PUBLIC SECTOR

Evolution:

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.

Independent India adopted planned economic development policies in a democratic, federal polity. The

country was facing problems like inequalities in income and low levels of employment, regional

imbalances in economic development and lack of trained manpower. India at that time was

predominantly an agrarian economy with a weak industrial base, low level of savings, inadequate

investments and infrastructure facilities. In view of this type of socio-economic set up, our

visionary leaders drew up a roadmap for the development of Public Sector as an instrument for

self-reliant economic growth. This guiding factor led to the passage of Industrial Policy Resolution of

1948 and followed by Industrial Policy Resolution of 1956. The 1948 Resolution envisaged

development of core sectors through the public enterprises. Public Sector would correct the regional

imbalances and create employment. Industrial Policy Resolution of 1948 laid emphasis on the

expansion of production, both agricultural and industrial; and in particular on the production of capital

equipment and goods satisfying the basic needs of the people, and of commodities the export of

which would increase earnings of foreign exchange.

In early years of independence, capital was scarce and the base of entrepreneurship was also not strong

enough. Hence, the 1956 Industrial Policy Resolution gave primacy to the role of the State which

was directly responsible for industrial development. Consequently the planning process (5 year

Plans) was initiated taking into account the needs of the country. 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.

Meaning of Public Enterprises:

Pubic enterprises are the enterprises which are owned, managed and controlled by central or State or

local government. Public enterprises are known as government enterprises, state enterprises and

government industries also.

Public sectors as defined in Encyclopedia of Britanica

“The term public enterprises usually refers to government ownership and active operation of

agencies engaged in supply the public with goods and services which alternatively might be supplied by

private enterprise operation”.

OBJECTIVES:

The public sector aims at achieving the following objectives:

i. To promote rapid economic development through creation and expansion of infrastructure.

ii. To generate financial resources for development

iii. To promote redistribution of income and wealth

iv. To create employment opportunities

v. To promote balanced regional growth

vi. To encourage the development of small-scale and ancillary industries, and

vii. To promote exports on the one side and import substitution, on the other.

Various Forms of Public Enterprises:

Public enterprises may be taken in various forms as follows:

1. Departmental Organisatiion,

2. Public Corporation,

3. Government Company,

4. Mixed Ownership Corporation and

5. Holding Company

1. Departmental Organisatiion It is the oldest and most common pattern of public enterprises. This

orgnisation is presided by the minister of respective ministry, who is responsible for the administration

of the department and is accountable to parliament and government.

Characteristics of Departmental Organisation-

1. Financial administration: Financial administration of departmental organization is made through

government exchequer and revenue from such enterprises is also credited to government exchequer.

2. Accounts and audit: The budget accounts and auditing of enterprises are carried out on the same

principle as other government departments.

3. Recruitment of personnel: Employees for these enterprises are appointed by public service

commission.

4. Organisation and control: The Organisation and control of such enterprises are carried out like a

sub department of central government.

5. Soveregion immunity of state: Departmental Organisation may enjoy soveregion immunity of

state and no suit can be filed on department organisatioin without the permission of government.

Advantages: 1. Attainment of social and political objective is possible.

2. Complete secrecy is maintained in departmental organization.

3. It controls over the misuse of government revenue.

4. It is most suitable for basic primary and heavy industries.

Disadvantages: 1. Centralization of authority is found

2. Lack of elasticity is visible.

3. Lack of sense of initiative and responsibilities is there.

4. Bureaucracy and red-tapism creates a lot of problems.

5. Strict financial control is against business and commercial principle.

Few examples of Departmental Organisation are: Railway, Post and telegraph, Doordarshan, Press,

Atomic power, Defence and forest department

2. Public Corporation: a Public Corporation means an organization which is established with a view to

achieve certain objectives under the ownership of state through a special act. It has separate legal entity

enjoying government power and yet possesses initiative and flexibility so that essential and imperative

changes may be adopted. It has its own finances too and conducts business in its own name. It can

borrow funds and use resources.

A public corporation is governed by a board of a chairman and directors. In board of directors

there are representatives of government as well as experts, consumers and non-officials.

Characteristics of Public Corporation-

1. Incorporate under special act.

2. A separate legal entity.

3. Service motive

4. Important policies chalked out by the government.

5. Management and administration vested in hand of board of directors.

6. Autonomous financial system.

7. Accounts and auditing procedure according to provision of companies act.

Advantages: 1. co-ordination between state ownership and autonomous management.

2. The benefit of both public and private sector.

3. An autonomous body that enjoy freedom.

4. The service of specialist and experts.

5. Goods and services at reasonable price.

Disadvantages: 1. Autonomy of public system is restricted due to provisions of its act.

2. Changes in act hinder its desired development.

3. Government control cause delay.

4. It lakes sense of initiative and responsibilities.

Public corporations in India are RBI, FCI, IDBI, SIDBI, IFCI, SBI, LIC, GIC

3. Government Company: A Government Company means a company in which government holds at

least 51%share. Its affairs are run by board of directors whose members are appointed by government.

Characteristics of Government Company-

1. Major contribution by government in share capital.

2. Government company incorporated under existing companies act 1956.

3. Management vested in hand of board of directors.

4. Accounts and auditing procedure according to provision of companies act.

5. Recruitment of employees made according to the rules set by board of directors.

Advantages: 1.There is no need of specific act.

2. There is sufficient autonomy and flexibility.

3. There is good combination of public and private sectors.

Disadvantages: 1. There is laxity in management.

2. There is problem of secrecy and it generates illusion.

3. Red-tapism and bureaucracy creates problem.

4. There is a possibility of misutilisation of fund.

Few government companies are SAIL, GAIL, HCL, HMT etc.

4. Mixed Ownership Corporation: These are enterprises in which capital is invested mainly by

government and management is given to private sector. It is considered a n important source of social

welfare.

Characteristics of Mixed Ownership Corporation-

1. Public and private both type of shareholding exist here.

2. These corporations are established with special rules.

Advantages: 1.The work is done on the principle of technical and commercial lines.

2. Private sector capital is made available to country.

3. Management is quality flexible.

Disadvantages: 1. Conflict are bound to arise as public and private interests are opposed to each other.

2. Profit motive creates conflict over basic policies.

5. Holding Company: When one company is in position to control the management of another

company, the former is called a Holding company and latter is called subsidiary company.

Section 4 (1) of the companies act, 1956 defines a subsidiary company as “A company is deemed

to be subsidiary of another if :”

(a) That other company controls the majority composition of its board of directors with sole object

of management.

(b) That other company holds more than half in the nominal value of its equity share capital, or

(c) In the case of any other company holds more than half of its voting power, or

(d) It is subsidiary of any other company of which is that other company is a subsidiary.

Causes For The Expansion of Public Enterprise

At the time of independence, India was backward and underdeveloped – basically an agrarian economy

with weak industrial base, high rate of unemployment, low level of savings and investment and near

absence of infrastructural facilities. Indian economy needed a big push. This push could not come from

the private sector because of the lack of funds and their inability to take risk with large long-gestation

investments.  As such, government intervention through public sector was necessary for self-reliant

economic growth, to diversify the economy and to overcome economic and social backwardness.

Let, discuss the rationale or causes for the expansion of public sector enterprises in India.

1. Rate of Economic Development and Public Enterprises: The justification for public enterprises in

India was based on the fact that the targeted rate of economic growth planned by the government was

much higher than could be achieved by the private sector alone. In other words, the public sector was

essential to realize the target of high growth rate deliberately fixed by the government.

2. Pattern of Resource Allocation and Public Enterprises: Another reason for the expansion of the public

sector lies in the pattern of resources allocation decided upon under the plans. In the Second Plan the

emphasis was shifted to industries and mining, mainly basic capital goods industries to be developed

under the aegis of the public sector. Thus more resources for industrialization were funneled through the

public sector.

3. Removal of Regional Disparities through Public Enterprises: Another important reason for the

expansion of the public sector was the need for balanced development in different parts of the country

and to see that there were no serious regional disparities. Public enterprises were set up in those regions

which were underdeveloped and where local resources were not adequate. Good examples are the

setting up of the three steel plants of Bhillai, Rourkela and Durgapur and the Neyveli Project in Madras

which were meant to help industrialise the regions surrounding the projects.

4. Sources of Funds for Economic Development: Initially, state was an important source of funds for

development. The surplus of government enterprises could be re-invested in the same industries or used

for the establishment and expansion of other industries. Profits of public sector industries can be directly

used for capital formation which is necessary for the rapid development of the country.

5. Socialistic Pattern of Society: The socialistic pattern of society envisaged in the Constitution calls for

expansion of public sector. For one thing, production will have to be centrally planned as regards the

type of goods to be produced, the volume of output and the timing of their production. Besides, one of

the objectives of the directive principles of the Indian Constitution is to bring about reduction of the

inequalities of income and wealth and to establish an egalitarian society. The Five Year Plans have taken

this up as a major objective of planning. The public enterprises were used as major instruments for the

reduction of inequalities of income and to bring about a more equitable distribution of income in several

ways.

6. Limitations and Abuses of the Private Sector: The behavior and attitude of the private sector itself was

an important factor responsible for the expansion of the public sector in the country. In many cases the

private sector could not take initiatives because of the lack of funds and their inability to take risk with

large long-gestation investments. In a number of cases, the government was forced to take over a private

sector industry or industrial units either in the interest of workers or to prevent excessive exploitation of

consumers. Very often the private sector did not function as it should and did not carry out its social

responsibilities. Accordingly, the government was forced to take over or nationalize the private sector

units.

To sum up, the expansion of the public sector was aimed at the fulfillment of our national goals, viz., the

removal of poverty, the attainment of self-reliance, reduction in inequalities of income, expansion of

employment opportunities, removal of regional imbalances, acceleration of the pace of agricultural and

industrial development, to reduce concentration of ownership and prevent growth of monopolistic

tendencies by acting as effective countervailing power to the private sector, to make the country self-

reliant in modern technology and create professional, technological and managerial cadres so as to

ultimately rid the country from dependence on foreign aid.

Public Enterprises Selection Board

The Public Enterprises Selection Board (P.E.S.B) is a high powered body constituted by Government of

India Resolution dated 3.3.1987 which was subsequently amended from time-to-time, the latest being on

11.11.2008.

The P.E.S.B has been set up with the objective of evolving a sound managerial policy for the Central

Public Sector Enterprises and, in particular, to advise Government on appointments to their top

management posts.

The policy of Government is to appoint through a fair and objective selection procedure outstanding

professional managers to Level-I and Level-II posts and posts at any other level, as may be decided by

the Government from time to time. Government have also recognised the need to develop a cadre of

professional managers within the public sector. Hence unless markedly better candidates are available

from outside, internal candidates, employed in the PSE, will be preferred for appointment to Board level

posts. However, if internal candidates are not available, preference will be given to candidates working

in other PSEs, either in the same area of business or in other areas. Mobility of managerial personnel

among PSEs within the same sector or group, failing which mobility within the public sector as a whole

will be encouraged, subject to certain limitations.

Functions of P.E.S.B: Specific functions assigned to the P.E.S.B include the following:

1. To be responsible for the selection and placement of personnel in the posts of Chairman,

Managing Director or Chairman-cum-Managing Director (Level-I), and Functional Director

(Level-II) in PSEs as well as in posts at any other level as may be specified by the Government;

2. To advise the Government on matters relating to appointments, confirmation or extension of

tenure and termination of services of the personnel of the above mentioned levels;

3. To advise the Government on the desired structure at the Board level, and, for senior

management personnel, for each PSE or group of PSEs;

4. To advise the Government on a suitable performance appraisal system for both the PSEs and the

managerial personnel in such enterprises;

5. To build a data bank containing data relating to the performance of PSEs and its officers;

6. To advise the Government on formulation and enforcement of a code of conduct and ethics for

managerial personnel in PSEs;

To advise the Government on evolving suitable training and development programs for management

personnel in PSEs.

Policy on Public Sector

The Industrial Policy Resolution of 1956 has been the guiding factor, which gave the public sector a

strategic role in the economy. Massive investments have been made over the past five decades to build

the public sector. Many of these enterprises successfully expanded production, opened up new areas of

technology and built up a reserve of technical competence in a number of areas. Nevertheless, after the

initial concentration of public sector investment in key infrastructure areas, public enterprises began to

spread into all areas of the economy including non-infrastructure and non-core areas.

Government of India announced on 24th July 1991 the ‘Statement on Industrial Policy’ which inter-alia

included Statement on Public Sector Policy. The statement contains the following decisions:

“Portfolio of public sector investments will be reviewed with a view to focus the public sector on

strategic, high-tech and essential infrastructure. Whereas some reservation for the public sector is being

retained, there would be no bar for area of exclusivity to be opened up to the private sector selectively.

Similarly, the public sector will also be allowed entry in areas not reserved for it.

Public enterprises which are chronically sick and which are unlikely to be turned around will, for the

formulation of revival/rehabilitation schemes, be referred to the Board for Industrial and Financial

Reconstruction (BIFR), or other similar high level institutions created for the purpose. Social security

mechanism will be created to protect the interests of workers likely to be affected by such rehabilitation

packages.

In order to raise resources and encourage wider public participation, a part of the government’s

shareholding in the public sector would be offered to mutual funds, financial institutions, general public

and workers.

Boards of public sector companies would be made more professional and given greater powers.

There will be a greater thrust on performance improvement through the Memorandum of Understanding

(MOU) System through which managements would be granted greater autonomy and will be held

accountable. Technical expertise on the part of the Government would be upgraded to make the MOU

negotiations and implementation more effective.

To facilitate a fuller discussion on performance, the MOU signed between Government and the public

enterprises would be placed in Parliament. While focusing on major management issues, this would also

help place matters on day-to-day operations of public enterprises in their correct perspective”.

In accordance with the decision announced in the aforesaid statement on industrial policy on public

sector and also as per budget speech of July 1991, in order to encourage wider participation and promote

greater accountability the Government equity in selected CPSEs was offered to mutual funds, financial

institutions, workers and the general public.

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.

Economic Development and Growth

Economic development increases a regional economy’s capacity to create wealth for local residents. It

depends upon deployment of a region’s building blocks – labor, financial capital, facilities and

equipment, know-how, land, other physical resources, and public and private infrastructure. (Kane and

Sand, 1988.)

Economic development is essential to the ongoing growth and vitality of a region, but

development itself differs from economic growth. Economic development implies a qualitative change

in what or how goods and services are produced through shifts in resource use, production methods,

workforce skills, technology, information, or financial arrangements. A regional economy can grow

without changing if it simply produces more of the same – same goods and services – in the same

manner. For example, an increase in the population of an area will mean more income and more

demand-driven growth even absent qualitative changes in the economic development environment.

Development implies something more. Development and growth complement each other in the long run,

although in the short run development will tie up resources that could otherwise feed more immediate

economic growth. (Flammang, 1979.)

In the broadest context, public-sector economic development efforts cover any capacity-building

investments or actions, including, for example, good schools and roads. Some argue that the best public-

sector approach to economic development is one that focuses on investments and efficiencies that shape

the broad economic environment for business and labor through education, the transportation

infrastructure, public safety, water and waste systems, regulation, and the overall tax structure. In a

narrower sense, economic development often refers to direct assistance for businesses and industries. In

this case, the public sector takes action to reduce costs or risks for businesses and thus encourages

business investment and productivity. (National Conference of State Legislatures, 2004.) Both views –

the broad and the narrow – tie back to the dynamics of regional economies and potential sources of

growth. And in both cases, policymakers must consider the appropriate role for public sector in regional

economic development.

What the Public Sector Does for Economic Development

Three Broad Approaches to Public-Sector Economic Development

In pursuit of impacts from public-sector economic development, state and local governments have

adopted a range of philosophies and strategies. Broadly speaking, economic development efforts,

particularly at the state level, can be split into three types, aimed at 1) business recruitment, 2) business

creation, retention, improvement, and expansion, and 3) the creation of a suitable environment for

industry-wide development.

Business recruitment. Economic development has long involved the recruitment of businesses to

specific sites, communities, or states through the use of marketing efforts, site preparation, tax

reductions, subsidized financing, cut-rate utility arrangements, targeted infrastructure development and

job training, and even publicly funded cash reimbursements to cover certain relocation costs.

Recruitment efforts often focus on businesses – especially manufacturers – that “export” their goods and

services for sale outside the region. State and local governments often offer tax breaks and other

incentives in order to attract export-oriented businesses. The impacts of these recruitment strategies are

mixed, especially at the state level. Businesses attracted to one location because of cost savings from

public subsidies may soon relocate to yet cheaper locales. If the costs of tax breaks and subsidies exceed

the tax payments from the new businesses, tax incentives for newcomers mean less funding for the

crucial public services and infrastructure needed to build local capacity for wealth creation. In this way,

the tax breaks may undermine public-sector investments that otherwise could lead to more business

growth through start-ups, retention, expansion, and attraction. Business that are already up and running

in an area may end up paying taxes to subsidize the relocation of incoming firms. And often enough,

governments provide incentive packages to firms that would have located within the same economic

region even absent the tax breaks and public subsidies. From the standpoint of public-sector fiscal

prudence, it makes little sense for governments to expend time and resources recruiting businesses that

will require significant, new tax-funded roads, water and waste systems, and other infrastructure.

(Bartik, 1995.) Also because almost all governments offer tax incentives and subsidies to relocating

businesses, any one government’s incentive package is neutralized by the proposals from other

communities and states, and the public sector in all states and regions end up poorer.

Business creation, retention, improvement, and expansion. State and local governments have moved

beyond an exclusive focus on industrial recruitment and broadened their economic development efforts

to encompass the creation of new enterprises, the retention of local firms, and the improvement and

expansion of existing businesses. This important and welcome evolution has turned the spotlight on

internal growth drivers in a regional economy and put existing and newly created businesses on more

even footing with firms recruited from elsewhere. Tax incentives and public subsidies are offered to

existing businesses as a strategy to encourage retention and expansion, resulting in many of the same

problems that plague recruitment efforts. Beyond the tax breaks and subsidies, economic development

has come to include firm-focused initiatives for entrepreneurship training, access to financial capital,

workforce training programs targeted to the needs of local businesses, business incubators, technology

transfer efforts, and international export promotion and other sales expansion initiatives. Economic

development has increasingly emphasized strategies designed to improve the productivity of local

businesses through such programs as job-oriented education and training, and engineering and

technology services for small and mid-sized firms. These public-sector programs spur real economic

growth when they are cost-effective and increase the level of output produced from a given level of

inputs. Not all creation, retention, improvement, and expansion programs have paid off, of course. Some

subsidize activities and development that would have occurred without public support, and some steer

public-sector decision makers into realms better left to the private sector, including business lending and

investment. Yet the emphasis on business creation, retention, improvement, and expansion provides

more balance to public-sector economic development policies.

Industry-wide development. In the last several decades, state governments in particular have dispatched

economic development tools to create a suitable environment for industry-wide development that builds

upon a region’s competitive advantages for the good of key or emerging local industries. This approach

moves beyond the firm-specific focus common to most other economic development strategies. States

analyze historical patterns, current circumstances, and emerging trends in order to identify the crucial

core industries and agglomerations that drive growth for a regional economy, or ones that hold promise

for doing so. The questions become: 1) What advantages does the state or region offer in terms of

industrial concentrations, supplier networks, specialized infrastructure, occupations and workforce

skills, geographic attributes, research and development opportunities, financial resources, and location

considerations, and 2) what can the public sector do by way of economic development policy to foster

those advantages for the economic health of the entire region? In short, what is possible and what is

desirable for the regional economy? (Bradshaw and Blakely, 1999.)

In the context of industry-wide development, states pursue strategies for business retention and

expansion, new business development, and industrial recruitment in ways that capitalized on local

advantages or opportunities and foster critical sectors of the regional economy. Efforts also focus on

crucial occupational groupings that have the potential to shape or drive the local economy. (Markusen,

2000.) The industry-wide approach recognizes that a region’s economic advantages, not tax incentives

and public subsidies, will spur development and growth in the long term. State initiatives often

emphasize the importance of high-performance, competitive industries with high productivity levels and

skilled workforces. (Bradshaw and Blakely, 1999.) Technical assistance programs may be designed

specifically for firms in critical industries. Tax incentives may be targeted toward key sectors of the

local economy, or used to offset state regulations or requirements deemed particularly harmful to

businesses in those sectors. The focus on industry-wide development certainly does not eliminate the

potential for missteps by the public sector, particularly when it comes to misguided efforts to shore-up

declining industries or to wholly create a critical mass of new businesses in the latest, “hot” industrial

sector, such as biotech or information technology. Done well, however, an industry-wide approach does

open up the discussion to a broader array of public-sector initiatives – including infrastructure and

education – in the context of regional development and growth.

Tax Incentives, Public Services and Infrastructure

The public sector employs a range of economic development strategies designed to encourage growth.

The factors that influence business creation, improvement, expansion, and location vary and mostly fall

outside the direct control of the public sector. Not surprisingly, then, governments focus much of their

attention on the levers they control directly, including taxes, public services, and infrastructure.

Tax incentives. Public-sector actors use targeted tax incentives for all types of economic development,

from business recruitment to retention and expansion to industry-wide development. Much of the

research on economic development and taxes looks at the effect of taxes on business location decisions.

Research shows that taxes have a limited impact on business location. (Rubin and Zorn, 1985.) When

selecting locations, businesses first consider more critical production factors, including labor quality,

costs, and availability; transportation costs and modes; access to markets for their goods and services;

and access to supplier firms. While the impact of taxes on interregional location decisions varies from

industry to industry, in general taxes are a secondary consideration.

But empirical evidence does indicate that taxes do matter to an extent, especially when businesses weigh

several potential locations within a favored region – sites within a metropolitan area, for example, or

sites in close-by states. (Bartik 1991.) Businesses identify the preferred region based on major cost and

production considerations; taxes may tip the location decision of a firm from one specific place to

another within a broader regional economy. From an economic standpoint, growth at one location within

a regional economy drives growth for the regional economy as a whole, so tax incentives designed to

draw businesses to one location in a region instead of another have little or limited impacts on overall

regional growth. That being the case, tax incentives for economic development in most cases work best

where they are least justified by swinging decisions from one site to another within the same region –

the region the firm already has identified as the one they want for their new location. (Fisher, 2004.)

What’s more, the effectiveness of tax incentives erode as more and more locations offer them,

undercutting the advantage gained by the locality that first put them in place. (Wassmer and Anderson,

2001.) And the high cost of tax incentives, per job gained, undermines the cost-effectiveness of the tax-

cut approach to economic development. (Bartik 1995.)

Public services and infrastructure. Public services and infrastructure influence business growth and

location. Businesses and workers use public services and infrastructure, the very public expenditures

that they pay for with their tax dollars. Research has shown that public investment in education and

infrastructure is positively related to local business activity and growth, although it is difficult to

determine if those public investments drove the growth or were, in fact, driven by it. (Bartik 1991.)

Businesses benefit from the public sector’s provision of education and training, transportation

infrastructure, water and waste systems, and police and fire services, for example. Public services and

infrastructure also contribute to a region’s quality of life, which stands out as an increasingly important

factor in the economic vibrancy of metro areas. (Florida, 2002.) And public officials cite infrastructure

improvement as one of the most commonly used economic development tools. (Bowman, 1987.) To the

extent that tax incentives for economic development reduce funding for critical public services and

infrastructure, they may even undermine long-term development and growth. (Lynch, 2004.) That said,

public investment in traditional infrastructure alone will not turn around a declining regional economy.

(Luger, 2002.)

Needless to say, businesses balance the cost of taxes with the desire for public services, and the

importance of each of these elements will vary from business to business. In the best of circumstances,

the public sector will minimize firm-specific tax breaks and subsidies and focus instead on fostering an

environment that encourages development and growth in crucial sectors and throughout the region.

Preferred Approaches to Public-Sector Economic Development

The public sector should take the following approaches to economic development:

1. Carefully and objectively analyze the structure of regional economies in order to identify

comparative advantages, critical industries and occupations, internal linkages, and emerging

prospects for development and growth.

2. Make sensible investments in the public infrastructure as a way to spur regional economic

development and growth.

3. Invest in public education and skills training to better the lives of residents and improve the

skills and knowledge that those residents bring to their jobs.

4. Minimize firm-specific tax breaks and public subsidies. When selecting locations, businesses

must first consider critical production factors, including labor quality, costs, and availability;

transportation costs and modes; access to markets for their goods and services; and access to supplier

firms. That being the case, tax incentives for economic development in most cases work best where

they are least justified by swinging decisions from one site to another within the same region – the

region the firm already has identified as the one they want for their new location.

5. Pay attention to industries and businesses that contribute to the economic base by selling their

goods and services outside the region or by competing for local sales that would otherwise go to

businesses located elsewhere.

6. Pursue economic development strategies that boost the productivity of key regional industries.

7. Improve the quality of life in regions in order to keep and attract people.

8. Focus economic development on industries, occupations, and businesses that provide high-

quality, good-paying jobs. Exceptions may make sense when the goal is to open up employment

opportunities for low-skilled residents.

9. Look for ways to encourage higher pay by local industries and businesses.

10. Exercise great caution before expending public dollars as financial capital for private ventures.

11. Strive for a strong return on investment from any public-sector economic development initiative,

program, or action.

Role of Public Sector in Economic developement

The public sector has been playing a vital role in the economic development of the country. 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 may be described as

follows:

1. Filling the Gaps in Capital Goods: 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 and 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. In this

way 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. These areas lacked basic industrial and civic facilities like electricity,

water supply, township and manpower. Public enterprises have developed these facilities thereby

bringing about complete transformation in the socio-economic life of the people in these regions. Steel

plants of Bhilai, Rourkela and Durgapur; fertilizer factory at Sindri, are few examples of the

development of backward regions by the public sector.

4. Contribution to Public Exchequer: Apart from generation of internal resources and payment of

dividend, public enterprises have been making substantial contribution to the Government exchequer

through payment of corporate taxes, excise duty, custom duty etc. In this way they help in mobilizing

funds for financing the needs for the planned development of the country. 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. In recent years, between the periods 2002-03 to 2004-05 the total contribution from

the public enterprises has increased considerably, by Rs 81,438 crores on the average.

5. Export Promotion and Foreign Exchange Earnings: Some public enterprises have done much to

promote India’s export. The State Trading Corporation (STC), the Minerals and Metals Trading

Corporation (MMTC), Hindustan Steel Ltd., the Bharat Electronics Ltd., the Hindustan Machine Tools,

etc., have done very well in export promotion. Public enterprises have earned foreign exchange of Rs.

3,942 crores during 1986-87 by way of exports. The foreign exchange earnings of the public sector

enterprises have been rising from Rs 35 crores in 1965-66 to Rs 42,264 crores in 2004-05.

6. Import Substitution: Some public sector enterprises were started specifically to produce goods

which were formerly imported and thus to save foreign exchange. The Hindustan Antibiotics Ltd., the

Indian Drugs and Pharmaceuticals Ltd. (IDPL), the Oil and Natural Gas Commission (ONGC), the

Indian Oil Corporation Ltd., the Bharat Electronics Ltd., etc., have saved foreign exchange by way of

import substitution.

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 and they have secured turnkey projects in several countries of the world.

In addition to the above, 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.

CPSEs Enriching Indian Economy Highlights 2005-06 The share of in GDP at market price stood at 11.12 percentCPSEs share in industrial production is about 27 percent.

CPSEs accounts for more than 1/3rd of total revenue receipts of Central Government Exchequer.

Net worth all Enterprises has increased by Rs 71,142 cr from Rs 341,595 cr in 2004-05 to Rs 412,737 cr in2005-06.

CPSEs have declared a Dividend of Rs 22,886 c in 2005-06 as against Rs 20,718 cr in 2004-05, an increase of 10.46 percent.

Total contribution of CPSEs to the Government of India through dividend, interest and taxes stood at Rs 1,25,384 crore in 2005-06.

Total investment (cumulative investment) of CPSEs as on 31.3.06 was Rs 393,057 cr as against Rs 357,937 cr in 2004-05.

The share of CPSEs in GDP at market price stood at 11.12 percent in 2005-06 and 11.68 percent in 2004-05.

Net Profit has increased to Rs 70,288 cr in 2005-06 from Rs 64,963 cr in 2004-05, registering an increase of 8.19 percent.

Turnover has increased by 11.86 percent from Rs 744,307 cr in 2004-05 to Rs 832,584 cr in2005-06.

CPSEs have earned a Return on Investment of 18.33 percent during the year 2005-06.

Foreign Exchange Earnings by exports of goods and rendering various types of services has increased by Rs 41,533 cr from Rs 42,250.05 cr in 2004-05 to Rs 46,403.35 cr during 2005-06.

CPSEs Foreign Exchange Earnings

(Rs. in Crore)

Particulars 2003-04 2004-05 2005-06

Export of Goods on FOB Basis 32976 39927.14 42576.48

Royalty, Know-how, Profes sional & Consultancy Fee 173 1079.50 1093.57

Interest and Dividend 452 725.19 880.16

Other Income 1292 518.25 1853.14

TOTAL 34,893 42,250.05 46,403.35

No. of loss making CPSEs has come down to 58 in 2005-06 from 79 in the previous year. The

accumulated losses of all CPSEs declined by Rs 10,578 cr from Rs 83,725 cr in 2004-05 to Rs 73,147 cr

in 2005-06.

The aggregate reserves and surpluses of all CPSEs have gone up to Rs 3,59,077 cr in 2005-06 as against

Rs 3,10,118 cr in 2004-05.

The public sector has a near monopoly in the production of coal (85.52 percent), crude oil (85.87

percent), and refinery (74.51 percent).

As many as 44 CPSEs are listed on the domestic Stock Exchanges. While the shares of MTNL (ADR)

are listed on the New York Stock Exchange, the shares of GAIL and SAIL are listed on the London

Stock Exchange.

Trend Analysis

PSEs Performance over Six Years

Particulars 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

   

No of operating

enterprises234 231 226 230 227 225

 

Capital employed 331372 389934 417160 452336 5044407 581250

 

Turnover 458237 478731 572833 630704 744307 832584

 

Net Worth 171406 225472 241846 291828 341595 412737

 

PBDIT-EP 69287 89550 101691 127320 142554 141951

 

PBITEP 48767 63190 72539 95032 108420 106533

 

Net Profit 15653 25978 32344 52985 64963 70288

 

Profit of profit making

CPSEs28494 36432 43316 61606 74433 76240

 

Profit making PSEs 123 120 119 139 138 157

   

Loss Incurring PSEs 110 109 105 89 79 58

   

Dividend 8260 8068 13769 15288 20718 22886

   

Dividend tax 842 8 1193 1961 2852 3215

The top ten enterprises earned a net profit of Rs 47,371.19 cr which is 62per cent of the total net profit

of Rs76,240 cr of the profit making PSEs. Oil and Natural Gas Corporation with a net profit of Rs

14,430.78 cr leads the list followed by Rs 8,939.69 cr from Bharat Sanchar Nigam.

Top Ten Profit Making CPSEs  

  (Rs. in Cr)

S.No. Name of Enterprise Net Profit

1. Oil & Natural Gas Corporation Ltd 14430.78

2. Bharat Sanchar Nigam Ltd 8939.69

3. NTPC Limited 5820.2

4. Indian Oil Corporation Ltd 4915.12

5. Steel Authority of India Ltd 4012.97

6. GAIL (India) Ltd 2310.07

7. National Mineral Development Corporation Ltd 1827.8

8. Nuclear Power Corporation of India Ltd 1712.97

9. Coal India Ltd 1711.66

10. Oil India Ltd 1689.93

  Total 47371.19

On the other hand, the top ten lossmaking enterprises accounted for atotal of Rs 4552 cr during the

year2005-06 out of the total net loss of Rs5,952 cr, accounting for 76.47 per cent of the total loss.

Top Ten Loss Making CPSEs  

  (Rs. in Cr)

S.No. Name of the Enterprises Net Loss

1. Fertilizer Corpn of India Ltd 1294

2. Hindustan Fertilizer Corpn Ltd 964.61

3. Hindustan Photofilms Mfg.Co.Ltd 560.9

4. Burn Standard Company Ltd 442.74

5. ITI Ltd 423.16

6. Hindustan Cables Ltd 295.32

7. Konkan Railway Corpn Ltd 235.61

8. Madras Fertilizers Ltd 131.74

9. NTC (AP, Karnataka, Kerala & Mahe) Ltd 103.99

10. Brahmaputra Valley Fertilizers Corpn Ltd 99.78

  Total 4551.85

CENTRAL GOVT. ENTERPRISES UNDER DIFFERENT COGNATE GROUPS (As on 31.3.2006)

STEEL06

HEAVY ENGINEERING10

MINERALS AND METALS10

COAL AND LIGNITE09

POWER07

PETROLEUM12

FERTILIZERS08

CHEMICALS AND PHARMACEUTICALS14

FINANCIAL SERVICES09

MEDIUM AND LIGHT ENGINEERING25

TRANSPORTATION EQUIPMENT10

CONSUMER GOODS11

AGRO-BASED INDUSTRIES04

TEXTILES15

TRADING AND MARKETING SERVICES13

TRANSPORTATION SERVICES11

CONTRACT AND CONSTRUCTION SERVICES11

INDUSTRIAL DEV. AND TECH. CONSULTANCY SERVICES 15

TOURIST SERVICES09

ENTERPRISES UNDER CONSTRUCTION20

TELECOMMUNICATIONS AND INFORMATION TECHNOLOGY SERVICES 04

SECTION 25 COMPANIES12

91 154TOTAL 245

It includes Miniratnas, Navaratnas and Maharatna Miniratnas: In 2002, there were 61 government enterprises that were awarded Miniratna status. These can also enter into joint ventures, set subsidiary companies and overseas offices but with certain conditions.

Category I: This designation applies to PSEs that have made profits continuously for the last three years or earned a net profit of Rs. 30 crore or more in one of the three years. These miniratnas granted certain

autonomy like incurring capital expenditure without government approval up to Rs. 500 crore or equal to their net worth, whichever is lower.

Example Bharat Sanchar Nigam Limited, Hindustan Copper Limited, Central Coalfields Limited, Oil India Ltd., South Eastern Coalfields Limited, RITES Limited, NHPC Limited.

Category II: This category includes those PSEs which have made profits for the last three years continuously and should have a positive net worth. Category II miniratnas have autonomy to incurring the capital expenditure without government approval up to Rs. 300 crore or up to 50% of their net worth whichever is lower.

Example India Trade Promotion Organization, Rajasthan Electronics & Instruments Limited, National Film Development Corporation Limited.Navratna: The incumbents of this group as of 1.12.2008 are: 19. The Navratna status is offered to PSEs, which gives a company enhanced financial and operational autonomy and empowers it to invest up to Rs. 1000 crore or 15% of their net worth on a single project without seeking government approval. In a year, these companies can spend up to 30% of their net worth not exceeding Rs. 1000 cr. They will also have the freedom to enter joint ventures, form alliances and float subsidiaries abroad.Example Bharat Electronics Limited, Bharat Heavy Electricals Limited, Bharat Petroleum Corporation Limited, Coal India Limited, GAIL (India) Limited, Hindustan Aeronautics Limited.Maharatna: In 2009, the government established the Maharatna status, which raises a company's investment ceiling from Rs. 1,000 crore to Rs. 5,000 crore. The Maharatna firms would now be free to decide on investments up to 15 per cent of their net worth in a project. Earlier, the Navaratna companies could invest up to Rs 1,000 crore without government approvals.

Example Indian Oil Corporation Limited, NTPC Limited, Oil and Natural Gas Corporation Limited,

Steel Authority of India Limited.

Limitations, Problems and Shortcomings:

Despite their impressive role, Public enterprises in India suffer from several problems and shortcomings.

Some of these are described below:

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 a precise

criterion and flaws in planning have caused undue delays and inflated costs in the commissioning of

projects. Many projects in the public sector have not been finished according to the time schedule.

Barauni Refinery was commissioned two years behind schedule and the Tromby fertilizer plant was

delayed by three years thereby causing an increase of Rs. 13 crores in the original cost estimates.

 2. Over-capitalization: Due to inefficient financial planning, lack of effective financial control and

easy availability of money from the government, several public enterprises suffer from over-

capitalization The Administrative Reforms Commission found that Hindustan Aeronautics, Heavy

Engineering Corporation and Indian Drugs and Pharmaceuticals Ltd were over-capitalized. 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. In many cases such establishment expenditure amounted to 10 percent

of the total project cost. Recurring expenditure is required for the maintenance of such overhead and

welfare facilities. 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 labour projections. On the other hand,

posts of Chief Executives remain unfilled for years despite the availability of required personnel.

5. Under-utilisation of Capacity: One serious problem of the public sector has been low utilisation 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.

Capacity Utilization in Public Enterprises

Range of

capacity

1982-83 1983-84 1984-86 1986-971986-87

utilization.

More than 75% 90 88 87 96 90

Between 50-

75%

43 49 47 45 56

Below 50 % 31 35 46 48 29

Total units            164            172            180            189         175

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 cost-consciousness, quality consciousness, and effective control on waste and

efficiency.

7. Inefficient Management: The management of public enterprises in our country leaves much to be

desired. Managerial efficiency and effectiveness have been low due to inept management, uninspiring

leadership, too much centralisation, frequent transfers and lack of personal stake. 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.

8. Unsatisfactory industrial Relations: In several public enterprises relations between management

and labour are far from cordial. There has been serious and frequent labour trouble in Durgapur steel

Plant, Bharat Heavy Electricals, Bhopal, and in Bangalore-based undertakings. Millions of mandays and

output worth crores of rupees have been lost due to strikes and gheraos. Wage disparities have been the

main cause of labour trouble in the public sector. The percentage increase in the per cent emoluments of

public sector employees had been higher than the percentage increase in consumer price index.

9. Lack of Coordination: Various public enterprises are dependent on one another as the output of one

enterprise is the input of another. For instance, the efficient functioning of power and steel plants

depends on the production and transportation of coal which n turn is dependent upon supplies of heavy

equipment machinery. Despite such interdependence, materials management and research has not been

achieved. A coordination in h production programmes of different enterprises at various stages would

help to reduce excess stocks and shortages of vital inputs

Measures for Improvement

There is, therefore, an urgent need to improve the efficiency of public enterprises by measures on the

following lines:

(i) The managerial autonomy of public enterprises should be preserved through greater delegation of

power and by reducing the number of civil servants and bureaucrats on their boards of directors.

(ii) A management culture different from the bureaucratic culture should be developed to promote

initiative and decision-making. Greater representation should be given to non-official part-time

directors. Now the Government of India has decided to appoint technocrats in place of civil servants on

the boards of public enterprises.

(iii) Chief executives should be provided a tenure of 5 years and superannuary posts should be created

for understudies of chief executives.

(iv) Special training programmes should be undertaken for developing a professional carde of managers

in the various functional areas of management. Participative management style should be promoted.

Standing Conference on Public enterprises (SCOPE) can help in this task.

(v) An efficient personnel management system is to be developed to improve recruitment, selection,

appraisal, promotion, job satisfaction, compensation and industrial relations in public enterprises.

Production incentives should be introduced.

(vi) The process of project appraisal an investment decisions should be streamlined. Detailed feasibility

studies should be made.

(vii) A drive should be launched to improve capacity Utilization and to build up cost consciousness

among public sector concerns.

(viii) Continuous monitoring of cash flows, tight control over inventory, improvement in productivity

are necessary for prudent use of working capital. Clear cut objectives should be laid down to3 facilitate

evaluation of performance.

(ix) An efficient management information system and early warning devices are to be developed to

avoid delays n taking and implementing decisions.

(x) An effective machinery for periodic review and appraisal of performance of pubic enterprises should

be created so that their problems are identified and remedial measures undertaken as early as possible.

The Government of India is formulating a comprehensive programme for efficient recruitment, training

and mid-career appraisal of public sector executives. A committee was appointed under the

chairmanship of Shri Arjun Sengupta to suggest improvements in the working of the public sector.

The Government has accepted most of the recommendations of the Sen gupta Committee. It has been

decided to adopt holding company structure which combines centralized policy formulation and

decentralized management. Various public sector companies in the non-core sectors will be organised

into a few holding companies which will continue to work under the sectoral ministers. The subsidiaries

will be delegated all authority needed for fulfillment of targets and operational efficiency. The

Government will place before Parliament a white paper on public sector units.

As suggested by the Administrative Reforms Commission “Government should make a comprehensive

and clear statement on the objectives and obligations of public sector undertakings. This statement

should lay down the broad principles for determining the precise financial and economic obligations of

the enterprises in matter such as creation of reserves, the extent to which the enterprise should undertake

the responsibility of self financing, the anticipated returns on the capital employed, and the basis for

working out the rational wage structures and pricing policies.”

During 1986-87, a number of measures were introduced with a view to provide greater autonomy to the

public enterprises. A system of Memorandum of Understanding (MOU) and Annual Performance plan

(APP) has been introduced in case of major undertakings in order to ensure greater autonomy to the

public sector undertakings and t the same time ensure accountability for results. In cases where MOU

cannot be entered into performance evaluation is to be done with reference to four-fold criteria, viz.,

financial performance, productivity and cost reduction, technical dynamism and defectiveness of project

implementation. Two holding companies were constituted for the engineering enterprises to ensure

proper coordination and flexibility of operations. It has been decided to give five-year term to chief

executives and functional directors to ensure stability of senior management. Investment proposals will

go to the Public Investment Board only where the proposal is for more than Rs. 20 crores. The

delegation of powers with the enterprises has been revised as given below:

Gross Block Power to sanction expenditure without

the approval of the government

Less than Rs. 100 crores Rs. 5 crores

Rs. 100 crores to Rs. 200 crores Rs. 10 crores

Above Rs. 200 crores Rs. 20 crores

On the recommendations of the Standing Committee on Public Sector Undertakings, the Government

has prepared a draft White Paper to spell out its strategy and objectives of the public sector. The

Planning Commission has constituted a high level Working Group under the chairmanship of Mr. V.

Krishnamurthy to:

(i) suggest an appropriate pricing policy for the public sector

(ii) review the achievements and shortcomings of public enterprises in fulfillment of national

development goals

(iii) suggest measures for improving management and work culture in the public sector

(iv) identify the areas where the public sector should be required to assume the role of the leader and

trend-setter for achieving excellence

(v) suggest measures for improving the autonomy of public enterprises while maintaining their overall

accountability.

The Working Group has been asked to submit its report by December 31, 1988.

Can Private sector be an option to Public sector?

It is unlikely because the objectives differ. The basic objective is profit maximization in case on of any

private sector enterprise while it is not the case for PSU. Till now, India has not resolved all its

traditional issues like lack of modern technology in strategic sectors, under exploitation of local

resources, a thin and lopsided industrial base, skewed income distribution, regional disparities and high

unemployment rate for which the PSUs were actually set up. So, one cannot rule out the continuing

existence of the public sector to meet these objectives.

The common argument forwarded in favour of the private sector option is that it will enable PSUs to

improve their efficiency and thus generate greater economic surpluses. However, the argument seems to

be based more on hope rather than an economic logic, There is nothing unique about private sector

enterprises that enable them to extract more profit.

In many cases, PSUs have better systems, which minimises abuse of power by an individual or a group

of individuals and, thus, avoid the pitfalls of expensive but unproven bets or ego boosting mergers and

acquisitions that may endanger long-term viability of the firm. As the global financial crisis of 2007 and

2008 showed that a private sector enterprise can become a vehicle to maximise management's wealth

rather than shareholders' value. This abuse of power is difficult in a public sector, with is layers of

accountability and inbuilt financial conservatism.

It does not mean that public sector should function in its traditional ways. The political and bureaucratic

constraints that hamper the functioning of many PSUs faced by Air India and BSNL must go. The

government should fix the ground rules and than let the PSUs operate at an arms length from the

government.

Conclusion:

In short, Indian economy could lose its vitality without public sector enterprises considering the

country's existing socio-economic structure. But there is an urgent requirement to address inefficiencies

and limitations pertaining to the sector. Mere privatisation of all public sector units could not be the only

solution to it. Rather, there is a need to have a fresh look on the role of public sector enterprises in

Indian economy and need to realign the policies accordingly.