Importance of public sector
Public sector has to play an important role in India. It is through the expansion of public sector that the state can assume commanding heights of the economy and give practical shape to its socio-economic policies designed at economic development with social justice.
Public sector is important due to the following reasons:
- To ensure a high rate of economic growth it is necessary that the state must actively participate in the programmes of economic development.
- The direct investment by the government in new industrial undertakings would lead to a rapid pace of industrialisation.
- Therefore, the government has stepped up the rate of investment in the economy and consequently much expansion is witnessed in the public sector enterprises.
The expansion of public sector was also thought to be desirable because it ensures a more equitable distribution of economic power.
- If industry is left entirely in the private hands, it leads to monopolistic tedencies which are against the interests of the masses. Therefore to avoid exploitation by the capitalists, the economic power must not be allowed to concentrate in a few hands.
- The public enterprises, either by replacing or by offering competition to the private industries, can serve the best interests of the consumers.
- Achieving a socialist pattern of society has been accepted as the ultimate object of economic policy in India.
- The attainment of this objective involves the setting up of more and more industries in the public sector.
- The sphere of private industry must contract and that of the government enterprises must expand if the State has to exercise a greater control over the economic activity in the country.
The expansion of public sector industries is also necessary to ensure a balanced regional growth.
- While industries concentrate in certain parts of the country the others may remain backward in this field because of a number of economic and non-economic factors.
- Therefore, the state must start new industries in those regions which have so far remained neglected.
- Public sector industries have been considerably expanded because some of these industries are such that they can be started only by the government.
- For example, major irrigation projects, steel plants or heavy industries require a huge investment which may be beyond the capacity of the private people.
- Further, such investment does not give quick returns while the private people want to maximise profits within the shortest possible period of time.
- Therefore, by nature such investment suits only the government which has large financial resources, and which is not guided by immediate gains.
- One of the reasons for the expansion of the public sector industries is the aid for industrial development given to the government by the foreign countries.
- The Socialist countries give aid to the public sector industries only, while other countries also think it feasible to deal with the government rather than the individual entrepreneurs.
- Therefore, many of the public sector industries have come up because of the foreign aid to such industries.
- Expansion of public sector industries may also be partly attributed to the ploughing back of the profits by such industries.
- While, in the private sector, most of the profits are distributed by way of higher dividends, in the public sector industries they are invested for further expansion.
- However, in India, only a few public sector industries have shown any significant amount of profits. Many of them are actually running at a loss.
- Therefore, ploughing back of profits does not constitute any major factor responsible for the expansion of public sector.
- Among the major objectives of the public sector are
- to help in rapid economic growth and industrialisation and create necessary infrastructure for economic development;
- to generate resource for development;
- to create employment opportunities,
- to promote balanced regional growth and
- to promote redistribution of income and wealth.
- The public enterprises have indeed contributed to industrial development of the country.
- By developing the basic and heavy industries, steel, cement, heavy electricals, machinery etc. a firm foundation of industrial development has been laid in India.
- The capital goods sector of the Indian industry which was virtually nil at the time of independence, is today quite well developed.
- The entire infrastructure—energy, transport, communication etc. owes its development to the public sector.
- The tremendous progress in coal, petroleum, electricity and transport sectors which provide the essential inputs to industry, is mainly due to the growth of public sector.
- The task of providing the economic infrastructure in the country had been entrusted to the public sector for reasons of its greater reliability, for the very large investments required and the longer gestation period of the projects crucial for economic development.
- Another major objective of public sector has been to promote balanced regional growth.
- In order that industrialisation may benefit the economy as a whole, it is important that disparities in development between different regions should be progressively reduced.
- A concentration of industries in certain areas due to ready availability of raw materials, power, water, transport etc. and virtual absence of industries in other areas where these facilities are not available perpetuates regional imbalances.
- Since public enterprises are not necessarily profit seekers, these can be set up in backward areas.
- The states and regions where the public sector enterprises are located stand to gain manifold in terms of removal of regional imbalances, increased employment opportunities, balanced growth of small scale an ancillary industries and development of industrial facilities.
- The public enterprises have been generally able to help in reducing regional imbalances.
- While deciding on the locations of public enterprises, due consideration is given to backwardness of the region subject to the techno-economic feasibility.
- Employment generation has been a major objective of public enterprises.
- Setting up of public sector units has resulted in generation of substantial employment, both direct as well as indirect in the regions where these units are located.
- These enterprises provide direct employment to over 22 million persons besides many millions more who may be the indirect beneficiaries.
- An important objective of the public sector enterprises has been to generate adequate resources for economic development.
- These enterprises were supposed to generate resources for financing their own expansion and provide the surplus for financing developmental plans of other sectors.
- The resources that the public enterprises generate are in the form of retained profits, depreciation and deposits etc.
- A part of it they keep for their own expansion and the rest is given to the exchequer as surplus of public enterprises which is used for financing development activity.
Capital Output Ratio in Public Sector
- Capital output ratio shows the relationship between the stock of capital employed and the annual flow of goods from these enterprises.
- Since most of these industrial units are such that they require massive amounts of investment in machinery and equipment and the gestation period between investment and output is long, the capital output ratio is bound to be higher. No one can contest this aspect of public enterprises.
- The private enterprises being interested in quick gains just do not enter into many fields where public enterprises operated. Thus the private sector may have a lower capital output ratio.
- But the high capital output ratio in public sector enterprises is also accounted for by the fact that because of faulty planning and delayed execution of these objects, the capital costs have increased.
- The low productivity and inefficiency of these enterprises, the lack of coordination between various activities, the bureaucratic attitude of the management t etc. all combine to generate a smaller flow of output. This naturally raises the capital output ratio.
- The private enterprises being run efficiently by professional managers maximise their output per unit of capital cost and hence reduce capital output ratio (or maximise output capital ratio).
Public Sector Reforms
The New Industrial policy of July 1991, apart from bringing down the number of areas reserved for public sector from 29 earlier to only 8 now, has also decided to introduce the following reforms.
- Restructuring involving modernisation, rationalisation of capacity, product-mix changes, selective exit and privatisation to make public enterprises viable, efficient and competitive.
- Review of portfolio of public sector investment with a view to focus the public sector on strategic, high-tech and essential infrastructure.
- While some reservation for the public sector will be 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.
- Increase in autonomy and performance accountability of public enterprises is critical to make them a dynamic force. For this there will be a grater thrust on performance improvement through the Memorandum of Understanding (MOU) system through which management would be granted greater autonomy and will be held accountable. The system of MOU between the administrative ministries and the public enterprises which has been already launched under the Seventh Plan, will be improved so as to be more effective.
- Borads of public sector companies would be made more professional and given greater powers. Changes will be made in management practices to promote efficiency, dynamic leadership, resourcefulness and innovation.
In order to raise resources and encourage wider participation, a part of the government's shareholding in public sector would be offered to financial institutions, general public and workers.
Some of these reforms have already been implemented. For example, shares of some public sector companies are now sold in the market.
Other reforms are being gradually put through. With these reforms, a positive and productive future awaits the public sector.
- The question of autonomy versus public accountability assumes special significance in context of the public sector enterprises which are owned by the Government and managed either by the Government itself or by any other agency appointed by the Government for their management.
- Autonomy means independence to take decisions for timely and quick action.
- Public accountability implies that these enterprises should be responsible to some pubic authority, be it the Department of the Government or the Parliament of the country; and through them to the scrutiny of the pubic in general.
- The need for autonomy arises on account of the fact that the activities of the public enterprises, whether it is production, sale, purchase, inventories etc., are essentially the business type activities which require quick decisions, timely action and immense initiative on the part of the management.
- If the management of a public enterprise does not have the powers to take quick decisions i.e., if their decisions are to be approved by the complex bureaucratic machinery, which is inflicted by red-tape and delays, before these could be implemented, these enterprises are bound to suffer vis-a-vis the private sector competitive enterprises which are more businesslike and autonomous.
- Thus autonomy is the essence of success as the Government department or even the Parliament cannot take quick and timely decision.
- It is therefore necessary that the process decision-making and responsibility must be vested in the Board of Management of Public Enterprise.
- The need for public accountability of the public enterprises, on the other hand, arises from the peculiar nature of their ownership and management.
- The profits or losses of pubic enterprises accrue to the Government who have invested public funds in them.
- The management of these enterprises in the hands of persons who have hardly any stake in them, since they are paid Government or semi-Government servants or bureaucrats, who have nothing much to do with the profits or losses of these enterprises and whose appointment to the Board of Management as well as promotions largely depends upon their seniority or political push and pulls rather than on their efficiency and skill.
- Thus, absence of any personal involvement in the business of enterprises may lead to inefficient handling, incompetent management and perpetual losses to the exchequer.
- It is therefore necessary that the managers of public enterprises should be made accountable to the public authorities who could closely scrutinise their work and policies and take suitable action in the interest of efficient functioning of these enterprises.