Economic and Political Interactions in Explaining the Performance of Public Sector Enterprises in India: The Disinvestment Experience

Abstract

India had adopted disinvestment, as part of broader reforms, in 1991 to improve performance of public sector enterprises (PSEs) owned by the Central government of India. The current study captures the effect of disinvestment policy on the performance of PSEs with special emphasis on the local political and economic environments in which these enterprises operate. Using firm efficiency to capture performance of all PSEs owned by the central government between 1991-92-2010-11, the study employs panel data fixed effects and two stage least square estimation. The results suggest that performance of PSEs is driven by a harmonious union of internal (firm specific) and external factors. Among external factors, disinvestment, as a policy intervention, has a limited impact on performance where as state specific political and economic factors affect firm performance strongly. Finally, the effect of disinvestment on firm performance is conditioned by the political factors in the state where the PSE is located.