Vol. 2, Iss.

1 Spring 2011 Sanford Journal of Public Policy

19
Abstract
Conditioned by the International Monetary Funds Stand-By Arrangement of
1991 and growing domestic support, India adopted many Washington Consensus policies,
including privatization of state enterprises. The privatization policy has since continued with
tbe aiv of avgvevtivg re.ovrce. ava ivprorivg tbe efcievc, of tbe.e evterpri.e.. .. tbe
Indian government looks to expand privatization with the objective of raising over $5 billion
per year, it is critical to evaluate the results of privatization in India to date.
Through 2008, privatization has raised $12.9 billion, enough to bridge 2.6 percent
of tbe vaiav .cat aecit per ,ear. Priratiatiov ba. ivcrea.ea proavctirit, ava efcievc,,
bvt tbere bare at.o beev .igvicavt evpto,vevt to..e., e.peciatt, iv tbe ca.e of a..et .ate
1

privatization. As privatization can unshackle the productive potential of state enterprises,
tbe gorervvevt .bovta pvr.ve it, a. ptavvea. orerer, to aerire optivvv bevet., tbe
gorervvevt .bovta cv.tovie tbe vetboa of .ate to tbe .ie ava protabitit, of tbe evterpri.e
being divested.
The Economic Need for Privatization
India initiated its privatization program in 1991 as part of a larger
macroeconomic stabilization and structural reform effort to cope with
extremely diFcult economic conditions. Innation had risen aboe 15
percent and foreign exchange reserves were dangerously low. India had to
access International Monetary Fund (IMF) resources through a Stand-By
Arrangement in 1991. The policies adopted by the country around that time
covered the whole gamut of Washington Consensus policies, including the
DOES PRIVATIZATION LEAD TO
BENIGN OUTCOMES?
A Case Study of India
Kumar V. Pratap

Kumar V. Pratap is a doctoral candidate at the University of Maryland, College Park. He was
handling the affairs of the Ministry of Disinvestment (later Department of Disinvestment) dur-
ivg bi. tevvre a. Depvt, ecretar, at tbe vaiav Prive Mivi.ter`. Ofce iv tbe perioa 20020,
where he developed insights into privatization policy and implementation. In addition, he has been
a diplomat and has worked for the Indian Ministry of Finance. Currently, he is on leave from the
Government of India to work at the World Bank.
Kumar V. Pratap
20
privatization of state enterprises.
2
There was a growing domestic consensus
that state-owned enterprises were not generating adequate returns and were
suering rom low eFciency, and the goernment expected that priatization
of these enterprises would lead to better outcomes. In this context, the two
main objectives of privatization in India were to raise revenues to ease the
Fscal crunch and to improe the proFtability and eFciency o the diested
enterprises.
Literature Review
There is extensive literature on privatization which discusses both the
general principles behind it and how it operates in developed, developing,
and transition economies. William Megginson, Robert Nash, and Matthias
van Randenborgh looked at the effect of privatization on 61 companies
from 18 countries and 32 different industries during the period from 1961
to 1990.
3
1heir main Fnding was that the mean and median proFtability,
real sales, operating eFciency, and capital inestment spending o . . . sample
Frms increased signiFcantly ,in both statistical and economic terms, ater
privatization. The results are quite robust, as they are supported when the
data is partitioned into various sub-samples. However, this study does not
control or business-cycle eects. In addition, the sample aors larger Frms,
which subjects the results to selection bias and reduces the ability to generalize
the impact o priatization on Frm perormance.
Studies in different political settings corroborate the positive economic
impact of privatization. Simeon Djankov and Peter Murrell, reviewing more
than a hundred empirical studies on the privatization experience in transition
economies, Fnd that the aggregate eects o priatization are positie.`
4

However, the authors add that while privatization, done correctly and under
the right circumstances, can have positive effects, it can also have detrimental
results. The varying consequences of privatization across transition economies
could be partly explained by the level of development of supportive institutions,
such as courts for promoting the rule of law, and also by the adoption of
sound competition and corporate governance policies.
While the economic impact of privatization is generally found to
be benign, studies have found that the distributional impact is less so. Both
Katharina Gassner et al.
5
and Sunita Kikeri
6
have found that privatization
decreases employment. Large-scale labor redundancy at state-owned enterprises,
caused by political and bureaucratic patronage, makes labor contraction prior
to or following privatization especially likely. Some studies have found that this
Vol. 2, Iss. 1 Spring 2011 Sanford Journal of Public Policy
21
labor contraction is not necessarily a negative result; state-owned enterprises
are often over-staffed, and therefore releasing excess labor to the economy
could be beneFcial in allowing that resource to be used more productiely.
7

While some researchers suggest that governments could use public resources
to help mitigate the adverse effects on unemployed workers, that issue is also
a source of contention in its own right, and outside the scope of this paper.
8
Nancy Birdsall and John Nellis develop the distribution argument
urther, noting that priatization`s positie eects on economic eFciency
come at a cost:
[Privatization] is seen as harming the poor, the disenfranchised,
the workers, and even the middle class; throwing people out of
good jobs and into poor ones or unemployment; raising prices
for essential services
9
T.T. Ram Mohan, in a study focusing on privatization in India from
1991 to 2000, concludes that in many [developing countries], neither of the
two essential conditions for successful privatization (i.e., market-friendly
macroeconomic environment and openness of the economy to competition)
may be met adequately. Under these circumstances, private ownership cannot
be expected to produce high standards of performance.
10
The extant literature on privatization in India does not rigorously
examine the impact o strategic sales-deFned as asset sales leading to
transer o management control to the priate sector-on Frm perormance.
If ownership matters, the impact of strategic sale on enterprise performance
should be analyzed. In addition, it is important to distinguish clearly the effects
o change in ownership on Frm perormance rom those o deregulation and
economic liberalization. 1his paper endeaors to Fll these gaps in the literature
by comparing the impacts o strategic sale and partial priatization on Frm
performance. A difference-in-differences analysis is used to isolate the effect
of change of ownership from other changes taking place simultaneously. In
addition, this paper uses a Fxed eects model to control or unobsered time-
constant Frm characteristics and urther isolate the impact o priatization
on Frm perormance. 1hrough these methods, this paper aims to enrich the
literature on privatization in general and privatization in developing countries
in particular.
Kumar V. Pratap
22
Managing the Political Economy of Privatization
Privatization is fraught with political economy problems associated
with organized labor, entrenched political interests, and bureaucratic inertia.
These powerful forces can both derail the privatization process and adversely
impact other economic reforms that a country is undertaking simultaneously
with privatization. Therefore, the Indian government has made special efforts
to manage the political economy of privatization. To increase employee
support for privatization, companies have reserved a certain percentage of
shares for employees, who can buy them at a discounted price.
11
This gives
employees an opportunity to make an immediate capital gain. Another effort
to increase employee support was to provide an employment guarantee for
at least one year following asset sale, as well as subsequent lay-off terms that
could not be worse than government-provided terms.
The government has also tried to turn small investors into privatization
stakeholders
12
in order to increase political support for privatization. Many
companies (e.g., Dredging Corporation of India, Gas Authority of India
Limited, IBP, and Oil and Natural Gas Corporation) offered shares to small
inestors at a Fe percent discount. 1his strategy increased the number o
shareholders, which was expected to augment the political support necessary
to make privatization irreversible.
The government also restricted foreign ownership of the divested
shares, largely for political economy reasons. Foreign investors were given
access to shares only from 1994-95,
13
whereas the privatization program started
in 1991-92. In the case o asset sales, insuFcient eorts to attract oreign
buyers may have reduced privatization receipts; however, these restrictions
helped insulate the privatization program from allegations that companies
were being sold-out to foreigners.
Data description
14
Though there have been sales of government stakes in banks, this
paper concentrates on the priatization o non-Fnancial companies. lourteen
companies have undergone asset sales with transfer of management control,
while 36 companies have undergone share issue privatization, in which the
goernment retains majority management control. 1hese 50 non-Fnancial
companies comprise all the companies that have undergone traditional
privatization in India in the period from 1991 to 2008.
Financial data was located for 37 of these companies from 1988-89 to
2008-09. 1hirteen companies were omitted due to insuFcient inormation.
Vol. 2, Iss. 1 Spring 2011 Sanford Journal of Public Policy
23
This creates potential for selection bias: smaller loss-making companies may
not hae Fnalized their accounts or released them in the public domain or
many years, allowing or an oer-representation o larger, more proFtable
Frms in the analysis. 1hese omissions also reduce sample size, limiting the
ability to Fnd statistically signiFcant results and to make generalizations.
Methodology
Comparison of Mean and Median Performance Parameters: I used the following
performance parameters to compare mean and median performance prior to
and ollowing priatization, and assessed the signiFcance o any change:
ProFtability:
o Return on sales = net income / sales.
o Return on assets = net income / total assets.
o Return on equity = net income / equity.
LFciency:
o Sales eFciency ~ sales , number o employees.
o Net income eFciency ~ net income , number o employees.
Output:
o Real sales ~ sales adjusted or innation using the wholesale
price index.
Employment:
o Total number of employees.
In addition, I examined the following parameters for any changes
following privatization:
Leverage:
o Total debt / total assets.
o Debt-equity ratio.
Dividend payout:
o Dividend paid or proposed (provision) / sales
o Dividend paid or proposed (provision) / net income.
These ratios were calculated over a nine-year period divided into
three-year sub-periods: the pre-privatization period, the transition period, and
the post-privatization period.
i
The mean and median of each performance
i Pre-priatization` is deFned as our years beore priatization to one year beore priatization
(t-4 to t-1,, transition period` is deFned as one year beore priatization to one year ater
privatization, including the year of privatization (t-1 to t+1,, post-priatization` is deFned as
one year after privatization to four years after privatization (t+1 to t+4).
Kumar V. Pratap
24
ariable or pre- and post-priatization periods were assessed or signiFcant
changes using the Wilcoxon signed-rank test and the t-test. Since both the pre-
privatization periods and the post-privatization periods are only three years
long, this analysis shows the short-term changes associated with privatization.
I also tested the robustness of my results by comparing the same
pre- and post-priatization perormance ariables or sub-samples o Frms
priatized through asset sales ,13 Frms,, and Frms priatized through other
means ,24 Frms,.
To verify robustness further, I examined the performance change over
the entire period for which complete data was available (1988-89 to 2008-09).
The longer time period for analysis was intended to prevent short-term effects
of privatization from being interpreted as sustainable improvements.
Difference-in-differences analysis: Difference-in-differences analysis
remoes the innuence o actors extraneous to priatization in innuencing
Frm perormance by constructing a control group, which is the set o all Frms
in the same industry as each priatized Frm. 1his method distills the impact
o priatization on Frm perormance rom simultaneously occurring external
dynamics that aect all Frms, such as deregulation and the liberalization o
the Indian economy. The difference-in-differences analysis compares pre- and
post-privatization industry-adjusted performance variables.
15

ivear regre..iov ritb rv ea effect.: I used Ordinary Least Squares
regression with performance parameters as dependent variables, after controlling
or size o the Frm, to see the impact o priatization on Frm perormance.
I also controlled or unobsered time-constant Frm characteristics with Frm
Fxed eects.
Results of Privatization
Privatization Receipts Have Not Been a Major Source of Government Revenues
Compared to Organization for Economic Cooperation and
Development (OECD) and transition countries,
16
the Indian privatization
program is modest thus far. Only 50 state-owned enterprises (SOEs), or 21
percent of total federally-owned SOEs, were privatized in the period from
1991 to 2008. Through 2008, the Indian government raised approximately
>12.9 billion at current exchange rates through partial ,36 Frms, and ull
priatization ,14 Frms,. 1his amount is small compared to the goernment`s
entire SOE portfolio. There are currently 242 federally-owned SOEs in India,
and the governments shares in the 44 listed SOEs are valued at over $200
Vol. 2, Iss. 1 Spring 2011 Sanford Journal of Public Policy
25
billion at current exchange rates, or over 15 times the amount raised through
privatization by 2008.
17
Table 1 compares annual privatization receipts against
the Fscal deFcit o the respectie year, as one o the major motiations or
priatization was to raise resources to plug the Fscal deFcit.
1able J: Privatization Receipts in India Compared to the Iiscal Decit in
USD million unless stated otherwise]
YEAR TARGET
PRIVATIZA-
TION
RECEIPTS
FISCAL
DEFICIT
PRIVATIZATION
RECEIPTS/
FISCAL DEFICIT
(PERCENT)
1991-92 $1,087 $1,321 $15,793 8.4
1992-93 962 736 15,451 4.8
1993-94 1,167 0 20,086 0
1994-95 1,290 1,562 18,614 8.4
1995-96 2,188 53 15,704 0.3
1996-97 1,429 109 16,018 0.7
1997-98 1,333 253 20,335 1.2
1998-99 1,220 1,310 21,844 6
1999-2000 2,326 433 24,353 1.8
2000-01 2,222 416 26,404 1.6
2001-02 2,553 1,204 29,990 4
2002-03 2,449 683 29,607 2.3
2003-04 3,085 3,308 26,228 12.6
2004-05 889 614 27,954 2.2
2005-06
NO TARGET
FIXED
357 33,281 1.1
2006-07
NO TARGET
FIXED
0 31,683 0
2007-08
NO TARGET
FIXED
588 31,523 1.9
2008-09 2,210 0 70,997 0
TOTAL $26,408 $12,945 $475,864 2.60%
Source: Government of India, Ministry of Finance, Economic Survey (various issues);
Government of India, Ministry of Finance, Union Budget (various years); Government of
India, Department of Disinvestment website (www.divest.nic.in), accessed July 20, 2009;
World Bank, World Development Indicators, Washington DC, 2008.
Kumar V. Pratap
26
Salient features of revenue generation from privatization are stated below:
Direct government revenues: While privatization successfully raised $12.9
billion from 1991 to 2008,
18
this amount bridged only about 2.6 percent of the
ederal Fscal deFcit oer the last 18 years ,1991-92 to 2008-09,. 1hereore, it
has not been a major Fscal cushion to the goernment. Annual receipts also
aried considerably: while the priatization receipt to Fscal deFcit ratio was as
large as 12.6 percent in 2003-04, many years saw no privatization receipts.
19
Privatization receipts have met about half (49 percent) of the
governments targeted privatization receipts. Receipts exceeded targets in only
four out of 18 years. Privatization receipts in a single year (2003-04) accounted
for about a quarter of the total privatization receipts.
20
Indirect government revenues: The discussion of privatization receipts
thus far relates only to their direct impact on government revenues. However,
privatization may also indirectly affect government revenues by (1) reducing
annual subsidies granted to loss-making government companies; and (2)
generating increased tax reenues rom more proFtable and productie newly
privatized enterprises. Governments as diverse as those in Mexico, Cte
d`Ioire, and Mozambique receied more tax reenues rom priatized Frms
in the Frst ew years ollowing sales than rom direct proceeds o these sales.
21
Potential government revenues: There is considerable scope for further
privatization. There were 242 federally-owned SOEs in India at the time of
this analysis. The value of the shares held by the government in the 44 listed
federal SOEs
22
as of July 24, 2009 was over $200 billion at current exchange
rates.
23
To emphasize the potential for additional privatization in the country,
the government, in its Economic Survey prescribed the following: (1) revitalize
the disinvestment
24
program and plan to generate at least $5 billion per year;

,2, complete the process o selling Fe to ten percent equity in preiously
identiFed proFt-making SOLs, ,3, list all unlisted SOLs and sell a minimum o
10 percent equity to the public; (4) auction all loss-making SOEs that cannot
be revived. For those SOEs in which net worth is zero, allow negative bidding
in the form of debt write-off.
25

Protabitit,, fcievc,, ava vpto,vevt vpact of Priratiatiov
1he proFtability o SOLs in India aces challenges due to multiple
and sometimes connicting objecties. Lxamples o these objecties include
modeling employer best practices, promoting employment and balanced
regional development, and diversifying industrial activity. After privatization,
these multiple objecties yield to the dominant objectie o proFt maximization.
Vol. 2, Iss. 1 Spring 2011 Sanford Journal of Public Policy
27
Table 2: Summary Results of Privatization in India (full sample)
PERFORMANCE
VARIABLES
N
MEAN
BEFORE
(ME-
DIAN)
MEAN
AFTER
(MEDI-
AN)
MEAN
CHANGE
(MEDI-
AN)
Z-STATIS-
TIC FOR
DIFFER-
ENCE IN
MEDIANS
(AFTER-
BEFORE)
PERCENT-
AGE OF
FIRMS
THAT
CHANGED
AS PRE-
DICTED
Z-STATIS-
TIC FOR
SIGNIFI-
CANCE
OF PRO-
PORTION
CHANGE
PROFITABILITY
RETURN ON
SALES
37 0.038 0.075 0.037 1.99
B
67.6 2.14
B
-0.043 -0.056 -0.013
RETURN ON
ASSETS
37 0.036 0.041 0.006 1.65
C
64.9 1.81
C
-0.031 -0.062 -0.031
RETURN ON
EQUITY
37 1.16 1.657 0.497 2.33
B
70.3 2.47
B
-0.324 -0.601 -0.277
EFFICIENCY
SALES
EFFICIENCY
31 2.910 4.358 1.448 4.11
A
87.1 4.13
A
-0.562 -1.150 -0.588
NET INCOME
EFFICIENCY
31 0.155 0.583 0.428 2.93
A
77.4 3.05
A
-0.030 -0.118 -0.087
OUTPUT
REAL SALES
37 2960.7 4328.9 1368.2 3.35
A
78.4 3.45
A
-917.1 -880.3 (-) (36.8)
EMPLOYMENT
TOTAL
EMPLOYMENT
31 20920 19793 (-) 1127 2.18
B
71 2.33
B
-8925 -8603 (-) (322)
LEVERAGE
DEBT TO
ASSETS
37 0.302 0.251 (-) 0.0501 2.33
B
70.3 2.47
B
-0.230 -0.177 (-) 0.0523
DEBT TO
EQUITY
37 1.061 0.567 (-) 0.4934 3.35
A
78.4 3.45
A
-0.775 -0.373 (-) 0.4017
DIVIDENDS
DIVIDENDS TO
SALES
37 0.010 0.022 0.012 2.97
A
70.3 2.47
B
-0.003 -0.01 -0.007
DIVIDEND TO
NET INCOME
37 0.133 0.186 0.053 1.90
C
62.2 1.48
-0.091 -0.129 -0.038
A
INDICATES SIGNIFICANCE AT THE 1 PERCENT LEVEL
B
INDICATES SIGNIFICANCE AT THE 5 PERCENT LEVEL
C
INDICATES SIGNIFICANCE AT THE 10 PERCENT LEVEL
Source: Authors calculations.
Kumar V. Pratap
28
Comparison of Mean and Median Performance Parameters
By comparing the mean and median performance parameters before
and ater priatization, and testing the signiFcance o the change, I show
that there is an increase in proFtability, eFciency, and real output ollowing
priatization. Other signiFcant results are an increase in diidend payout and a
decrease in leverage post-privatization (see Table 2).
1he mean and median employment in priatized Frms decreases ater
privatization in the short-run (see Table 2). The decrease in employment is
also signiFcant or the proportion o Frms that experience an employment
decrease. I get similar results showing decreased employment after privatization
in both my sub-samples o Frms ,Frms priatized through asset sales and
Frms priatized through other methods,. loweer, there is one result that
stands out: each and eery Frm that was diested through asset sales saw a
highly signiFcant decrease in employment.
Over the longer time period, the impact of asset sales on employment
changes. In the long run, CMC, Indian Petrochemicals Corporation
Limited, and Videsh Sanchar Nigam Limited, which underwent asset sales,
increased employment as a result of major increases in their real output with
commensurate rise in their demand for workers. In the other 10 companies
for which I have data, employment decreased after asset sales because the
real output growth was weaker. Therefore, even with asset sales, a decrease in
employment is not a foregone conclusion; in the longer time period, there may
be an actual increase in employment in Frms that experience a sharp surge
in output as they will then need to hire more workers even with rising sales
eFciency.
Perhaps the most politically problematic aspect of privatization is
its perceied association with employment losses at the Frm leel. In India,
the impact of privatization on employment is a very sensitive issue because
formal jobs are scarce: only 2.7 percent of Indias population of 1.03 billion
26

is employed in the organized sector.
27
To add to this, recent years have seen
jobless growth as shown in Figure 1. This explains why trade unions and some
political parties vehemently oppose privatization, especially in the form of
asset sales, and why the government has jettisoned the asset sales variant of
privatization in recent years.
Vol. 2, Iss. 1 Spring 2011 Sanford Journal of Public Policy
29
Figure 1: Employment in the Indian Organized Sector (1991-2006)
5
10
15
20
25
30
Year 1991 1994 1995 1996 1997 1008 1999 2000 2001 2002 2003 2004 2005
E
m
p
l
o
y
m
e
n
t

(
m
i
l
l
i
o
n
)
Total Public sector Private sector
Note: 1. Coverage in construction, particularly on private account, is known to be inadequate.
2. Employment in private sector relates to non-agriculture establishments in private sector
employing 10 or more persons. Employment in public sector relate to all establishments
irrespective of size.
Source: Government of India (Ministry of Finance), Economic Survey 2008-09.
Difference-in-Differences Analysis
Most industry-adjusted proFtability ratios improe ater priatization,
as do mean diidends. 1hese results mirror the Fndings aboe ,where I do not
adjust the Frm perormance ariables with industry perormance ariables,.
loweer, ery ew o the changes are statistically signiFcant.
One highly signiFcant result is that the real output relatie to the industry
improed in only three o the 35 Frms. 1hus, while priatization is associated
with a signiFcant increase in real output, the industry output increased een
more. This is in line with Rafael La Porta
28
and Florencio Lpez-de-Silanes
29
Fndings that monopoly power does not play an important role in explaining
the increased proFtability o Mexican priatized Frms.
Linear Regression with Firm Fixed Effects
1able 3 shows the eect o priatization on proFtability, eFciency,
and employment using Ordinary Least Squares regression with Frm Fxed
effects. OLS results mirror the results found above and indicate that, holding
eerything else constant, priatization has a signiFcant positie impact on
Kumar V. Pratap
30
return on sales, return on equity, sales eFciency, and net income eFciency,
while haing a signiFcant negatie impact on employment.
Table 3: Privatization Results using Linear Regression with Firm Fixed
Effects
RETURN
ON SALES
RETURN
ON
ASSETS
RETURN
ON
EQUITY
SALES
EFFICIEN-
CY
NET IN-
COME EF-
FICIENCY
NUMBER
OF EM-
PLOYEES
PRIVATIZA-
TION 0.032 0.015 0.518 1.988 0.619 -2827
(2.03)* -1.61 (2.03)* (4.66)** (5.03)** (3.99)**
CONTROLS YES YES YES YES YES YES
FIRM FIXED
EFFECTS YES YES YES YES YES YES
R-SQUARED 0.42 0.32 0.44 0.8 0.7 0.96
F-STATISTIC 1.82 2.52 8.8 103.29 29.44 11.19
OBSERVA-
TIONS 537 537 537 537 537 537
ABSOLUTE VALUE OF Z-STATISTICS IN PARENTHESES
* SIGNIFICANT AT 5 PERCENT LEVEL; ** SIGNIFICANT AT 1 PERCENT LEVEL
Note: Model results with privatization as a dummy variable taking a value of 0 for the entire
time period before the year of privatization and a value of 1 for the entire time period after
the year of privatization. Values in the table report Ordinary Least Squares regression results
with Frm Fxed eects to control or unobsered time-constant SOL characteristics.
Source: Data relate to 37 Indian SOEs privatized through share issues or asset sales since 1991
and have been sourced mainly from the Prowess database of the Centre for Monitoring Indian
Economy; see endnote 14 for a full list of data sources.
Avenues for Future Research
The social impact of privatization on employees and consumers needs
to be studied more rigorously in Indias case. If privatization is associated
with price increases and job losses, then a judgment on the overall outcome
of privatization would have to weigh these effects against the demonstrated
proFtability and eFciency increases. In addition, urther research should
examine whether the proFtability and eFciency increases at the Frm leel
translate into employment gains for the wider economy to partially compensate
or the job losses at the Frm leel.
Vol. 2, Iss. 1 Spring 2011 Sanford Journal of Public Policy
31
The issue of policy endogeneity has not been explicitly addressed in
the existing body o literature: why were the speciFc Frms that hae been
privatized chosen for privatization?
30
The issue of endogeneity persists despite
using dierence-in-dierences analysis and Frm Fxed eects models in
an eort to get unbiased estimates o the impact o priatization on Frm
performance. Unobservable and potentially time-varying characteristics may
hae led the goernment to choose these Frms or priatization, which may
bias the results. Similar issues o endogeneity arise in cases o Frms selected
for asset sales as opposed to partial privatization. The issue of endogeneity has
not been adequately addressed in this paper and should be addressed in future
research.
Selection bias remains a potential problem. Though 50 companies
were priatized in India in the period rom 1991 to 2008, I only had suFcient
information to analyze the performance of 37. Because smaller and poorly
perorming companies would be more likely to hae insuFcient Fnancial
information available in the public domain, bigger and better performing
Frms may be oer-represented in the analysis. 1hese omissions also reduce the
size o the sample, limiting the ability to Fnd statistically signiFcant results and
make generalizations. Thus, the next stage of analysis should emphasize data
collection and analysis of the entire range of privatized SOEs in India.
Conclusion
Priatization in India has led to signiFcant improement in proFtability
and eFciency o Frms. In addition, it has proided a modest Fnancial boost
to the government through privatization receipts. However, the impact on
employment is negative. This is true for SOEs privatized through share issues
and asset sales, over the short-run and long-run, and after controlling for the
impact of deregulation and liberalization on SOE performance. Regardless, the
government should continue with the policy of privatization, mainly because
of its potential to unleash the productive potential of state-owned enterprises
through signiFcant improements in their proFtability and eFciency.
The government is not currently emphasizing asset sale privatization,
owing primarily to its signiFcant aderse impact on employment. loweer,
it is necessary for the government to have all methods of privatization in its
arsenal rather than being dogmatic about a particular method. Though not
examined in this paper, the size o the company and its proFtability status
should be important considerations in deciding the method of sale. For
example, Jessop and Company Limited and Lagan Engineering Company
Kumar V. Pratap
32
Limited hae both become proFtable ater asset sale.
31
Given their small size
and loss-making status, they would have attracted little investor interest in
share issue privatization but were eminently suitable for asset sales. By the
same token, the share issue privatization of Oil and Natural Gas Corporation
in 2003-04 was appropriate gien its size and proFtability status. 1he positie
changes in its proFtability and eFciency since partial priatization demonstrate
the effectiveness of this method in motivating positive change. Thus, to derive
optimal beneFts rom priatization, the goernment should customize the
method of sale to the condition of the state-owned enterprise being divested.
Endnotes
1 India has used two main variants of privatization, i.e., asset or strategic sales or full
privatization leading to transfer of management control to the private sector; and
share issue privatization or partial privatization in which government retains
management control.
2 It is to be expected that diFcult policy measures like priatization would be taken up
during periods of grave crisis: organized labor, entrenched political interests, and
bureaucratic inertia would prevent the policy from being launched during normal
times.
3 William L Megginson, Robert C. Nash, and Matthias van Randenborgh, The
Financial and Operating Performance of Newly Privatized Firms: An International
Empirical Analysis, Journal of Finance 49 no.2 (1994): 403-452.
4 Simeon Djankov and Peter Murrell, Enterprise Restructuring in Transition: A
Quantitative Survey, Journal of Economic Literature 40 (2002): 739-792.
5 Katharina Gassner, Alexander Popov, and Nataliya Pushak, An Empirical Assessment
of Private Sector Participation in Electricity and Water Distribution in Developing and Transition
Countries (Washington, D.C.: The World Bank, 2007).
6 Sunita Kikeri, Labor Redundancies and Privatization: What should governments
do? Viewpoint Note No. 174. (Washington, D.C.: The World Bank, 1999).
7 Martn Rama, Public Sector Downsizing: An Introduction, The World Bank Economic
Review, 13 no. 1 (1999): 2.
8 Rama, Public Sector Downsizing, 2.
9 Nancy Birdsall and John Nellis, Winners and Losers: Assessing the Distributional
Impact of Privatization, World Development 31 no.1 (2003): 1617-1633.
10 T.T. Ram Mohan, Privatisation in India: Challenging Economic Orthodoxy (New York:
Routledge Curzon, 2005).
11 Generally less than 10 percent of shares have been reserved for employees.
12 Graham advocates the stakeholders approach to make privatization sustainable.
See, Carol Graham, Private Markets for Public Goods: Raising the Stakes in Economic
Reform (Washington, D.C.: The Brookings Institution, 1998).
Vol. 2, Iss. 1 Spring 2011 Sanford Journal of Public Policy
33
13 The Indian Financial Year is from 1 April to 31 March.
14 The data used in the analysis comes from the following sources:
- Prowess database of the India-based market research company, Centre for
Monitoring Indian Lconomy ,CMIL,. 1he database proides detailed Fnancial
information for companies for the period 1988-89 to 2008-09.
- The website of the Department of Disinvestment, the nodal department in
the Government of India which deals with privatization. [Summary of receipts
from disinvestment : 1991-92 till date, accessed July 20, 2009, http://www.divest.
nic.in]
- Public Enterprises Survey (various issues) of the Department of Public Enterprises,
Government of India. [Public Enterprises Survey, 2006-07, 2007-08, and 2008-09,
accessed July 2009, http://dpe.nic.in/newsite/pesurvey.htm]
- The website of the Bombay Stock Exchange [Stock Reach, accessed July 25,
2009, http://www.bseindia.com]
- The website of the Economic Times [Stocks, accessed July 2009, http://
economictimes.indiatimes.com]
- 1he websites o speciFc companies |Oil and Natural Gas Corporation Annual
Reports, accessed July 2009, http://www.ongcindia.com; Jessop & Company
Limited linancials,` accessed July 2009, http:,,www.jessop.co.in,Fnancials,
Fnancials.php, Lagan Lngieering Company Limited 1he Company,` accessed July
2009, http://www.lagan.co.in/about_us.html]
- World Bank, World Development Indicators, Washington, D.C., 2008.
15 Industry-adjusted performance variables are calculated by subtracting industry
perormance ariables rom Frm-leel perormance ariables.
16 Transition countries here refers to newly independent countries in Eastern Europe
and former communist countries.
17 As of 24 July, 2009. [Source: Bombay Stock Exchange website (Stock Reach,
accessed July 2009, http://www.bseindia.com.)]
18 1his number has not been adjusted or innation, and was calculated using current
exchange rates.
19 Given that revenue in terms of GDP does not vary much in this period, oscillating
between 13.7 percent and 15.9 percent, the conclusions would hold even if the
ratio was calculated as a percent o reenue, rather than as a percent o the deFcit.
20 This large receipt was due to the ONGC issue that raised about $2 billion. This was
the largest share issue in India till 2008, and tops the total privatization receipts in the
country in all other years.
21 Birdsall and Nellis, Winners and Losers, 1621.
22 For listed SOEs, see Government of India, Department of Disinvestment (Ministry
of Finance), White Paper on Disinvestment of Central Public Sector Enterprises (New Delhi,
2007): 41.
23 Share prices were obtained from Bombay Stock Exchange website (www.bseindia.
com).
Kumar V. Pratap
34
24 Privatization in India is referred to as disinvestment.
25 Government of India, Ministry of Finance, Economic Survey 2008-09 (New Delhi,
2009).
26 2001 census Fgures. |Source: 2001 Census,` accessed August 2009, http:,,www.
censusindia.net)
27 Organized sector refers to public sector establishments irrespective of size and
private sector non-agricultural establishments employing 10 or more persons.
28 Raael La Porta and llorencio Lpez-de-Silanes, BeneFts o Priatization - Lidence
from Mexico, Quarterly Journal of Economics. 114 no. 4 (1999): 1221.
29 Increased monopoly power would imply an increase in the output o the Frm
relative to the industry. This did not happen in India.
30 Timothy Besley and Anne Case, Unnatural experiments? Estimating the Incidence
of Endogenous Policies, The Economic Journal, 110 no. 467 (2000).
31 The return on equity improved from -62.5 percent (short-run, pre-privatization) to
+37 percent (short-run, post-privatization) and -63.2 percent (long-run, pre-
privatizat ion) to +26.9 percent (long-run, post-privatization) in the case of Jessop
& Company Limited. Corresponding numbers in the case of Lagan Engineering
Company Limited were -34 percent, and +4 percent in the short-run, and -12.5
percent and +14.1 percent in the long-run. [Source: authors analysis.]