The finance ministry’s bid to disinvest over ₹1 trillion worth of shares in public sector undertakings (PSUs) has been met with protests from workers, trade unions and opposition parties. Privatization is widely believed to improve PSU performance but new research suggests that there may be other ways to do this.
Specifically, granting greater managerial autonomy to the board of PSUs could significantly boost their performance. Namrata Kala, in a paper published by the National Bureau of Economic Research, explores the effect of managerial autonomy in PSUs in India. She examines the impact of an earned autonomy programme introduced in 1997 that grants different levels of financial and operational autonomy to profit-making PSUs.
Using data from the government’s Public Enterprise Survey report and the Centre for Monitoring Indian Economy (CMIE), she analysed financial performance, expenditures and labour composition of 193 firms between 1992-2009.
Under the programme, the board of PSUs were allowed to take strategic decisions on matters that did not require government funding such as capital expansion and formation of subsidiaries, without seeking government approval. Kala finds that this decision-making autonomy significantly improved PSU profits and productivity.
The study also finds that PSUs with managerial autonomy hired more people while maintaining profitability. Autonomy also ensured that governments are less likely to interfere in hiring decisions, especially before elections for potential electoral benefits.
Interestingly, Kala notes that PSU managers are not motivated to grow profitability by their potential progress within the organization. Instead, they are driven by the need to showcase their ability for their career prospects in the private sector.
Because of all these effects, Kala concludes that there are ways beyond privatization to bring efficiency into the public sector and increase public sector employment.
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