How autonomy can drive PSU profits
1 min read . Updated: 24 Sep 2019, 03:30 PM ISTGreater operational and financial autonomy can help state-owned enterprises increase profits, productivity and employment, suggests new research
The centre’s bid to disinvest over ₹1 lakh crore shares in Public Sector Undertakings (PSU’s) has been met with protests from workers, trade unions and political opposition. Privatization is widely believed to improve PSU performance but new research suggests that there may be other ways to do this. Specifically, granting greater managerial autonomy to the board of directors of PSUs could significantly boost PSU performance.
Namrata Kala, in a paper published by the National Bureau of Economic Research, explores the effect of managerial autonomy in PSU in India. She examines the impact of an earned autonomy programme introduced in 1997 that grants different levels of financial and operational autonomy to profit-making PSUs. Using data from the government’s Public Enterprise Survey report and the Centre for Monitoring Indian Economy (CMIE), she analysed financial performance, expenditures and labour composition of 193 firms between 1992-2009.
Under the programme, PSU board of directors were allowed to take strategic decisions on matters that did not require government funding, such as capital expansion and subsidiary formation, without seeking government approval. Kala finds that this decision-making autonomy significantly improved PSU profits and productivity.
The study also finds that PSUs with managerial autonomy hired more people while maintaining profitability. Autonomy also ensured that governments are less likely to interfere in hiring decisions, especially before elections for electoral benefits.
Interestingly, Kala notes the PSU managers are not motivated to increase profitability by their potential progress within the organization. Instead, they are driven by the need to showcase their ability for their career prospects in the private sector.
Because of all these effects, Kala concludes that there are alternative ways, beyond privatization, to bring efficiency into the public sector and increase public sector employment.
Also read: The Impacts of Managerial Autonomy on Firm Outcomes
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