SLACK IN THE STATE-OWNED ENTERPRISE - AN EVALUATION OF THE IMPACT OF SOFT-BUDGET CONSTRAINTS

In this paper slack in resource utilization is estimated, using data e nvelopment analysis, for a sample of 67 Indian state-owned, 63 private sector and 27 foreign-owned enterprises on a comparative basis. The s tudy is cross-sectional and carried out for the year 1991 to assess ho w far the operation of soft-budget constraints has had an impact on th e economic performance of Indian firms, particularly operated as state -owned enterprises. Specifically, the presence of debt-capital, provid ed primarily by government-owned financial institutions, is strongly a nd negatively related to performance. The results show that if firms t urn out to be all equally-efficient, then average materials costs, hum an capital usage costs, costs associated with other operating items an d physical capital usage by each state-owned enterprise sampled can be reduced by Rs. 203 million, Rs. 201 million, Rs. 53 million and Rs. 2 55 million, respectively. If existing levels of inputs are used effici ently, then the average addition to the value of output by each state- owned enterprise can rise by Rs. 693 million. The analyses reveal sign ificant slack in resource utilization in Indian state-owned firms resu lting from soft-budget constraints, and the implications of the existe nce of slack are discussed. (C) 1998 Elsevier Science B.V.