This Selected Issues paper analyzes the medium-term macroeconomic outlook for India. The paper highlights that in the strong adjustment scenario, the joint effect of strong fiscal consolidation and ambitious structural reforms would bring the Indian economy onto a sustainable high growth path, reaching 7 percent around the turn of the century. Although there could be some initial dip in growth, owing to the contractionary effects of fiscal retrenchment, this should be temporary as a strong surge in investment, together with productivity improvements related to structural reforms, should drive an acceleration in growth performance.


This Selected Issues paper analyzes the medium-term macroeconomic outlook for India. The paper highlights that in the strong adjustment scenario, the joint effect of strong fiscal consolidation and ambitious structural reforms would bring the Indian economy onto a sustainable high growth path, reaching 7 percent around the turn of the century. Although there could be some initial dip in growth, owing to the contractionary effects of fiscal retrenchment, this should be temporary as a strong surge in investment, together with productivity improvements related to structural reforms, should drive an acceleration in growth performance.

V. Strengthening Public Enterprise Performance 1

The post-1991 era saw industrial policy reform get off to a fast start with the dismantling of the industrial licensing system that had been in place for over 40 years. Private firms were given the freedom to compete in all but a few areas of industry, and they responded strongly to the new opportunities that this created. Public sector enterprises were also exposed to increased competition. However, this did not have a marked impact on their efficiency and profitability, and the public enterprise sector has remained a drag on the economy. The principal objectives of this paper are to examine why public enterprises have not significantly improved their performance over recent years and to outline the key elements of a more ambitious public enterprise reform program.

The discussion and analysis that follows focusses on central public enterprises (CPEs), of which there are currently about 240. This reflects the ready availability of information about these enterprises and the fact that reform efforts to date have largely targeted them. This paper does not discuss the three departmental enterprises—Railways, Posts and Telecommunications—which are formally part of the central government. These enterprises have similar problems to the CPEs. Nor does it discuss state enterprises (SEs), of which there are 800-900. Apart from the state electricity boards (SEBs), most of these are small. While some state governments have begun to reform their SEs—mainly through privatization—these efforts have been largely ad hoc rather than part of a coherent reform strategy.

The chapter concludes that slow progress in improving public enterprise performance has reflected a basic failure to change the structure of corporate governance. While some benefits might be expected from building on industrial policy initiatives taken in recent years (including further opening up of reserved industries, improved memoranda of understanding, increased divestment, more effective restructuring), a bolder, wider-ranging reform strategy would be more likely to achieve a significant improvement in the efficiency and profitability of CPEs. Such a strategy would require tackling difficult issues like privatization, bankruptcy, and retrenchment.

A. Industrial Policy Reform and Public Enterprises

The 1991 Statement on Industrial Policy sought to influence public enterprise performance through four principal channels.

  • The number of industries subject to public sector reservation was immediately reduced from 17 to eight. There was a further reduction to six in 1993.2 Moreover, in one of the six reserved sectors (petroleum), private investment is permitted in exploration, refining and retailing.

  • The system of memoranda of understanding (performance contracts) between CPE managers and supervising ministries, which was introduced in 1987/88, was to be expanded and strengthened.

  • Divestment of CPE shares was to commence. The Committee on the Divestment of Shares in Public Enterprises (Rangarajan Committee) was established to. draw up a comprehensive divestment strategy, although some of its recommendations—including the phasing out of majority ownership in a number of “non-core sectors”—were never formally accepted by the Government.

  • Bankruptcy procedures applied in the case of private firms were extended to CPEs and SEs through amendment of the 1985 Sick Industrial Companies Act (SICA), while resources were to be made available to finance retraining and deployment through the National Renewal Fund.

The above changes were to be complemented by reduced central government budget support and by banking reform aimed at curtailing favorable treatment by public banks. Together with changes intended to enhance the private sector’s capacity to compete in previously protected markets-not only industrial delicensing but also the removal of restrictions on capacity expansion, a more liberal foreign investment regime, and lower tariff protection for firms engaged in import substitution—the overall reform was expected to result in more efficient and profitable public enterprises.

Despite these changes, the performance of CPEs has continued to be weak and the savings of the public enterprise sector have stagnated (Table V.1). Consequently, the sector continues to run a sizeable deficit which is still partly financed by central government budget support in the form of equity and loans.3 Attempts to contain the deficit have resulted in public enterprise investment being scaled back. While there was clearly much inefficient investment that could be curtailed, reduced investment by CPEs involved in the provision of infrastructure (e.g. power generation, telecommunications, transportation) is likely to have been detrimental to the economy’s long-term growth potential.

Table V.1.

India: Public Enterprise Deficits and Savings-Investment Balances, 1990/91-1995/96

(In percent of GDP)

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Sources: Budget documents; National Accounts Statistics; and staff estimates.

Profits after taxes less dividends and loan repayments plus depreciation allowances and deferred current expenditure written off.

Includes some current spending and excludes investment undertaken outside the Plan.

Equity and loans.

Includes bond issues, external borrowing, and other items.

Central public enterprises, state enterprises, and departmental enterprises.

B. Profitability in the Public and Private Sectors

According to the most recent data, gross profits of the CPEs in 1994/95 were about 14 percent of capital employed and profits after tax about 5 ½ percent of net worth, a small return on the Government’s large cumulative investment in CPEs (Chart V.1). Profitability levels and trends have been dominated by developments in the oil sector. Oil enterprises have historically been much more profitable than non-oil enterprises, although the post-1990 period has seen the gap narrow somewhat. Taken as a whole, non-oil enterprises were barely profitable during the first half of the 1990s. While this represented some improvement over the average loss experienced through most of the 1980s, it is still the case that about a half of all enterprises make losses and many of them are technically ‘sick’ (i.e., they have negative net worth).



(In percent)

Citation: IMF Staff Country Reports 1996, 132; 10.5089/9781451818598.002.A005

Source: Public Enterprises Survey (various issues).

Data available for a sample of private firms reveal much higher profitability than in the public sector, and a more marked increase in the 1990s compared with the second half of the 1980s (Chart V.2). Such a comparison may be misleading to the extent that a sample of 600-1,200 private firms is not comparable with the population of 240 public enterprises.4 Moreover, some public enterprises provide subsidized inputs to private firms, implying that the latter to some extent achieve higher profits at the expense of the former. Nevertheless, the difference in performance between firms in the public and private sectors is too large to be mainly attributed to such factors. This is confirmed by panel data for a subset of broadly comparable manufacturing enterprises analyzed by Goswami (1996) (Table V.2). Furthermore, cross-country data also point to the poor performance of Indian public enterprises relative to those in many other developing countries (World Bank, 1995). It should also be noted that weak profitability understates the burden of inefficient CPEs on the economy to the extent that profitable enterprises exploit monopoly power to compensate for their inefficiency.

Table V.2.

India: Corporate Profitability and Costs, 1988/89-1993/94

(In percent)

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Source: Goswami (1996).

One hundred and six non-oil central government manufacturing public enterprises.

One hundred and fifty six private manufacturing firms.



(In percent)

Citation: IMF Staff Country Reports 1996, 132; 10.5089/9781451818598.002.A005

Source: Public Enterprises Survey (various issues) and unpublished data provided by the Centre for Monitoring the Indian Economy.

The panel data also provide insight into the factors underlying the difference in profitability. In terms of transforming variable inputs like raw materials and energy costs into sales, there is no significant difference between public and private firms; thus, from the standpoint of technological capability, they are broadly comparable. However, fixed expenses, most notably wages and interest, are about 75 percent higher per unit value of sales in the public sector (Goswami, 1996). This is the result of overstaffing, which reflects the employment objective assigned enterprises and obstacles to retrenchment, as well as excessive low-return investment financed through government loans and preferential access to bank credit. These differences between wage and interest costs in the public and private sectors are to a significant degree a reflection of the way in which corporate governance is exercised in the public sector.

C. Governance of Public Enterprises

Public enterprise managers are expected to meet a variety of social and other noncommercial objectives, in addition to financial objectives.5 However, in pursuing these objectives, managers are given limited discretion over employment, investment, and pricing policies. Faced by multiple objectives and restricted autonomy, and with few rewards for success, managers will normally avoid business decisions and initiatives that could significantly affect enterprise performance. The existing system of public accountability, based on monitoring by enterprise boards dominated by representatives of supervising ministries and parliamentary oversight, and appointment procedures that have usually emphasized seniority over ability have probably reinforced the inclination to be cautious.

A system of governance that limits the scope for good management implies that public enterprise performance would be expected to lag behind that in the private sector irrespective of the degree of competition. In an attempt to counteract this tendency, memoranda of understanding, divestment, and bankruptcy procedures have been intended to promote better management and otherwise enhance the ability of public enterprises to be competitive.

D. The Impact of Industrial Policy Initiatives

Memoranda of understanding

Memoranda of understanding (MOUs) are negotiated performance contracts between enterprise managers and supervising ministries. They were introduced in 1987/88 with the aim of providing clearer performance objectives for public enterprises, a framework for management audit based upon clear standards of accountability, and increased managerial autonomy. Under the MOU system, performance would be assessed relative to both financial and social objectives. The MOU system got off to a slow start, as it met resistance from both supervising ministries and enterprises (Iyer, 1996). Fewer than 25 enterprises signed MOUs in the first four years. However, with an increased emphasis placed on MOUs after 1990/91, the system expanded quickly and 101 were signed in 1993/94.

MOUs have been claimed to be a success by the parties involved and some observers. This is based largely upon the evaluation ratings that have been achieved. For example, 99 enterprises signed MOUs in 1994/95 and the evaluation ratings were:

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Thus, 80 percent of enterprises rated came out excellent or very good; similar results were achieved in previous years. However, still less than half of all enterprises sign an MOU, and it is mainly loss-making enterprises that exercise their right not to do so. Moreover, there are concerns that the results give a misleading impression of the performance of profitable enterprises.

Given the respective motivations of enterprise managers and supervising ministries, there is every reason to believe that the performance standards reflected in MOUs are not very demanding (Goswami, 1996). It is in all parties’ interest to demonstrate good performance without expending too much effort doing so. Indeed, in some cases, negotiations are drawn out to such an extent that the targets largely reflect actual performance. There is also evidence that some enterprises that are highly rated under the system have recorded lower profitability than in the previous year, implying that such a rating must have been generated by success vis-a-vis social and other non-commercial targets, which could, until recently, be given a weight of up to 50 percent in the overall evaluation (Goswami, 1996). A decision to increase the weight given to financial performance to 60 percent from 1995/96 may have had some impact at the margin, but it is unlikely to have significantly affected the incentive to emphasize soft social targets rather than harder financial targets.

Another problem with the MOU system is that it has few incentives built into it; there is no penalty for underperformance and little reward for overperformance. In countries where MOUs have been used with greater success—e.g., Pakistan and South Korea—penalties and rewards have been integral to the process (World Bank, 1995). While a decision has been taken to place 75 percent weight on MOU evaluations in assessing the performance of chief executives, pay scales are too rigid for a meaningful incentive to result. Moreover, MOUs cannot provide managers with much autonomy under the current governance structure, and without additional autonomy managers know that they will not be held accountable for poor performance.


The divestment of public enterprise shares began in 1991/92. There were two tranches of divestment in that year, with small blocks of shares of 31 enterprises sold in bundles of eight or nine to selected (mainly public sector) financial institutions. With a stock market boom in progress, initial sale proceeds exceeded expectations. Nonetheless, the Government realized that selling the shares of individual enterprises separately would yield greater revenues, and this they did in two rounds of divestment in 1992/93. Private companies were also allowed to bid for shares. These sales, however, took place against the backdrop of a more bearish market, and sale proceeds fell short of expectations. Divestment conditions were further eased in 1993/94, with bidding opened up to industrial and foreign institutional investors. Shares sales occurred only at the tail end of 1993/94, and were actually booked in 1994/95. Together with the two rounds of divestment that occurred in that year, 1994/95 turned out to be the last year of significant divestment activity. With a slump in the stock market, the Government’s ambitious program for 1995/96 fell far short of its objective.

To date, shares of 39 enterprises have been sold for a total of Rs 101.5 billion (Table V.3). While up to 37 percent of shares in some enterprises have been sold, the average is 10.4 percent, and the Government’s total ownership of enterprise shares has fallen by only 2.6 percent.6 Moreover, the only enterprises to yield significant revenue per share were those in the oil sector and a few other protected monopolies. The sale of shares in oil enterprises generated about a third of total proceeds.

Table V.3.

India: Impact of Divestment, 1991/92-1996/97

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Source: Public Enterprises Survey and budget documents.

Excludes bundled shares sold in 1991/92.

The Rangarajan Committee report (1993) highlighted the importance of sustained disinvestment from both a fiscal and an efficiency standpoint, and recommended that the government ownership could be reduced below 50 percent except in priority areas. However, the policy that the Government would retain a stake of at least 51 percent in all enterprises was not changed in response to the report, although the new Government has given a mandate to the Divestment Commission to reexamine this issue with respect to particular enterprises (see below).

By insisting upon majority ownership, the Government has not shown a strong commitment to privatization in particular and public enterprise reform in general. Indeed, by emphasizing the importance of divestment as a source of revenue, it may have sent a signal that public enterprises would continue to be exploited for non-commercial purposes. And by limiting private participation to well below 49 percent, control has remained with the Government, leaving private shareholders with little effective say in the running of enterprises. Hence, corporate governance has been largely unaffected by divestment. This is likely to have depressed the prices of shares in enterprises exposed to competition.

In the 1996/97 budget, the Government is again aiming to generate considerable revenue through divestment. To develop and implement the divestment program for 1996/97 and beyond, the Government has set up a Divestment Commission. Its terms of reference include determining the overall size of the program, the extent of divestment in each CPE referred to the Commission, the choice of divestment techniques, the degree of employee protection and the promotion of public awareness. As regards the extent of divestment, the Government has requested the Divestment Commission to make specific recommendations regarding the enterprises referred to it, subject to the general restrictions that there would be no divestment of enterprises in strategic sectors (defense, atomic energy, railways, telecommunications); up to 49 percent divestment of shares would be considered in core sectors (petroleum, steel, minerals and metals, coal and lignite); and up to 74 percent divestment of shares would be considered, on an enterprise-by-enterprise basis, in non-strategic, non-core sectors. The Government has recently referred 40 CPEs to the Divestment Commission, including some large core sector enterprises.

Bankruptcy procedures

Prior to 1991, sick public enterprises were routinely kept alive through budget support. Many of these enterprises, and especially those in the textile sector, had in fact gone bankrupt under private ownership and had been nationalized to prevent job losses. The SICA had put in place procedures for the restructuring of sick industrial companies in the private sector under the direction of the Board for Industrial and Financial Restructuring (BIFR). Since 1991, sick public enterprises have also been referred to the BIFR. An enterprise is registered with the BIFR once it is sick in the sense that its net worth is wiped out by accumulated losses. In such cases, a number of restructuring options can be considered: rehabilitation; management change; merger; sale; and closure. However, the BIFR has reached a decision in the case of only about half the CPEs registered with it since 1991, although its record is slightly better where SEs are concerned (Table V.4). And even where a recommendation is reached, the process of implementation is typically lengthy.

Table V.4.

India: Status of Sick Public Enterprises Referred to the BIFR Since 1991 1/

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Source: BIFR Secretariat.

As of September 30, 1996.

Coming within the scope of SICA.

Not technically ‘sick’.

The majority of CPEs currently registered with the BIFR were referred to it in 1992, and many of these are still under enquiry. The protracted nature of the process reflects the fact that procedures are based upon an open-ended pursuit of negotiated consensus. Moreover, since the BIFR rarely recommends closure, negotiations are prolonged because exit is not a credible outcome; so far, no CPE has been closed. BIFR procedures also have other shortcomings. One is that reference to the BIFR often comes when it is already too late to turn an enterprise around. Another is that insufficient attention is paid to the distinction between enterprises that operate in a declining industry and those that perform badly in a competitive market. With the former, closure will often be inevitable but rehabilitation is typically recommended. With the latter, survival is often a realistic possibility, and such enterprises should be the focus of BIFR efforts. Many of these observations were made in 1993 by the Committee on Industrial Sickness and Corporate Restructuring (the Goswami Committee). While the recommendations of this committee have not yet been acted upon, the new Government has set up another committee to look afresh at the issue of exit policy.

Since enterprise restructuring is hampered primarily by concerns about job losses, an effective exit policy needs to address the issue of retrenchment as a result of both closure and downsizing. Sick industries employ about 400,000 workers, the majority of whom should be retrenched. Given the need to shed excess labor in the rest of the public enterprise sector, the demands on a social safety net are potentially large.7 The National Renewal Fund (NRF), which was set up in 1992 mainly to provide assistance with retraining and redeployment of retrenched workers from the public and private sectors, could provide such a safety net. However, so far the resources made available to the NRF have been small, they have not been fully utilized, and expenditure has been devoted almost entirely to financing voluntary retirement for 87,000 public sector workers (Table V.5).

Table V.5.

India: National Renewal Fund Finances, 1992/93-1995/96

(In billions of rupees)

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Source: Ministry of Industry.

E. Strategy for Public Enterprise Reform

A recent World Bank study of public enterprise reform concluded that in a number of countries successful reform has depended on taking an aggressive approach to increasing competition, privatization, hardening budget constraints and financial sector reform (World Bank, 1995). While both successful and unsuccessful reformers attempted to change the relationship between enterprise managers and the government, this reform appears to have been effective only when undertaken in conjunction with broader reforms. The new Government’s approach to public enterprise reform—as reflected in its Common Minimum Program and subsequent policy announcements—has emphasized the need to ensure that public enterprises are efficient and run on commercial lines, and has acknowledged the need for the public sector to be reformed and restructured. However, a comprehensive strategy needs to be spelled out, which would tackle head on a number of difficult issues.

  • Further measures to increase competition. While there has been considerable progress in this regard, there are key areas where competition is permitted but still limited. Most notable in this regard is the oil sector, where the liberalization of exploration, refining and retailing has moved slowly, although the new Government has recently announced the allocation of a number of exploration licenses. Cumbersome bureaucratic procedures and the perceived favorable treatment of public enterprises partly explains slow progress (Joshi and Little, 1996). Administered pricing of crude oil and petroleum products has also discouraged private sector involvement.8

  • A shift to full-scale privatization. While the recent decision to consider divestment of up to 74 percent of shares in non-strategic, non-core sectors is a step in this direction, the final objective should be the sale of the majority of shares in all but those enterprises where there is a strong element of natural monopoly or where security considerations argue in favor of public ownership. The privatization program should emphasize:

    • The early sale of smaller trading and manufacturing enterprises. This would have the advantage that direct sales could be quickly arranged, getting the privatization process off to a fast start, which would enhance its credibility.

    • Larger trading and manufacturing enterprises which are poorly managed would be sold in stages, with initial sale of a controlling interest. This would enable the market to assess the value of a change in control prior to a public offer, helping to optimize the sale value of the company. Well-managed enterprises could proceed directly to a public offer.

    • Public enterprises that dominate contestable markets would be broken up to promote competition. Wherever possible, liberalization should precede privatization, which would prevent the emergence of private monopolies, a tendency which should anyway be curtailed through regulation (Vickers and Yarrow, 1988). While sales of shares in public monopolies might yield significant revenue, there would be a risk that the sale would create a subsequent barrier to liberalization.9

    • While natural monopolies may stay within the public sector, some contestable activities that in the past have been undertaken by public monopolies may be privatized, as is happening in the telecommunications and power sectors.

  • Improved governance. Many enterprises will remain under majority public ownership. For these enterprises, there should be a shift in emphasis from social and noncommercial objectives to financial objectives; enterprise managers should be given autonomy over employment, investment, pricing and other decisions that affect their ability to meet the performance targets set for them; and an incentive system should be put in place that encourages managers and workers to perform better. To encourage such commercialization of enterprises, private sector membership of enterprise boards could be increased. MOUs might continue to play a role, although they would have to give more weight to financial performance than at present.10

  • The imposition of a hard budget constraint. To this end, budget support should be limited to the amount necessary to compensate enterprises for the noncommercial objectives they have to pursue. These in turn should be restricted to a few objectives that cannot be more efficiently met through other means, such as tax and expenditure policies.

  • Increased capital market discipline. In addition to reducing budget support, lifting the obligation on the part of insurance and provident funds to invest in enterprise debt instruments would further strengthen market discipline. Because public financial institutions do not provide effective corporate oversight, they should not become the dominant shareholders of privatized firms. By the same token, they should divest themselves of their large holdings of shares in private firms (Mohan, 1995). A new takeover code has been proposed, which should make it easier for the ownership of underperforming firms to change hands.

  • Effective exit policy. The Goswami Committee report (1993) has made a number of recommendations that would facilitate restructuring, including:

    • Basing bankruptcy procedures on a definition of bankruptcy that allows early detection of the need for restructuring to increase the chance of survival.11

    • BIFR procedures that are fast, simple and transparent.12 In this connection, there should be no inherent bias in favor of owners, managers, workers or creditors.

    • Early sale of sick companies, so that outcomes are determined by market forces.

    • Speedy implementation of BIFR recommendations, including closure, enforced where necessary by independent administrators.

  • Goswami (1996) has also recommended legislative changes to encourage more flexibility in employment decisions:

    • The 1947 Industrial Disputes Act (IDA) requires state governments to sanction retrenchment; this they normally refuse. Consequently, some enterprises—and in particular textile mills—have faced no other choice than to declare a perpetual lock out and workers have been deprived of both pay and termination benefits. It would be desirable to allow retrenchment to be negotiated bilaterally between employers and employees without requiring government permission.

    • The 1976 Urban Land (Ceiling and Regulation) Act (ULCRA) limits the sale and use of urban land. Some enterprises—and again most notably textile mills—have surplus land that could be sold to finance retrenchment and other costs associated with restructuring.

Finally, to mitigate the adverse impact of closure and other BIFR recommendations on employment, there has to be an adequate social safety net for retrenched workers. This will require additional resources to finance the NRF, some of which could be provided from privatization and land sale proceeds.


  • Goswami Committee (1993), Report of the Committee on Industrial Sickness and Corporate Restructuring, Ministry of Finance, New Delhi.

  • Goswami, O. (1995), India’s State Owned Enterprises Performance, Prospects and Reform Issues, unpublished, Indian Statistical Institute, New Delhi.

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  • Goswami, O. (1996), Wither Corporate Sector Reforms in India? The Public Sector, Banks, Monit-oring and Exit”, unpublished, Indian Statistical Institute, New Delhi.

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  • Iyer, Ramaswamy, R. (1996), The Memorandum of Understanding System—Indian Experience in S.L. Rao (ed.), Reforming State-Owned Enterprises, National Council for Applied Economic Research, New Delhi.

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  • Joshi, Vijay and I.M.D. Little (1996), India’s Economic Reforms: 1991–2001. Oxford University Press, New Delhi.

  • Mohan, Rakesh (1995), Public Sector Reform and Issues in Privatization, OECD Development Center, Paris.

  • Committee (1993), Report of the Committee on the Divestment of Shares in Public Enterprises, Ministry of Finance, New Delhi.

  • Vickers, J., and G. Yarrow (1988), Privatization: An Economic Analysis, MIT Press, Cambridge, Mass.

  • World Bank (1995), Bureaucrats in Business, Oxford University Press, New York.


Prepared by Richard Hemming.


The reserved industries are atomic energy, coal and lignite, defense equipment, petroleum and crude oil, radioactive minerals, and railways.


Some enterprises also receive subsidies, most notably fertilizer producers for which the retention price scheme provides a guaranteed return on net worth. Subsidies are also paid to shipyards, textile mills, and a few other enterprises. In addition, the Government occasionally writes off loans to enterprises, which is an implicit subsidy. Fertilizer producers received subsidies totaling 0.4 percent of GDP in 1995/96, paid mainly to CPEs; other subsidies to CPEs amounted to less than 0.1 percent of GDP.


The main differences are that the private sector data, collected by the Centre for Monitoring the Indian Economy, include financial firms and many sectors where the public sector is not heavily involved (construction, trade, services), and exclude sectors where the public sector has a monopoly or virtual monopoly (mining, oil and petroleum, power).


Employment creation and preservation is the main non-commercial objective. However, enterprises are also expected to employ particular disadvantaged groups, to locate in certain areas, and to otherwise serve the common good.


Thus clearly justifying a recent conclusion that “the world-wide wave of privatization…has not yet touched India’s shores” (Joshi and Little, 1996, page 178).


World Bank estimates put overstaffing of CPEs at 25-33 percent of the workforce, or 500,000-650,000 workers.


A six-year strategy for full liberalization has been recently outlined by the Strategic Planning Group on Restructuring the Oil Industry (the ‘R’ Group).


While this has been mentioned as a possibility with the sale of oil company shares, at this point the liberalization of the oil sector seems inevitable. The risks seem greater where there is resistance to liberalization and inefficiencies would persist.


The work of a government committee (the Satyapal Committee) set up to advise on the measurement of financial performance in MOUs should be useful in this connection.


The new Government is addressing this issue, and is expected to propose that a firm which defaults on payments to banks and financial institutions for a year or more should be declared sick.


In the private sector, restructuring decisions should be based solely upon financial considerations. This should also be the principal concern with public enterprises. However, the decision to extend MOUs to sick enterprises yet to be registered with the BIFR appears to be motivated by a desire to justify their survival by reference to non-commercial objectives

India: Selected Issues
Author: International Monetary Fund