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 envelopment analysis, for a sample of 67 Indian state-owned, 63 private sector and 27 foreign-owned enterprises on a comparative basis. The study is cross-sectional and carried out for the year 1991 to assess how far the operation of soft-budget constraints has had an impact on the economic performance of Indian firms, particularly operated as state-owned enterprises. Specifically, the presence of debt-capital, provided primarily by government-owned financial institutions, is strongly and negatively related to performance. The results show that if firms turn out to be all equally-efficient, then average materials costs, human capital usage costs, costs associated with other operating items and physical capital usage by each state-owned enterprise sampled can be reduced by Rs. 203 million, Rs. 201 million, Rs. 53 million and Rs. 255 million, respectively. If existing levels of inputs are used efficiently, then the average addition to the value of output by each state-owned enterprise can rise by Rs. 693 million. The analyses reveal significant slack in resource utilization in Indian state-owned firms resulting from soft-budget constraints, and the implications of the existence of slack are discussed. (C) 1998 Elsevier Science B.V.