Public sector is base for development

Lack of infrastructure and equipment

• Lack of information, skills, training and exposure
• Preoccupation with other public health issues
• Low priority at all levels
• Infertility patients are time intensive and high maintenance
• Private practice by public sector doctors
• Non-implementation of clear protocols at primary, secondary and tertiary levels
• Inadequate regulatory mechanisms
•
•
•
•
•
•
• The private sector had not been given a significant role in the economic development.
The government has entrusted the basic and capital goods industries to the public sector
and made it the prime mover of economic development. As a consequence, the private
sector has to be satisfied with the secondary role assigned to it.
• The most important problem was delays due to regulatory structure. There have been too
many regulations imposed by the government on the private sector which often resulted
in procedural delays. It is estimated that on an average it takes seven years from the
conceptual stage to the production stage for any significant investment project to
materialise in India.
• Unrealistic controls influenced by contradictory motives hampered private sector
initiative and flexibility. For example, the price controls imposed by the government on
many of the goods do not give proper incentive for additional production. Capacity
restrictions (with a view to prevent concentration of wealth and economic power) further
aggravated the problem. Actually, the government should encourage competition among
the rival firms and the resulting increase in production would automatically bring down
prices. In complete contrast to this, price controls under conditions of shortage tend to
perpetuate shortages, rise of black markets, and possible shifting of investment from
controlled items to the production of non-controlled items.
• Reservation for small scale sector and special initiatives to units in that sector made the
large scale sector to stand at a disadvantage. Further the complementarity of the two
sectors in the process of growth has been lost.
 • The decentralised sector has been facing the problem of inadequate credit facilities
despite the existence of a network of financial institutions. With the economic reforms
initiated in 1991, the private sector's prospects appear to be very bright.

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 theIndian
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 nation’s 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 growth…
Public 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
Parliament’s 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.

Public Sector Performance since 1950

A Fresh Look
Since the mid-1980s, the public sector’s share in domestic investment has been nearly
halved, but its output share has remained roughly constant at about a quarter of GDP,
suggesting a sustained rise in productivity over nearly two decades. The improvement in
performance is also evident from (i) a rise in physical efficiency in electricity generation;
(ii) a fall in public sector employment growth; and (iii) an increase in central public sector
enterprises’ profitability (even after excluding the petroleum sector). Yet public sector
finances have remained adverse. Why? In electricity, passenger road transport and railways
the revenue-cost ratio is less than one, and has declined since the early 1990s. Moreover,
over the last 40 years, the public sector price deflator declined by 17 percentage points,
relative to the GDP deflator. Hence, correct pricing and collecting user charges
are probably key to setting public sector finances right.

The public sector in India, in its broadest measure as

recorded in the National Accounts Statistics (NAS),
currently contributes to about a quarter of the gross
domestic product (GDP) increasing from slightly less than
one-tenth in 1960-61 (the earliest year with firm estimates). The
gross value added of the administrative departments, broadly
representing Adam Smith’s “duties of the sovereign”, account
for 8 to 9 per cent of GDP; natural monopolies such as the railways
and the postal system add another 3 to 4 per cent. But the largest
share of public sector gross value added, 12 to 13 per cent of
GDP, comes from the non-departmental enterprises (NDEs),
producing many private goods and services, but mainly from
utilities and infrastructure, owned and operated by the central,
state and local governments. NDEs are further disaggregated into
(a) financial enterprises that are part of the financial sector
(including the Reserve Bank of India), and (b) the non-financial
enterprises, which account for much of the growth in public sector
output during the last half century

PUBLIC SECTOR IN INDIA

1.1 EVOLUTION
1.1.1 Prior to Independence, there were few ‘Public Sector’ Enterprises in the country.
These included the Railways, the Posts and Telegraphs, the Port Trusts, the
Ordinance Factories, All India Radio, few enterprises like the Government Salt
Factories, Quinine Factories, etc. which were departmentally managed.

In early years of independence, capital was scarce and the base of entrepreneurship
was also not strong enough The new strategies for the public
sector were later outlined in the policy statements in the years 1973, 1977, 1980
and 1991. The year 1991 can be termed as the watershed year, heralding
liberalisation of the Indian economy.

The main elements of the present Government policy towards Public Sector
enterprises as contained in the National Common Minimum Programme (NCMP)
are reproduced below:
i) To devolve full managerial and commercial autonomy to successful,
profit making companies operating in a competitive environment
ii) Generally , profit-making companies will not be privatized
iii) Every effort will be made to modernize and restructure sick public
sector companies and revive sick industry
iv) Chronically loss making companies will either be sold off, or closed,
after all workers have got their legitimate dues and compensation
v) Private industry will be inducted to turn-around companies that have
potential for revival
vi) Privatization revenues will be used for designated social sector
schemes
vii) Public sector companies and nationalized banks will be encouraged to
enter the capital market to raise resources and offer new investment
avenues to retail investors.

Performance Status: Over the years, operations of CPSEs have extended to a

wide range of activities in the manufacturing, engineering, steel, heavy machinery,
machine tools, fertilizers, drugs, textiles, pharmaceuticals, petro-chemicals,
extraction and refining of crude oil and services such as telecommunication,
trading, tourism, warehousing, etc. and a range of consultancy services.
In 2006-07, there were 247 Central Public Sector Enterprises in India, as
compared to 236 in 1997-98. The macro view of overall performance of these
number of CPSEs in the last 10 years is given in Table 1.1.
The following observations are made regarding the performance of CPSEs during
the last 10 years:-
a. The capital employed has increased from Rs. 2,49,855 Crores in 1997-98 to
Rs.6,65,124 Crores in 2006-07 recording a growth of 266%.
b. Number of loss incurring CPSEs, it has come down from 100 in 1997-98 to
59 in 2006-07.
c. Turnover increased to Rs.9,64,410 Crores in 2006-07, from Rs. 2,76,002
Crores in 1997-98 recording a net worth growth of 349% increased from Rs.
1,34,443 Crores to Rs.4,52,995 Crores in 2006-07 recording a growth of
337%.
d. The turnover is equal to Rs.9,64,410 Crores in 2006-07, which is an increase
of 349% in comparison to 1997-98 (Rs. 2,76,002 Crores ). As regards Net
worth, it has increased by 337% in 2006-07 in comparison to 1997-98 (Rs.
1,34,443 Crores), and is presently at Rs.4,52,995 Crores.
e. Net profit has increased by 599% in 2006-07 in comparison to 1997-98 (Rs.
13582 Crores), and is currently to the tune of Rs. 81550 Crores.
_________ __________ _______

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Industries Reserved for the Public Sector in

India
Public sector has played an
importantrolein the industrial development of India.Before independence there were a few public
sector enterprises in India such as Railways, the Posts and Telegraphs, the Port Trusts, the
Ordinance Factories, and All India Radio etc. In the early years of independence, capital was
scarce and the entrepreneurial resource was not strong enough. Therefore, the 1956 Industrial
Policy Resolution gave primacy to the role of the State which was directly responsible for
industrial development. The public sector provided the required thrust to the economy and
developed and nurtured the human resources. During this era public sector enterprises came to be
known as the commanding heights of the Indian economy.
In 1991, when the government decided to shift to a liberalized economy with greater reliance
upon market forces, a larger role for the private sector was envisaged. Since then the policy
thrust has been on reforms such as reduction in the scope of industrial licensing, reforms in the
Monopolies and Restrictive Trade Practices (MRTP) Act, reduction of areas reserved exclusively
for public sector, disinvestment of equity of selected public sector enterprises (PSEs).

Central Public Sector Enterprises (CPSEs) were classified into two categories - strategic and
non-strategic. Strategic CPSEs were identified in the areas of:
• Arms & Ammunition and the allied items of defence equipments, defence air-crafts and
warships
• Atomic Energy (except in the areas related to the operation of nuclear power and
applications of radiation and radio-isotopes to agriculture, medicine and non-strategic
industries).
• Railway transport
All other public sector enterprises were considered as non-strategic.

Role Of Public Sector In India The public sector has been playing a
vital role in the economic development of the country. In fact the public sector has come to
occupy such an important place in our economy, that on its effective performance depends
largely the achievement of the country's economic n social goals.

Public sector is considered a powerful engine of economic development and an important

instrument of self-reliance. The main contributions of public enterprises to the country's
economy maybe described as follows:

1. Fillings of Gaps: At the time of independence, there existed serious gaps in the industrial
structure of the country, particularly in the fields of heavy industries such as steel heavy,
machine tools, exploration an refining of oil, heavy Electrical and equipment, chemicals and
fertilizers, defense equipment, etc. Public sector has helped to fill up these gaps. The basic
infrastructure required for rapid industrialisation has been built up, through the production of
strategic capital goods. The public sector has considerably widened the industrial base of the
country.
2. Employment: Public sector has created millions of jobs to tackle the unemployment problem
in the country. Public sector accounts for about two-thirds of the total employment in the
organised industrial sector in India. By taking over many sick units, the public sector has
protected the employment of millions. Public sector has also contributed a lot towards the
improvement of working and living conditions of workers by serving as a model employer.

3. Balanced Regional Development: Public sector undertakings have located their plants in
backward and untrodden parts of the county. There area lacked basic industrial and civic
facilities like electricity, water supply, township an manpower. Public enterprises have
developed these facilities thereby brining about complete transformation in the socioeconomic
life of the people in these regions. Steel plants of Bhilai, Rourkela and Durgapur; fertilizer
factory at Sindri, Machine Tool plants in Rajasthan, Precision Instruments plants in Kerla and
Rajasthan, etc. are a few examples of the development of backward regions by the public sector.

4. Contribution to Public Exchequer: In recent years, the public sector has made increasing
contributions to the public sector in the form of dividend, corporate taxes, excise and customs
duty, etc. The total contribution from the public enterprises to the Exchequer increased from Rs.
11,074 crores in 1982-83 to Rs. 23, 972 crores in 1986-87.

5. Foreign Exchange Earnings: Public sector has contributed a great deal in improving the
balance of payments position of the county. The public enterprises have saved valuable foreign
exchange trough import substitution. Public enterprises have earned foreign exchange of Rs.
3,942 crores during 1986-87 by way of exports.

6. Development of Ancillary industries: In order to encourage the development of small scale

and medium-sized industries in the country, the Government of India has launched a national
programme. Public sector ha contributed to this programme by fostering the growth of ancillary
industries and satellite planets. Such plants have been established around the major public sector
undertakings. There is a strong base of ancillary industries at several centers such as the Bokaro
Industrial Complex, the Bhilai Steel Plant, The Rourkela Steel Complex, the Heavy Engineering
Corporation at Ranchi, Hindustan Machine Tools at Bangalore, and the units of Bharat Heavy
Electrical at Bhopal, Hyderabad and Hardwar.

7. Research and Development: As most of the public enterprises are engaged in high
technology and heavy industries, they have undertaken research and development programmes in
a big way. Public sector has laid strong and wide base for self-reliance in the field of technical
know-how, maintenance and repair of sophisticated industrial plants, machinery and equipment
in the country. Through the development of technological skill, public enterprises have reduced
dependence on foreign knowhow. With the help of the technological capability, public sector
undertakings have successfully competed in the international market an they have secured
turnkey projects in several countries of the world.
8. Community Development: Several public sector undertakings have developed townships to
provide all the civic amenities to their employees. These townships consists of houses, etc.
Public enterprises have constructed roads and other infrastructural facility to link these townships
to other parts of the country. Such townships have been very helpful in improving community
life.

9. Social Justice : Public enterprises have contributed towards the achievement of constitutional
objectives. They have been helpful in reducing the concentration of economic power in private
hands, in curbing anti-social monopolies, in accelerating public control over the national
economy and in bringing about a socialistic pattern of society.

In addition to the foregoing, the public sector has played an important role in the achievement of
constitutional goals like reducing concentration of economic power in private hands, increasing
public control over the national economy, creating a socialistic pattern of society, etc. With all its
linkages the public sector has made solid contributions to national self-reliance.