[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
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REIMAGINING INDIA<br />
Figure 2. Distribution Of Rates Of Return Of Public Sector Enterprises<br />
Rate of Return (%)<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
-40<br />
PrivateSector Listed Firms<br />
PSEs (Centre)<br />
PSEs (State)<br />
-50<br />
0 10 20 30 40 50 60 70 80 90<br />
Percentile<br />
cies of the central and state governments<br />
often favour PSEs. Because they<br />
dominate some markets, political interference<br />
in the operation of PSEs also<br />
adversely influences overall market conditions.<br />
7. <strong>The</strong>re have been some attempts to<br />
commercialise the activities of central<br />
PSEs through, for example, the Navratna<br />
and Mini-Ratna concepts and<br />
the introduction of higher limits for investments<br />
that do not need to be cleared<br />
by parliament. <strong>The</strong> proportion of loss<br />
significant variation across states (Table<br />
1). With a large tail of unprofitable<br />
firms, the total losses of loss-making<br />
central and state PSEs amounted to almost<br />
1% of GDP in 2005.<br />
8. <strong>The</strong>re are a number of ways in which<br />
the corporate governance of the PSEs<br />
could be improved to ensure a level<br />
playing field and government neutrality<br />
in its dealings with the private sector<br />
and thereby increase competition. <strong>The</strong><br />
centre and state governments need to<br />
transparently unbundle the commercial<br />
<strong>The</strong> financial health of the state-owned PSEs is, on average,<br />
poor and worse than that of the central enterprises.<br />
<strong>The</strong> total losses of loss-making central and state PSEs<br />
amounted to almost 1% of GDP in 2005<br />
making central enterprises has been reduced<br />
but, even so, the return earned by<br />
the median PSE was only 3% in 2005<br />
(after subsidies) against 10% in the private<br />
sector (Figure 2). <strong>The</strong> financial<br />
health of the state-owned PSEs is, on<br />
average, poor and worse than that of the<br />
central enterprises, although there is<br />
and promotional/policy roles of the<br />
PSEs. Moving towards a more centralised<br />
model of PSE management would<br />
be a large step in this direction. Currently,<br />
at the centre, responsibility for<br />
the PSEs rests primarily with the line<br />
ministry while the Department of Public<br />
Enterprises plays a coordinating role<br />
and elaborates the overall<br />
ownership policy. This decentralised<br />
model was predominant<br />
in OECD countries before<br />
the first wave of public<br />
sector reforms during the<br />
1970s. With the shift from<br />
industry-specific policies to<br />
more framework-oriented<br />
and market liberalisation<br />
policies, the main advantage<br />
of this approach of allowing a<br />
more activist industrial policy<br />
has now vanished.<br />
9. A more centralised approach,<br />
where PSEs are put<br />
under the responsibility of an investment<br />
agency, would achieve a clearer<br />
separation between policy and commercial<br />
functions and distance PSEs from<br />
political control. It would also facilitate<br />
a more unified and consistent ownership<br />
policy, simplify the often elaborate<br />
committee structures that currently supervise<br />
and control PSEs, and ensure<br />
equitable treatment of non-state shareholders.<br />
Care would be needed to ensure<br />
that centralising the ownership<br />
function of the PSEs did not entail the<br />
creation of additional layers of control<br />
or bureaucracy within government. Ultimately,<br />
the structure of the public administration<br />
needs to be reorganised to<br />
be more consistent with a modern-day<br />
focus on general framework conditions<br />
instead of the current “command and<br />
control” approach. This will entail a<br />
significant consolidation and reduction<br />
in the number of ministries and departments<br />
in both the central and state<br />
governments.<br />
10. In addition to a more centralised approach,<br />
the way in which any remaining<br />
140 THE <strong>IIPM</strong> THINK TANK