India’s federal fiscal framework is witnessing a subtle yet significant shift. The Finance Commission has increasingly encouraged state governments to align their public sector undertaking (PSU) policies with that of the Centre-particularly in areas of disinvestment, strategic restructuring, and fiscal accountability. This nudge reflects a broader effort to improve efficiency in public enterprises while easing long-term fiscal pressures on both Union and state finances.
Why the Focus on State PSUs?
State-level PSUs play a critical role in sectors such as power, transport, water supply, and industrial development. However, many of these enterprises have become financially stressed due to operational inefficiencies, mounting losses, and high debt burdens. Loss-making PSUs often depend on recurring budgetary support, limiting states’ ability to spend on priority areas such as healthcare, education, and infrastructure.
By encouraging states to adopt reforms similar to the Centre’s PSU policy, the Finance Commission aims to address structural inefficiencies and ensure better use of public resources.
Learning from the Centre’s Approach
Over the past decade, the Union government has pursued a calibrated PSU strategy-classifying enterprises into strategic and non-strategic sectors, undertaking disinvestment, and improving corporate governance standards. Strategic disinvestment, asset monetisation, and performance-linked incentives have helped reduce fiscal strain while improving operational outcomes in select PSUs.
The Finance Commission’s recommendation suggests that states can benefit from adopting similar frameworks-identifying non-core enterprises for restructuring or exit, professionalising management, and enforcing transparency in financial reporting.
Fiscal Discipline and Accountability
A key motivation behind this nudge is fiscal discipline. State PSU losses often remain outside headline deficit figures, masking the true fiscal position of states. Aligning PSU policies with the Centre’s approach would bring greater transparency to off-budget borrowings and contingent liabilities.
Improved disclosure norms and accountability mechanisms would also strengthen investor confidence and credit ratings, making it easier for states to raise funds at competitive rates.
Autonomy vs Alignment
While the recommendation promotes alignment, it does not mandate a one-size-fits-all model. States differ widely in economic capacity, sectoral priorities, and social responsibilities. The Finance Commission’s approach preserves state autonomy, allowing governments to tailor reforms to local realities while adhering to broad principles of efficiency and fiscal prudence.
The Road Ahead
If implemented thoughtfully, mirroring the Centre’s PSU policy could help states unlock value from underperforming assets, reduce fiscal stress, and redirect public spending toward development priorities. However, political consensus, employee concerns, and social obligations will remain key challenges.
Ultimately, the Finance Commission’s nudge is less about privatisation and more about responsible governance—ensuring that public enterprises serve public interest without becoming a long-term fiscal liability.
Source: financialexpress
