1997-98 | 1998-99 |
| Fertilisers | 2 | 2 |
| Chemicals | 2 | 2 |
| Heavy Engineering | 1 | 1 |
| Transport Equipment | 2 | 2 |
| Consumer | 5 | 6 |
| Textiles | 5 | 6 |
| Total | 17 | 19 |
Social Returns from PSEs
The social objectives of the PSEs include development of infrastructure, employment generation and income redistribution . The process of planning in India emphasises the need for balanced growth . thus , while deciding on the location of public enterprises, the level of development of the region is considered along with the techno-economic feasibility of the projects. Therefore, the share of capital investments by PSEs are found to be evenly distributed among different states with only one State, Maharashtra accounting for double digit share in gross capital employed by the PSEs as on end March, 1998.
Administered pricing policy of public products was the major instrument of ensuring social returns, often at the cost of financial health of PSEs. An equitable pricing policy led PSEs to deviate from the profit maximising principle while charging for their products. The social gains from such a policy was accompanied by reduced internal resource generation making the PSEs more dependent on budgetary resources.
Also,employment generation was considered to be a means to ensure balanced regional development and in removing income disparities. Accordingly, employment in the public sector rose steadily till the end of the seventh plan and stood at the peak level of 22.36 lakhs. The average emoluments of Rs. 0.44 lakhs per annum inflated the wage bills of the enterprises and was a drag on the profitability of PSEs. The PSS also contributed generously towards the welfare of their staff, through housing and township development.
Reservations for weaker segments of the society is another aspect of the social returns from public enterprises. As on 1.1.99, 24 per cent of workforce (5.1 lakh) were from the reserved categories. This report, around 1 lakh women are at present employed by these units.
Sectoral Performance
The sectoral performance of the public sector enterprises presented in the Table below indicates that a very high proportion of PSE profits came from Oil,Power,Coal, Telecommunication and Financial Services sectors. Their aggregate profit for 1998-99 at Rs. 17,767 crore was higher than the combined net profit of all central PSEs indicating that the rest of the PSEs in other sectors reported a net loss of Rs. 4532 crores. Enterprises in Steel,Fertilisers, Consumer goods , Agro-based units,and Construction services performed poorly incurring a loss of Rs.6,406 crores. (Table enclosed ). An examination of the performance of PSEs in different sectors over the last decade does not reveal any significant change in the profit making and loss making sectors. An effective stategy for the sectors where PSEs are saddled with persistent losses remains a priority in the reform process. As some of the sectors such as consumer goods and construction services are not essential and core sectors, there appears to be a strong case for the retreat of the State in these sectors. Suitable reform measures for PSEs in the Fertiliser and Textile sectors needs to be chalked out in the near future. The recent Government decision ( May 26,2000) of disinvestment of Air India is an effort in this direction .
SECTION III
Financial Performance of Major public sector enterprises
In order to elicit more information on the forces influencing the profitability and general performance of PSEs , we present an analysis of 40 Large Public Sector Enterprises ranked in terms of turnover. The sample selected is representative, as they account for around 89 per cent of total turnover of all PSUs, 67 per cent of employment and 76 per cent of capital employed. These 40 enterprises also accounted for 57 per cent of foreign exchange earnings by all central PSEs. In this analysis, we look into profitability, turnover, inventories, value added, value added less wages, foreign exchange earnings, disinvestment strategies , capacity utilisation, employment and capital employed by the selected organisations and try to derive the proximate sources or determinants of profitability through cross sectional analysis.
Prima facie observation of these enterprises reveal that net profits were reported by 33 out of 40 units in our sample. Petroleum, Telecommunication and Power units accounted for the major share of profits. , while major sources of losses were enterprises in steel and coal sectors (SAIL , Rashtriya Ispat Nigam , Eastern and Cental Coalfields, Bharat Coking Coal and Air india). Average n of days of inventories of these units turned out to be 72 days, marginally higher than the average for all units of 64 days. All these big units reported positive value added. The average capacity utilisation of these units was 90 per cent . The aveage use of capital of these units was Rs. 5195 crore while average employment of these units was 33,356.
We present the correlogram below showing the relationship between profitability and other performance variables of PSEs .
Table : Correlation of Profitability and Other Performance Indicators of Selected PSEs
| Association between | Correlation Coefficient |
| Profit- Turnover | 0.5 |
| Profit-Disinvestment | 0.47 |
| Profit-Capacity utilisation | 0.54 |
| Profit – Value added | -0.25 |
| Profit- value added less Wages | 0.40 |
| Profit- Employment | -0.47 |
The correlation coefficients of the table above indicate positive association of profit and turnover( the size variable) , weak positive association of profit and disinvestment efforts (the privatisation variable) and a positive association between net profit and capacity utilisation . Interestingly, value added by the enterprise did not seem to have a positive relation with net profit . After deducting wages from value added, a positive correlation of Value added and profit could be established indicating the crucial importance of wage bill on the profitability of PSEs. Employment as a share of capital employed was found to be negatively related to the profitability of the enterprises in the sample.
Sectoral Profitability of PSEs -1998-99
| 1992-93 | 1993-94 | 1994-95 | 1995-96 | 1996-97 | 1997-98 | 1998-99 | |
| 1.Steel | -200.27 | -116.73 | 720.18 | 1041.94 | -240.02 | -511.92 | -2396 |
| 2.Minerals & Metals | 373.62 | 231.04 | 629.08 | 1044.93 | 636.4 | 744.2 | 427.9 |
| 3.Coal & Lignite | 369.46 | 511.45 | 203.05 | 846.89 | 1311.97 | 1788.94 | 1727.7 |
| 4.Power | 1029.01 | 1013.53 | 1133.47 | 1607.85 | 2049.06 | 2743.77 | 3540.8 |
| 5.Oil Sector | 2330.28 | 3947.48 | 4563.55 | 5154.66 | 5526.14 | 7420.74 | 8607.3 |
| 6.Fertilizers | -564.76 | -272.81 | -377.53 | -717.93 | -977.61 | -1143.12 | -1419.53 |
| 7.Chemicals & Pharmaceuticles | 38.12 | -15.9 | 481.52 | 534.24 | 357.71 | 13.63 | -257.3 |
| 8.Heavy Engineering | -107.38 | -369.91 | -430.02 | -166.75 | 185.23 | 457.78 | 541.27 |
| 9.Medium & Light Engg | 111.91 | -48.85 | -170.76 | -416.8 | -257.55 | -198.75 | -125.66 |
| 10.Transportation | -134.69 | -165.63 | -68.68 | -156.5 | -50.54 | -57.67 | 81.58 |
| 11.Consumer Goods | -414.36 | -699.26 | -641.02 | -496.54 | -425.83 | -503.25 | -869.99 |
| 12.Agro based Industries | -11.28 | -3.88 | 3.38 | 3.92 | -1.07 | -9.17 | -12.62 |
| 13.Textiles | -650.1 | -640.68 | -443.01 | -680.1 | -725.48 | -901.92 | -1090.63 |
| Maufacturing (A) | 2169.56 | 3369.85 | 5603.41 | 7599.81 | 7370.41 | 9958.6 | 8754.75 |
| 55.32 | 66.28 | 35.63 | -3.02 | 35.12 | -12.09 | ||
| 1.Trading & Marketing Services | 153.49 | 122.94 | 142.78 | 125.48 | 146.97 | 103.61 | 69.34 |
| 2.Transportation Services | 123.51 | -31.57 | -48.05 | -183.03 | 230.17 | 530.46 | 500.6 |
| 3.Contract and Construction Services | -125.44 | -234.42 | -196.89 | -119.84 | -225.15 | -445.77 | -630.91 |
| 4.Ind.Dev.& Technology. Construction.Services | 244.98 | 231.52 | 257.23 | 342.84 | 407.68 | 437.96 | 585.27 |
| 5.Tourist Services | -4.4 | 3.94 | 31.67 | 81.29 | 84.38 | 50.575 | 9.22 |
| 6.Financial Servicers | 376.53 | 545.15 | 492.91 | 555.77 | 493.61 | 940.62 | 1268.93 |
| 7.Tele Communication Services | 320.74 | 520.26 | 879.65 | 1139.15 | 1437.53 | 2098.04 | 2622.2 |
| 8.Section 25 Companies | 12.24 | 17.21 | 23.99 | 32.85 | 46.22 | 51.14 | 55.17 |
| Services (B) | 1101.65 | 1175.03 | 1583.29 | 1974.51 | 2621.41 | 3766.63 | 4479.82 |
| 6.66 | 34.74 | 24.71 | 32.76 | 43.69 | 18.93 | ||
| TOTAL (A+B) | 3271.21 | 4544.88 | 7186.7 | 9574.32 | 9991.82 | 13725.23 | 13234.57 |
| 38.94 | 58.13 | 33.22 | 4.36 | 37.36 | -3.57 |
| Table : Performance of 40 Largest Public Sector Enterprises by Turnover : 1998-99 | ||||||||
| PSE | Profit | Turnover | Inventories | Value Added | Forex Earning | Disinvestment | Utilisation | Employment |
| (Rs.crore) | (Rs.crore) | (Days of Production) | (Rs.crore) | (Rs.crore) | (Per cent) | (Per cent) | (Nos) | |
| IOC | 2214 | 63581 | 37 | 10525 | 1408 | 19 | 99.3 | 33515 |
| HPCL | 901 | 23190 | 27 | 3443 | 30 | 49 | 91 | 11583 |
| Food corp of India | N.A. | 22443 | N.A. | N.A. | 0 | 0 | 62959 | |
| BPCL | 706 | 21599 | 26 | 3683 | 299 | 34 | 130 | 12264 |
| SAIL | -1573 | 15156 | 168 | 4881 | 552 | 14 | 86 | 169308 |
| ONGC | 2755 | 14963 | 74 | 9978 | 0 | 16 | 97 | 41040 |
| NTPC | 2816 | 14081 | 60 | 7312 | 2 | 44 | 73 | 23630 |
| VSNL | 1324 | 6831 | 0 | N.A. | 0 | 47 | 2975 | |
| BHEL | 545 | 6795 | 107 | 3050 | 190 | 32 | 62212 | |
| GAIL | 106 | 6643 | 15 | 1548 | 0 | 17 | 82 | 3057 |
| IBP Co | 35 | 5670 | 39 | 1172 | 3 | 0 | 104 | 2727 |
| MTNL | 1297 | 5032 | 25 | N.A. | 0 | 44 | 61967 | |
| MMTC | 18 | 4290 | 16 | N.A. | 100 | 1 | 2986 | |
| COCHIN Refinery | 338 | 4171 | N.A. | 639 | 0 | 6 | 104 | 1785 |
| AIR INDIA | -174 | 4135 | 35 | N.A. | 2598 | 0 | 18658 | |
| Indian Petro Chem | 29 | 3850 | 78 | 1414 | 133 | 40 | 104 | 13402 |
| Madras Refinery | 205 | 3747 | N.A. | 543 | 0 | 17 | 74 | 1749 |
| Indian Airlines | 13 | 3424 | 19 | N.A. | 1424 | 0 | 21922 | |
| S.E. Coalfields | 416 | 3292 | 50 | 2341 | 0 | 0 | 93 | 98105 |
| Rashtriya Ispat | -457 | 2761 | 132 | 469 | 293 | 0 | 60 | 17400 |
| IRFC | 326 | 2558 | N.A. | N.A. | 0 | 0 | ||
| Shipping Co | 201 | 2521 | 19 | N.A. | 2549 | 19 | 9383 | |
| W. Coalfields | 259 | 2436 | 36 | 1882 | 0 | 0 | 96 | 83156 |
| C.Coalfields | -149 | 2326 | 66 | 1575 | 0 | 0 | 78 | 84993 |
| National Fertilisers | 41 | 2302 | 120 | 811 | 0 | 2 | 6742 | |
| N. Coalfields | 529 | 2181 | 91 | 1526 | 1 | 0 | 99 | 17193 |
| RCF | 106 | 2061 | 86 | 834 | 2 | 8 | 5545 | |
| E.Coalfields | -473 | 2049 | 47 | 1645 | 0 | 0 | 74 | 142746 |
| Hindustan Aeronautics | 178 | 2048 | 238 | 1217 | 0 | 0 | 34828 | |
| Bharat Coking Coal | -442 | 2008 | 96 | 1553 | 0 | 0 | 70 | 127072 |
| State Trading Co | 13 | 2006 | 34 | N.A. | 57 | 9 | 1628 | |
| Nuclear power Co | 362 | 1940 | 35 | 979 | 0 | 0 | 11825 | |
| Power Grid Co | 444 | 1710 | N.A. | N.A. | 0 | 0 | 6811 | |
| Neyveli lignites | 575 | 1704 | 142 | 1431 | 0 | 6 | 114 | 21357 |
| Airport Authority of India | 208 | 1591 | N.A. | N.A. | 425 | 0 | 18854 | |
| Mahanadi Coalfields | 406 | 1558 | 48 | 1317 | 0 | 0 | 106 | 22983 |
| ITI | 27 | 1539 | 154 | N.A. | 7 | 23 | 23945 | |
| National Aluminium | 248 | 1506 | 126 | 940 | 559 | 13 | 92 | 6468 |
| Power finance Co. | 541 | 1397 | N.A. | N.A. | 0 | 0 | 271 | |
| hindustan Zinc | 76 | 1309 | 138 | 748 | 65 | 24 | 62 | 11851 |
| PSE | Capital employed | Wage Bill | Value Added less Wages |
| Rs.cr | Rs.cr | Rs.cr | |
| IOC | 12344 | 759 | 9766 |
| HPCL | 3729 | 275 | 3168 |
| Food corp of India | 15147 | 1008 | @ |
| BPCL | 3487 | 282 | 3401 |
| SAIL | 23499 | 2381 | 2500 |
| ONGC | 27941 | 342 | 9636 |
| NTPC | 24843 | 476 | 6836 |
| VSNL | 4301 | 79 | @ |
| BHEL | 3164 | 1242 | 1808 |
| GAIL | 4938 | 53 | 1495 |
| IBP Co | 529 | 64 | 1108 |
| MTNL | 9376 | 616 | @ |
| MMTC | 745 | 72 | @ |
| COCHIN Refinery | 1122 | 35 | 604 |
| AIR INDIA | 3658 | 967 | @ |
| Indian Petro Chem | 5495 | 301 | 1113 |
| Madras Refinery | 1527 | 52 | 491 |
| Indian Airlines | 2200 | 875 | @ |
| S.E. Coalfields | 2298 | 984 | 1357 |
| Rashtriya Ispat | 5960 | 255 | 214 |
| IRFC | 12497 | 0.23 | @ |
| Shipping Co | 3300 | 342 | @ |
| W. Coalfields | 1425 | 855 | 1027 |
| C.Coalfields | 2289 | 921 | 654 |
| National Fertilisers | 2173 | 152 | 659 |
| N. Coalfields | 1784 | 229 | 1297 |
| RCF | 1513 | 91 | 743 |
| E.Coalfields | 776 | 1506 | 139 |
| Hindustan Aeronautics | 1099 | 509 | 708 |
| Bharat Coking Coal | 1332 | 1276 | 277 |
| State Trading Co | 525 | 46 | @ |
| Nuclear power Co | 2980 | 109 | 870 |
| Power Grid Co | 7588 | 106 | @ |
| Neyveli lignites | 4006 | 317 | 1114 |
| Airport Authority of India | 1437 | 541 | @ |
| Mahanadi Coalfields | 1279 | 244 | 1073 |
| ITI | 1066 | 305 | @ |
| National Aluminium | 3014 | 126 | 814 |
| Power finance Co. | 367 | 10 | @ |
| hindustan Zinc | 1033 | 202 | 546 |
Problems facing the PSEs in India and the need for second phase of reforms
Despite the progress made in the reform of public sector enterprises, several significant challenges face the Indian policymakers in the near future. These are to attain internal resource generation in a greater number of PSES by raising their operational efficiency, reducing cross-holdings of PSE shareholdings among Government and All India financial institutions, giving true powers to the Disinvestment Commission and ensuring that the cost of financial restructuring of the PSEs is minimized and institution of a workable exit policy. A major challenge before the policy authorities is to address these institutional rigidities that persist even after almost a decade of PSE reform. There is a need to arrive at a workable framework to ensure an efficient unbundling of so-called natural monopolies .
Cross Holding of shares as an Impediment towards transition from State to market
Cross holding of equity by PSUs was conceived by Government of India so as to allow one Government company to develop a strategic partnership with another Government company. The objective was to be achieved by permitting Government companies to acquire a block of shares in each others’ equity. This arrangement was also to serve as a mechanism for disinvestment of Government of India’s share holding in PSUs . Cross holding of Shares was also introduce to allow Oil companies to develop synergetic relationship so as face global competition jointly, Government of India decided (January 1999) that the three Government companies, viz. Oil & Natural Gas Corporation Ltd.(ONGC) , Indian Oil Corporation Ltd.(IOC) and Gas Authority of India Ltd.(GAIL) would cross-hold equity as follows: ONGC and IOC purchased 10 percent of each other’s equity being held by Government of India ; ONGC and IOC bought 5 percent of equity of GAIL being held by Government of India; and GAIL bought 2.5 percent of equity of ONGC being held by Government of India.
While ONGC & IOC have financed investment of Rs.1501.18 crore and Rs.2470.19 crore respectively from their internal resources, GAIL invested Rs.556.28 crore in the equity of ONGC partly through borrowing. While a sum of only Rs.256.28 crore could be obtained from their internal resources; the balance of Rs 300 crore was raised through a bank loan at 13 percent rate of interest. Since dividend is paid/payable only on the face value of the shares, it requires at least a dividend return of 210% on the face value of shares purchased to meet the payment of interest on the loan of Rs.300 crore. Hence, the dividend of 55 percent (1998-99) from ONGC was not sufficient to neutralize the cost of borrowing. Such crossholding through borrowing can thus affect the financial position of PSEs.
HIDDEN SUBSIDIES TO PSUS – Need for Reform
Since the initiation of structural reforms in the Indian Economy in 1991, the Central Government has undertaken various measures to reduce their subsidy burden. These measures include, among others, phasing out unnecessary subsidies and targeting subsidies to the weaker segments of the population. Such efforts have resulted in a reduction of the subsidy burden from 1.8 per cent of GDP in 1991-92 to 1.2 per event in 1999-2000. However, apart from these explicit subsidies, there are certain implicit or hidden subsidies on which significant costs are incurred by the Government. Some of these are credit subsidy, tax subsidy, equity subsidy, regulatory subsidies. These have however not been curbed through policy measures. The CAG in its Report ‘Union Government (Civil) Accounts of the Union Government, No.1 of 1999 has made a laudable effort to identify two major equity subsidies are incurred by the Central Government but are not explicitly accounted for.The first hidden subsidy identified by the CAG relates to investments made by Government in PSUs and statutory corporations. While the dividend received by the Government ranged from 1.43 per cent to 3.19 per cent during 1993-94 to 1997-98, the interest paid by the Government in the form of reinvestment of the equity in Government securities ranged between 11.90 per cent to 13.75 per cent. Thus, the hidden subsidy to PSUs based on the CAG report is around 0.33 per cent of GDP in 1997-98.
| Table : IMPLICIT Subsidies to PSUs and Statutory Corporations (Based on CAG Report- Rs crore) | ||||||
| YEAR | TOTAL | DIVIDEND | PERCENTAGE OF | WEIGHTED AVERAGE | Implicit Interest | HIDDEN SUBSIDY |
| INVESTMENT | RECEIVED | DIVIDEND TO | OF COUPAN RATE ON | Subsidy | To PSUs | |
| INVESTMENT | GOVT.’S DATED | col2 x (col5-Col4) /100 | ||||
| SECURITIES | As Per cent of GDP | |||||
| 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| 1993-94 | 44116 | 633 | 1.43 | 12.63 | 4940.99 | 0.56 |
| 1994-95 | 47070 | 824 | 1.75 | 11.9 | 4777.61 | 0.46 |
| 1995-96 | 49737 | 1216 | 2.44 | 13.75 | 5625.25 | 0.46 |
| 1996-97 | 53194 | 1577 | 2.96 | 13.69 | 5707.72 | 0.40 |
| 1997-98 | 57120 | 1820 | 3.19 | 12.01 | 5037.98 | 0.33 |
Source : CAG Report ‘Union Government (Civil) Accounts of the Union Government, No.1 of 1999 and (b) CAG,
A reassessment of returns from PSEs is therefore necessary and policy should be guided through a comprehensive assessment of profitability and social returns.
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