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Why the govt must exit all businesses? - Views on News from Equitymaster
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  • Nov 20, 2000

    Why the govt must exit all businesses?

    ‘It’s not the government's business to be in business’. Well, Britain surely followed this advice to the hilt and carried out what is regarded as successful public sector disinvestment. In India, on the other hand, politicians still want to cling onto the public sector. Indeed, one incumbent minister even wants to buyout the foreign partner in a public sector car venture!

    The latest available data clearly highlights the dismal state of the central public sector enterprises (PSEs). Of the 235 central PSEs, 106 are loss making. Together, the central PSEs employ capital to the tune of Rs 2.7 trillion and generate net profits of only Rs 132 bn. The return on capital is, not surprisingly, a fraction of what many successful private sector firms earn. It is clearly evident that there is hardly any economic rationale for tying up so much capital in such inefficient businesses. Nevertheless, politicians and bureaucrats continue to cling onto any enterprise that is owned by the government.

    Performance of Central Public Sector Enterprises
    (Rs bn) FY97 FY98 FY99
    Capital Employed 2,312 2,537 2,737
    Value Added 571 727 NA
    Gross Profit 309 372 398
    Net Profit 102 137 132
    Gross Profit as % of capital emp 13.4% 14.7% 14.5%
    No of PSEs 236 236 235
    Profit making 130 134 127
    Loss making 104 100 106
    No profit No loss 2 2 2

    That successful disinvestment will raise resources for the government is only one aspect of the disinvestment argument. The other benefits will flow in terms of better utilization of this capital. Just to put this in perspective, a 1% improvement in margins, will add Rs 27 bn to the bottomline of the central PSEs taken as a whole. And given the large inefficiencies that presently exist, one should not be surprised even if the margins increase substantially once privatization is ushered in. There is a lot to gain from privatization, much more than the initial proceeds anticipated to be realized from the sell-off.

    There have been many false starts in the disinvestment process, right from FY92. Of late the performance has only got worse, with the government in one year adopting dubious means (cross holdings) to meet the set target. Whether the disinvestment process will finally move ahead is a tough call to make. But anyone that does make the right call surely deserves to be a ‘crorepati’!



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