This paper analyzes the performance of India’s 235 public sector undertakings (PSUs) – India’s socialistic legacy from the Nehru-Gandhi days. Of these 7 largest PSUs are called Maha Ratnas, 17 are called Nav Ratnas and some 73 are given the title of Mini Ratnas. The economic reforms of 1991 dismantled the “license-raj” but left the PSUs intact. Attempts were made to improve their performance through performance contracts called Memorandum of Understandings (MoUs) with some success but with still a large number of loss makers. A brief attempt was made under the NDA-1 government from 1999-2004 to begin dismantling this legacy with strategic disinvestment (privatization) but met with considerable opposition from vested interests and labour unions. Subsequent UPA governments tried to further improve the performance of these companies through better performance contracts and bringing more PSUs into the Ratna classification. Under UPA-2 more aggressive disinvestment (partial privatization) was also pursued to raise more revenue and hopefully improve firm performance.

 

Using firm-level data over the period 1990-2015 from the Public Enterprise Survey now collated in the Capitaline Data Base, this paper looks into factors that explain the performance of these PSUs. The results show that MoUs have had a positive impact on PSU performance by increasing their return on capital (ROC) by almost 8-9 percentage points. This result holds mainly for the non-service sector (manufacturing, mining) but less so for service sector firms. In the case of service sector firms, partial privatization (share sales) has a significant impact on performance, making them ideal candidates for more aggressive disinvestment. The results also show that larger PSU–Maharatnas appear to perform better than smaller PSUs and even better than private firms of similar size. But smaller PSU– Navratnas and MiniRatnas perform worse than private companies and should be good candidates for strategic disinvestment (privatization). PSUs that do not have Ratna status, and are loss makers should be disposed of for their real estate and scrap value. We conclude that India should raise capital through strategic disinvestment (privatization), disinvestment and liquidation of up to $250 billion which can be re-invested in public infrastructure through the National Infrastructure Investment Fund and not into the budget as a revenue raising measure.