Public, Private and Joint SectorsTrimester I2009

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 SectorObjectives: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 developmentTo promote redistribution of income and wealthTo create employment opportunities.To promote balanced regional developmentTo assist the development of small scale industry and ancillary industries

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

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

Factors identified for the same were:Huge cost and time over-runs in project implementationLocation 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 servicesExploration 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 technologySmall scale and non strategic areasInefficient and unproductive areasAreas with low social responsibilityAreas 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 lowerRestructuring and reviving the potentially viable PSUs.Close down PSUs which cannot be revivedFully protect the interests of the workers

In order to give the thrust to the process of disinvestment in PSUs, a new department of PSUs was set up. The new public sector policy marks a much needed change for accelerating the pace of development by better utilization of the nations resources. In July 1997, Government after a detailed study selected PSUs for making them world class entities and named them Navratnas.

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

Indian Scenario.Guidelines on Pricing Policy:A uniform price for all the public enterprises is ruled out because of the nature of goods or services they produce or provide, the production function and the market situations are not uniform. On the basis of the nature of the business, public enterprises in India can be classified into enterprises engaged in:Production of public utilities and services.Production of consumer goods.Production of basic and capital goods.Trading BusinessFinancial 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 lossesIn the case of public utilities and services, greater stress should be laid on output than on return on investmentWhile 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:Government would own 51% or over of the whole of the capital stock.All the directors were appointed by the Government.It is a corporate body created under the Companies Act. It is created by an executive decision of the Government without Parliaments specific approval.Its funds are obtained from the Government and in some cases, from private shareholders and from the revenue earned through the sale of its goods and services.

A predominant criticism against this form was that in most cases the Government was only a shareholder and that the way the Company was organized it diluted the accountability and audit control.

Organisation of Public EnterprisesMinistry and Departmental UndertakingsFor the management of the Indian Railways, there is a full fledged Ministry with a Railway Minister and the Railway Board headed by the Chairman.

Departmental Undertakings are directly subordinate to the Ministry. The need for secrecy, strategic importance and similar conditions make the departmental undertakings the most suitable form of organization. However, these undertakings have the disadvantage of governmental and political interference, lack of authority and initiative in decision making.

Statutory Corporations:A corporation is a body corporate created by a separate law, independently financed and vested with autonomy in managing its affairs. Industrial Finance Corporation, RBI and National Textile Corporation are examples of statutory corporation, also called public corporations.

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

With the New Industrial Policy, 1991, the role of the private sector has been considerably expanded. Now private sector corporations are allowed in all industries except two industries.