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Public Sector Enterprises in India

The Impact of Disinvestment and Self Obligation on Financial Performance

Authors: P.K. Jain, Seema Gupta, Surendra S. Yadav

Publisher: Springer India

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

The book examines the various aspects of non-financial central public sector enterprises (PSEs) in India, for a period from 1986-87 to 2010-11. The analysis is based on all the key financial ratios; namely, profitability, efficiency, liquidity, leverage and productivity.

Liberalization and globalization have caused competition in India and have lowered the profit margins. At the same time, Indian government has reduced subsidies and budgetary support for PSEs to curtail their own fiscal deficit. Strategic and economic reforms were also introduced in PSEs to make their operations commercially profitable so that they are not dependent on the government to meet their financial requirements on the one hand, and have their own earnings to finance their expansion/modernization requirements as well as their social obligations, on the other. To what extent, the PSEs have succeeded in this objective constitutes one major aspect of the present research work. The other equally important aspect examined is financial performance of the PSEs which have opted for disinvestment and have signed memorandum of understanding (MoU)/ self obligations. The Indian Government has desired the central PSEs to be profitable in their operations in post-liberation era of 1990s. For this purpose, two major instruments, namely, disinvestment and MoUs, were introduced. This book examines, in detail, financial performance of PSEs which had opted for disinvestment and have signed MoU. Based on analysis/ findings and literature on the subject, the book contains some concrete suggestions that would prove extremely helpful to Indian Government to further improve their financial performance.

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Table of Contents

Frontmatter

Chapter 1. The Impact of Disinvestment and Self-Obligation on Financial Performance of PSEs in India: An Introduction

Abstract

This chapter is aimed at providing brief outline of the study. It has described the importance of public enterprises, their contribution towards achieving self-reliant economic growth and capital formation. Two major recommendations of economic reform policies, namely, disinvestment and signing of Memorandum of Understanding (MoU)/charter of self-obligations, have also been discussed in it. Additionally, the chapter also describes the objectives, scope, need, significance of the study, research methodology (in brief), and the chapter plan of the research.

P. K. Jain, Seema Gupta, Surendra S. Yadav

Chapter 2. Public Sector Enterprises in India: An Overview

Abstract

This chapter highlights the significant role played by public sector enterprises (PSEs) in shaping the path of the Indian economic development. It also delineates changes since the 1990s after the liberalization and globalization of Indian economy, key sectors for PSE operations (such as balanced regional development, increasing employment opportunities, concentration of economic power, export promotion and import substitution, research and development, etc.), operational excellence initiatives adopted by PSEs, and the contribution of them towards Indian economy.

P. K. Jain, Seema Gupta, Surendra S. Yadav

Chapter 3. Literature Review on Aspects of PSEs

Abstract

The objective of this chapter is to present the major research works and their findings on aspects such as the performance of public sector enterprises (PSEs), disinvestment in PSEs, Memorandum of Understanding (MoU), and measures of financial performance (including ratio analysis). The literature survey shows that there are potentials for further inquiry which focuses on the policies and reforms of public sector enterprises primarily in terms of disinvestment and Memorandum of Understanding (MoU).

P. K. Jain, Seema Gupta, Surendra S. Yadav

Chapter 4. Research Methodology to Assess the Financial Performance of PSEs

Abstract

This chapter delineates the research methodology followed in the study to assess the financial performance of public sector enterprises (PSEs) and the performance of disinvested PSEs and Memorandum of Understanding (MoU) PSEs. It also enumerates gaps identified from literature review, research objectives, hypotheses, sources of primary data (based on questionnaire survey, personal visit/interview, telephonic calls and emails) and secondary data (drawn from Public Enterprises Surveys and Prowess database from Centre for Monitoring Indian Economy, considered credible in Indian context relating to virtually all 209 non-financial central public sector enterprises), data analysis (primarily in terms of major financial ratios, namely, profitability, efficiency, solvency, liquidity, and productivity), statistical techniques used (such as ANOVA, paired test, independent t-test, frequency distribution techniques), and research model.

P. K. Jain, Seema Gupta, Surendra S. Yadav

Chapter 5. Financial Performance of PSEs in India

Abstract

The public sector enterprises (PSEs) have been set up to overcome the socio-economic problems of the Indian economy; these socio-economic responsibilities have been identified as one major reason for non-profitable operations of a large number of such enterprises and financial crisis in the country. Therefore, economic reforms in 1991 have been introduced by the government to overcome with this crisis and to make these PSEs profitable as profitable organizations (only) can also discharge their social obligations better. Therefore, this chapter aims at assessing the financial performance of virtually all the non-financial central public sector enterprises (PSEs) in India for the time period of two decades (1991–1992 to 2010–2011, post-reform period). The financial performance (in terms of select financial ratios, i.e., profitability, efficiency, solvency, liquidity and productivity) has been analyzed separately for (1) manufacturing and service sector central PSEs and (2) profit-making and loss-making central PSEs.

Findings suggest that service sector PSEs have indicated better profitability and liquidity compared to manufacturing sector PSEs; the productivity of capital, inventory holding period, and debtor collection period have shown an appreciable improvement in both types of manufacturing and service PSEs. As far as profit-making and loss-making PSEs are concerned, (as expected) profitability, operating efficiency, liquidity, and productivity of profit-making CPSEs are better compared to loss-incurring CPSEs. It is gratifying to note that inventory holding period, leverage position, and productivity per manpower have recorded satisfying performance in loss-incurring CPSEs. The loss-incurring CPSEs (as a group) have ceased their losses and have started earning profits w.e.f. 2005–2006 onwards. However, they have continued to be beset with low assets turnover ratios, dissatisfactory liquidity position, usage of high debt, and deterioration (decrease) in net income efficiency over the years; they seem to be in worrisome zone, needing urgent attention and effective governmental policies. It is important to mention that among the loss-incurring CPSEs, one-fourth of the enterprises (as per upper quartile) have recorded a good amount of improvement and satisfactory trend in almost all the parameters across the phases.

P. K. Jain, Seema Gupta, Surendra S. Yadav

Chapter 6. Impact of Disinvestment on Financial Performance of PSEs

Abstract

The objective of this chapter is to assess and compare the financial performance of disinvested and non-disinvested central public sector enterprises (PSEs) based on 19 financial ratios (pertaining to the profitability, efficiency, leverage, liquidity, and productivity per manpower) over a period of 20 years (1991–1992 to 2010–2011). The findings indicate that the profitability in most of the parameters of disinvested PSEs is several times higher compared to non-disinvested PSEs in the major time span covered by the study. Similarly, better assets turnover, productivity of capital, and liquidity position have been observed in disinvested PSEs vis-à-vis non-disinvested PSEs. Further, no major impact of recession has been observed in both types of PSEs.

P. K. Jain, Seema Gupta, Surendra S. Yadav

Chapter 7. Impact of MoU/Self-Obligation on Financial Performance of PSEs

Abstract

Memorandum of Understanding (MoU)/charter of self-obligation has been conceived as an instrument to quantify/assess social and commercial obligations/performance of central public sector enterprises (PSEs) in India. The purpose of this chapter is to measure the financial performance of the MoU PSEs, to compare their performance with PSEs which have not opted for MoU (referred to as non-MoU PSEs), to examine the performance of manufacturing and service MoU PSEs, and to analyze the performance of profit-making and loss-making MoU PSEs over a period of 17 years (i.e., 1993–1994 to 2010–2011). The financial performance of PSEs has been assessed on the basis of ratio analysis pertaining to the profitability, efficiency, liquidity, solvency and productivity.

The findings suggest that MoU seems to have yielded decisive improvement in the performance of PSEs which have signed MoUs during the period of the study under reference. At the same time, the performance of non-MoU PSEs is unsatisfactory. As expected, profitability of profit-making PSEs (PME) has increased after signing MoUs over the phases. MoU has played pivotal role in bringing up the performance of loss-making MoU PSEs (LME) after signing MoUs. Hence, several committees’ recommendations for closing down the LME need to be relooked at.

In view of salutary impact of MoU, it is suggested that the government should encourage the remaining non-MoU PSEs to sign it; in fact, there is a merit of considering to make signing of MoU mandatory for all PSEs.

P. K. Jain, Seema Gupta, Surendra S. Yadav

Chapter 8. Financial Performance of PSEs in India (with focus on Disinvestment and MoU): Concluding Observations

Abstract

The objective of this chapter is to provide a brief summary of main findings of the study. The study covers 209 non-financial central public sector enterprises (PSEs) in India for the time span of two decades (i.e., 1991–1992 to 2010–2011); this period has been divided into different sub-phases for different purposes. The findings of the study have been summarized; they are related to the assessment of financial performance of the central PSEs, disinvested PSEs, MoU PSEs, and impact of recession. Based on the major findings, some concrete suggestions/recommendations have been made for the government/management of PSEs for their better functioning. The chapter also contains major implications and recommendations of the study.

Three major recommendations are as follows: (1) The government should henceforth aim at strategic disinvestment as small and modest sizes of disinvestment are not likely to be fruitful; (2) MoU should be mandatory for all the PSEs (instead of the current practice of its being voluntary in nature); and (3) the government’s intervention in the operational functioning and managerial decision making should be a matter of last resort.

P. K. Jain, Seema Gupta, Surendra S. Yadav

Backmatter

Title: Public Sector Enterprises in India
Authors: P.K. Jain
Seema Gupta
Surendra S. Yadav
Copyright Year: 2014
Publisher: Springer India
Electronic ISBN: 978-81-322-1762-6
Print ISBN: 978-81-322-1761-9
DOI: https://doi.org/10.1007/978-81-322-1762-6