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

This paper analyses the performance of India’s Public Sector Undertakings (PSUs) using measures of labour and overall efficiency and productivity indicators as opposed to financial 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 privatization 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, especially in public infrastructure, and reduces the possibility of political interference in their functioning in future.