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T
he public sector in India, in its broadest measure as as on the basis of many non-economic factors, with the proviso
recorded in the National Accounts Statistics (NAS), that the way to reconcile these conflicting aims is to evolve
currently contributes to about a quarter of the gross institutional mechanisms to insulate public sector management
domestic product (GDP) increasing from slightly less than from short-term economic considerations and political inter-
one-tenth in 1960-61 (the earliest year with firm estimates). The ference. Many organisational innovations, with modest
gross value added of the administrative departments, broadly success, have been tried: setting up of holding companies,
representing Adam Smith’s “duties of the sovereign”, account entering into a formal contract between the management and
for 8 to 9 per cent of GDP; natural monopolies such as the railways the government, called a memorandum of understanding
and the postal system add another 3 to 4 per cent. But the largest (MoU), and so on.
share of public sector gross value added, 12 to 13 per cent of Since the early 1990s, seized with fiscal imbalance, the
GDP, comes from the non-departmental enterprises (NDEs), government sought to dilute public ownership (and control)
producing many private goods and services, but mainly from in order to impart capital market-based discipline on public
utilities and infrastructure, owned and operated by the central, sector management. In sectors with non-corporate entities (power
state and local governments. NDEs are further disaggregated into and ports, for instance), corporate forms of organisation were
(a) financial enterprises that are part of the financial sector encouraged, with (the tacit) prospect of an eventual change in
(including the Reserve Bank of India), and (b) the non-financial their ownership. However, experience and political expediency
enterprises, which account for much of the growth in public sector seem to have changed the stance from disinvestment and
output during the last half century. privatisation to “public-private partnership”. 1 The reforms
Such a rising share is justifiable on conventional economic sparked (an expectedly inconclusive) debate and political action,
as well as radical arguments. But extension beyond these on the need for and the effects of the reforms on public sector
activities has been criticised for being responsible for the performance.
widely cited inefficiency, and for the public sector’s financial But this has deflected attention away from a careful analysis
losses. In the popular perception, Modern Bread and Ashok of what has really happened. This paper seeks to redress the
Hotel, for example, are emblematic of everything that is situation by taking a fresh look at public sector output,
wrong with the extension of the state in the economic investment and saving behaviour over the last half century in
sphere. Since the public sector was an instrument of the deve- relation to the national economic aggregates, mainly using the
lopment strategy, its microeconomic inefficiency was be- NAS that furnish a complete and consistent time series since
lieved to have got translated into fiscal imbalances that 1960-61, though restricted to a few aggregative measures.
periodically aggravated inflation and the balance of payments Using a set of graphs, Section I tries to diagnose public sector
[Joshi and Little 1994]. performance; Section II suggests an explanation for the findings,
Without denying these arguments, the growing spread of the and Section III draws the main conclusions and their policy
public sector is often defended on strategic considerations as well implications.
20 6
15 5
4
Ratio
10
3
5
2
0
1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 1
Year ending 0
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
GDCF/GDP ratio GDCF/GDP ratio Public sector GDP/GDP Year ending
(1950-51 to 1978-79) (1960-61 to 2001-02)
Total Public Sector Private sector
Figure 2: Composition of Public Sector Output
16
Figure 4: Composition of Public Investment
14
12 60
Per cent of GDP
10 50
8 40
Per cent
6 30
4 20
2 10
0 0
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001
Year ending
Year ending
Administration Dept enterprises Non-Dept enterprises Infrastructure Manufacturing
Per cent
20 20
10
10
0
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 0
Year ending –10 2
2
90
66
70
74
78
82
86
94
98
6
Share of Infrastructure Year ending
CPEs Quasi govt Total Public Sector
Figure 6: Manufacturing Sector Share in Public Sector Output Figure 8: Electricity Sector Performance
90
25 80
70
20
60
Per cent
Per cent
15 50
10 40
30
5
20
0 10
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001
0
Year ending
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Share of Manufacturing
Year ending
Plant load factor Revenue to cost ratio
Fall in Public Sector Employment Growth 1998-99 (Figure 9). But much earlier in 1986-87 the saving
ratio of government administration turned negative, which is the
A bloated workforce, often employed on non-economic same as the government’s revenue deficit ratio. It is the NDEs’
considerations, is widely cited as a source of public sector saving that has kept the public sector saving positive for over
inefficiency. But the evidence suggests that despite such pres- a decade.8
sures, the growth rate in public employment has declined dras- Figure 10 gives a break-up of the NDEs’ saving (as proportions
tically: from about 6 per cent per year in the mid-1970s to a of current GDPmp) into (i) non-departmental financial enterprises
negative 1 per cent in 2002-03 in public sector enterprises owned (NDFEs) that are part of the banking and financial system, and
and managed by the central government (central PSEs, for short), (ii) non-departmental and non-financial enterprises (NDNFEs)
in quasi public sector, and in the public sector as a whole as well that comprise public entities producing goods and services at all
(Figure 7).6 Without denying the need for further rationalisation levels of government. Over the four decades, savings of the non-
of the workforce, what can certainly be claimed is that public financial enterprises contributed a greater share of NDEs’ saving;
sector employment growth has got drastically reduced in the financial sector’s share is consistently lower.
spite of the compulsions to the contrary, contributing to the Between 1980-81 and 1994-95, NDNFEs’ share in gross public
improved productivity. saving rose rapidly (though it declined in the following five
years). But even this component of public saving does not seem
Improvement in Efficiency of Thermal to adequately reflect the improved physical performance noted
Power Plants above. In the absence of further disaggregation in the NAS, we
turn to other data sources to seek an answer.
Gross inefficiency in thermal power plants, producing the bulk
of the nation’s electricity generation, is also a widely cited reason Central PSEs’ Profitability
for poor productivity. But the average plant load factor (PLF)
for all the thermal power plants (a proxy for efficiency) has What is the correct measure of profitability? It depends upon
witnessed an uninterrupted rise from 44.3 per cent in 1979-80 the purpose. From the view point of a private individual, the ratio
to over 74.8 per cent in 2004-05 (Figure 8).7 Since the electricity of net profits to equity capital (or net worth) may be appropriate,
sector roughly accounts for about a third of total public invest- but it may be unsuitable to measure a PSE’s contribution to the
ment, such an improvement would have surely contributed to economy, for many reasons. One, PSEs usually have a high
the overall productivity growth noted above. depreciation cost since they have to invest not only in plant and
Although the forgoing measures of physical efficiency display machinery, but also on social overhead capital, for which bud-
impressive strides, does it show up in the financial results? getary provisions are made. Second, a PSE’s capital structure
is not aimed to maximise return on shareholders’ investment, but
Public Sector Saving provision of goods and services that the market has not (or
inadequately) succeeded in supplying – the argument of “missing
Public sector gross saving, as a proportion of current market”. Third, very often PSEs start with a high proportion of
gross domestic product at market prices (GDPmp) peaked at debt as government expects a certain interest on its loans. When
4.9 per cent in 1976-77, declined thereafter, turning negative in the enterprise commences production it is often saddled with a
4.0
20
2.0
15
Per cent
0.0
1957
1960
1963
1993
1996
1951
1954
1966
1969
1972
1975
1978
1981
1984
1987
1990
1999
2002
-2.0 10
-4.0
5
-6.0
0
-8.0
Year ending 74 76 78 80 82 84 86 88 90 92 94 96 98 2000 2002 2004
Year ending
Public sector saving Public admn Non-Dept enterp
CPE’s profitability CPE’s Profitability net of petroleum firms
Figure 10: Disaggregation of NDEs’ Saving Figure 12: Indian Railway’s Financial Performance
2.5
140
Per cent of current GDPmp
2 120
1.5 100
Per cent
80
1
60
0.5 40
0 20
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 0
1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003
Year ending
Year ending
NDNFEs’ Saving NDFEs’ Saving
Revenue to cost ratio
high debt-equity ratio, which is usually renegotiated to make in spite of a sustained increase in the physical efficiency of power
the enterprise commercially viable. Finally, for the economy, generation, the SEBs’ finances have deteriorated.
what matters is not the capital structure but return on total Similarly, Figure 12 records revenue-cost ratio for the railways
capital employed. Thus, gross profit to total capital employed for 53 years since 1950-51.10 The ratio was consistently greater
is a better measure of public sector profitability, which we have than one up to 1990-91, but deteriorated thereafter. Though the
used below. information for the RTCs is limited to nine years, the trend is
Thus measured, profitability of the central PSEs has increased unmistakably similar: a decline from 91.4 in 1992-93 to 88.7
from around 8 per cent in the mid-1970s to 21 per cent in in 2000-01 (Figure 13).11
2003-04 – a respectable figure by any reasonable reckoning Thus, we identify these services as potential suspects for the
(Figure 11). Such rosy estimates may conceal the effect of high public sector’s poor financial results. The finding is tentative as
mark-up, cost-based administered pricing in the performance of it is based on a single financial indicator and it warrants a more
petroleum companies. Surely, net of the petroleum sector, the detailed analysis. But considering that they constitute the bulk
profitability is lower, but with an unmistakable rising trend, at of the non-financial public sector outside of the central PSEs,
18 per cent return on gross capital employed in 2003-04. the finding seems robust.
Thus, the central PSEs as a source of NDNFEs’ poor financial Admittedly, deterioration in the revenue to cost ratio could be
position is ruled out, leaving us mainly with the utilities and either due to relatively faster rise in costs and increase in
infrastructure services at the state level – that is, state electricity inefficiency, or poor pricing and low recovery of user charges,
boards (SEBs) and road transport corporations (RTCs). In prin- or both. As there is an unmistakable rise in efficiency of thermal
ciple, public irrigation would belong to this category, as it power plants for nearly 30 years now, the decline in revenue
accounts for a sizeable share of plan expenditure in most states. to cost ratio can only be on account of poor pricing and recovery
But as it is included in the administrative department, its accounts of dues. One suspects the problem is no different in the railways
are not available separately, hence not considered here.9 But and RTCs.
railways are included in our analysis below as it also has similar Thus, the real culprit of poor public sector saving is not the
features. central PSEs (that have been the subject of much of reforms)
but inadequate pricing of the utilities and infrastructure services,
Problem of Pricing and lack of recovery of user charges for the services rendered.
Perhaps a telling evidence of the problem, in the aggregate, is
Figure 8 also displays SEBs’ revenue-cost ratio since 1993-94, the movement of the public sector price deflator, relative to the
as a proxy for financial performance. Although the PLF has gone GDP deflator since 1960-61 (Figure 14). Over the last 40 years
up from 55 per cent in 1975-76 to 75 per cent in 2004-05 (as public sector prices never exceeded the overall price level, and
noted earlier), the revenue-cost ratio has declined from 82.2 per in 2003-04 the relative price stood just 83 per cent of what it
cent in 1993-94 to 68.6 per cent a decade later. In other words, was in 1960-61. In other words, public sector prices have risen
92 100
Per cent
90 80
88
60
86
40
84
20
82
1993 1994 1995 1996 1997 1998 1999 2000 2001
Year ending 0
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003
Revenue to cost ratio Year ending
Budgetary support Internal resources
Figure 14: Ratio of Public Sector Deflator and GDP Deflator
120 deflator output relative to the GDP deflator over the last 40 years
100 since 1960-61.
Index number
80
II
60
Reasons and Implications
40
What accounts for the changes in the performance of the public
20
sector? Arguably, the market-oriented reforms since the 1980s
0 could have induced the desired effect. But, such an explanation
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001
Year ending
would seem too facile to be taken seriously, in the absence of
Public sector deflator/GDP deflator
a casual explanation between the reforms and the observed
improvement. Since revenue to cost ratios deteriorated in the
1990s in an atmosphere of neglect and tacit threats of privatisation
at a slower rate than the overall prices in the economy over and retrenchment of workers, the argument of positive effects
the long run, adversely affecting its financial position. of the reforms on efficiency seems simply not a serious one.
However, as these are decreasing cost industries, their prices But probably what has perhaps been happening is (i) a hardening
can be expected to rise relatively slowly. But they are also capital- of the budget constraint, accompanied by a greater managerial
intensive industries, where the principle of access to these ser- autonomy, and (ii) a growing competition in the product market.
vices on social considerations raises the cost of provision. In NDNFEs, between 1960-61 and 2002-03, government’s
Moreover, the public sector, being an instrument of public policy budgetary support (sum of equity capital and loans) declined,
is often made to shoulder many social responsibilities, increasing and the share of internal resources (depreciation and net
its expenditure, which needs to be recovered from reasonably saving) rose, both as a proportion of gross fixed capital formation
pricing the output or from the budget. With a growing fiscal (Figure 15). In 1963-64, budgetary support was 97.6 per cent
imbalance, reasonable pricing is the only avenue to compensate of fixed capital formation, which came down to as little as 16.9
for the services rendered. per cent in 1996-97; the share of internal resource went up from
To recapitulate the main findings so far, 11.2 per cent in 1960-61 to 73 per cent in 2002-03.12 Changes
(1) There is a distinct improvement in the efficiency of resource in market conditions and financial governance could have ensured
use in the public sector in the aggregate since the second half greater accountability and cost consciousness. But these advan-
of the 1980s, and a corresponding fall in the average capital output tages could not get translated into improved financial results, as
ratio. pricing and recovery of user charges continued to remain a matter
(2) Improvement in physical efficiency, in part, may reflect of public policy.
a fall in public sector employment growth (however, measured). The problems of inadequate electricity pricing, incomplete
(3) Thermal power plants in India that account for the bulk metering of power usage and recovery of user charges are too
of electricity generation (and a sizeable share of public invest- well known to be recounted here. Railway finances were a victim
ment) show an uninterrupted rise in efficiency. of coalition politics and competitive populism, as evident from
(4) These trends are, however, inadequately reflected in public a sharp decline in the revenue to cost ratio in the 1990s.13 In
sector financial performance, despite a sustained improvement the passenger road transport sector, open and covert deregulation
in profitability of the central PSEs (even excluding the petroleum of profitable long distance inter-city routes could have adversely
enterprises). affected RTCs’ revenues; increasing the subsidy burden on social
(5) Thus, the source of financial distress is the utilities and considerations, without a rational rise passenger fares could have
infrastructure services, like the SEBs, RTCs and the railways. seriously dented their financial viability.
(6) The SEBs’ revenue-cost ratio deteriorated since the 1990s; In principle, these financial losses can be withstood if buoyancy
the same is true of the railways and the RTCs. in tax collection as a proportion of domestic output is maintained
(7) That inadequate pricing of the output public sector utilities by tapping producers and consumers at different points in the
is the main reason for their deteriorating financial position is circular flow of commodities and incomes in an expanding
illustrated by a 17 percentage point fall in the public sector price economy. Alternatively, the growing public domestic debt burden