Government-Linked Companies and Sustainable, Equitable Development

Terence Gomez, François Bafoil, Kee-Cheok Cheong

• Publisher: Routledge
• Year: 2014
• eBook ISBN:
  9781317625681
• Topic: Economia
• Subtopic: Sviluppo sostenibile

The debate over how far governments should intervene in economies in order to promote economic growth, a debate which from the 1980s seemed settled in favour of the neo-liberal, non-interventionist consensus, has taken on new vigour since the financial crisis of 2008 and after. Some countries, most of them in industrialised Asia, have survived the crisis, and secured equitable economic growth, by adopting a developmental state model, whereby governments have intervened in their economies, often through explicit support for individual companies. This book explores debates about government intervention, assesses interventionist policies, including industrial and innovation policies, and examines in particular the key institutions which play a crucial role in implementing government policies and in building the bridge between the state and the private sector. The countries covered include China, India, South Korea, Malaysia and Taiwan, together with representative countries from Europe and Latin America.

1 Economic liberalization and the performance of public sector enterprises in India

Sunil Mani

Introduction

There are two specific ways in which the state can intervene in promoting industrialization in the so-called late industrializing or catch-up countries. The first method is for the state to put in place some framework industrial policies, which would support and encourage the market in its industrializing efforts. The second method is for the state to directly intervene in industrialization by setting up its own enterprises. Most countries have followed a combination of the two methods, as is the case with India.

Since the market was not that well developed in the period immediately following her independence, India has been according a fair amount of importance to state-owned undertakings. In fact, public sector enterprises (PSEs) were supposed to be the “commanding heights of the economy” and were charged with the responsibility of promoting not just industrialization, but also balanced regional development and technological self-reliance in a whole host of especially high technology areas ranging from aerospace to machine tools. However, over time the actual performance of PSEs appears to have fallen short of the high expectations that were placed on them by the state. In fact, this disenchantment has manifested itself with the privatization of public enterprises since 1991. The policy on privatization took on various dimensions such as divestiture, deregulation, and contracting out, although divestiture was by far the most prominent method employed. In this context, the purpose of this chapter is to map out the changing position of public sector enterprises in India’s economy by focusing essentially on one of the more important rationale for the establishment of public enterprises, namely domestic technology development. I do this by focusing on one area of technology development, namely heavy electrical equipment which is used for the generation, transmission, and distribution of electric power.

The chapter is structured into three sections. The first section will present a quantitative survey of the changing role of public enterprises in India’s economy. The purpose of this section is to analyse the more recent changes in the policy towards PSEs and the effect of these policies on the performance of the sector. The second section will map out the relative roles of public and private sector enterprises in the generation of innovations in India’s economy. This will be discussed in terms of a number of conventional innovation indicators such as research and development (R&D) expenditure, and patents. This section will also analyze, briefly, the position of one of India’s leading high technology PSEs, namely BHEL. The third and final section will sum up the findings of the study and will distil out the policy conclusions that emanate from my analysis.

Changing role of public sector enterprises in India

Right through Independence, public sector enterprises were assigned the exalted position of “commanding heights of the economy.” This manifested itself in terms of several areas of manufacturing and services reserved exclusively for the public sector. However, the recent wave of economic liberalization that has been put into effect, albeit in an unstructured and ad hoc manner, has sought to reduce this premier position of the public sector. This was to be done through a combination of policies aimed at reducing areas reserved exclusively for the public sector coupled with a policy of divestiture (read privatization) that sought to reduce the government’s equity in government-controlled companies. Consequent to this, the share of public sector enterprises in India’s economy has been reduced to about 8 percent of the country’s GDP. But there has been a rise in its share of overall investments, thereby implying declining productivity levels (see Table 1.1). This is contrary to what Nagaraj (2006) had observed for public sector¹ as whole until 2002–3 or so.

However, in terms of growth performance, while the private sector has followed the direction of movement depicted by the growth performance of India’s economy, the public sector’s performance appears to be following an independent growth path. Out of the five years under consideration, its performance is better than the overall macroeconomic performance only in two years (see Figure 1.1). One of the most important developments affecting public enterprises in India has been the government policy on privatization through essentially the divestiture route. This policy, first articulated in 1991, has undergone a number of minor changes (see Table 1.2 for a chronological documentation of this policy on divestiture.)

Table 1.1 Share of public sector enterprises in gross domestic product (GDP) and gross domestic capital formation

Year	GDP	Investment
2004–5	11%	10.8%
2005–6	10.1%	10.75
2006–7	9.8%	10.5%
2007–8	9.3%	11%
2008–9	8.9%	13.5%
2009-10	8.4%	12.6%

Source: Central Statistical Organization (2011)

Figure 1.1 Growth performance of public sector enterprises

Source: Central Statistical Organization (2011)

Table 1.2 Evolution of the policy on divestiture since 1991–2

Date	Event
1991–2 Interim Budget	Government announced its intention to divest up to 20% of its equity in selected Central Public Sector Enterprises (CPSEs) in favor of public sector institutional investors.
Industrial Policy statement dated July 24, 1991	In the case of selected enterprises, part of government holdings in the equity share capital of the enterprises will be disinvested in order to provide further market discipline to the performance of public enterprises.
Rangarajan Committee April 1993	It emphasized the need for substantial disinvestment and stated that while the percentage of equity to be divested should not be more than 49% for industries explicitly reserved for the public sector, it should be either 74% or 100% for others.
Budget speech, 1998–9	Government has also decided that in the generality of cases, its shareholding in public sector enterprises will be brought down to 26%. In cases of public sector enterprises involving strategic considerations, the government will continue to retain majority holding. The interest of workers shall be protected in all cases.
Budget speech,...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• List of contributors
• Preface and acknowledgements
• Introduction: The state’s return to business: government-linked companies in the post-crisis global economy
• 1 Economic liberalization and the performance of public sector enterprises in India
• 2 The Chinese state, state enterprises, and the global crisis
• 3 The creative role of the state and entrepreneurship: the case of Taiwan
• 4 South Korea: government-linked companies as agents of economic development
• 5 The state’s business: government-linked companies, the financial sector, and socioeconomic development in Malaysia
• 6 Poland: a systemic transforming process from state-planned to liberal economy
• 7 Internationalization and a competitiveness agenda: state development finance agencies and the financial crisis in Brazil and Chile
• Index