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60% of state deficits due to PSUs

BS Economy Bureau in New Delhi | April 16, 2004 10:18 IST

About 60 per cent of the fiscal deficit of state governments are due to the support they have to provide to their public sector undertakings.

This is the conclusion of a report on reforms in state PSUs, prepared by the Planning Commission. Speaking on the report, the chairman of the report NJ Kurien said, the 750 state-level PSUs in the country, registered a compound annual growth of over 17 per cent in their losses instead of providing any return over a ten-year period. The study tracks the health of these PSUs between 1991-92 to 1998-99.

Kurien said, therefore states like Andhra Pradesh, West Bengal, Kerala, and Madhya Pradesh which provided a larger degree of support to the PSUs for ideological reasons have seen a higher growth rate of state debt.

In 1998-99, the various state governments have subsidised these companies by a whopping Rs 4,935 crore (Rs 49.35 billion).

Commenting on the report, Kurien also said that it was the sheer scale of employment in these PSUs, that often stopped the states from privatising or closing them down.

A surprising finding of the report is that welfare enterprises have outperformed other PSUs, earning profits and improving their net worth. It concludes that state governments should therefore move out of provide manufacturing, trading and other services.

The study group was set up by the Plan Panel as the first ever exercise to collect data on these enterprises in the country. It recommends that each state have an independent body looking after the divestment exercise. It has also suggested that a social safety net be set up for the employees being displaced due to privatisation of the state enterprises.

Moreover, a portion of the divestment proceeds should go towards setting up of state renewable funds in each states. These renewal funds would aid the states in offering voluntary retirement and retrenchment schemes to those who find themselves out of jobs due to the divestment process.

The report has advised that there was an urgent need to curb the practice of the state government borrowing from the public sector units through state guarantees to preserve their financial viability.

It has also suggested that suitable compensation be provided the PSUs for carrying out their social obligations. For better motivation of the management and the workers of the PSUs the report suggests the option of providing employee stock options, be explored in those enterprises that have been showing profits for some time in past.

Other recommendations include a fixed minimum tenure for the managing director of the state enterprise, so that frequent transfers does not interfere in their functioning. More professional management is also needed in these enterprises.

The report has also suggested setting up of nodal agencies at the state levels to co-ordinate the work of the state enterprises.

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