Public sector enterprises are those enterprises which are owned and managed by the Central, State or Local Governments. At the time of Independence, public sector enterprises of the Central Government were confined to a very small segment of the economy namely—Railways, Posts and Telegraphs, Ports and Defence establishments. After Independence, the expansion of public sector as a deliberate policy of the State has become an integral element of national economic planning. The Industrial Policy Resolutions of 1948 and 1956 and the subsequent policy statements of the Government assigned a leading role to the public sector in conjunction with private sector. Public Sector was assigned the role of ushering in rapid industrialisation, capturing the commanding heights of the economy, establishment of basic and key industries, reducing imbalances in regional industrial development, providing infrastructural facilities, generating surpluses for public exchequer, promoting exports and bring about import substitution and offering competition to the private sector so as to discourage their monopolistic tendencies. The Industrial Policy Resolutions provided for exclusive reservation of certain industrial sector like Atomic Energy, Defence equipment etc., for the public sector. The public sector was also expected to take the initiative in establishing new units in several other categories of industries such as ferrous alloys, non-ferrous metals, machine tools, drugs and pharmaceuticals and so on, while private enterprises were allowed to continue to operate in them. In fact, a mixed economy with co-existence and co-operation between public and private sectors and their simultaneous development has been the policy of the State ever since 1948.
Rationale
The rationale of justification for establishment and expansion of public enterprises may be outlined as follows:
Planned economy: The ushering in of national economic planning are characterised by a series of Five year plans against meaning and strength only through expansion of public sector units on a mass scale, so as to channelise the public resources and investments in to productive lines in a planned manner.
Rapid industrial growth: Public enterprises are the vehicle for achieving a more rapid industrial growth than mere and exclusive dependence on the private sector for the purpose.
Ability to make huge investments: Public sector becomes necessary as it is in a position to invest in basic heavy and capital intensive industrial projects requiring huge investments which also entail long gestation period. Private Enterprise may feel hesitant to embrak upon such ventures. Similarly, public enterprises set an example and give leadership in establishment of certain type of industrial unit. The private sector entered such field after observing the public sector’s initiative in setting up a series of fertiliser units.
Infrastructure development: Public sector has a tailor-made role in establishing infrastructural facilities for speedy industrial development. Such facilities as thermal and hydro electric power units, coal mining and petroleum exploration and refining units, railways and port facilities, tele-communications etc. which are more in the nature of public utilities with limited rate or profitability and long gestation period, could be established only by the public sector which is not solely motivated by the narrow profit criterion.
Development of backward regions: The establishment of large industrial units in economically backward regions with a view to reduce regional imbalances in industrialisation could only be thought of by the public sector. Private enterprises look for a massive scale of incentives and concessions for moving into backward areas and are not interested otherwise as it will be unremunerative and risky.
Countering private sector monopolies: The monopolistic tendencies and undue concentration of economic power in private big business houses could partly be tackled by establishment of public sector units to break the hold of private business empires and to offer stiff competition to them. Public sector and publicisation of private enterprises is the answer to the problem of abuse of economic power by private enterprises as was done by the State when Life Insurance was nationalised, and when 14 private sector banks were taken over by the state in 1969.
Socialistic development: It is argued that public enterprises are the kingpin of socialistic oriented industrial development. First, industrial activites which are of strategic and critical importance to the nation as an independent entity such as defence industries, atomic energy, basic and heavy industries should be in the public sector for the sake of public interest. Second, industrial activities in the establishment of which, larger and broad based economic and social consideration are the true determining factors to the subordination of narrow commercial and profit considerations deserves to be established in the public sector. Third, industrial activites which generate huge surpluses should be used for public purposes and hence should go to the national exchequer through the public sector, instead of enriching a few private industrial magnates, managers and shareholders. Such a step will also help in reducing extreme disparities in the distribution of wealth and income.
Performance
It would be rewarding to examine the performance of the public sector in India by reference to the above reationale.
Growth of Public Sector: There has been rapid expansion of public sector since 1951. There were only 5 public sector undertakings on the eve of the First Fvie Year Plan with an investment of only Rs. 29 crores. At the end of March 1999 the number of central public enterprises has increased to 240 with total investment to the tune of Rs. 2,30,140 crores.
As could be seen from the above, the growth of public sector has been steadily increasing except on a few occasions.
Range of public sector industrial operations: There is a tremendous diversity of operations and field of activity of public sector enterprises. They range from shipbuilding, thermal, hydro and nuclear power, electronics, steel, non-ferrous metals, machine tools, machinery, heavy electricals, heavy chemicals, petroleum products, road and rail transport, airlines, cement, mining, fertilisers, watches, textiles, paper and pulp, commercial vehicles, passenger cars, footwear, bread, photo films, surgical equipment, tele-communication equipment, defence equipment, foodrains procurement, state trading technological and consultancy services and so on. Thus public enterprises are spread over a wide canvas-extraction industries, basic and heavy industries, consumer goods industries, trade and services sector. About 55% of the investment of Central public enterprises is concentrated in industries like steel, coal, petroleum, power, minerals and metals.
Public sector has been playing a significant role in developing the key sectors of the economy such as railways, iron & steel, coal, power, oil exploration and refining etc. which may be regarded as the commanding heights of economy. Its dominance in the above and a few other areas like fertilisers, newsprint, photo films, non-ferrous metals etc. is very high. Some of the abvoe sectors represent infrastructural facilities which are critical to the over-all economic development. Infact, public sector strongly supports and catalyses the development of private sector to the extent that the goods and services manufactured by the public sector serve as critical inputs for the growth of private sector. Private sector, left to itself would not have been able to install and operate such facilities on such a mass scale.
It is also clear that public sector has laid a strong foundation for industrial development by pumping in huge investments and facilities in key sectors of the economy, without caring much for narrow commercial and profit centered considerations.
Economic Contribution: The share of the public sector enterprises in net domestic product has increased from 7.5 per cent in 1950-51 to 25 per cent in recent years.
Its share in the capital formation was 41 per cent in 1950-51 which has risen to 49 per cent in the seventh plan. It is being projected at 35 per cent during the Ninth Plan. Infact, it is due to the capital formation process of the public sector which has led to the development of infrastructural services which are essential for rapid economic growth.
Another important contribution of public sector has been in the form of employment generation. Of the total employment in the organised sector as on March 1999, the public sector accounted for 70 per cent. Employment in public sector is more than twice the employment in private sector. During the two decades 1961-80, public sector employment has grown at a rate of 4.3 per cent. In nineties however, the growth rate of employment in the public sector slowed down (to less than 1 per cent) whereas it increased in the private sector (to more than 2.5 per cent).
Foreign Trade: The contribution of public enterprises in foreign exchange earning too has been remarkable and most of their exports are in highly competitive fields. This sector has been provideing almost one-fourth of total export earnings Besides the State Trading Corporation of India, Minerals and Metais Trading Corporation and their subsidiaries, which are all public sector undertakings, have been playing critical role in exports of minerals and other products and imports of essential and scarce raw materials needed by the economy.
Several public sector enterprises manufacture goods which are hitherto largely imported—such as iron & steel, chemicals, heavy electrical equipment, fertilisers, newsprint, petroleum products, defence, electronics and so on. It would be difficult to quantify the extent of import substituton contributed by public sector enterprises as our needs for imports of the above and other products have been increasing over the years. Also, public sector enterprises depend on foreign countries for meeting their needs of machinery and equipment, technical knowhow, certain types of raw materials, etc.
Development of ancillary industries: Since the early 1970s, emphasis has been laid on the development of ancillary industries by public sector. The Bureau of public enterprises has given certain guidelines to public sector and has been monitoring the growth and development of ancillary industries by public sector. The latter are required to vacate such areas/items/services which can be off-loaded to the small scale sector. As a result, a number of ancillary units have come into existence to take over some of the production responsibilities of public sector. The public sector has been supporting these units by providing technical know-how and management consultancy services, apart from patronising their products/services and giving them long-term contracts.
Reduction of regional disparities in industrial development: Locational decisions in respect of public enterprise manufacturing units are made by the administering ministry. A substantial proportion of public sector investment is allocated to the setting up of units in backward States and regions. All the four steel units—Durgapur, Rourkela, Bhilai and Bokaro were set up in industrially backward areas of the country. So was the case with several other public sector units like defence establishments, fertiliser factories, heavy electricals units, units of Hindustan Aircraft, and so on.
Profit generation: Though profits are not the criterion for examining the performance of public sector enterprises but since they are set up at huge cost to the national exchequer they are supposed to make some contribution in the form of generation of surpluses. Till 1980-81, public sector units generally suffered losses. However, sitaution changed thereafter and public sector recorded impressive profits. A variety of factors have been identified for the unsatisfactory performance of public enterprises such as cost and time over-runs, faulty locational and investment decisions, excessive capacity-generation, etc.
However, if we see group/sector wise figures we find that only 5 sectors (Petroleum power, medium and light engineering, heavy engineering and minerals and metals) have been able to produce reasonable profits. Other important sectors like coal, chemicals, fertilizer and pharmaceuticals, consumers goods, transportation, equipment etc., have all contributed to either marginal profits or losses.
Problems of the public sector
The public sector in India has come of age and its role and contribution will inevitably be more significant in the years to come. In this context, we may focus on some major problems which are associated with the functioning of public enterprises, the removal or solution of which would definitely make the enterprises more productive and dynamic.
Unremunerative pricing: The government makes final decisions on prices and on their revision from time to time on the basis of a range of objectives and considerations. They include: need for additional revenue to meet public expenditure, need to subsiddise the requirements of certain sections of society—such as farmer, for example, need to compensate for rising cost, need to curb consumption in the interests of resource conservation, and need to mop up price premium prevalent in the market on some products. The pricing policy decisions in public enterprises are vaguely diffused over the minister, the department and the managers. Government determines the over-all framework and decisions, some of which are again to be referred to government for approval. Some times, government directly intervenes and determines the prices on its own, without reference to the guidelines. The pricing policies of public enterprises are partly political, based on convenience, compromise and extraneous compulsions and partly economic based on costs, demand and competition.
Dilution of commercial considerations: Public enterprises are supposed to give attention to several consideration of global and non-economic nature in their decision making processes of generating target profits. As a result, economic inefficiencies creep into their functioning.
High losses: A large number of public enterprises incure considerable losses from year to year while some make quite a low margin. The credibility of such enterprises is quite low in the public eye. Even government frowns upon such enterprises. In quite few cases, losses are incurred by enterprises for reasons beyond their control. A simplistic assumption is made in several otherwise responsible quarters that losing public undertakings are inefficient and ill-managed ones and profit-making undertakings are efficient and well-managed ones.
Sick-units burden: A large number of sick industrial enterprises were taken over by the Government and are allowed to continue. The scope of nursing them back to normal health is quite low. They are a liability to the public sector and bring bad name to it.
Poor Project planning and control: Public sector industrial enterprise projects take inordinately long time for completion and for starting commercial production on the normal scale because of poor project planning and control. Such delays shoot up cost of the projects and render their economic operations also costly.
Over-staffing: There is no proper and scientific manpower planning in many public enterprises. Over-staffing is a bane in them, especially at lower operational level. The maintenance of excessive manpower increases the costs of operations and birngs down per work productivity.
Management gap: Some public sector enterprises experience flight of managerial talent because of unfavourable internal organisational climate. Several public enterprises remain top-less for months and years together, because of the inability on the part of Government to find suitable persons for holding chief executive positions. A top-less enterprise tends to drift along aim lessly.
Over-capitalisation: It is also pointed out by knowledgeable sources that several public enterprises are over-capitalised occasioned by excessive constrction time and cost, provision of infra-structural facilities (such as living quarters for officers and staff, transport facilities, establishment of ancillary untis etc. for example), surplus machine capacity, high cost of imported machinery, unscientific project location decisions and so on. Further, some public sector undertakings are highly capital-intensives as indicated earlier. In all such cases, the capital-output ratio tends to be unfavourable, especially if the output is not priced along commerical lines.
Under-utilisation of capacity: Under-utilisation of capacity is another problem of public enterprises, which is a part of the larger problem in the industrial sector in India, as discussed earlier. Several factors accout for under-utilisation but in the case of public enterprises one conspicuous factor is said to be the indifferent and inept nature of management.
Inadequate autonomy: Public enterprises are also said to suffer from lack of sufficient autonomy for management to make decisions and take action initiatives. The management is constrained to operate under excessive controls by the administrative ministry. The functioning and performance of public enterprises are exposed to excessive scrutiny and questioning by parliamentary/political and other institutioins like the Comptroller and Auditor General.
Lack of autonomy leads to lack of accountability for results. Public sector managers tend to disown accountability on matters on which they have no freedom to manage. Even callous and casual managerial functioning and behaviour leading to huge wastage and leakage of resources is sometimes explained in terms of deficient autonomy and accountability.
Bureaucratic culture: The internal functioning of many public enterprises is characterised by bureaucratic culture—leisurely pace of work, lack of initiative and innovativeness, over-centralisation of authority, feeble level of business acumen, conservtism and over-cautiousness and so on. Such a bureaucratic culture is not conducive for business-like commercial and efficient functioning of public enterprises.
Permissive atmosphere: It is also widely believed that there is a high degree of permissiveness at the operational level in public enterprises tendencies such as lack of commitment for work, low concern for economy, indiscipline, arrogance and so on, are said to characterise the behaviour of people both at managerial and non-managerial levels in public enterprises.
However, in any assessment of the public sector units based on the rate of return or profitability, one cannot forget the social purpose which they fulfil. By their very character of being in the heavy industries category, the ratio of fixed capital to output is about to be high. Due to the long gestation period, they cannot yield an early return. These concerns pay more attention to amenities of the staff as a result of which they so spend large sums on townships which the private sector probably does not do to that extent. Profitability cannot be the sole criterion for these enterprises because they are not out to earn profits; their main purpose is to initiate growth in the basis and key sectors so the economic activity in the other ancillary sector is speeded up. To be able to fulfil this purposes, they should be effectively and economically run but they cannot be judged by profits alone, for profit can be earned by charging a high price. This industrial base which the country has been able to build would not have been there without an active participation of these enterprises, therefore, in any assessment of the public sector, one has to consider not only the money cost but the social cost and benefit.
Privatisation
Due to the inability of the public enterprises in generating adequate resources for sustaining the growth process and due to other weak-nesses, there has been an increasing demand for the privatisation.
What is Privatisation? : Privati-sation, in general, refers to the transfer of assets or service functions from public to private ownership or control and the opening of hitherto closed areas to private sector entry. Privatisation can be achieved in many ways—franchising, leasing, contracting and divestiture. Of the many form privatisation could take, divestiture through equity sale is the most significant, since ownership is trans-ferred to public/corporate entities. Certain preconditions should exist for privatisation to prove successful.
1 Liberalisation and de-regulation of the economy is an essential pre-requisite if privatisation is to take off and help realise higher productivity and profits.
2 Capital markets should be sufficiently developed to be able to absorb the disinvested public sector shares.
Arguments in favour of privatisation :
1 Privatisation will help reducing the burden on exchequer which results from the public subsidising of chronically loss making public sector units.
2 It will help the profit making public sector units to modernise and diversify their business.
3 It will help in making public sector units more competitive.
4 It will help in improving the quality of decision making of managers because their decisions will be made without any political interference.
5 Privatisation may help in reviving sick units which have become a liability on the public sector.
6 Without government financial backing, capital market and international market will force public sector to be efficient.
Arguments against Privatisation: Privatisation is opposed on the following grounds:
1 Privatisation will encourage growth of monopoly power in the hands of big business houses. It will result in greater dispariteis in income and wealth.
2 Private enterprises may not show any interest in buying shares of loss-making and sick enterprises.
3 Privatisation may result in lop-sided development of industries in the country. Private entrepreneurs will not be interested in long-gestation projects, infrastructure investments and risky projects. It may retard growth of capital good industries and other industries where the profit margin is less.
4 The limited resources of the private individuals cannot meet some of the vital tasks which alter the very character of the economy. Private individuals prefer to invest money in trade, real estate and other services areas which allow small investments and where capital obtains quick returns. But for changing the very structure of the economy, the investment should go to strategic sectors of economy.
5 The Private sector may not be uphold the principles of social justice and public walfare. The may look for maximising their short-run profits ignoring the needs of the economy.
6 Given is commitments to W.T.O., the government of India cannot avoid forreign competition nor it can favour particular firms in the private sector. Under such circumstances, some of our public sector giants are best for becoming globally competitive firms.
Disinvestment
As stated above, one of the ways of privatisation is disinvestment. Disivestment means selling of an investment. The process of disinvestment in India or selling off government’s equity in public sector units in the market began in 1992 in the wake of the new policy of liberalization and privatisation of the economy put forward by the then finance minister Dr. Manmohan Singh.
Background
The Indian economy had virtually embraced bankruptcy during the period 1981-91. Its coffers were almost empty. The fund crunch forced the government to incorporate disinvestment as an important element of the new Economic Policy 1991. It was decided to unload PSU equity in the market. Unloading government equity in select public sector enterprises or disinvestment as it is called was important as this would fulfil the objectives of modernization of the public sector throught strenthening R&D, initiating diversification/expansion programmes, retraining and reemployemt of employees, funding the genuine needs of expansion, widening the capital market base and mitigating fiscal deficits of the government. The government appointed two committees—Krishnamurthy Committee in 1991 and the Rangarajan Committee in 1992. Both these committees recommended disinvestments. Further, the Government constituted a five member Public Sector Disinvestment Commission under the Chairmanship of G.K. Ramkrishnan in 1996 for drawing a long-term disinvestment programme for the PSUs referred to the Commission. The Disinvestment Commission submitted the reports covering 50 enterprises out of 70 enterprises referred to it by the government. Recommendations ranged from strategic sales in various proportions to disinvestment at varying levels. The Commission’s recommendations are in various stages of implementation. The Commission was ultimately abolished in November 1999. The government set up a new Departnment of Disinvestment in 1999 for expediting the process of disinvestment in public sector enterprises.
Methods of Disinvestment : In order to achieve the various objectives of disinvestment many methods of disinvestment have been formulated and implemented.
Initially, equity was offered to retail investors through domestic public issues. This was followed by issuance of the Global Depository Receipts (GDRs) to tap the oversees market abroad. Other methods included cross-holding (the government simply selling part of its shares in one PSU to other PSUs), warehousing (Government’s own financial institutions buying government’s stake in select PSUs and holding them until any third buyer emerged) and retaining golden share (retaining government’s state upto 26 per cent in the PSU to protect its interest). Of late, the government is pursuing the strategic sale method. Under this method, the government sells a major portion of its stake to a strategic buyer and also give over the management control.
Progress
The disinvestment programme started in 1991-92 but the disinvestment carried out so far has been half-hearted. It has been too insignificant to affect either the structure of management or the working environment of the PSUs. In fact, it has been pointed out that the government carried out the whole exercise of disinvestment in a hasty, unplanned and hesitant way. It launched the programmes without creating the conditions for its take off. It did not get public enterprises listed on the stock exchange. Adequate efforts were not made to build up the much needed linkage between the public enterprises and the capital market.
The procedures adopted for disinvestment have suffered from adhocism in the absence of a long-term policy of disinvestment. It narrowly focussed only on disinvestment of shareholdings without taking into consideration other important issue such as the initial price offers, involvement of strategic partners, setting up of a trust, employees stock ownership and participation, handing over the enterprises to workers unions/cooperatives and management buy-outs etc.
During the entire disinvestment programme, the public equity has been under-priced and thus has been sold for a fraction what it could actually fetch. This is true for not only enterprises which were loss making but also the high profile companies such as Oil and Natural Gas Corporation, Steel Authority of India, Indian Oil Corporation and Shipping Corporation of India etc.
As a result, the total realisation of the government from various rounds of disinvestment has been much below the target most of the times.
Disinvestment is of much importance today as the government can bring through this policy instrument both as a change in the operating style of these enterprises and also raise funds to mitigate its fiscal deficits. It is here that the international experience can be very useful to the government in making its disinvestment process effective and useful.
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