Why Privatize? The Decline of Public Ownership in India and its Impact on Industrial Performance

Abstract

This article examines patterns of decline in the public ownership of the corporate sector in Indian industry over a twenty five year period, 1973-74 to 1997-98, to assess whether a transformation in ownership has taken place and whether the boundaries of the state as a participant in industry have significantly declined. The data cover the entire industrial population of India, albeit at an aggregate level, with the findings having immediate salience and applicability to current concerns. Privatization in a significant way has not taken place in India; nevertheless, the boundaries of the state as an industrial participant have shrunk significantly as a result of the growth of private entrepreneurship in India. The numbers of private companies being established in India have grown and the volume of equity capital being invested has risen substantially, both in absolute volume terms as well as in investment per company. This trend has been pronounced in the post-1991 period, after reforms were introduced in India. Associated with this relative shrinking of government ownership is a significant increase in industrial performance. When the data for 1973-74 to 1997-98 are augmented with data for the 1998-99 to 2001-02 periods the relationship between the shrinkage of the boundaries of the state and performance remains significant. Autonomous private sector growth has had a substantial impact in enhancing performance. Thus, the role of privatization as a mechanism to enhance performance becomes moot in the Indian context, especially since the costs of adjustment can be high, if the decline in relative government shareholding comes about as a result of other means, such as the growth of entrepreneurship in India. Simultaneously, the resources of the state can be better spent on actively encouraging investment activities rather than in undertaking divestment activities.

Keywords: Boundaries of the state, corporate performance, crowding out, entrepreneurship, private sector growth, privatization, public ownership

JEL Classification: L33, G34, G32, P31