Download - Public Sectors & Economic Developement
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.