Financing Public Enterprise in India: The Case of Central Government Enterprises

Gupta Anand P

IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: This paper provides a perspective on how Central Public Enterprises’ plan investments are financed. It reveals that although budgetary support continues to be a major source of financing Central Public Enterprises’ plan investments, its contribution has declined from 53% in 1984/85 to 46.9% in 1986/87 and is expected to decline further to 40.3% in 1987/88. As per cent of GDP, budgetary support for CPEs’ plan investments has declined from 2.83% in 1984/85 to 2.66% in 1986/87 and is expected to decline further to 2.18% in 1987/88. There is reason to believe that this trend would continue. Significantly, while budgetary support for CPEs’ plan investments is declining, Government of India’s budget deficit continues to be high – it is expected to be about 8.5% of GDP in 1987/88 against 7.8% in 1984/85. Indeed, the 1987/88 deficit would have been 9% of GDP, not 8.5%, had the GOI not changed the accounting treatment of oil surplus funds. (These funds amounted to at least Rs. 35 billion during 1982/83 – 1085/86 and were shown in the GOI’s books as interest-bearing capital receipts from the Oil Coordination Committee. The GOI has now decided to treat most of these surplus funds as a current contribution from the OCC. The contribution amounted to Rs. 13 billion in 1986/87 and is expected to be Rs. 17 billion in 1987/88.) What all this boils down to is that it is the rapid growth in GOI’s disbursements other than budgetary support to finance its enterprises’ plan investments, which is responsible for the rising budget deficit. This is an important point, given the general tendency of many commentators to attribute the recent rises in GOI’s budget deficits to its budgetary support to CPEs to enable them to finance their plan investments. Clearly, a strategy to control the GOI’s rapidly rising expenditures urgently needs to be developed. There is also a strong case for determined efforts to improve the financial performance of CPEs. The paper shows that net return on net worth employed in CPEs is pitifully low – 4.5% in 1986/87, the latest year for which the relevant data are available. This is substantially less than even the artificially low interest rates which the GOI pays on the resources it borrows. What is more, even the above overall net return is largely because of the petroleum enterprises, which accounted for nearly three-fourths of the net profits of profit-making CPEs. Indeed, as the net profits of non-petroleum CPEs were inadequate to offset the losses of loss-making CPEs the net return in the non-petroleum sector was in the negative - -1.2%. Clearly, this is not a happy situation.

Date: 1988-04-01
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