A Can of Worms

The article entitled “Memorandum of Understanding and Business Performance Appraisal of the Public Sector” by R Venkatesan under the Review of Industry and Management (EPW, 27 September 2008) is well presented with respect to both facts and analysis of the performance of the public sector while, at the same time, willynilly opening a can of worms. Before going into details, it would be appropriate to stress that the memorandum of understanding (MOU) touches only a fringe of the whole spectrum of government companies that comprise newly established companies and those taken over by the government. The schema, presented in terms of parameters, does not touch some of the typical structuralfunctional issues that directly reflect on the performance of these companies. The sales to the other government companies and public corporations that comprised more than 50% of the total sales, a major share of which were on credit, remained in the books to only eat into the vitals of these companies. Debts outstanding for periods of more than three and five years have been high and the profits as shown in the profit and loss account have been artificially pushed up under the accrual system of accounting. Accounting misclassification has remained a common feature almost as a rule. For an authentic presentation of details, including the profitability features, one should refer to the Audit Report (Commercial) of the Comptroller and Auditor General of India (CAG), available in multiple parts and showing detailed examination of the central government companies of which one or more relate to detailed examination.

The MOU does not cover all the relevant details of performance, one important reason being the structural inadequacies inherent in most of them. It has not been applied in the cases of all the companies in the central government sector. Structural planning for most of the newly established companies was done by the government, which spelt a standing inadequacy in terms of cost-ineffective doses of funds made available to them, insistence on debt-equity ratio of 1:1 even in high gestation units, and capitalisation of expenditure during construction that created a permanent bottleneck affecting efficiency all the way. As if all this was not enough, shifting the paradigm from “no profit, no loss” to profit could not wish away the factors that fitted in the social objectives which were not in the profitability cult that came up later.