Privatisation and the Indian State

With a strong impetus towards privatisation, the current government has been pushing to reduce state ownership across most sectors. The last two years have specifically witnessed the dilution of ownership approach being replaced by a firm resolve to transfer control. This article closely examines the privatisation policy discussed in the previous two economic surveys (2019–20 and 2020–21) that point to the privatisation of all state-owned enterprises operating in non-strategic sectors.  Reducing state ownership to the extent of transferring control to private hands for better performing state-owned enterprises is not a well-suited policy decision. It reflects a closer alignment of the government's objective with generating funds for bridging the fiscal deficit/debt gap, by sacrificing future profits for short-term capital gains. In contrast, the Indian CPSE performance revival plan must incorporate a more structured approach that involves segmenting firms into various categories according to past performance, future profitability, industry characteristics, and revival chances. The government should customise the choice of restructuring plan according to these categories and segments.

The Indian state's approach towards privatisation in the last few years has been a revelation of sorts. The finance minister had expressed bold resolve towards aggressive privatisation of central public sector enterprises (CPSEs) with exorbitant disinvestment targets announced in the last two budgets—2.1 lakh crore in 2020–21 and 1.75 lakh crore in 2021–22. Despite these exceedingly high targets, disinvestment policy continues to be a politically sensitive policy decision with reservations and opposition from various parties. The political sensitivity surrounding this action explains the slow pace of implementation of disinvestment policy since its inception. Unsurprisingly, the realisation of disinvestment proceeds has been abysmally low in the last few years.

This article examines the specific aspects of disinvestment policy discussed by the Indian government in the last two years. This paper summarises and offers a critique of the analysis and policy prescriptions related to the disinvestment of CPSEs taken by the government of India by using the Economic Surveys of 2019–20 and 2020–21. We start with the Economic Survey, 2019–20 that had the entire Chapter 9 dedicated to the policy option. The chapter begins with a quote on the free market by Margaret Thatcher supporting and motivating privatisation.1 The chapter marks a complete shift away from the typical Indian disinvestment experience towards aggressive transfer of control and focuses on privatisation and the efficiency gains that follow. 

Chapter 9 of Economic Survey, 2019-20

The chapter starts with a discussion on the rise in the value of shareholders' equity for Bharat Petroleum Corporation Limited (BPCL), a CPSE operating in the petroleum sector, by 30,000 crores after its strategic disinvestment announcement in September 2019. The comparison of BPCL share prices with that of Hindustan Petroleum Corporation Limited (HPCL), another CPSE in the same sector, from September 2018 suggests that while the price trend for both these companies was in sync before the announcement, there is a spike in the share price of BPCL post the information. The soaring trend of BPCL share price reflects anticipated gains from efficiency improvement. This diverging trend is the motivation behind the positive effect of strategic disinvestment based on the principle that the government should disengage in manufacturing sectors that are competitive. 

The chapter then examines the efficiency gains from privatisation by analysing the before and after performance of 11 CPSEs that had undergone strategic disinvestment from 1999–00 to 2003–04. Performance indicators used are net worth (equity capital and profits), net profit (profit after tax), gross revenue, return on assets (profit after tax to assets), return on equity (profit after tax to net worth), net profit margin (profit after tax to operating income), sales growth, and gross profit per employee (profit to the number of employees).2 The performance of these 11 CPSEs is then compared for 10 years before and after privatisation. To examine the differences between firms explicitly, the survey examines the trends for each of the performance indicators of privatised firms 10 years before and after privatisation. As a next step, the difference-in-difference (DiD) estimation3 technique is used to measure the effect of privatisation on the various performance indicators. The difference-in-difference method captures the significant differences in outcomes across the treatment and control groups, which occur between pre-treatment and post-treatment periods. In the current case, privatisation is the treatment and hence, privatised and non-privatised firms are the treatment and control groups respectively. The main results indicate a positive impact of privatisation (refer to Table 1 wherein a DiD value of 5.04% for return on assets implies that privatisation increases return on assets by 5.04%). Based on this analysis, the chapter pushes for aggressive privatisation and disengagement of the government from non-strategic competitive sectors.

Table 1: DiD Measure for Select Performance Indicators


DiD value 

Return on assets


Return on equity


Net profit margin


Sales growth rate


Gross profit/employees

21.34 (in lakhs)

Source: Compiled from Chapter 9, Economic Survey 2019–20

Limitations of the Analysis

It is imperative to acknowledge the limitations within the narrow framework in Chapter 9 of the Economic Survey, 2019–20. The chapter motivates the privatisation drive with the anticipated gains that follow the privatisation announcement for BPCL in September 2019. Realistically, a rise in share prices of BPCL (Business Standard 2019), may be strongly related to the firm's past performance (refer to Table 2).

Table 2: Profit After Tax for BPCL and HPCL (in Crores)

Profit After Tax 





















Source: Compiled from the Annual Reports of Both Companies

The higher stock price trend for BPCL post-strategic disinvestment announcement is because it is one of the top Maharatna CPSEs and is valued highly on the stock market. Selling away profitable CPSEs is similar to selling off the family's silver to meet your daily needs.4 The inexplicable reason for making such a move probably stems from the two main objectives of the disinvestment policy—performance improvements and bridging the fiscal deficit/debt gap. While poor-performing CPSEs are naturally better candidates for the first objective, by selecting profitable CPSEs, the government caters to the second objective. Thus, relating this to future performance improvement may not be a careful prediction. It requires a more scrupulous argument of forgoing long-term profits for short-term capital gains. 

There are few other limitations associated with the analysis presented in this chapter. While analysing the pre and post differences in outcome variables of privatised and a peer group of firms, it uses eight variables of which three are measured at levels such as net worth, net profits, and gross revenue with no explicit account for the size of the firms. Privatised and peer firms may differ in these three financial parameters due to differences in the scale of operation. Thus, only the remaining five indicators are more relevant, and the evidence from those is mixed.5 Of the 11 privatised firms, almost six firms have experienced minuscule benefits or adverse effects on performance, questioning the validity of extending this policy to all CPSEs. 

Next, DiD estimation suggests that there are some improvements in these five indicators. However, one of the essential requirements of a DiD methodology is the satisfaction of parallel path assumption, that is, the outcome trend between the treatment and control group must be in sync (or parallel) with each other before the policy. This ensures that the change in the outcome variables is indeed due to the exogenous policy option. However, the graphical trends presented in this chapter raise ambiguity more than the certainty of this assumption.6 Finally, the choice of the control group, referred to as "peer" firms in the chapter, demands that performance trends between the privatised and this group of firms be time-invariant. The survey uses private firms such as Vedanta, Moser Baer, Mahindra & Mahindra, Ashok Leyland among others as the "peer" firms. These firms are structurally and functionally very different from state-owned enterprises, hence rendering them ill choices for candidacy to a control group. A better-suited approach would have been CPSEs in the same sector not selected for privatisation. 

These comments suggest that Chapter 9 of the economic survey has serious limitations within the narrow framework adopted to promote privatisation. Flash-forward a year, the latest Economic Survey of 2020–21 continues to flirt with the privatisation policy with a plan to embark on a high-speed big-ticket privatisation of all CPSEs except the few strategic ones. Despite an absence of a separate chapter on privatisation, the push towards aggressive privatisation is starkly evident in this survey as well. It is justified and bolstered as a necessary need for efficient utilisation of resources reiterated the few times privatisation is discussed in the Economic Survey of 2020–21. 


With the aggressive privatisation stride reflected in the government's approach in the last two years, it is crucial to question the narrow assumptions and framework on which the government views the public sector and the policy of privatisation. The assumption of a movement towards a profit-oriented objective as a solution is not appropriate for examining the performance of state-owned enterprises. The existence of state-owned firms in the manufacturing sector goes beyond the narrow paradigm of profit maximisation. It enters a multidimensional objective function ranging from employing the masses, keeping prices low in specific sectors, reducing regional imbalances, and operating in areas and sectors where the private sector is unwilling or not well-suited. Hence, the haziness of this social objective may be thoroughly diluted when solutions are perceived through the narrow lens of privatisation. 

The view of privatisation as the only remedy to efficiency improvement leads to discarding the role and prevalence of slow-paced disinvestment typical to the Indian experience. In contrast, a huge strand of literature focuses on the positive effect of disinvestment in India (Majumdar 1998; Ghosh 2008; Gupta 2005; Jain 2017; Chhibber and Gupta 2018). With more than a third of the CPSEs selected for disinvestment in the last three decades as opposed to a mere 11 firms being privatised, disinvestment serves as a better policy candidate for analysis and policy prescription. 

Taking into account the ambiguity and complexity of state-owned enterprises, a combination of various policy tools such as memoranda of understanding (which limit political interference), Ratna statuses (which award financial autonomy) and listing on the stock market (which introduce discipline and better governance) need to be strengthened as alternative and complementary strategies for improving performance without comprising on the social mandate of the government. 

The Indian CPSE performance revival plan must incorporate a more structured approach involving segmenting firms into various categories according to past performance, future profitability, industry characteristics, and revival chances. The choice of policy tools should be customised according to these categories and segments. To conclude, strategic disinvestment as the "go-to" policy option reflects the strong emphasis on the current government's short-term capital gains. Mere reduction of the solution to privatisation indicates the narrow lens through which public sector enterprises have been evaluated in the Economic Surveys of 2019–20 and 2020–21.




The author is grateful to seminar participants at the Centre for Development Studies, Trivandrum. A shorter version of this piece is published as part of the “Discussion on Indian Economic Survey, 2020” by CDS, Trivandrum. The usual disclaimer applies.

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