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The Centre is heading for an acute financial stress if it continues to allow inefficiency in the operations of the public sector undertakings at a socially high cost proportion, according to a study of the Reserve Bank of India.

The study, prepared by the Department of Economic Analysis and Policy of the RBI, says the mismatch in receipts and expenditures of the public sector has resulted in rising public deficit since 1990-91 and in a large overhang of debt, leading to an unsustainable fiscal situation and posing threat to the macro- economic stability in the economy.

Given the large resource requirements to realise the growth and equity objectives, the problem of mobilising adequate resources domestically through non-inflationary sources has been critical to the question of fiscal consolidation.

The crux of the issue in regard to the operation of the public sector units (PSU) is that despite its massive asset base, resources ploughed back in the form of profits and dividends are not consistent with the government policy and the return to capital invested is not adequately forthcoming. In this context, the study emphasised the need to strengthen the operational efficiency of the PSUs so as to generate more internal resources and mobilise more resources from the market at competitive rates instead of depending on government budgetary support.

While efforts are being made to restructure the PSUs through disinvestment policy, the RBI study said that the disinvestment initiated since 1991-92 had not been adequately successful in attaining the targets due to factors like the unattractiveness of PSU shares and limitations in the pricing strategies.

While some of the factors were transient in nature, the structural problem of operational inefficiency required immediate redressal giving larger emphasis on operational autonomy of PSUs and prioritisation of investment towards the attainment of enhanced productivity and efficiency of public investment, the RBI study said.

Between 1970-71 and 1995-96, the net return on capital employed in central PSUs remained more or less stagnant and abysmally low at around 2.5 per cent throughout the 1970s to early 1990s. Out of the 239 operating PSUs in 1995-96, 134 were running on profits and as many as 101 were loss making units, 86 of them were sick.

Consequently, the amount of net losses by these units has progressively risen from Rs 780 million in 1970-71 to Rs 48.26 billion in 1995-96. The PSUs in the manufacturing sector accounted for almost 83 per cent of the losses while enterprises in the services sector contributed the remaining 17 per cent of the losses.

Pointing out that major areas like infrastructure investment which suffered a massive setback in recent years, the study said the public sector investment in infrastructure projects like power, transport and communication which had remained at around three per cent of gross domestic products (GDP) during the 1970s and four per cent during the 1980s, became stagnant during the first four years of the 1990s.

The above factors have led to a rethinking on the role of government and reassessment of the nature of the co-existence of the state and market economy. The changing perception in favour of privatisation and prioritisation of public sector investment needs careful examination from the viewpoint of the complementarity and sustainability of public and private investment in the Indian context, the study said.

A generally positive association between public and private investment could be observed between 1950 and 1990, reinforcing the complementary character of public investment in the country. However, since 1990-91, the trend visible was one of divergence between public and private investment, with the former showing near steady decline while the latter claiming an increasingly larger share in aggregate investments as well as in the GDP.

The slowdown in public investment is closely linked with the changing perception about the investment and operational efficiency of the PSUs in India.

The findings of the study showed that while inflationary financing was perhaps inevitable for investment promotion in the context of resource constraints and underdeveloped capital markets during the early years of planning, continued and increasing recourse to such a mode of financial during the subsequent years, did not bring forth the desired results.

In fact, the resulting inflation was found to be negatively associated with the household saving rate, the rate of public capital formation as well as the growth of real output.

As far as public capital formation concerned, the empirical analysis in the study reinforced the hypothesis of a long term complementarity of public investment to private investment. It also emphasised the need to step up infrastructure investment for improving the growth prospects of the economy.