[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

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