Economic Survey 2020: How privatisation helps CPSEs unlock growth potential

Economic Survey 2020: The analysis showed that these privatised CPSEs, on an average, perform better post privatisation than their peers in terms of their net worth, net profit, return on assets

The Economic Survey 2020 pitched for aggressive disinvestment, preferably through the route of strategic sale to bring in higher profitability, promote efficiency, increase competitiveness and to promote professionalism in the management of Central Public Sector Enterprises (CPSEs).

In support, the Survey examined the realised efficiency gains from privatisation in the Indian context. It analysed the before and after performance of 11 CPSEs, which had undergone strategic disinvestment from 1999-2000 to 2003-04. To enable a careful comparison using a difference-in-difference methodology, these CPSEs are compared with their peers in the same industry group. The analysis showed that these privatised CPSEs, on an average, perform better post privatisation than their peers in terms of their net worth, net profit, return on assets (RoAs), return on equity (RoE), gross revenue, net profit margin, sales growth and gross profit per employee. More importantly, the ROA and net profit margin turned around from negative to positive surpassing that of the peer firms, which indicate that privatised CPSEs have been able to generate more wealth from the same resources. This improved performance holds true for each CPSE taken individually too.

In November 2019, India launched its biggest privatisation drive in more than a decade. An "in-principle" approval was accorded to reduce the government's paid-up share capital below 51 per cent in select CPSEs.

"The performance of privatised firms, after controlling for other confounding factors using the difference in performance of peer firms over the same period, improves significantly following privatisation," the survey added.

The analysis clearly affirms that privatisation unlocks the potential of CPSEs to create wealth.

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"The analysis clearly affirms that disinvestment improves firm performance and overall productivity, and unlocks their potential to create wealth. This would have a multiplier effect on other sectors of the economy. The focus of the strategic disinvestment needs to be to exit from non-strategic business and directed towards optimising economic potential of these CPSEs. This would, in turn, unlock capital for use elsewhere, especially in public infrastructure like roads, power transmission lines, sewage systems, irrigation systems, railways and urban infrastructure," it added further.

The Cabinet has 'in-principle' approved the disinvestment in various CPSEs. These need to be taken up aggressively to facilitate creation of fiscal space and improve the efficient allocation of public resources.

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