Bolder Disinvestment or Better Performance Contracts? Which Way Forward for India’s State-Owned Enterprises

Abstract

This paper analyses the performance of India's Public Sector Undertakings (PSUs) us-ing measures of labour and overall efficiency and productivity indicators as opposed to finan-cial returns. Using methods that correct for selection bias, the results show that performance contracts do not improve firm efficiency but disinvestment has a very strong positive effect on firm efficiency. Disinvestment improves labour productivity and efficiency, which is not surprising, but it also improves overall efficiency. India should pursue much bolder privati-zation even of PSUs which claim to be making operational profits - such as Air India, because privatization improves overall firm efficiency and unlocks capital for use elsewhere, espe-cially in public infrastructure, and reduces the possibility of political interference in their functioning in future.