Public Enterprise, 2019, Issue 24., Vol.1, Article 1

Bolder Disinvestment or Better Performance Contracts?

Which Way Forward for India's State-Owned Enterprises

Ajay Chhibber

National Institute of Public Finance and Policy, New Delhi, India

Institute of International Economic Policy, George Washington University, Washington, DC, USA

Swati Gupta

National Institute of Public Finance and Policy, New Delhi, India

Received March 2018; Revised January 2019; Accepted January 2019

https://doi.org/10.21571/pehyj.2019.2401.01

Abstract

This paper analyses the performance of India's Public Sector Undertakings (PSUs) using measures of labour and overall efficiency and productivity indicators as opposed to financial returns. Using methods that correct for selection bias, the results show that performance contracts do not improve firm efficiency, but disinvestment has a very strong positive effect on firm efficiency. Disinvestment improves labour productivity and efficiency, which is not surprising, but it also improves overall efficiency. India should pursue much bolder privatization even of PSUs which claim to be making operational profits - such as Air India, because privatization improves overall firm efficiency and unlocks capital for use elsewhere, especially in public infrastructure, and reduces the possibility of political interference in their functioning in the future.

Keywords: Disinvestment (privatization), MOU (performance contract), public sector restructuring, public sector undertakings, state owned enterprises.

Reference to this paper should be made as follows: Chhibber, A. & Gupta, S. (2019). Bolder Disinvestment or Better Performance Contracts? Which Way Forward for India's State-Owned Enterprises. Public Enterprise, 24(1), 1-22. https://doi.org/10.21571/pehyj.2019.2401.01

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