Public, Private and Joint Sectors

Trimester I
2009

Public Sector
Policy on the public sector was guided by the Industrial Policy Resolutions

1956 & 1991 which gave the public sector a strategic role in the Indian
economy.
Given the type of problems faced by the country on its economic, social and
strategic fronts and the various imperatives, it became a wise decision to
deploy the public sector as an instrument for self-reliant growth so as to
develop agricultural and industrial base, diversify the public economy and
overcome the economic and social backwardness.
The predominant considerations for continued large investments in
public sector enterprises were to accelerate the growth of the core
sectors of economy like Railways, Telecommunications etc.
Another category of public enterprises was the consumer oriented industries
such as drugs, hotels, food industries etc. The rationale for setting up such
enterprises was to ensure availability of vital articles of mass consumption, to
introduce check on prices and help promote emerging areas like tourism etc.
Also, a large number of private enterprises belonging to the category of sick
units were taken over from the private sector to sustain production and
protect employment.
The overall profile of public sector enterprises was thus a heterogeneous
conglomerate of basic and infrastructural industries.

Public Sector
Objectives:
The public sector enterprises had a multitude of objectives:
To help in rapid economic growth and industrialization of the country
and create the necessary infrastructure for economic development.
To earn return on investment and generate resources for
development
To promote redistribution of income and wealth
To create employment opportunities.
To promote balanced regional development
To assist the development of small scale industry and ancillary
industries

Downside of Growth of Public Sector

The public sector certainly had a very important role in the development of the Indian
economy characterized by the dearth of capital, entrepreneurship and
technology. However, giving the private sector a secondary role in many
industries had an adverse effect on growth and competition.
The new economic policy characterized by scope for substantial privatization,
including de-reservation of industries for the public sector, in fact amounts to
acceptance of the same.

The performance of the public sector has been far from satisfactory and a large
number of them including several monopolies have made losses.
Keeping in mind the massive investments that have been made in the PSEs, the
questionable fact is the level of efficiency that these units have been operating in.
To what extent have these enterprises been customer friendly. Several of the loss
making units have been either in the non-priority sectors or in sectors where the
private sector has proved to be more efficient.

Factors identified for the same were:

Huge cost and time over-runs in project implementation
Location and investment decisions in some sectors and projects have adversely
affected performance. Eg: In the power sector, excessive investment in generation
capacities with incommensurate attention to transmission network led to imbalances.
Problems relating to allocation of resources, delays in filling up of top level posts, tight
regulations etc.

New Public Sector Policy

According to the Industrial Policy announced in July 1991, the role of the public
sector was redefined. The following have been set as the priority areas for
growth of public enterprises:
Essential infrastructure goods and services
Exploration and exploitation of oil and mineral resources.
Technology development and building of manufacturing capabilities in areas
crucial for the long term development of the economy.
Manufacture of products where strategic considerations predominate such
as defence equipment etc.
Therefore, the number of industries reserved for the public sector was reduced
to 8. The list was further pruned in May 2001 and now only atomic energy
and railway transport are reserved for the public sector. Now, foreign
investment upto 26% is also allowed in the defence sector.

New Public Sector Policy

The new policy also indicated that the public sector would withdraw from the
following:
Industries based on low technology
Small scale and non strategic areas
Inefficient and unproductive areas
Areas with low social responsibility
Areas where the private sector has developed sufficient enterprise and
resources
The main elements of the policy are:
Bringing down the Government equity in all non-strategic PSUs to 26% or
lower
Restructuring and reviving the potentially viable PSUs.
Close down PSUs which cannot be revived
Fully protect the interests of the workers
In order to give the thrust to the process of disinvestment in PSUs, a new
department of PSUs was set up. The new public sector policy marks a much
needed change for accelerating the pace of development by better utilization of
the nations resources. In July 1997, Government after a detailed study selected
PSUs for making them world class entities and named them Navratnas.

Indian Scenario.
Had India adopted the concept of Profit making Pricing, the public sector

would have generated a reasonable return on the massive capital

investments in them, and the pace of economic progress would have been
faster.
In the absence of surpluses from the public sector, we had to put up with
more taxes and more deficit financing and a slower pace of economic
growth.
It is clear from the plan documents that the public sector in India is expected
to augment resource availability for the development of the nation by
making profits and generating surpluses.
Making profits, to make resources available for investment has been
certainly an important objective of the Indian public sector. A 12% return on
investment in the public sector was regarded as reasonable.
V.K.R.V Rao, pleaded that the pricing policy of the public enterprises
should be such as to promote the growth of the national income and the
rate of this growthPublic enterprises must make profits, and the larger the
share of public enterprises in all enterprises, the greater is the need for their
making profits. Hence the need for giving up the irrational belief that Public
Enterprises should, by definition, be run on a no-profit basis.
Our Five Year Plan documents have pointed out that the public sector
should make a significant contribution to the pool of investible funds by
generating commercial surpluses.

Indian Scenario.
Guidelines on Pricing Policy:
A uniform price for all the public enterprises is ruled out because of the nature of goods or
services they produce or provide, the production function and the market situations
are not uniform. On the basis of the nature of the business, public enterprises in India
can be classified into enterprises engaged in:
Production of public utilities and services.
Production of consumer goods.
Production of basic and capital goods.
Trading Business
Financial enterprises.

The Administrative Reforms Commission has recommended that the following

principles should be kept in view in formulating the pricing policies of public
enterprises:

Public enterprises in the industrial and manufacturing field should aim at earning
surpluses to make a contribution to their capital development.
Public enterprises should pay their way and not run into losses
In the case of public utilities and services, greater stress should be laid on output than
on return on investment
While determining the price structure, public enterprises should keep the level of
output as near the rated capacity as possible.

Ownership Pattern of Public

Enterprises
Companies:
Most of the public sector undertakings had been organized as Companies.
Principal characteristics:
1. Government would own 51% or over of the whole of the capital stock.
2. All the directors were appointed by the Government.
3. It is a corporate body created under the Companies Act.
4. It is created by an executive decision of the Government without
Parliaments specific approval.
5. Its funds are obtained from the Government and in some cases, from
private shareholders and from the revenue earned through the sale of its
goods and services.
A predominant criticism against this form was that in most cases the
Government was only a shareholder and that the way the Company was
organized it diluted the accountability and audit control.

Organisation of Public Enterprises

Ministry and Departmental Undertakings
For the management of the Indian Railways, there is a full fledged
Ministry with a Railway Minister and the Railway Board headed by the
Chairman.
Departmental Undertakings are directly subordinate to the Ministry.
The need for secrecy, strategic importance and similar conditions
make the departmental undertakings the most suitable form of
organization. However, these undertakings have the disadvantage of
governmental and political interference, lack of authority and initiative
in decision making.
Statutory Corporations:
A corporation is a body corporate created by a separate law,
independently financed and vested with autonomy in managing its
affairs. Industrial Finance Corporation, RBI and National Textile
Corporation are examples of statutory corporation, also called public
corporations.

Private Sector
The Industrial Policy Resolution of 1956 made it amply clear that as an
agency for planned national development, in the context of the
countrys expanding economy, the private sector would have the
opportunity to develop and expand.
Development of the industries outside the Schedules A & B would
be undertaken ordinarily through the initiative and enterprise of the
private sector.
It was the policy of the state to encourage development of these
industries by ensuring the development of transport, power and
other core services.
Industrial undertakings in the private sector would need to
necessarily adhere to the social and economic policies of the state.
The private sector would be allowed to grow as far as it is consistent
with the targets and objectives of the national plan.
With the New Industrial Policy, 1991, the role of the private sector

has been considerably expanded. Now private sector corporations

are allowed in all industries except two industries.