Disinvestment and Privatisation

Disinvestment and Privatisation in India
Assessment and Options*
R Nagaraj
Ownership reform in public sector enterprises (PSEs) initiated since 1991 has as yet been
quantitatively modest. It is perhaps too early to judge the effects of these initiatives on their
financial performance. While the slow pace of the reform can be perceived as an opportunity,
there is perhaps merit in carefully reviewing the policy in light of economic theory, and
comparative experience. As the bulk of the public investments are in industries with economies of
scale and scope (with externalities that in principle invite considerable regulation), this study
suggests an alternative institutional arrangement for improving PSEs’ financial performance:
mutual stock holding among complementary enterprises tied around a public sector bank to
minimise problems of soft budget constraint, dysfunctional legislative and bureaucratic
interference, and to encourage close interaction between banks and firms to promote long term
economic development.
Indira Gandhi Institute of Development Research

Gen. Vaidya Marg, Goregaon East
Mumbai 400 065
Email: nagaraj@igidr.ac.in
March 26, 2005
*
This study is prepared for the ADB Policy Networking Project, coordinated by Chiranjib Sen, Indian
Institute of Management Bangalore. I am grateful to T C A Anant, K L Krishna and many participants of the
two workshops held in New Delhi and Bangalore, for their comments and suggestions on the earlier drafts
of the paper. Usual disclaimers apply.
Disinvestment and Privatisation in India
Assessment and Options
R Nagaraj
Introduction:
Employing about 19 million persons, public sector currently contributes about a quarter
of India’s measured domestic output. Administrative departments (including defense)
account for about 2/5th of it, the rest comes from a few departmental enterprises (like
railways and postal services), and a large number of varied non-departmental enterprises
producing a range of goods and services. These include, close to 250 public sector
enterprises (PSEs) owned and managed by the central government, mostly in industry
and services (excluding the commercial banks and financial institutions). At the state
level, production and distribution of electricity, and provision of passenger road transport
form the principal activities under public sector, run mostly by autonomous boards and
statutory corporations. Though public investment in irrigation would perhaps rank next
only to electricity in most states, it is generally viewed as public service, hence counted
as part of public administration. Besides, there are about 1,100 state level public
enterprises (SLPEs) that are relatively small in size. While the contribution of all these
varied publicly owned and managed entities to national development is widely
acknowledged, their poor financial return has been a matter of enduring concern –
especially since the mid-1980s when, for the first time, the central government’s revenue
account turned negative – an imbalance that has persisted ever since.
In 1991, a small fraction of the equity in selected central PSEs was sold to raise resources
to bridge the fiscal deficit.1 Though quantitatively modest (as will be seen later), the
‘disinvestment’ signaled a major departure in India’s economic policy2. While there have
been instances of sale of publicly owned enterprises as running concerns on pragmatic
considerations, it is only in the last decade that such sales (and sale of limited equity)
acquired the status of public policy. Table 1 summarises what successive union finance
ministers have said about the policy intent in their budgetary speeches, how they wished
to pursue it, and what they planned to use the proceeds for.
Such a shift in policy is in tune with the widespread move away from public ownership
since it was initiated in the late 1970s in the UK, and in the early 1980s in Chile – a
change that has swept the world since then. Structural adjustment lending that was
initiated around the same time by the Bretton Woods institutions’ included privatisation
as an integral component of the policy based lending for the economies in financial
1
Besides disinvestment, the reforms also decided refer chronically loss-making PSEs to BIFR (as with
the private sector firms), national renewal fund was set up to finance voluntary retirement scheme for
public sector employees, introduced memorandum of understanding (MOU) to be signed between PSEs
and their operating ministry, as a means of imparting managerial freedom and performance appraisal.
2
See Appendix 1 for relevant excerpt from Industrial Policy Statement, 1991
R Nagaraj 2 Disinvestment and Privatisation

distress. Such an initiative was buttressed by the World Bank’s influential official
publication, Bureaucrats in Business (1995), which was a serious indictment of how the
extension of the state in provision of private goods and services resulted in serious loss of
efficiency, waste and lost growth opportunities for many less developed economies.3
In macroeconomics, especially after the Latin American debt and inflationary crisis in the
1980s, privatisation was widely advocated as a quick and sure means of restoring
budgetary balance, to revive growth on a sustainable basis (Dornbusch, 1991). At the
micro level, the change in ownership is often advocated to increase domestic competition,
hence efficiency; and encourage public participation in domestic stock market – all of
which is believed to promote ‘popular’ capitalism that rewards risk taking and private
initiative, that is expected to yield superior economic outcomes.4
Thus, these changes are part a wider reversal in perception and policy in the recent times.
Without attempting a detailed appraisal of the analytics and evidence of privatisation, this
report briefly reviews the Indian experience in Part I, and examines the policy options in
Part II.5 The study is largely restricted manufacturing and non-financial enterprises
owned and managed by the central government.
Part I
Review of Disinvestment and Privatisation
Disinvestment was initiated by selling undisclosed bundles of equity shares of selected

central PSEs to public investment institutions (like the UTI), which were free to dispose
off these shares in the booming secondary stock market. The process however came to an
abrupt halt when the market collapsed in the aftermath of Harshad Mehta led scam, as the
asking prices plummeted below the reserve prices.6 Since the stock market remained
subdued for much of the 1990s, the disinvestment targets remained largely unmet.
The change of government at the Centre in 1996 led to some rethinking about the policy,
but not a reversal. A Disinvestment Commission was constituted to advise the
government on whether to disinvest in a particular enterprise, its modalities and the
utilization of the proceeds. The commission, among other things, recommended
(Disinvestment Commission, 1997):
3
For a symposium of five papers on this study from different perspectives, see World Development,
January 1999.
4
It is perhaps useful to draw a distinction between privatization and deregulation or liberalization. While
the former strictly deals with change in ownership, the latter is concerned broadly with change in rules of
entry and exit of firms and on their conduct. In this study we are concerned strictly with privatization,
and not with deregulation or liberalization.
5
There are many comprehensive reviews of literature on this issue, for instance, Megginson and Netter
(2001), Rammohan (2001), Tandon (1997), Cook and Kirkpatrick (2000).
6
Though disinvestment was not part of the scandal, the process got some what discredited as some
officials associated with the policy reforms were found have had an association with Harshad Mehta.

• Restructuring and reorganization of PSEs before disinvestment,
• Strengthening of the well-functioning enterprises, and
• To utilize the disinvestment proceeds to create a fund for restructuring of PSEs.
In response to the public debate, and to the commission’s recommendations, some large
and well-functioning PSEs were declared “jewels” (Navaratnas) in the government’s
crown, and were granted greater managerial and financial autonomy. However,
disinvestment did not pick up as the share prices remained subdued because of the
scandals that rocked the financial markets.7 But, by the turn of the decade, there was
some improvement mainly in response to the stock boom engineered by Ketan Parikh.
Apparently some PSEs stocks were part of the scandal, which this time also involved the
UTI.8
The new government that came to power in 1998 preferred to sell large chunks of equity
in selected enterprises to “strategic” partners – a euphemism for transfer of managerial
control to private enterprises. A separate ministry was created to speed up the process, as
it was widely believed that the operating ministries are often reluctant to part with PSEs
for disinvestments as it means loss of power for the concerned ministers and civil
servants. The sales were organised through auctions or by inviting bids, bypassing the
stock market (which continued to be sluggish), justified on the grounds of better price
realisation. Notwithstanding the serious discussion on the utilization of disinvestment
proceeds, they continued to be used only to bridge the fiscal deficit.
Strategic sale in many countries have been controversial as it is said to give rise to a lot of
corruption, discrediting the policy process. Aware of such pitfalls, efforts were made to
be transparent in all the stages of the process: selection of consultants to advice on the
sale, invitation of bids, opening of tenders and so on. Between 1999 and 2003, much
greater quantum of public assets were sold in this manner, compared to the earlier
process, though the realised amounts were consistently less than the targets – except in
2003 (Table 2 and 3).
Nonetheless, there are series of allegations of corruption and malpractice in many of

these deals that have been widely discussed in the press and the parliament. Instances of
under pricing of assets, favouring preferred buyers, non-compliance of agreement with
respect to employment and retrenchment, and many incomplete contracts with respect to
sale of land, and assets have been widely reported.9
7
It is perhaps worth reminding ourselves that the 1990s witnessed a series of frauds in the financial sector
that seriously dented the credibility of the stock market, which is yet to recover in terms of participation
of domestic “small” investors. After the Harshad Mehta scam, there was, MS Shoe scam, collapse of
NBFCs, vanishing companies scam, teakwood plantation scam, collapse of CRB group of financial
companies, collapse of housing bubble in 1996, and finally the Ketan Parikh scam in 2000.
8
A credible and careful account of the reasons of the collapse of UTI (and along with it, public’s trust in
the stock market) is yet to be written. One could hypothesize that the government’s directive to buy
PSEs’ stocks probably contributed to the beginning of the end of UTI.
9
As official agencies and courts are investigating many of these issues, we do not consider it prudent on
our part to go into them at this stage.

Thus, during the last 13 years Rs. 29,520 crores were realised by sale of equity in
selected central government PSEs, (in some cases) relinquishing managerial control as
well (Table 4). This formed less than one per cent of central government’s cumulative
fiscal deficit in this period.
Amid disinvestment and privatisation, some new PSEs are also created. For instance,
many departmental activities were being corporatised (setting up of BSNL for instance)
with a view to disinvestment. New PSEs are also formed to take up newer activities like
road development corporations (promoted by state governments to execute highways and
irrigation projects).
Legal issues in the D-P process:
Legality of the disinvestment process has been challenged on a variety of grounds that
slowed the sale of public assets. However, there were two significant judicial rulings that
broadly set the boundaries of the D-P process. These are:
1. Privatisation is a policy decision, prerogative of the executive branch of the state;

courts would not interfere in it.
2. Privatisation of the PSE created by an act of parliament would have to get the
parliamentary approval.
While the first ruling gave impetus for strategic sale of many enterprises like Hindustan
Zinc, Maruti, and VSNL etc. since 2000, the second ruling stalled the privatisation of the
petroleum companies, as government was unsure of getting the laws amended in the
parliament.
Privatisation at the state level:
A sizable proportion of the state level enterprises are “welfare corporations” largely
intended to meet social welfare objectives, and to secure resources from public sector
banks and development financial institutions. However, many SLPEs are also involved in
manufacturing and mining activities to utilize local resources and to cater to the regional
markets. SLPEs as a whole make sizable financial losses.10
Privatisation at the state level began somewhat earlier than at the Centre. Sale of the state
government’s equity holding in Allwyn Nissan Limited in Andhra Pradesh in 1989, UP
State Cement Corporation to Dalmia Group, and Auto Tractors in 1991 – were precursors
to the national level policy changes (Bajaj, 1994)11. By 2003, 35 such SLPEs have been
10
Apparently, these corporations serve an important political function. Legislators who are denied
ministerial positions are usually appointed as their chairpersons of such enterprises.
11
Allwyn Nissan was a state level joint venture set up in 1985 to produce light commercial vehicles in
collaboration with Nissan of Japan.

privatized. But, interestingly, over five times as many enterprises (180) were shut down
during this period (Table 5).
Employment in PSEs:
As Figure 1 shows, employment in the central PSEs has declined from about 2.2 million
in 1991-92 to about 1.7 million a decade later. A marginal rise in 2001-02 is on account
of the shift of employment from department of telecommunication to incorporation of
BSNL as a corporate entity. If one traces employment in a set of same enterprises over
the 1990s, perhaps the decline would be greater. The fall in employment is clearly the
result of voluntary retirement scheme (VRS) initiated using the National Renewal Fund,
as part of the structural adjustment programme.
What has happened to employment after privatisation? Perhaps it is too early to get firm
evidence since substantial privatisation occurred only during the last four years.
However, popular reports suggest some retrenchments and compulsory retirement of
workers. Reportedly some private firms have violated their contract in this regard
(Modern Foods, for instance). There are also reports of employment generation at
BALCO on account of capacity expansion.
Performance of PSEs after disinvestment and privatisation:
In principle, disinvestment is unlikely to affect economic performance since the state

continues to be the dominant shareholder, whose conduct is unlikely to be influenced by
share prices movements (or return on equity). Privatisation can be expected to influence
economic outcome provided the firm operates in a competitive environment; if not, it
would be difficult to attribute changes performance sole or mainly to the change in
ownership.
Assessing the principles, premises and performance of the D-P process:
Right from the beginning in the UK, privatisation has been a policy in search of an
economic rationale – to borrow the title of Kay and Thompson’s (1986) well-known
contribution. Mainstream economics is largely agnostic about the role of ownership,
focusing mainly on how market structure affects performance of firms (Vickers and
Yarrow, 1991). If privatisation is seen as a means of raising resources for the budget, it
can be analytically shown to be cheaper to sell public bonds than public assets (Yarrow,
1986).
Instead of seeking the reasons for privatization, one could instead ask why a certain firm
should remain in public sector. Some would contend that with rapid technological
change, natural monopoly, as a powerful argument for public ownership has simply
disappeared. Such an argument would surely hold for telecommunications, not but for
the rest of public monopolies. Based on studies of privatisation of natural monopolies,
Ravi Ramamurthi (1999) contended:

Sectors such as railways, however, are harder to regulate after privatization (see Ramamurthi,
1997). The regulatory task can be especially difficult in sectors such as highways, or water or
sewage, where competition is weak or totally absent, investments are lumpier, externalities are
much more important, and pay back periods run 8-10 years or more, thereby increasing
uncertainty and risk for contracting parties. Renegotiations are likely to be the rule, brought on by
unanticipated developments or simply opportunism on the part of investors or governments.
History is full of examples in which such arrangements have fallen apart a few years after they
were signed (Ramamurthi, 1999: 149).
In fact, it is mainly the property right theorists who have underlined the role of ownership
on economic performance (Fama, 1980). But in the twentieth century, with the separation
of ownership from control in modern industry, there is a serious agency problem
regardless of its ownership. The view that the secondary capital market and the market
for managers provide adequate discipline on a firm’s performance is at variance with
evidence, especially the US experience (more about it later).
What is the evidence on the efficiency effects of privatisation? It is highly mixed, to put it
mildly. Florio (2004), perhaps the most recent and definitive quantitative account
covering the longest time period of the UK experience, does not show any measurable
efficiency gains on account of the changes in ownership. World Bank’s official study
(Ghalal et al, 1995), perhaps the most careful exercise at making pair-wise comparisons
of comparable firms in many countries, was extremely cautious in suggesting welfare
gains. In fact, one of the authors of the study, Pankaj Tandon, in an independent paper
was more categorical in rejecting the hypothesis of efficiency gains from privatisation in
less developed countries (Tandon 1997). If this selective review of evidence is anything
to go by, then one should have a modest expectation from whatever privatisation that has
happened in India.12
Britain, the cradle of modern capitalism, has witnesses the public policy pendulum swing
from nationalisation to privatisation (or denationalization) many times over, in the 20th
century. While the US has a model of private ownership, and control with public
regulation, continental Europe and Japan have, by and large, stayed steady with greater
public ownership in such industries. Although there have been some privatisation in these
economies, such attempts have remained relatively modest with limited changes in
ownership and control of national assets. Thus, there seems to be no unique ‘model’ that
is universally sound for promoting efficiency of resource use. Perhaps it has a lesson for
us: we have to search for a solution suited for our conditions that are broadly consistent
with economic reasoning.
Before seeking evidence on the effects of the D-P in India, perhaps it would be useful to
ask how valid were the premises of the disinvestment policy to begin with. It is widely
believed, as large and growing share of the fiscal deficit was on account of PSEs’
financial losses getting rid of them would restore the fisc back to health. How valid was
such a diagnosis? Nagaraj (1993) had shown, using a widely accepted a methodology that
PSEs’ financial losses were not the principal cause of the growing fiscal deficit in the
12
For a different reading of the evidence, with a greater focus on the financial aspects of the reform, see
Megginson (2005).

1980s, and in fact PSEs’ share in the fiscal deficit had steadily declined in the decade. In
other words, the government per se was largely responsible for the growing fiscal deficit,
not the enterprises owned by it.
Updating these estimates for the 1990s using a more refined method, the estimated
deficits of the general government confirmed our previous findings (Figure 2).13
Government’s share (in terms of equity and debt) as a proportion of PSEs’ total fixed
investment shows a steady decline since the mid-1970s, suggesting a gradual tightening
of their budget constraint (Figure 3). The decline in government’s contribution is being
met increasingly by a rise in internal resources (Figure 4). These long-term trends
indicate, contrary to the widely held views, the growing fiscal deficit since the 1980s is
not on account of financial losses of the enterprises.
The above evidence suggests that the popularly used indicator of net profit as a
proportion of total equity does not adequately reflect PSEs’ financial performance. While
such a measure may be useful for a private shareholder, it has many shortcomings to
gauge the return on public investment. For many reasons, PSEs tend to be over
capitalized. First, while these enterprise are expected to develop infrastructure on their
own using budgetary resources (adding to their capital costs), state government agencies
usually vie with each other to provide larger and better infrastructure for private firms,
thus reducing their capital cost. Therefore, depreciation charges for PSEs tend to be much
larger. Second, capital structure of PSEs is seldom designed to maximise returns for the
shareholder, namely the government. Usually PSEs are granted large loans in the initial
year; when they are unable to service the loans, these are often converted into equity to
reduce their debt repayment burden. Thus, many PSEs have high equity, not by design
but by default, adversely affecting the net profitability ratio. Moreover, from an economic
viewpoint, capital structure of an enterprise is of secondary importance compared to
return on capital employed.
It is widely believed that PSEs’ respectable profitability ratio (gross profits to capital
employed) is mainly on account of the surpluses of the petroleum sector enterprises
whose pricing includes an element of taxation. Interestingly, as shown in Figure 5, the
profitability ratio has improved since the 1980s even excluding the petroleum sector
enterprises – a clear evidence on improvements in PSEs financial performance. But could
it be merely due a faster rise in administered prices of PSEs’ output (on account of their
monopolist position in the domestic market)? This is not so, as evident from the fact that
the ratio of deflators of public sector output and GDP has declined since the mid-1980s
(Figure 6).
If PSEs’ financial performance has improved as shown above, what then accounts for the
growing deficits? The problem seems to lay in poor financial returns in electricity boards,
road transport corporations and railways, which are probably not adequately reflected in
the above measures. For instance, revenue-to-cost ratio in SEBs has remained less than
one for much of the 1990s, a decade of much talked about reforms, despite a steady rise
13
For methodological details of the results reported in this section, refer to Appendix 2.

in physical efficiency of thermal power plants (as measured by plant load factor)
(Figure7).
If the above reasoning and evidence is persuasive, then they suggest that the empirical
premises for the ownership reforms were rather thin. While undoubtedly public sector’s
financial performance needed an improvement, they were not, in the main, on account of
the central PSEs that were the targets of the D-P. They mainly lay in (i) the growing
expenditure and subsidies of the government, and (ii) poor return on investment in
electricity, irrigation and road transport. In all these cases, the real problem is not so
much public ownership, but pricing of public utilities and government ’s inability to
collect user charges, for a variety of political and social reasons.
To sum up, as the sale of equity has been quantitatively a modest, in relation to the size of
public sector in India, it is hard to judge the efficacy of the reform effort. Moreover, it is
perhaps too early to be definitive about the outcomes. Analytical bases of the policy
reform were fragile to begin with, and comparative experience does not give much
optimism for measurable efficiency gains from these changes in ownership of industrial
assets. Above all, if the evidence reported is anything to go by, the premises of the D-P
policy were rather weak.
II
Policy Options
With over a decade of sustained efforts to redraw the boundaries of the ownership of
public industrial assets, there has hardly been any political or professional consensus on
the need for, and the modalities of, privatisation. This can be interpreted to mean either of
the two possibilities: that there is a great potential for the sale of public equity, or, that
there are practical difficulties of doing it. Realistically speaking, if ownership reform is a
policy imperative then the options before us seem limited to the following:
1. Rule out large-scale privatization, considering (a) the shallow domestic stock
market,14 (b) relatively small size of the private corporate sector,15 and (c) the
wide spread political opposition to transfer of managerial control to foreign
owned firms, and (d) social costs of such transfers.
2. In principle, disinvestment without a change in management is unlikely to make
much difference to efficiency. It may help raise limited resources from the capital
market, mainly reflecting the government monopoly in the industry. But this is a
14
Despite considerable modernisation of institutions and procedures of securities markets in the last
decade, they are many shortcomings: one, the market is still very shallow with a few scripts accounting
for the bulk of the trade; two, volatility in the Indian market is still one of highest in the world; three,
despite NSEs’ phenomenal growth, it is small coterie of BSE brokers that call the shots in the entire
market. Thus, the India market continues to be what Vijay Joshi and I M D Little appreciatingly called it
the “snake pit”.
15
It is perhaps worth reiterating that size of India’s private corporate sector is relatively small, estimated to
be between 10 to 12 per cent of domestic output. Barring a few, most private sector firms are small
compared to PSEs that are targets of privatisation.

costly source of finance with high transaction costs. Given excess liquidity
currently in the financial system it would be cheaper to sell bonds domestically to
raise the required finances.
3. Financially unviable (loss making) PSEs need to be drastically restructured or
closed down. However, these enterprises are invariably located on valuable real
estate, as most of these industrial enterprises were the locus of urban and regional
industrial development. Empowered committees consisting of all the stakeholders
could be created to shut down such enterprises, dismantle the plant and
machinery, and sell the real estate in a transparent manner; and/or develop the real
estate jointly with institutions like the LIC or state housing boards. Workers are
unlikely to object to such proposals if they are assured of a fair share of the sale
proceeds either in cash or part of the housing to be built using the land.
4. In consumer goods industries like hotels etc, where PSEs may have quality assets
in prime locations but lack sound management, long term leases or management
contracts could be a viable option. However, efficacy of this option lies in the
design of contracts. If they were highly loaded against government it would
vitiate the purpose.
5. Need for the institutional mechanism of disinvestment commission with
representatives from different stakeholders to deliberate on all the above matters
in a transparent manner. Doing it administratively by a ministry would perhaps
discredit the D-P policy.
If we admit that there are genuine limitations of selling off of PSEs – core of which
belong to energy, infrastructure, and industries of strategic interest in national
development – then there is perhaps no credible alternative but to improve the
functioning of these enterprises.16 We, then, are back to the old question: how to improve
PSEs performance where a change in ownership is unlikely to make much difference.17
There is a large (administrative) literature (including many valuable official reports)

addressing such a question; much of it dwells on the autonomy and accountability of
enterprises posed mainly in terms of administrative controls of the government as the
ultimate “owner”, and procedural accountability of the managers. One of the widely
advocated suggestions is to create industry wise holding companies – for instance, Arjun
Sengupta Committee’s main suggestion (Government of India, 1984) – as an institutional
buffer between an enterprise and the government. But the evidence on this organizational
form is perhaps not encouraging, as it often implies creation of another tier of
bureaucracy, undermining the autonomy of the firm or factory level managers.18
16
For instance, In 1991, 14 largest PSEs constituted 55 per cent of value added and capital employed. The
enterprises included in decenig order in terms of gross block are: ONGC, NTPC, SAIL, Rashtriya Ispat
Nigam Ltd., NALCO, Indian Oil, Neyveli Lignite, MTNL, Indian Airlines, Shipping corporation, IPCL,
Air India, and South Eastern Coal Fields.
17
PSEs need not necessarily have to be large and monolithic organization. There is considerable scope for
rationalization of these enterprises.
18
It is worth remembering that PSEs like SAIL and Coal India were conceived and functioned initially like
a holding company.

Economic analyses of public sector performance, however, seem to have largely ignored
the institutional ‘black box’, by focusing mainly on the macroeconomic effects of public
investment and planning for growth. Many studies critical of India’s growth and its
distribution have identified political economic reasons for poor performance of PSEs.
More recently, in line with the current orthodoxy, some have advocated ownership
reform, which we have argued to be of limited value.
Problem of corporate governance:
In the evolution of modern capitalism, with separation of ownership from control as firms
grow in size and complexity, agency problem arises: how to ensure that the managers
(“promoter” in Indian parlance) work to maximise return on shareholders’ capital. Given
the information asymmetry, managers could pursue their private goal disregarding the
shareholders’ interests. This is at the heart of the problem of modern literature on
corporate governance. Various institutional and contractual mechanisms have evolved in
the last century to grapple with this problem.
In the context of efficiency of resource use in a socialist economy, Oskar Lange sought to
solve the problem of how to ensure that managers of public firms maximized efficiency
consistent with the goals set by the central planners. However, looking at the
microeconomics of firms in a socialist economy, Jonas Kornai argued that they were
unlikely to be efficient because of the soft budget constraint: that is, firms do not go
bankrupt or managers do not loose their jobs for their poor performance. Firms can
always renegotiate their contracts with the planners to hide their inefficiency.
In India public sector firms are often face with multiple objectives, and multiple owners
or monitors – central government, state governments, legislators, public auditors and so
on. Managers may not necessarily maximise profits as they could always highlight a
particular achievement to suit their convenience. Managers may be risk averse as they
face constitutionally mandated procedural audit by the CAG if an enterprise is majority
government owned. Managers’ efficiency objectives may come in conflict with
dysfunctional political interference in operational matters (at the expense of policy
issues) to meet narrow political goals. However, at the same time, poor performance by
managers does not involve any punishment as they can re-negotiate the output prices,
budgetary support, or have access to soft and/or government guaranteed loans; in other
wards they do not face a hard budget constraint.
Thus, the agency problem is endemic to all economic systems. Moreover, problem of soft
budget constraint is not restricted to socialist economies but evident in market economies
as well when the firm is question is large and considered of strategic importance for the
economy, though perhaps to much lesser extent. Rescue of Chrysler Corporation – the
third largest automotive firm in the US – in the late 1970s and United Airlines after
“9/11” in the US are clear instances of state support for failing companies. Such support
is more common in financial sector, where failure of firms can have significant systemic
risk.

Comparative experience:
Experience of the last century shows that different economic systems have sought to
solve this problem in a variety of ways, with varying degrees of success. The Soviet
system was perhaps quite capable of solving the problem in the initial phases of
‘extensive growth’ with a clear objective of maximisation of national output. However
the system began to falter, as the economy got more complex, in the phase of ‘intensive
growth’ when objective was to increase productivity of resources (Bhaduri, 1998). The
command economy was unable to resolve the agency and incentive problems at the micro
level because of the soft budget constraint.
As noted earlier, in the Anglo Saxon economies, the secondary stock market acted as the
disciplining device on corporate performance and as market for managers. In principle,
stock prices that summarise all publicly available information on the firm performance
should provide adequate signals for managers to act optimally. The system is also seems
capable of providing risk capital to spur rapid technological progress, as witnessed in the
role that venture capital funds played in promoting the Internet revolution. However,
given the agency problem, there is enormous scope for abuse of the system, adversely
affecting the shareholders’ interests and possibly hurting economic efficiency in the
aggregate. Hostile takeovers and leveraged buyouts have exposed the inefficiency of such
a disciplining mechanism (Dore, 2000). The recent implosion of some of the world’s
biggest companies, astronomical rise in managerial remuneration disproportionate to
performance of firms, and widespread abuse of stock options by top managements in
firms like Enron and Tyco by the turn of the last century have seriously dented the
credibility of the stock market based principles of corporate governance (Stiglitz, 2003).
“Follower industrializing” economies of continental Europe and Japan evolved a bank

centric mechanism of financing of industrialization and corporate governance to
overcome some of the well known shortcomings of the stock market – heeding to
Keynes’s advise, and Greschenkron’s (1962) historical insights (Zysman, 1983). In this
system, banks not only provide loans but equity as well, hence closely monitor the
performance of firms. Japanese system of interlocking equity ownership centered around
a main bank, called Keiretsu, with mutual stock holding leading to accountability and risk
sharing, has been able to overcome some of the widely observed informational
deficiencies in the stock market based system, hence improved efficiency and growth
over a sustained period (Aoki, 1996).
Admittedly, bank centric systems have had their share of problems. While such a system
was perhaps capable of engineering a rapid capital accumulation and technological catch
up with the US, it was probably not nimble enough to finance risk taking to extend the
technological frontier as evident from the experience of the 1990s. Many blame the close
and opaque nexus between firms, banks and the bureaucracy for the Japanese debacle in
the 1990s that has persisted for more than a decade now. Similarly, state sponsored
industrialistion is believed to be responsible for the East Asian crisis in 1997.

Although there is some rethinking on the basis of the above mentioned instances in Japan
and continental Europe about their institutional mechanism, it is hard to deny the
superiority of the bank centric systems in promoting the post-war experience (1945-
2000). Variants of the Japanese model of financing and governance have contributed in
no less measure to the unprecedented success of “late industrialising” economies of East
Asia – as represented by the “rise of the rest”, to use Alice Amsden’s phrase (Amsden,
2001). Thus, on balance, history and theory seem to favour a bank centric system – at
least in the early phase of industrialisation.
Evolution of the Indian system:
In light of above, how does one chrecterise India? Over the first three decade of the
planned economic development, a bank centric system was broadly put in place with an
elaborate network of public sector banks, development finance and investment
institutions. Though banks, especially the DFIs had representation on company boards by
virtue of their large debt and equity holding (both public and private), there was no
attempt to nationalise private corporate firms, or to interfere with managerial control of
existing promoters unless the firms were mismanaged. Thus, the system was broadly
supportive of development of private enterprise consistent with the national objectives.
Moreover, as Indian enterprises are predominantly family-managed, public financial
institutions sought modernize corporate governance (like introduction of professional
managers in the boards) and financial practices, without questioning the rights of
management of the promoters.
But, the role of the financial institutions was largely subordinated to the implementation
of quotas and licenses. Financial system, thus, could not adequately develop expertise in
screening investment projects, market and technologies, and assessing market risk. They
had little role disciplining corporate managers with financial carrots and sticks. In other
words, banks and financial institutional were not encouraged to develop their
“reputational capital”, that is perhaps central to a sound financial system. A close reading
of the early studies by R K Hazari (1986) on licensing, and later Narasimham Committee
report on shifting from physical to financial controls (Ministry of Finance, 1985) seem to
suggest that they proposed to nudge the institutions towards a bank centric system of
financing and corporate governance.
Although development banks increasingly financed PSEs investments, they had limited
role in governance of these enterprises, was largely in the hands of the operating
ministries and were subjected to parliamentary controls. Parliament constituted
Committee on public undertakings (COPU) that looked into the functioning of selected
PSEs. Similarly, CAG is constitutionally mandated to audit PSEs in which the central
government held more than 50 per cent of equity shares. While such measures of public
accountability are in principle desirable in a democracy, in practice, the parliamentary
committees had little role in ensuring efficacy of resource use in these publicly owned
firms. As measures of enforcing sound corporate governance, these methods were not
effective.

However, overlooking the hard task of institutional design to suit the specificities of
large, heterogeneous, democratic industrializing economy of India, the reforms initiated
in the 1990s have sought to improve PSEs’ financial performance by transferring
ownership and control to private sector, and resort to stock market based discipline. As
the above discussion clearly demonstrates, regardless of ownership agency problem
exists is ubiquitous, and problems of soft budget persist in varying degree when the firms
involved are large and strategic. Further, private ownership would not guarantee
improvement in efficiency if the market structure remained the same; on the other hand a
private monopoly, could be worse than a public one.19
A suggestion for reform:
On the basis of the above, if we accept that the real problems facing PSEs are, (i)
dysfunctional political interference, (ii) constitutionally mandated procedural audit and
(iii) soft budget constraint, then following measures can be suggested:
• Reduce the government holding in PSEs to less than 50 per cent by transferring
share to mutually complementary firms by creating Japanese style keiretsu, tied
around a public sector bank or financial institution. For instance interlocking of
equity holding among steel, coal and electricity firms; or petroleum exploration,
refining and petrochemical complexes. Such a measure would eliminate the
procedural audit as well as political interference on the day-to-day operational
matters.
• However, to ensure public accountability managers may be asked to make
presentations to the parliamentary sub-committees on efficiency of resource use.
At the same time, managers should have clearly defined security of tenure for say
3 or 5 years to ensure continuity and to show measurable performance.
• Harden the budget constraint for PSEs by a clear sunset clause on budgetary
support or government guarantee for loans, except for specific public purpose
oriented investments.
• Given that banks provide substantial equity and loans, they would, in principle,
have incentive to monitor PSEs performance to retain their reputatational capital.
• However, question would still remain who will monitor the banks? There are no
easy answers to it. Given the increasing independence of the Reserve Bank, it is
conceivable to device a system to where the central bank and other regulatory
authorities are given the responsibility of appointing top managers of banks. Such
a scheme of delegated monitoring is in principle is better for efficiency. Such a
monitoring could focus on long-term corporate goals such as productivity growth
market shares, and R&D outcomes.
• To ensure that PSEs do not abuse their oligopolistic position in the domestic
market, reasonably open trade and investment regime could impart the discipline
of the world market.
19
In a political democracy, a public monopoly would be more answerable to political representatives than
a private monopoly.

Pranab Bardhan (1991 and 1993) has argued in favour of such a system for India to
overcome the problem of soft budget constraint and a way to acquire dynamic
comparative advantage. Applying the recent advances in information economics and
drawing from the recent experience, Stiglitz and his associates caution developing
economies against moving from financial repression to financial liberalization (Hellman,
Murdock and Stiglitz, 1996). Such attempts have more often than not, led to many
financial crises. Arguing against such polar extremes, these scholars have advocated
Japanese style relationship banking system or Korean style hard budget constraint
banking as desirable forms of financial system, which they define as “financial restraint”.
Conclusions
While public sector enterprises’ contribution to national development is widely

acknowledged, their poor financial return has been a matter of deep and enduring
concern, especially since the mid-1980s when, for the first time, the central government’s
current revenues were found inadequate to meet its current expenditure. Though firm and
industry level studies of PSEs have often highlighted gross inefficiencies and poor
profitability, many of them have also suggested their unquantifiable (or difficult to
quantify) non-economic benefits. However, macroeconomic discourse in India has
largely focused on the “crowding-in” effects of public investment, and the need for
institutional structures to insulate the PSEs from political and bureaucratic interference to
improve their financial returns. Deeper analyses have sought to offer political economic
explanations for continuation of such a state of affairs.
As a means to restore budgetary balance, after the crisis in 1991, government sold a small
fraction of its equity shares in selected public sector enterprises to public investment
institutions. Though quantitatively modest, it signaled a major departure in public policy;
it was the thin end of the wedge that led to transfer of managerial control in a few PSEs
about a decade later. The policy shift was also significant, as it deflected the contours of
the discourse on public sector reform from institutional design and corporate governance
to a change in ownership in favour of private sector as a means to overcome the
inefficiencies. The shift in debate was consistent with the changes in the discussions on
economic policies worldwide.
Quantitatively, the disinvestment and privatisation have been modest so far, as

proportions of the targets, revenues realised, or as a proportion of the fiscal deficit.
Disinvestment did not secure much revenue, as the stock market was subdued during
much of the 1990s on account of a series of scandals that repeatedly rocked the financial
markets. Sale of substantial chunks of equity with transfer of managements that took
place in the last 3-4 years has yielded sizable revenues. But most of these sales have been
contentious with a series of legal cases pending in the courts, and enormous adverse
commentary on them in press and the parliament.
Should we persist with the policy of ownership reform? Realistically speaking, prospects
for the D-P appear limited, as the bulk of the public investments (in terms of capital
employed) are in infrastructure and industries of strategic importance, where market

failures and national interests seem too significant to be left unattended by public policy.
There is little that is credible in economic theory that argues ownership as the principal
basis for economic outcomes. Moreover, accumulating evidence on privatisation across
the world does not give any prospect of this policy making a genuine difference to firm
level performance on a sustainable basis.
If the above assessment is reasonably persuasive, then we are back to the earlier question:
how to design an institutional mechanism that limits (if not overcomes) the agency
problem that is at the heart of modern capitalism with the separation of ownership and
control of large firms, that puts hard budget constraint on firms, and reduces
dysfunctional political bureaucratic interference. Solution to this problem seems closely
tied to financing of investment, and financial system that provides resources for
development and performs the function of a disciplining device on firms. While
disinvestment and privatisation necessarily lead towards stock market based discipline,
we have argued that history and theory do not seem to support it to be the superior
alternative. We are inclined to favour the Japanese and German style interlocking of
ownership of complementary PSEs tied together with a bank that enforces greater
managerial accountability, and encourages long term outlook of output growth and
acquisition of technological capabilities.
Admittedly, there are a numerous enterprises with modest investments that are in the
public sector fold that operate in competitive markets or do not serve ant strategic
purpose. Among these, loss making ones can be disposed off by selling the real estate of
these enterprises by creating empowered committees of all stakeholders in these
enterprises. Workers are unlikely to oppose such moves if there is a reasonable and
transparent sharing of proceeds of such sales. The remaining PSEs operating broadly in
“competitive” environment can be granted greater autonomy, or give out to private
parties on management contracts or on lease. To undertake these tasks, there is a need for
a body like the disinvestments commission with representation from all stakeholders to
workout the modalities of undertaking these changes.
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Table 1: What successive Finance Ministers have said about D-P in their budget speeches
Year Finance Minister Key phrases used in the Budget speech

Why disinvstment?

1991-92 Yashwant Sinha For broad-based equity
Manmohan Singh Improve management
Raising resources for the PSUs
1997-98 P Chidambaram Long-term disinvestments policy for enhancing budgetary
receipts
1999-2000 Yashwant Sinha For improving productivity and profitability of
enterprises
Developing capital markets
2003-04 Jaswant Singh To unlock production potential of undertakings
Which PSUs to disinvest?
1991-92 Yashwant Sinha
Manmohan Singh Selected PSUs
1997-98 P Chidambaram Silent
1999-2000 Yashwant Sinha Non-strategic PSUs
How to Disinvest and to whom?
1991-92 Yashwant Sinha Up to 20 per centequity to MFs/investment institutions in
public sector
1991-92 Manmohan Singh Do
1997-98 Chidambaram Government to retain majority equity in strategic PSUs
1998-99 Yashwant Sinha Do
1999-2000 Yashwant Sinha Though gradual disinvestments or strategic sale
2000-01 Yashwant Sinha Bring down government equity to 26 per cent or less
2001-02 Yashwant Sinha Not in small lots
2003-04 Jaswant Singh Asset management Co. to hold residual shares post
disinvestments
How disinvestments proceed be used?
1992-93 Manmohan Singh NRF for assistance to workers (specially women)in
unorganized sector;
Also, for special employment schemes in backward areas
After meting VRS needs, create a Restructuring fund for
PSUs.
1999-2000 Yashwant Sinha To fund social and infrastructure sectors
2001-02 Yashwant Sinha PSU restructuring
For creating workers safety net
Public debt reduction
Social and infrastructure sector
2003-04 Jaswant Singh Create Disinvestment Fund to direct proceeds for specific
uses.
Source: Sarma (2004): 2195
Table 1: What successive Finance Ministers have said about D-P in their budget speeches
Year Finance Minister Key phrases used in the Budget speech

Why disinvstment?

1991-92 Yashwant Sinha For broad-based equity
Manmohan Singh Improve management
Raising resources for the PSUs
1997-98 P Chidambaram Long-term disinvestments policy for enhancing budgetary
receipts
1999-2000 Yashwant Sinha For improving productivity and profitability of
enterprises
Developing capital markets
2003-04 Jaswant Singh To unlock production potential of undertakings
Which PSUs to disinvest?
1991-92 Yashwant Sinha
Manmohan Singh Selected PSUs
1997-98 P Chidambaram Silent
How to Disinvest and to whom?
1991-92 Yashwant Sinha Up to 20 per centequity to MFs/investment institutions in
public sector
1991-92 Manmohan Singh Do
1997-98 Chidambaram Government to retain majority equity in strategic PSUs
1998-99 Yashwant Sinha Do
1999-2000 Yashwant Sinha Though gradual disinvestments or strategic sale
2000-01 Yashwant Sinha Bring down government equity to 26 per cent or less
2001-02 Yashwant Sinha Not in small lots
2003-04 Jaswant Singh Asset management Co. to hold residual shares post
disinvestments
How disinvestments proceed be used?
1992-93 Manmohan Singh NRF for assistance to workers (specially women)in
unorganized sector;
Also, for special employment schemes in backward areas
After meting VRS needs, create a Restructuring fund for
PSUs.
1999-2000 Yashwant Sinha To fund social and infrastructure sectors
2001-02 Yashwant Sinha PSU restructuring
For creating workers safety net
Public debt reduction
Social and infrastructure sector
2003-04 Jaswant Singh Create Disinvestment Fund to direct proceeds for specific
uses.
Source: Sarma (2004): 2195
Table 1: List of Privatised PSEs
1 Lagan Jute Machinery Company Limited (LJMC)

2 Modern Food Industries Limited (MFIL)

3 Bharat Aluminium Company Limited (BALCO)
4 CMC Ltd. (CMC)
5 HTL Ltd. (HTL)
6 IBP Co. Ltd. (IBP)
7 Videsh Sanchar Nigam Limited (VSNL)
8 Indian Tourism Development Corporation (ITDC)
9 Hotel Corporation of India Limited (HCI)
10 Paradeep Phosphates Limited (PPL)
11 Jessop and Company Limited
12 Hindustan Zinc Limited(HZL)
13 Maruti Udyog Limited (MUL)
14 Indian Petrochemicals Corporation Ltd.(IPCL)
Table 2: Actual Disinvestment from April 1991 onwards and Methodologies Adopted
No. of
Target receipt Actual
Companies in
Year for the year (Rs. receipts (Rs. Methodology
which equity
in Crore) in Crore)
sold
Minority shares sold by auction
47 (31 in one
method in bundles of “very
1991-92 tranche and 16 2500 3038
good”, “good”, and “average”
in other)
companies.
Bundling of shares abandoned.
35 ( in 3
1992-93 2500 1913 Shares sold separately for each
tranches)
company by auction method.
Equity of 7 companies sold by
1993-94 - 3500 0 open auction but proceeds
received in 94-95.
Sale through auction method, in
which NRIs and other persons
1994-95 13 4000 4843
legally permitted to buy, hold or
sell equity, allowed to participate.
Equities of 4 companies
auctioned and Government piggy
1995-96 5 7000 361
backed in the IDBI fixed price
offering for the fifth company.
GDR (VSNL) in international
1996-97 1 5000 380
market.
1997-98 1 4800 902 GDR (MTNL) in international

market.
GDR (VSNL) / Domestic
offerings with the participation of
FIIs (CONCOR, GAIL). Cross
1998-99 5 5000 5371
purchase by 3 Oil sector
companies i.e. GAIL, ONGC &
Indian Oil Corporation
GDR—GAIL, VSNL-domestic
1999-00# 4 10000 1860 issue, BALCO restructuring,
MFIL’s strategic sale and others
Strategic sale of BALCO, LJMC;
2000-01 4 10000 1871 Takeover - KRL (CRL), CPCL
(MRL), BRPL
Strategic sale of CMC – 51%,
HTL –74%, VSNL – 25%, IBP –
2001-02 33.58%, PPL-- 74%, and sale by
9 12,000 5632
# other modes: ITDC & HCI;
surplus reserves: STC and
MMTC
Strategic sale : HZL – 26%,
MFIL-26%, IPCL – 25% HCI,
2002-03 6 12,000 3348 ITDC, Maruti: control premium
from renunciation of rights issue,
ESOP:HZL,CMC.
Maruti- IPO(27.5%), Jessop &
Co. Ltd. (Strategic sale-72%),
HZL (Call Option of SP -
2003-04 9 13,200 15547 18.92%), Public Offers - IPCL
(28.95%), CMC (26%), IBP
(26%), DRDG (20%), GAIL
(10%), ONGC (10%), ICI (9.2%)
Total # 48* 91500 45066
* Total number of companies in which disinvestment has taken place so far.

# Figures (inclusive of control premium, dividend/dividend tax,
restructuring and transfer of surplus cash reserves prior to disinvestment etc.)
Table 3: Disinvestment in Public Sector Enterprises

(Rs. Crore)
Year Target Proceeds
1991-91 2,500 3038
1992-93 2,500 1913
1993-94 3,000 -
1994-95 4,000 4843

1995-96 7,000 362
1996-97 5.000 380
1997-98 4,800 902
1998-99 5,000 5371
1999-00 10,000 1860
2000-01 10,000 1871
2001-02 12,000 5632#
2002-03 12,000 3348
2003-04 14,500 15,547
# Figures inclusive of amount realized by way of control premium, dividend/dividend tax

and transfer of surplus cash reserves prior to disinvestment etc.
Source: Economic Survey 2003-04
Table 4: Status of Privatisation of SLPEs (as on March 31, 2003)
State No. of No. No. Closed Working

enterprises privatized Proposed enterprises
to be Profit Loss
privatized making making
Andhra Pradesh 128 30 22 15 25
Tamil Nadu 82 39 11 34 47
Arunachal Pradesh 5 2
Assam 42 5 3 36
Bihar 54 30 8

Delhi 15 5 3
Goa 16
Gujarat 49 3 6 22 24
Haryana 28 1 2 12 16
Himachal Pradesh 21 8 13
Jammu-Kashmir 23 2 3 16
Karnataka 79 5 12 32 38
Kerala 109 15 23 34 59
Lakshwadeep 1
Madhya Pradesh 34 6
Maharashtra 66 3 18 44
Manipur 16 2
Meghalaya 13 1 3 10
Mizoram 6 1 4
Nagaland 6 3
Orissa 67 1 1 14 10
Pondicherry 11 5 5
Punjab 53 1 4 24 10 25
Rajasthan 29 1 1 11 11
Sikkam 11 2
Tripura 9
UP 104 24 23 30 68
West Bengal 81 10 5 20 62
Total 1158 35 103 180 288 519
Source: Mishra (2004)

Figure 1: Employment in Central PSEs
25
20
15
In lakh
10
5
0
92 93 94 95 96 97 98 99 2000 2001 2002 2003
Year ending
Employment
Figure 2: P ublic sector's share in fiscal deficit

of the non-fin. con. gen. govt.
80
70
Per cent of fiscal deficit
60
50
40
30
20
10
0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96
Fiscal year ending
Figure 3:NDNFEs' budget constraint, 1961-96

Govt equity+loans in NDNFEs' investment
Per cent of NDNFEs'
100
80
investment
60
40
20
0
61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95
Fiscal year ending
Govt's contribution

F ig u re 4 : F ina nc ing o f N D N F E s , 1 9 8 1 -9 5
a s % o f g ro s s inve s tm e nt
90
80
70
60
Per cent of gross cap. formation
50
40
30
20
10
0
-1 0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96
F is c a l y e a r e n d in g
In te rn a l re s o u rc e s D o m e s t ic re s o u rc e s F o re ig n re s o u rc e s
F igure 5: P rofita b ility of C P E s

G ross p rofit to ca pital e m p loye d
20
Profitability in per cent
15
10
0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97
F is c al y ear ending
Total CP E s A ll CP E s -petroleum

Figure 6: Public sector price deflator
relative to GDP deflator, 1982-96.
Relative price
114
112
110
108
106
104
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96
Fiscal year ending
Relative price
Figure 7: Cost and efficiency of power sect or

84 Revenue-cost rat io and P lant load fact or 70
82 65
80
60
Per cent
78
55
76
50
74
72 45
70 40
91 92 93 94 95 96 97 98
Fiscal
Revenue to costyear
rat ending
Plant load f actor

Appendix 1
Industrial Policy statement in 1991
Public Sector
Portfolio of public sector investment will be reviewed with a view to focus the public
sector on strategic, high-tech and essential infrastructure. Whereas some reservation for
the public sector is being retained there would be no bar for areas of exclusivity to be
opened up to the private sector selectively. Similarly the public sector will also be
allowed entry in areas not reserved for it.
Public enterprises which are chronically sick and which are unlikely to be turned around
will, for the formulation of revival/rehabilitation schemes, be referred to the Board for
Industrial and Financial Reconstruction (BIFR), or other similar high level institutions
created for the purpose. A social security mechanism will be created to protect the
interests of workers likely to be affected by such rehabilitation packages.
In order to raise resources and encourage wider public participation, a part of the
government's shareholding in the public sector would be offered to mutual funds,
financial institutions, general public and workers.
Boards of public sector companies would be made more professional and given greater
powers.
There will be a greater thrust on performance improvement through the Memoranda of

understanding (MOU) systems through which managements would be granted greater
autonomy and will be held accountable. Technical expertise on the part of the
Government would be upgraded to make the MOU negotiations and implementation
more effective.
To facilitate a fuller discussion on performance, the MOU signed between Government

and the public enterprise would be placed in Parliament. While focusing on major
management issues, this would also help place matters on day-to-day operations of public
enterprises in their correct perspective.
Excerpts relating to public sector taken from Press release on July 24, 1991.

Appendix 2
Public Sector Enterprises and Fiscal Deficit
Alternative estimates for India
To test if PSEs growing deficits is the principal reason for the increasing fiscal
imbalance, we need consistent time series information that includes all PSEs, at all levels
of government (in a federal set up), after reconciling transactions among them. Since
India's National Accounts Statistics (NAS) seem to provide such data set, it perhaps offers
an opportunity to test the hypothesis in a limited way. Moreover, as quality of Indian data
is accepted to be better than many developing countries, such an exercise appears a useful
starting point.
Nature and the limitations of the data set
In NAS, public sector consists of (i) administrative departments, (ii) departmental

enterprises (DEs) like railways, telecom, postal and irrigation services, and (iii) non-
departmental enterprises (NDEs) that include corporate entitities like Steel Authority of
India, statutory organizations like state electricity boards and road transport corporations.
NDEs are further disaggragated into (a) non-departmental financial enterprises and (b)
non-departmental non-financial enterprises (NDNFEs). If PSEs are publicly owned
organizations that produce goods and services whose selling price is related to costs, then
DEs plus NDNFEs would include all PSEs in India.
However, the NAS data has some limitations: (i) given the format of the published
information, it is not always possible to aggregate DEs and NDNFEs, (ii) since the data
are not presented in balance sheet format, widely appreciated financial ratios cannot be
computed, and (iii) considerable delay in publication of these tables. Although these
categories are comprehensive (compared to the easily available information on central
government PSEs), we cannot present all our results for total PSEs; some times they are
restricted for NDNFEs only. However, as the information is available for three decades,
results based on it could have considerable value. Results reported in Nagaraj (1993)
follows the above method. However, this method has some limitations. For instance, it
excludes DEs, underestimating the deficits of PSEs. While the overall deficit is estimated
using the NAS, the fiscal deficit is based on the public finance statistics that does not fully
capture the transactions between the government and its enterprises. To overcome these
limitations, we use Anand Gupta's (1993) method that consistently uses NAS.
To arrive at the true size of India's fiscal deficit, Gupta outlined a method to estimate
gross fiscal deficit of the general government including its enterprise sector, by
reconciling various accounts of the public sector. In other words, his method estimates
capital finance accounts for various parts of the public sector, and aggregates them to
compute the fiscal deficit (excluding non-departmental financial enterprises).

Introduction
Indian economy had experienced major policy changes in early 1990s. The new economic
reform, popularly known as, Liberalization, Privatization and Globalization (LPG model) aimed
at making the Indian economy as fastest growing economy and globally competitive. The series
of reforms undertaken with respect to industrial sector, trade as well as financial sector aimed at
making the economy more efficient.
With the onset of reforms to liberalize the Indian economy in July of 1991, a new chapter has
dawned for India and her billion plus population. This period of economic transition has had a
tremendous impact on the overall economic development of almost all major sectors of the
economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks
the advent of the real integration of the Indian economy into the global economy.
This era of reforms has also ushered in a remarkable change in the Indian mindset, as it deviates
from the traditional values held since Independence in 1947, such as self reliance and socialistic
policies of economic development, which mainly due to the inward looking restrictive form of
governance, resulted in the isolation, overall backwardness and inefficiency of the economy,
amongst a host of other problems. This, despite the fact that India has always had the potential to
be on the fast track to prosperity.
Now that India is in the process of restructuring her economy, with aspirations of elevating herself
from her present desolate position in the world, the need to speed up her economic development
is even more imperative. And having witnessed the positive role that Foreign Direct Investment
(FDI) has played in the rapid economic growth of most of the Southeast Asian countries and most
notably China, India has embarked on an ambitious plan to emulate the successes of her
neighbors to the east and is trying to sell herself as a safe and profitable destination for FDI.
Globalization has many meanings depending on the context and on the person who is talking
about. Though the precise definition of globalization is still unavailable a few definitions are worth
viewing, Guy Brainbant: says that the process of globalization not only includes opening up of
world trade, development of advanced means of communication, internationalization of financial
markets, growing importance of MNCs, population migrations and more generally increased
mobility of persons, goods, capital, data and ideas but also infections, diseases and pollution. The
term globalization refers to the integration of economies of the world through uninhibited trade
and financial flows, as also through mutual exchange of technology and knowledge. Ideally, it
also contains free inter-country movement of labor. In context to India, this implies opening up the
economy to foreign direct investment by providing facilities to foreign companies to invest in
different fields of economic activity in India, removing constraints and obstacles to the entry of
MNCs in India, allowing Indian companies to enter into foreign collaborations and also

encouraging them to set up joint ventures abroad; carrying out massive import liberalization
programs by switching over from quantitative restrictions to tariffs and import duties, therefore
globalization has been identified with the policy reforms of 1991 in India.
The Important Reform Measures (Step Towards liberalization privatization and

Globalization)
Indian economy was in deep crisis in July 1991, when foreign currency reserves had plummeted
to almost $1 billion; Inflation had roared to an annual rate of 17 percent; fiscal deficit was very
high and had become unsustainable; foreign investors and NRIs had lost confidence in Indian
Economy. Capital was flying out of the country and we were close to defaulting on loans. Along
with these bottlenecks at home, many unforeseeable changes swept the economies of nations in
Western and Eastern Europe, South East Asia, Latin America and elsewhere, around the same
time. These were the economic compulsions at home and abroad that called for a complete
overhauling of our economic policies and programs. Major measures initiated as a part of the
liberalization and globalization strategy in the early nineties included the following:
Devaluation: The first step towards globalization was taken with the announcement of the
devaluation of Indian currency by 18-19 percent against major currencies in the international
foreign exchange market. In fact, this measure was taken in order to resolve the BOP crisis
Disinvestment-In order to make the process of globalization smooth, privatization and

liberalization policies are moving along as well. Under the privatization scheme, most of the
public sector undertakings have been/ are being sold to private sector
Dismantling of The Industrial Licensing Regime At present, only six industries are under
compulsory licensing mainly on accounting of environmental safety and strategic considerations.
A significantly amended locational policy in tune with the liberalized licensing policy is in place.
No industrial approval is required from the government for locations not falling within 25 kms of
the periphery of cities having a population of more than one million.
Allowing Foreign Direct Investment (FDI) across a wide spectrum of industries and
encouraging non-debt flows. The Department has put in place a liberal and transparent foreign
investment regime where most activities are opened to foreign investment on automatic route
without any limit on the extent of foreign ownership. Some of the recent initiatives taken to further
liberalize the FDI regime, inter alias, include opening up of sectors such as Insurance (upto
26%); development of integrated townships (upto 100%); defense industry (upto 26%); tea
plantation (upto 100% subject to divestment of 26% within five years to FDI); enhancement of FDI

limits in private sector banking, allowing FDI up to 100% under the automatic route for most
manufacturing activities in SEZs; opening up B2B e-commerce; Internet Service Providers (ISPs)
without Gateways; electronic mail and voice mail to 100% foreign investment subject to 26%
divestment condition; etc. The Department has also strengthened investment facilitation
measures through Foreign Investment Implementation Authority (FIIA).
Non Resident Indian Scheme the general policy and facilities for foreign direct investment as
available to foreign investors/ Companies are fully applicable to NRIs as well. In addition,
Government has extended some concessions especially for NRIs and overseas corporate bodies
having more than 60% stake by NRIs
Throwing Open Industries Reserved For The Public Sector to Private Participation. Now
there are only three industries reserved for the public sector
Abolition of the (MRTP) Act, which necessitated prior approval for capacity expansion
The removal of quantitative restrictions on imports.
The reduction of the peak customs tariff from over 300 per cent prior to the 30 per cent rate
that applies now.
Wide-ranging financial sector reforms in the banking, capital markets, and insurance sectors,
including the deregulation of interest rates, strong regulation and supervisory systems, and the
introduction of foreign/private sector competition.
Impact of Globalization of Indian Economy
The novel Tale of Two Cities of Charles Dickens begins with a piquant description of the
contradictions of the times: It was the best of times, it was the worst of times; it was the age of
wisdom, it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity;
we had everything before us, we had nothing before us
At the present, we can also say about the tale of two Indias: We have the best of times; we have
the worst of times. There is sparkling prosperity, there is stinking poverty. We have dazzling five

star hotels side by side with darkened ill-starred hovels. We have everything by globalization,
we have nothing by globalization.
Though some economic reforms were introduced by the Rajiv Gandhi government (1985-89), it
was the Narasimha Rao Government that gave a definite shape and start to the new economic
reforms of globalization in India. Presenting the 1991-92 Budget, Finance Minister Manmohan
Singh said: After four decades of planning for industrialization, we have now reached a stage
where we should welcome, rather fear, foreign investment. Direct foreign investment would
provide access to capital, technology and market.
In the Memorandum of Economic Policies dated August 27, 1991 to the IMF, the Finance Minister
submitted in the concluding paragraph: The Government of India believes that the policies set
forth in the Memorandum are adequate to achieve the objectives of the program, but will take any
additional measures appropriate for this purpose. In addition, the Government will consult with the
Fund on the adoption of any measures that may be appropriate in accordance with the policies of
the Fund on such consultations.
The Government of India affirmed to implement the economic reforms in consultation with the
international bank and in accordance of its policies. Successive coalition governments from 1996
to 2004, led by the Janata Dal and BJP, adopted faithfully the economic policy of liberalization.
With Manmohan Singh returned to power as the Prime Minister in 2004, the economic policy
initiated by him has become the lodestar of the fiscal outlook of the government.
The Bright Side of Globalization
The rate of growth of the Gross Domestic Product of India has been on the increase from 5.6
per cent during 1980-90 to seven per cent in the 1993-2001 period. In the last four years, the
annual growth rate of the GDP was impressive at 7.5 per cent (2003-04), 8.5 per cent (2004-
05), nine per cent (2005-06) and 9.2 per cent (2006-07). Prime Minister Manmohan Singh is
confident of having a 10 per cent growth in the GDP in the Eleventh Five Year Plan period.
The foreign exchange reserves (as at the end of the financial year) were $ 39 billion (2000-
01), $ 107 billion (2003-04), $ 145 billion (2005-06) and $ 180 billion (in February 2007). It is
expected that India will cross the $ 200 billion mark soon.
The cumulative FDI inflows from 1991 to September 2006 were Rs.1, 81,566 crores (US $
43.29 billion). The sectors attracting highest FDI inflows are electrical equipments including
computer software and electronics (18 per cent), service sector (13 per cent),
telecommunications (10 per cent), transportation industry (nine per cent), etc. In the inflow of FDI,
India has surpassed South Korea to become the fourth largest recipient.

India controls at the present 45 per cent of the global outsourcing market with an
estimated income of $ 50 billion.
In respect of market capitalization (which takes into account the market value of a quoted
company by multiplying its current share price by the number of shares in issue), India is in the
fourth position with $ 894 billion after the US ($ 17,000 billion), Japan ($ 4800 billion) and
China ($ 1000). India is expected to soon cross the trillion dollar mark.
As per the Forbes list for 2007, the number of billionaires of India has risen to 40 (from 36
last year)more than those of Japan (24), China (17), France (14) and Italy (14) this year. A press
report was jubilant: This is the richest year for India. The combined wealth of the Indian
billionaires marked an increase of 60 per cent from $ 106 billion in 2006 to $ 170 billion in 2007.
The 40 Indian billionaires have assets worth about Rs. 7.50 lakh crores whereas the
cumulative investment in the 91 Public Sector Undertakings by the Central Government of
India is Rs. 3.93 lakh crores only.
The Dark Side of Globalization
On the other side of the medal, there is a long list of the worst of the times, the foremost casualty
being the agriculture sector. Agriculture has been and still remains the backbone of the
Indian economy. It plays a vital role not only in providing food and nutrition to the people, but
also in the supply of raw material to industries and to export trade. In 1951, agriculture provided
employment to 72 per cent of the population and contributed 59 per cent of the gross
domestic product. However, by 2001 the population depending upon agriculture came to
58 per cent whereas the share of agriculture in the GDP went down drastically to 24 per
cent and further to 22 per cent in 2006-07. This has resulted in a lowering the per capita
income of the farmers and increasing the rural indebtedness.
The agricultural growth of 3.2 per cent observed from 1980 to 1997 decelerated to two per cent
subsequently. The Approach to the Eleventh Five Year Plan released in December 2006 stated
that the growth rate of agricultural GDP including forestry and fishing is likely to be below two per
cent in the Tenth Plan period.
The reasons for the deceleration of the growth of agriculture are given in the Economic Survey
2006-07: Low investment, imbalance in fertilizer use, low seeds replacement rate, a distorted
incentive system and lo post-harvest value addition continued to be a drag on the sectors
performance. With more than half the population directly depending on this sector, low
agricultural growth has serious implications for the inclusiveness of growth.
Introduction:

Globalisation is the new buzzword that has come to dominate the world since the
nineties of the last century with the end of the cold war and the break-up of the
former Soviet Union and the global trend towards the rolling ball. The frontiers of the
state with increased reliance on the market economy and renewed faith in the
private capital and resources, a process of structural adjustment spurred by the
studies and influences of the World Bank and other International organisations have
started in many of the developing countries. Also Globalisation has brought in new
opportunities to developing countries. Greater access to developed country markets
and technology transfer hold out promise improved productivity and higher living
standard. But globalisation has also thrown up new challenges like growing inequality
across and within nations, volatility in financial market and environmental
deteriorations. Another negative aspect of globalisation is that a great majority of
developing countries remain removed from the process. Till the nineties the process
of globalisation of the Indian economy was constrained by the barriers to trade and
investment liberalisation of trade, investment and financial flows initiated in the
nineties has progressively lowered the barriers to competition and hastened the pace
of globalisation
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Definition:
Globalised World - What does it mean?
Does it mean the fast movement of people which results in greater interaction?
Does it mean that because of IT revolution people can be in touch with each other in
any part of the world?
Does it mean trade and economy of each country is open in Non-Intrusive way so
that all varieties are available to consumer of his choice?
Does it mean that mankind has achieved emancipation to a level of where we can
say it means a social, economic and political globalisation?
Though the precise definition of globalisation is still unavailable a few definitions

worth viewing, Stephen Gill: defines globalisation as the reduction of transaction cost
of transborder movements of capital and goods thus of factors of production and
goods. Guy Brainbant: says that the process of globalisation not only includes
opening up of world trade, development of advanced means of communication,
internationalisation of financial markets, growing importance of MNC's, population

migrations and more generally increased mobility of persons, goods, capital, data
and ideas but also infections, diseases and pollution
Impact on India:
India opened up the economy in the early nineties following a major crisis that led by a
foreign exchange crunch that dragged the economy close to defaulting on loans. The
response was a slew of Domestic and external sector policy measures partly prompted by
the immediate needs and partly by the demand of the multilateral organisations. The new
policy regime radically pushed forward in favour of amore open and market oriented
economy.
Major measures initiated as a part of the liberalisation and globalisation strategy in the
early nineties included scrapping of the industrial licensing regime, reduction in the
number of areas reserved for the public sector, amendment of the monopolies and the
restrictive trade practices act, start of the privatisation programme, reduction in tariff
rates and change over to market determined exchange rates.
Over the years there has been a steady liberalisation of the current account transactions,
more and more sectors opened up for foreign direct investments and portfolio
investments facilitating entry of foreign investors in telecom, roads, ports, airports,
insurance and other major sectors.
The Indian tariff rates reduced sharply over the decade from a weighted average
of 72.5% in 1991-92 to 24.6 in 1996-97.Though tariff rates went up slowly in the late
nineties it touched 35.1% in 2001-02. India is committed to reduced tariff rates. Peak
tariff rates are to be reduced to be reduced to the minimum with a peak rate of 20%, in
another 2 years most non-tariff barriers have been dismantled by march 2002, including
almost all quantitative restrictions.
India is Global:
The liberalisation of the domestic economy and the increasing integration of India with
the global economy have helped step up GDP growth rates, which picked up from 5.6%
in 1990-91 to a peak level of 77.8% in 1996-97. Growth rates have slowed down since
the country has still bee able to achieve 5-6% growth rate in three of the last six years.
Though growth rates has slumped to the lowest level 4.3% in 2002-03 mainly because of
the worst droughts in two decades the growth rates are expected to go up close to 70% in
2003-04. A Global comparison shows that India is now the fastest growing just after
China.
This is major improvement given that India is growth rate in the 1970's was very low at
3% and GDP growth in countries like Brazil, Indonesia, Korea, and Mexico was more
than twice that of India. Though India's average annual growth rate almost doubled in the
eighties to 5.9% it was still lower than the growth rate in China, Korea and Indonesia.
The pick up in GDP growth has helped improve India's global position. Consequently
India's position in the global economy has improved from the 8th position in 1991 to 4th
place in 2001. When GDP is calculated on a purchasing power parity basis.

Globalisation and Poverty:
Globalisation in the form of increased integration though trade and investment is an

important reason why much progress has been made in reducing poverty and global
inequality over recent decades. But it is not the only reason for this often unrecognised
progress, good national polices , sound institutions and domestic political stability also
matter.
Despite this progress, poverty remains one of the most serious international challenges
we face up to 1.2 billion of the developing world 4.8 billion people still live in extreme
poverty.
But the proportion of the world population living in poverty has been steadily declining
and since 1980 the absolute number of poor people has stopped rising and appears to
have fallen in recent years despite strong population growth in poor countries. If the
proportion living in poverty had not fallen since 1987 alone a further 215million people
would be living in extreme poverty today.
India has to concentrate on five important areas or things to follow to achieve this goal.
The areas like technological entrepreneurship, new business openings for small and
medium enterprises, importance of quality management, new prospects in rural areas and
privatisation of financial institutions. The manufacturing of technology and management
of technology are two different significant areas in the country.
There will be new prospects in rural India. The growth of Indian economy very much
depends upon rural participation in the global race. After implementing the new
economic policy the role of villages got its own significance because of its unique
outlook and branding methods. For example food processing and packaging are the one
of the area where new entrepreneurs can enter into a big way. It may be organised in a
collective way with the help of co-operatives to meet the global demand.
Understanding the current status of globalisation is necessary for setting course for
future. For all nations to reap the full benefits of globalisation it is essential to create a
level playing field. President Bush's recent proposal to eliminate all tariffs on all
manufactured goods by 2015 will do it. In fact it may exacerbate the prevalent
inequalities. According to this proposal, tariffs of 5% or less on all manufactured goods
will be eliminated by 2005 and higher than 5% will be lowered to 8%. Starting 2010 the
8% tariffs will be lowered each year until they are eliminated by 2015.
GDP Growth rate:
The Indian economy is passing through a difficult phase caused by several unfavourable
domestic and external developments; Domestic output and Demand conditions were
adversely affected by poor performance in agriculture in the past two years. The global
economy experienced an overall deceleration and recorded an output growth of 2.4%
during the past year growth in real GDP in 2001-02 was 5.4% as per the Economic

Survey in 2000-01. The performance in the first quarter of the financial year is5.8% and
second quarter is 6.1%.
Export and Import:
India's Export and Import in the year 2001-02 was to the extent of 32,572 and
38,362 million respectively. Many Indian companies have started becoming respectable
players in the International scene. Agriculture exports account for about 13 to 18% of
total annual of annual export of the country. In 2000-01 Agricultural products valued at
more than US $ 6million were exported from the country 23% of which was contributed
by the marine products alone. Marine products in recent years have emerged as the single
largest contributor to the total agricultural export from the country accounting for over
one fifth of the total agricultural exports. Cereals (mostly basmati rice and non-basmati
rice), oil seeds, tea and coffee are the other prominent products each of which accounts
fro nearly 5 to 10% of the countries total agricultural exports.
Where does Indian stand in terms of Global Integration?
India clearly lags in globalisation. Number of countries have a clear lead among them
China, large part of east and far east Asia and eastern Europe. Lets look at a few
indicators how much we lag.
•Over the past decade FDI flows into India have averaged around 0.5% of
GDP against 5% for China 5.5% for Brazil. Whereas FDI inflows into
China now exceeds US $ 50 billion annually. It is only US $ 4billion in
the case of India
•Consider global trade - India's share of world merchandise exports increased

from .05% to .07% over the pat 20 years. Over the same period China's
share has tripled to almost 4%.
•India's share of global trade is similar to that of the Philippines an economy 6

times smaller according to IMF estimates. India under trades by 70-80%
given its size, proximity to markets and labour cost advantages.
•It is interesting to note the remark made last year by Mr. Bimal Jalan,
Governor of RBI. Despite all the talk, we are now where ever close being
globalised in terms of any commonly used indicator of globalisation. In
fact we are one of the least globalised among the major countries -
however we look at it.
•As Amartya Sen and many other have pointed out that India, as a
geographical, politico-cultural entity has been interacting with the outside
world throughout history and still continues to do so. It has to adapt,
assimilate and contribute. This goes without saying even as we move into
what is called a globalised world which is distinguished from previous

eras from by faster travel and communication, greater trade linkages,
denting of political and economic sovereignty and greater acceptance of
democracy as a way of life.
Consequences:
The implications of globalisation for a national economy are many. Globalisation has
intensified interdependence and competition between economies in the world market.
This is reflected in Interdependence in regard to trading in goods and services and in
movement of capital. As a result domestic economic developments are not determined
entirely by domestic policies and market conditions. Rather, they are influenced by both
domestic and international policies and economic conditions. It is thus clear that a
globalising economy, while formulating and evaluating its domestic policy cannot afford
to ignore the possible actions and reactions of policies and developments in the rest of the
world. This constrained the policy option available to the government which implies loss
of policy autonomy to some extent, in decision-making at the national level.

Disinvestment and Privatisation

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Disinvestment and Privatisation in India

Assessment and Options*

Indira Gandhi Institute of Development Research

March 26, 2005

R Nagaraj 2 Disinvestment and Privatisation

Disinvestment was initiated by selling undisclosed bundles of equity shares of selected

R Nagaraj 3 Disinvestment and Privatisation

Nonetheless, there are series of allegations of corruption and malpractice in many of

R Nagaraj 4 Disinvestment and Privatisation

Legal issues in the D-P process:

1. Privatisation is a policy decision, prerogative of the executive branch of the state;

Privatisation at the state level:

R Nagaraj 5 Disinvestment and Privatisation

Performance of PSEs after disinvestment and privatisation:

In principle, disinvestment is unlikely to affect economic performance since the state

Assessing the principles, premises and performance of the D-P process:

R Nagaraj 6 Disinvestment and Privatisation

R Nagaraj 7 Disinvestment and Privatisation

R Nagaraj 8 Disinvestment and Privatisation

R Nagaraj 9 Disinvestment and Privatisation

There is a large (administrative) literature (including many valuable official reports)

R Nagaraj 10 Disinvestment and Privatisation

Problem of corporate governance:

R Nagaraj 11 Disinvestment and Privatisation

“Follower industrializing” economies of continental Europe and Japan evolved a bank

R Nagaraj 12 Disinvestment and Privatisation

Evolution of the Indian system:

R Nagaraj 13 Disinvestment and Privatisation

A suggestion for reform:

R Nagaraj 14 Disinvestment and Privatisation

While public sector enterprises’ contribution to national development is widely

Quantitatively, the disinvestment and privatisation have been modest so far, as

R Nagaraj 15 Disinvestment and Privatisation

R Nagaraj 16 Disinvestment and Privatisation

Bajaj, J L (1994): “Divesting State Ownership: A Tale of Two Companies”, Economic

Disinvestment Commission (1997): Report of the Disinvestment Commission (Chairman:

Dornbusch, Rudiger (1991): “Policies to Move from Stabilisation to Growth”,

Galal, Ahmed, et al (1994): Welfare Consequences of Selling Public Enterprises: An

Gerschenkron, Alexander (1962): Economic Backwardness in Historical Perspective,

R Nagaraj 17 Disinvestment and Privatisation

Kay, John and Thompson, D J (1986): “Privatisation: A Policy in Search of a Rationale”,

Megginson, William L (2005): The Financial Economics of Privatisation, Oxford

Ministry of Finance (1985): Report of the Committee to Examine Principles of Possible

Mishra, R K (2004): Privatisation Challenges for Good Governance: A Case of India,

_______ (1993): “"Macroeconomic Impact of Public Sector Enterprises: Some Further

R Nagaraj 18 Disinvestment and Privatisation

Tandon, Pankaj (1997): “Efficiency of Privatised Firms: Evidence and Implications”,

Vickers, John and Yarrow, George (1991): Economic Perspectives on Privatisation,

World Bank (1995): Bureaucrats in Business: The Economics and Politics of

Year Finance Minister Key phrases used in the Budget speech

R Nagaraj 19 Disinvestment and Privatisation

Source: Sarma (2004): 2195

Year Finance Minister Key phrases used in the Budget speech

R Nagaraj 20 Disinvestment and Privatisation

Source: Sarma (2004): 2195

Table 1: List of Privatised PSEs

1 Lagan Jute Machinery Company Limited (LJMC)

R Nagaraj 21 Disinvestment and Privatisation

R Nagaraj 22 Disinvestment and Privatisation

* Total number of companies in which disinvestment has taken place so far.

Table 3: Disinvestment in Public Sector Enterprises

R Nagaraj 23 Disinvestment and Privatisation

# Figures inclusive of amount realized by way of control premium, dividend/dividend tax