Public Sector in India

Meaning
• A state-owned enterprise in India is called
a public sector undertaking (PSU) or a public
sector enterprise.
• These companies are owned by the
union government of India, or one of the
many state or territorial governments, or
both.
• The company stock needs to be majority-
owned by the government to be a PSU.
 History
• The public enterprises came into existence as a result
of the expanding scope of public administration.
• The advent of the concept of welfare state after the
Second World War and the increasing developmental
initiative undertaken by Government across the world,
the system of public enterprises was developed.
• The government sells goods and services to the
common people through the means of a state owned
enterprise system which incorporates the
characteristics of both public and private enterprises.
 The Origin of PSU/PSEs
• 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.
 The Origin of PSU/PSEs
Post Independence
• Poor, newly independent countries were
discouraged from industrialization by WB and
developed countries.
• 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 adopted vastly successful Soviet model of 5
Year Plans and became a socialist economy.
 The Origin of PSU/PSEs
• 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.
 The Origin of PSU/PSEs
• 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.
• Existence of large public sector was not unusual –
manipulating expenses of public sector was a way
to influence employment levels of a country.
 Public Sector in India
• The government operates in the areas which are
of basic or strategic importance and also the
areas that require huge investments beyond the
scope of private enterprises.
• The public enterprises in India have been on a
steady rise since their big show in the Third Five
Year Plan and have engaged themselves in a
number of economic activities like advancing
loans, regulating trade and commerce, heavy
machine manufacturing, chemical drugs and
fertilizers, oil drilling etc.
 Public Sector in India
• The government of India boasts of five
Maharatnas and nine Navratnas (ratna
meaning gems) public enterprises which are
engaged in myriad of economic and
developmental activities in the country, e.g.
The Steel Authority of India, Hindustan
Aeronautics Limited, National Thermal Power
Corporation etc.
 Maharatnas
• National Thermal Power Corporation (NTPC)
• Oil and Natural Gas Corporation (ONGC)
• Steel Authority of India Limited (SAIL)
• Bharat Heavy Electricals Ltd. (BHEL)
• Indian Oil Corporation Limited(IOCL)
• Coal India Limited(CIL)
• Gas Authority of India Limited(GAIL)
 Navaratnas
• Bharat Electronics Corporation (NMDC)
• Bharat Petroleum (BPCL) • Neyveli Lignite Corporation
• Container Corporation of • Oil India
India (CONCOR) • Power Finance Corporation
• Engineers India • Power Grid Corporation of India
• Hindustan Aeronautics • Rashtriya Ispat Nigam Limited
• Hindustan Petroleum (HPCL) • Rural Electrification Corporation
• Mahanagar Telephone • Shipping Corporation of India
Nigam (MTNL)
• National Aluminium
Company (NALCO)
• National Buildings Construction
Corporation (NBCC)
• National Mineral Development
 Rationale of PSUs in India
• Rapid Economic Development
• Reduction of Concentration of Economic
Powers
• Balanced Regional Growth
• Employment Generation
• Import-Substitution and Export-Promotion
• Resource Mobilisation
 Objectives of PSU/PSEs
• To promote rapid economic development through
creation and expansion of infrastructure
• To generate financial resources for development
• To promote redistribution of income and wealth
• To create employment opportunities
• To promote balanced regional growth
• To encourage the development of small-scale and
ancillary industries, and
• To accelerate export promotion and import
substitution
 Performance of PSU/PSEs
• The performance of public enterprises like the
private sector enterprises are generally judged
on the profitability criterion.
• Public enterprises are generally criticised on
the ground that their performance has been
very poor in terms of rate of return or profit
made on capital investment.
 Criteria for Evaluating PSU/PSEs
• Profitability
– Return on Investment, Net Profit
• Technical efficiency
– Ratio of output to input
• Allocative efficiency
– Correction of market failures by production of certain
essential products/services which free market won’t
• Dynamic efficiency
– Introduction of innovation and up gradation of
technology
 Recent Financial Performance Data on
PSU/PSEs
2015-16 2014-15
Overall net profit of 244 CPSEs is Overall net profit of 236 CPSEs is
Rs.1,15,767 crore in 2015-16 Rs.1,02,866 crore in 2014-15

165 CPSEs posted net profit of 159 CPSEs posted net profit of
Rs.1;44,523 crore in 2015-16 Rs.1,30,364 crore in 2014-15

78 CPSEs incurred net loss of 76 CPSEs incurred net loss of

Total investment in 320 CPSEs stood Total investment in 298 CPSEs stood at
at Rs. 11,77,844 crore in 2015-16 Rs. 10,95,554 crore in 2014-15
Dividend paid by CPSEs during 2015- Dividend paid by CPSEs during 2014-
16 is Rs. 70,954 crore 15 is Rs. 56,527 crore
 PSU Performance
• The profits earned and dividend paid by PSEs
has been steadily improving over the years.
• There is an improvement in the amount of
capital employed.
• The trend clearly indicates the expansion of
CPSEs and improvements of efficiency in using
investible funds.
 Major PSU Reforms
• 1991 – LPG Era:
– PSU had bad track record of negative returns
– New market oriented policies and market-based rules
• Rule 1: then Finance Minister Manmohan Singh
removed blanket ban on private sector and
foreign companies in their functioning in any
field. 1956 industrial policy resolution was
nullified. Public sector was to be confined to
strategic areas like armament industry.
 1991 Reforms
• Rule 2: remaining public sector would behave like
the private sector i.e. government would refrain
from subsidizing state enterprises.
• Rule 3: State bound by MoU limiting financial
support from government but providing
autonomy to make decisions relating to staff
strength, promotion and wages.
• Rule 4: privatization of a large number of state-
owned enterprises – Ministry of Disinvestment
(only in India!)
 PSU Reforms since 1991
• Allowing Managerial Autonomy to PSEs
• Performance-based accountability through
Momorandum of Understanding (MoU) system
(MBO rather than Management by Control)
• Manpower Rationalization (VRS schemes)
• Professionalism in Management (No govt.
interference)
• Dereservation (18 exclusive PSU sectors reduced
to just 2, atomic energy and railway transport)
• Transparency (RTI Act)
 PSU Reforms
• Revival and restructuring of Sick Units
– Chronically sick are closed, divested.
– private sector included to facilitated revival process
• Allowing PSE to enter Capital Market
• Modernization of plants, technology, product mix
etc. (National Investment Fund established in
2005 to help modernization initiatives)
• Disinvestment and Privatization
 Disinvestment of PSU/PSEs
• It involves transfer of Government holding in PSEs
to the private shareholders.
• Disinvestment introduces competition and
market discipline on PSEs and depoliticizes the
decision-making process.
• Disinvestment refers to the dilution of
government’s stake in a public enterprise.
• If the dilution of government’s stake involves the
transfer of management and control of the
enterprise as well then it is referred to as
privatization.
 Is Disinvestment good for Indian
Economy?
• By divesting [selling shares in PSUs] there will be some drop
in the dividend the government gets. But, that is nothing
compared to:
– Salaries paid to the employees. If you sell off BSNL, the
government doesn't need to pay an army of employees. As a
private company it will pay salaries from its own revenues.
– Tax incentives that the companies get. Most PSUs don't pay
taxes as they get a variety of other incentives. As private
companies they will pay more taxes to the government.
• Government as a referee/umpire, not a player.
• Govt should focus on security, defense, international
relations etc, rather than running expensive PSUs.
• Invest in Education (govt gets the most benefit from
educated workforce in terms or productivity, taxes etc.)
 Disinvestment
• As a source of public financing
• Pooling resources for National Investment
Fund created to modernize PSUs
• Move from protection to competition
• Promoting free market
 Disinvestment Targets by the
Government
• Fiscal 2016-17 is the seventh year in a row when the
government would not be meeting the disinvestment
target fixed in the Budget.
• As much as Rs 56,500 crore was budgeted to be raised
through PSU disinvestment in 2016-17 (Rs 45,500 crore
raised )
• the Government has budgeted to raise Rs 72,500 crore
through disinvestment in CPSEs in 2017-18
• “The shares of Railway public sector enterprises (PSEs)
like IRCTC, IRFC and IRCON will be listed stock
exchanges,” Jaitley said in his 2017-18 Budget speech.
Q/A