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Public Enterprises/ Units

Public Enterprises are industrial, commercial an economic activities carried on by:Central govt. or by State govt. or Jointly by Central and State government.

Objectives of Public Sector

1. To Increase the Capital Formation

Savings , an important part of capital formation is less in underdeveloped countries. This retards the rate of economic growth. In order to accelerate the economic growth, such industries are set-up by the govt. This will stimulate the production, encourage other industries, increase savings and promote investment.

2. To Set-up Basic and Heavy Industry

Heavy and key industries require large amount of substantial capital which is beyond the capacity of private entrepreneurs. Large scale industries like iron and steel, heavy industries, atomic energy, fertilizers could be established only under public sector. For establishing such industries, government has to set-up public enterprises.

3. Development of Infrastructure

Development of infrastructure comprising of transport, power, communication, basic industries is pre-condition of growth. Pace of industrial development cannot be accelerated without their establishment. Their development requires huge capital investment which cannot be mobilized by private sector. This development is possible only in public sector.

4. Import Substitution

For the favorable balance of payment, it is essential that the goods imported from other countries are produced within the country or their substitutes are developed. Public sector units are playing appreciable role in the field of import substitution. Public sector is producing various kinds of medicines, electronic goods, watches etc. This saves considerable amount of foreign exchange.

5. Export Promotion

Public sector in India has promoted exports in the country. Public sector exports consists of railway engines, steel and machinery. The State Trading Corporation (STC) and Minerals and Metal Trading Corporation (MMTC) have done a wonderful job on the area of export promotion. In 2008-09, export earnings of public enterprises were Rs.74,184 crores.

6. Availability of Economic Resources For Planning

Profits earned by public sector goes to the govt. It can be used for the purpose of economic development. Therefore, many industries are set-up in public sector. The workers in public sector units gets reasonable wages and more facilities. In this way, economic profit of the public sector is used for promoting social welfare.

7. Rapid Economic Development

Rapid economic development for under developed countries and developing countries calls for expansion of public sector. Private sector units does not possess as much resources so as to make necessary production for rapid economic development. The expansion of public sector becomes inevitable in order to remove the shortage of production of private sector so as to make available necessary resources.

8. Generation of Employment and Equitable Distribution of Income and Wealth

Socialistic pattern of society requires equitable distribution of income and wealth. By generating large scale employment opportunities, the rate of participation of public sector enterprises can be enhanced in the process of growth. Higher the rate of participation, greater the equality in distribution of income and wealth.

9. Balanced Regional Growth

Balanced regional growth requires spread of industrially backward regions of the country. Only public sector units can be established on social considerations, rather than economic consideration of industrial location. For Example:- Steel plants in Rourkela, Durgapur, Bhilai have been established by the govt. in conformity with the norms of balanced regional growth.


1. Poor Project Planning

Investment decisions in many public enterprises are not based upon proper evaluation of demand and supply, cost benefit analysis and technical feasibility. Lack of precise criterion and flaws in planning have caused undue delays and inflated costs in commissioning of the projects. Many projects in public sector have not been finished according to their time schedule.

2. Over-Capitalization

Due to inefficient financial planning, lack of effective financial control and easy availability of money from the govt. , several public enterprises suffer from overcapitalization. The Administrative Reforms Commission found that Hindustan Aeronautics, Heavy Engineering Corporation and Indian Drugs and Pharmaceuticals Ltd were overcapitalized. Such over-capitalization resulted in high capital-output ratio and wastage of scare capital resources.

3. Excessive Overheads

Public enterprises incur heavy expenditure on social overheads like townships, schools, hospitals, etc. Hindustan Steel alone incurred an outlay of Rs. 78.2 crore on townships. Such amenities may be desirable but the expenditure on them should not be unreasonably high.

4. Overstaffing

Manpower planning is not effective due to which several public enterprises like Bhilai Steel have excess manpower. Recruitment is not based on sound labor projections. On the other hand, posts of Chief Executives remain unfilled for years despite the availability of required personnel.

5. Under-utilization of Capacity

One serious problem of the public sector has been low utilization of installed capacity. In the absence of definite targets of production, effective production planning and control and proper assessment of future needs many undertakings have failed to make full use of their fixed assets. There is considerable idle capacity. In some cases productivity is low on account of poor materials management or ineffective inventory control.

6. Lack of a Proper Price Policy

There is no clear-cut price policy for public enterprises and the Government has not laid down guidelines for the rate of return to be earned by different undertakings. Public enterprises are expected to achieve various socio-economic objectives and in the absence of a clear directive, pricing decisions are not always based on rational analysis. In addition to dogmatic price policy, there is lack of costconsciousness, quality consciousness, and effective control on waste and efficiency.

7. Inefficient Management

The management of public enterprises in India leaves much to be desired. Managerial efficiency and effectiveness have been low due to : Inept

management, Uninspiring leadership, Too much centralization, Frequent transfers.

Civil servants who are deputed to manage the enterprises often lack proper training and use bureaucratic practices. Political interference in day-to-day affairs, rigid bureaucratic control and ineffective delegation of authority hamper initiative, flexibility and quick decisions. Motivations and morale of both executives and workers are low due to the lack of appropriate incentives.


Sector Cooperation

Administrative Reform Committee is of opinion that all the public sector units should be brought under one cooperation. All engineering enterprises should be brought under one cooperation. All fertilizers enterprises should be brought under separate cooperation and so on. This policy is useful as it would bring more economies of scale, more research can be conducted for growth of such enterprises and it would become convenient for the government to manage such enterprises.

Reforms in BoD

Board of Directors should be suitably reformed. The Boards of PSUs should have professionals, representatives of workers and financial experts. Politicians should not be appointed as directors of these Boards.

Efficient Management and Able Employees

The appointment of managers in PSUs should be based on merit. Management training facilities must be extended. Every employee in PSUs should have accountability. Promotions should be based on performance and not on the basis of seniority. Efficient employees should be suitably awarded.

Inspection of Public Enterprises

The government should establish a committee for inspection of public enterprises. The committee will inspect the working of PSUs. The committee would require every PSUs to publish a comprehensive report of its functioning so that general public should come to know about the performance of PSUs.

Autonomy to PSUs

Complete autonomy must be given to PSUs for their day-to-day work. There should be minimum possible government interference. Politicians should not be appointed to control these enterprises. However, if competent and able politicians are available, then they should be appointed as honorary consultants.

Full Utilization of Productive Capacity

PSUs should be fully toned to fully utilize their installed capacity. Productive capacity of existing units should be raised only if 85% of existing capacity is utilized.

Commercial Outlook

The price policy of PSUs should be based upon the market forces i.e., the prices of products of PSUs should be based on market forces. In case of government monopolies, the prices should be determined with view to raise the level of profitability.

Increase in Efficiency

PSUs should raise their efficiency level. For this :


should be proper research department of these units. There should be incentives for raising the level of production, reducing expenses and improving the quality of product. There should not be red tapism in decision making. Efficiency of PSUs must be annually assessed.

Revival of PSUs

Sick PSUs must be revived to improve their performance, productivity and profitability. The sick PSUs capable of being revived must be referred to BIFR for formulating rehabilitation packages.

Check on Extravagance

Growing extravagance in PSUs must be checked. There should be strict Parliamentary control on PSUs.

Memorandum of Understanding (MoU)

The main objective of MoU is to reduce government control and increase accountability of government employees.


The table shows that till about 1980-81, public enterprises in India, continued to suffer losses. It is only after 1980-81, public sector units have started to show the profitability. However, the rate of profit has remained discouraging. Percentage of pre-tax profit was 4.4% in 199596. It increased marginally to 5.7% in 1996-97. In 2000-01, it was recorded 9% which was not encouraging.