Public Sector Undertakings

Answer : The era of Globalisation has facilitated the process of coming closer of government and public enterprises. As expected, it has brought about certain changes in the functioning of public undertakings for the good. The ongoing era of Globalisation, New Public Management as well asEntrepreneurial Government has enabled the public and private sectors to come closer through Memorandum of Understanding (MoU). This MoU regime has enabled an improvement in the performance of public undertakings.

Now public undertakings enjoy more autonomy in their functioning. They are given more freedom in their financial and personnel administration field. This has led to more flexibility in their approach which has resulted in better efficiency and effectiveness in their functioning.

Now, the public undertakings go for more specialisation through use of latest available technologies, skills development trainings for their employees, better planning for their expenditure and revenue generation. The more exposure they are getting at international level is also making them more competitive and professional in their working.

The following other points can be noted with regard to the memorandum of understanding.

1. The MoU is an agreement between the government (ministry) and the public enterprises management to grant autonomy to the latter, that is, to reduce day-to-day interference of the ministry in the management of public enterprises.
2. It defines obligations of both the parties for improving performance of public enterprises.
3. It makes public enterprises management responsible and accountable for results. Thus, it is a system of annual performance contract between the ministry and the enterprises.
4. It was recommended by the Arjun Sengupta Committee (the committee to Review the policy for the public enterprises) Report of 1986.

Thus, the MoU regime has been able to break the bottleneck of bad performance for public undertakings.

Answer : Our bureaucratic set up has still not been able to come out of colonial hangover. This also reflects itself in the poor performance of our public sector.

As public enterprises are invested from public funds and therefore they should be accountable to the people. As it cannot be accountable to the people directly it should be accountable to the parliament which represents people in a democracy.

Again in order to achieve growth, it is necessary that the public enterprises should be profitable. However, there is conflicting claim between commercial profitability and social profitability. Commercial profitability is easier to judge in terms of percentage return on the capital invested or by some other accepted method of measurement. This is not so with social profitability. Thus clear and well-defined goals are not available for Indian public enterprises.

It is assumed that they should not be held accountable to each and every action but only for the achievement of objectives set out for them. In the use of their productive resources, PEs are expected to operate with efficiency of private enterprise, but with the higher accountability for results. The legislature and the audit often concern themselves with individual decisions. This infringes with the autonomy of Public Enterprises. Again in order to be public, the ministers are responsible to parliament for the performances of Public Enterprises, the concerned ministries have to keep a close watch on the working of Public Enterprises.

The traditional Indian administrative set up revolves round bureaucracy. This machinery is fully responsible for policy formulation, implementation, monitoring, review and evolution. All physical and intellectual resources lye at the disposal of bureaucracy.

But our bureaucratic system suffers from age-old practices, for example rigid hierarchial set up, top-bations communication, obsession with rules, excessive secrecy, red-tapism. All these have been responsible for evils like corruption, unaccountability, closed system etc. In fact, these things have been the root causes of bad performance of our public sector. The situation is so vulnerable that PSUs, who have to compete with specialized private undertakings, are usually manned by the officers from IAS, which are of generalist nature.

Answer : Public Sector enterprises have been considered as key operational instrument to achieve the twin ideas of economic planning socialism, the two doctrines which had caught the imagination of non-welfare states which handled the first half of twentieth century. Planned economy was the method evolved by the socialists for achieving rapid economic development.

During the last fifty years, the role of the state in the economic and social development of a country has shifted dramatically.

The institution of public sector enterprises is today of crossroads. Doubts are also being raised whether state owned industries can successfully operate in an era of liberalization and globalisation. Currently a philosophy of economic development based on liberalization, privatization and reliance on market forces is being advocated. The state and markets cannot be the substitutes but should complement each other. The role of state in economic development has become more important due to ongoing process of globalisation.

Now that India has already developed a strong public sector, the issue of vital importance to the nation should not be that of dismantling it and handling its ownership to private entrepreneurs but how to restructure it and promote its efficiency operation.The role of public enterprises is diminishing as regarding welfare kind of activities.The liberalization measures have opened up the economy and exposed it to the competition.

Privatisation has led to transfer of ownership of the public assets, in particular of public enterprises, to private sector. This is known as denationalization. It leads to losses of job, reduction welfare oriented activities for equitable societal growth.

Public sector enterprises have a strong social content including employment of some disadvantaged sections of the society, which is most likely to be affected after denationalisation. Besides, trade unions of all shades and ideologies are against any dilution of public enterprises, which is a big base and support for them. Labour has a strong vested interest in the continuance of public enterprises, which acts as model employer without labour being a model employee.

These and other implications have to be looked into in depth and acceptable answers found. It may not be advisable to recommend any wholesale privatisation to start with. We may start with a few non-core smaller units, then non-core bigger units, core-units and finally public utilities. There is no doubt that PEs as they exist in India today need trimming. The experience of other countries can provide valuable lessons when details of a scheme of privatization are worked out.

Answer : There was virtually no “public sector” in the Indian economy prior to independence. The idea that economic development should be promoted by the state actually managing industrial concerns did not take root in India before 1947, even though the concept of planning was very much discussed by congress government in the Indian provinces as far back as 1931. However, in the post-independence period, the expansion of public sector was undertaken as an integral part of the industrial policy, 1956.As on March 31,2001, there were 234 central government undertakings, excluding banks, financial institutions and departmental undertakings like the railways, ports etc.

The expansion of public sector was aimed at the fulfillment of our national goals, viz. the removal of poverty, the attainment of self-reliance, reduction in in-equalities 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.

The steady expansion of public sector was based on the fact that the rate of economic development planned by the government was much faster than can be achieved by the private sector alone. Secondly, in the second plan the emphasis was shifted to industries and mining, mainly basic and capital goods industries to be developed under the aegis of the public sector. Thus more resources for industrialization were funnelled through the public sector. Thirdly, the anxiety for balanced development in different parts of the country and to see that there may not be serious regional disparities. Public enterprises of the Central Government are to be set-up in those regions which are underdeveloped and where local resources are not adequate.

Also public sector is an important source of funds for development. The surplus of government enterprises can be re-invested in the same industries or expansion of other industries. All these needs led to steady expansion of public sector in India. But, unfortunately, the performance of public sector undertakings has been far from satisfactory. Lack of professional management is one of the major causes of decline of public sector in India. Lack of autonomy is another cause of decline of public sector. There is lack of freedom in day-to-day administration of public enterprises in India. There is frequent interference by the Ministry.

They often interfere in administrative matters such as selection and promotion of officers, granting contracts etc. Such interference and detailed parliamentary control do not leave scope for independent judgment and initiative, which are essential for commercial success.

Apart from above, poor project management, faculty financial planning, underutilization of capacity, heavy overheads, long gestation period.

The following major steps may be taken to improve the performance of public sector undertakings in India:

1. Proper Planning: Detailed project feasibility reports and implementation programmes should be prepared at the inception stage. Proper and adequate planning will help to check time and cost overruns in the commissioning of projects. After the project is successfully commissioned each undertaking should spell out its strategy in terms of the type of market to be served and the methods of doing it.
2. Professional Management: Innovativeness and enterprising management is essentially for the efficient operation of public enterprises. Top executives should be appointed from industry. Persons having professional knowledge and experience of management should be appointed as chief executive.
3. Operational Autonomy: Public enterprises should be treated as organs of the government. The government and parliament should lay down the broad objectives and major policies. Within this regulatory framework, the managers of public enterprises should be given the freedom for day-to-day administration. Minister should continue themselves to giving guidance and direction of policy. Top executive should be held responsible for the achievement of quantitative profit and other goals.

Clear-Cut pricing policy: Govt. should clearly lay down guidelines for pricing decisions in each and every public enterprise. All enterprises cannot follow the same pricing policy. The relative emphasis to be placed on profit-making and other goals should also be spelt out.

Answer : The Industrial Policy 1991, is a major departure from the hitherto followed policy according a dominant role to the public sector. Its feature are –

1. Area of public sector investments will be reviewed with a view to focus the public sector on strategies, high-tech, and essential infrastructure
2. Public Enterprises which are chronically sick and unlikely to be turned around will, for the formulation of rehabilitation schemes, be referred to the Board for Industrial and Financial Reconstruction (BIFR). A social security mechanism will be created to protect the interest of worker likely to be affected by such rehabilitation package
3. In order to raise resources and encourage wider public participation, a part of the govt. share holding in the public sector would be offered to mutual funds, financial institutions, general public and workers
4. There will be a greater thrust on performance improvement through MOU system.

New economic policy since 1991, has played great role in manoeuvering the public sector. Government has already set up Disinvestments Commission to regulate the sale of government share holding as well as to restructure PSEs. The government of India has decided to grant full financial and operational autonomy to leading PSE’s, the so called ‘Navratnas’. This would reduce political and bureaucratic interference in the operation of PSE’s in general. They can also enter financial or technological joint ventures with other industries in India and abroad.

Answer : In public sector enterprises huge capital is locked up but these sector are faces with many serious difficulties and most of them are running in heavy losses. General impression about our public sector undertakings is that these are centre of corruption and dens of nepotism. Inefficiency breeds in these undertakings. It is said that these are very extravagant bodies because of which these are running into losses.

In India we have had a strong commitment to socialism where public ownership by itself is considered valuable. Our industrial policies aimed to make public enterprises pillars of our economy. But these public undertakings are no longer occupy commanding heights as it used to two to three decades back.

But our public sector undertakings are facing with some serious difficulties, especially with arrival of the concept of privatization, liberalization and globalisation have come to be accepted. One of the objects of privatisation is to increase the efficiency of the economy by making public sector management more dynamic. The liberalisation process will end an era of monopoly and will make public enterprises efficient for their own survival.

Another reason for its decline in importance, frequent Minister’s intervention and control goes to fantastic lengths and silent method of informal guidance has been used in matters of details. In addition to this these enterprises are also faced with the problem of workers participation in management.

All these have brought down the, efficiency and importance of public sector undertakings.

Answer : Public Sector Enterprises (PSEs) have been considered as key operational instrument to achieve the twin ideas of economic planning and socialism, the two doctrines which had caught the imagination of non-welfare states which handled the first half of twentieth century. Planned economy was the method evolved by the socialists for achieving rapid economic development.

However during the last two decades the view regarding the role of the states in the economic and social development has shifted dramatically. The collapse of the command economies of the Soviet Union and East European countries has resulted in retrieval of the concept of planned economy. Nevertheless, the state has to provide main impulse for development. Economic, social and sustainable development cannot take place without an effective state. The question which is widely debated currently is whether the state should be direct provider of growth or act as partner, catalyst and facilitator. Today a wave of liberalization, privatization and globalisation of economy is sweeping the globe and only such business enterprises which can operate efficiently and withstand competition both domestic and international can survive. This places the public sector enterprises in new setting.

Important factors which led to establishment of public sector enterprise in India are:

1. To accelerate economic development and compensate private sector inadequacies.
2. Natural monopoly and infrastructure need.
3. Government revenues and economies of scale.
4. Commanding heights; self-reliance and reducing domination.
5. Employment and regional development.

Now that India has already developed a strong public sector, the issue of vital importance to the nation should not be that of dismantling it and handling its ownership to private entrepreneurs but how to restructure it and promote its efficient operation. For this, it is necessary that public enterprises enjoy a large degree of autonomy. This raises a very difficult question regarding the degree and character of relationship with government and parliament.

While the command economy is a failure, the alternative is not laissez-faire but a welfare state where production is left largely to private enterprises and social welfare to the government has to concentrate more on the front of social justice and welfare retreating on the production front. In a competitive environment of a market economy, people derive maximum satisfaction/welfare. If there is a market failure, it is easy to detect and correct the economic imbalances in a command economy. In order to decide the question whether public intervention should be in the shape of direct product or through other policies, it is prudent to use the ‘double market failure criterion’. First there must be some evidence of market failure. Secondly, one must also search for evidence that a less instructive policy cannot be utilized. Wherever double market failure criterion is fulfilled, the case for public sector production/provision of such goods is usually strong. The need for public sector production is more or less well established when moral hazards and opportunistic/strategic behaviour are strongly indicated as in the production of public goods (defence, police etc.), collection of taxes, printing of money, administration of justice, etc.

Another question often asked is whether public sector enterprises are less efficient than private enterprises. In practical terms, the degree of competition in a market is a better prediction of efficient performance than the question of ownership (public verses private) per se. PSEs have more often been found to be less efficient than private firms in globally competitive market. The competitive order is generally more efficient because it breeds insecurity and almost instantaneous accountability through the ever present threat of other competitors and the ultimate year of exit. It should be realized that competition is the key for efficient growth.

The public sector has clear role in the direct provision of public goods and certain items of infrastructure and basic social services. There also exists strong growth for public sector activity to protect the interests of future generations in certain areas such as environmental preservation which are often poorly represented in the private preferences of contemporaries. Welfare needs are not revealed in the market. These are areas where markets do not play an active role. In such areas public administration has large scope.

It is impossible and undesirable to eliminate public sector enterprises completely. Simultaneously efforts should be taken to drastically improve the efficiency of those units that would continue to remain in public sector. Both private and public sector enterprises should freely compete with each other in a common market. When the competition is not perfect, both the sectors should be exposed to similar regulations which curb the ill effects of the imperfect market without in any way hindering their contribution to the society. Thus, an effective public-private partnership would jointly promote public interest and accelerate the establishment of the welfare state. The cycle of competition-efficiency-growth-wealth-welfare would be complete.

The challenge before India is to more away from any doctrinarian belief of so-called socialist or capitalists path of economic – development and adopt a pragmatic approachand gear on economy including state-owned industries towards greater productivity and profitability so that we achieve self-sustained economic growth and more towards an equitable and just society.

Answer : Public enterprises are those which are owned wholly or partially by the central government or a state government or jointly by central and state government and which are engaged in the industrial, agricultural, or financial activities having self-management.

Public enterprises in India are organized into four major patterns (principal forms)-departmental undertakings, public corporations, government companies, and holding companies. Besides, there are various other forms viz, commissions, control boards, cooperative societies, public trusts, and commodity boards.

These public sector undertakings have played very crucial role in the economic-social development of the country but inspite of these developments following are major problems. For limited success and below expectation performance of public enterprises are:

1. Unsound and non-national price policy.
2. Technological obsolescence.
3. Lower utilization of production capacity.
4. Lack of proper recruitment policy to over manning .
5. Long-gestation periods .
6. Delay in completion of constructions and resultant increase in cost of projects.
7. Over-capitalization.
8. Higher capital intensities leading to lower employment generation.
9. Inefficient management.
10. Lack of autonomy due to faulty controls.
11. High overhead cost like townships, hospital and so on.
12. Faulty selection of sites due to political considerations.
13. Evil competitions and sabotage.
14. External factors like trade unionism, union rivalries and so forth.
15. Inefficient inventory management and so on.

As a follow-up of new economic policy and a series of macroeconomic policy reforms leading to liberalisation of the Indian economy, the government had taken various measures to reform the public enterprises. These are explained below:

1. Reservations: In 1991, the number of industries reserved for the public sector was reduced from 17 to 8, too more items were deleted from the reserved list. Again in 1998, another two items were deserved. Recently in May 2001, the government opened up one more areas to the private sector.
2. Sick Units: In 1991, Sick Industrial Companies Act (SICA, 1985) was amended to enable the sick public enterprises to be referred to the Board for Industrial and Financial Reconstruction (BIFR, 1987) for revival and closure.
3. Golden Hand Shake:In 1988, government initiated the Voluntary Retirement Scheme (VRS) to help public enterprises to shed excess manpower. This scheme came to be popularly known as “Golden Hand Shake” policy as the workers get a handsome amount from the enterprise at the time of dissociation.
4. Disinvestment: In 1991-92, the disinvestment programme was started with the main objective of raising non-inflationary kind of finance for the government budget. Disinvestment is the process where the government withdraws a portion or the total of its equity in a public enterprise.
5. Memorandum of understanding: The memorandum of understanding (MoU) was introduced in 1987-88. It has grown at a steady rate from 4 MoUs in 1987-88 to 97 MoUs in 2002-03.

The following other points can be noted with regard to the memorandum of understanding:

1. The MoU is an agreement between the government (ministry) and the public enterprises management to grant autonomy to the latter, that is, to reduce day-to-day interference of the ministry in the management of public enterprises.
2. It defines obligations of both the parties for improving performance of public enterprises.
3. It makes public enterprises management responsible and accountable for results. Thus, it is a system of annual performance contract between the ministry and the enterprises.

It was recommended by the Arjun Sengupta Committee (the committee to Review the policy for the public enterprises) Report of 1986.

Answer : In India we have had a strong commitment to socialism where public ownership by itself is considered valuable. Our industrial policies aimed to make public enterprises pillars of our economy. Bigger public enterprises are formed as corporations. From a modest beginning of five undertakings with an investment of Rs. 29 crore in 1951, the public sector has grown to 242 undertakings with an investment of Rs. 193121 crore in 1996-97.

In India, both ideology and practical consideration necessitated a major role for the state in the early years of the Republic. The capital markets were practically non-existent and private capital was away. The public sector could capture almost the ‘commanding heights’ of the economy. However, disillusion set in when it was found that despite its increased size, the public sector failed to deliver results. Losing public sector enterprises became a drain on the public exchequer instead of contributing to the state revenue. Their deficit and losses assumed the traits of a huge indirect form of taxation. At this stage, they were considered as white elephants or exhausted Leviathans, as if they have no positive role to play.

Now, the concepts of privatization, liberalization and globalisation have come to be accepted. The liberalization process will end an era of monopoly and will make public enterprises efficient for their own survival. In areas like creating infrastructure, public sector corporations still have an active role to play.

Answer : A public undertaking is an industrial or commercial undertaking owned managed and controlled by the government to produce and supply goods and services to society. In India, public enterprises were initially provided adequate and feasible environment to flourish, to enhance the economic development and public enterprises, to use pattern of resource allocation, to remove the regional disparities through public enterprises, to bring socialistic pattern of society through equity.

As public enterprises are invested from public funds and therefore they should be accountable to the people. As it cannot be accountable to the people directly it should be accountable to the parliament which represents people in a democracy.

Again in order to achieve growth, it is necessary that the public enterprises should be profitable. However there is conflicting claim between commercial profitability and social profitability. Commercial profitability is easier to judge in terms of percentage return on the capital invested or by some other accepted method of measurement. This is not so with social profitability. Thus clear and well-defined goals are not available for Indian public enterprises.

It is assumed that they should not be held accountable to each and every action but only for the achievement of objectives set out for them. In the use of their productive resources, PEs are expected to operate with efficiency of private enterprise, but with the higher accountability for results. The legislature and the audit often concern themselves with individual decisions. This infringes with the autonomy of Public Enterprises. Again in order to be public, the ministers are responsible to parliament for the performances of Public Enterprises, the concerned ministries have to keep a close watch on the working of Public Enterprises. These indicate the need and the problem of balancing ‘Public’ and ‘Enterprising’ role of Indian Public Enterprises.

Answer : Public enterprises are those which are owned wholly or partially by the Central Government or a State Government or jointly by central and a state government. These are directly funded by public exchequer’s money. Due to this it becomes imperative for the government to control them and make them accountable. The Railways, Post and Telegraph are the two major departmental undertakings.

The principal objectives of control over departmental public undertaking are many, like promotion of efficiency, attainment of national objectives, attainment of targeted results, regulation of power concentration etc.

By efficiency, it is meant the optimum use of men, materials and money invested in the enterprise. This efficiency is guaranteed under the control of government and parliament. For good result it’s essential to make them accountable.

The other purpose for control includes earning surpluses for general economic development, training of personal skills, a contended and motivated personnel, workers’ participation in management, etc. It is necessary that these objectives are specified with regard to each enterprise and revised from time to time.

The other reason for control is for the attainment of targeted results. For this purpose it is essential that all the ways and means together with a clearly defined objective be laid down. It is done by the government. For checking the over concentration of power and their misuse by the official it is necessary for the government and parliament to control the public undertaking.

For stopping the misuse of money paid by public exchequer it is important that government controls the public undertakings, only then the very purpose behind their existence can be served.