Public Sector Undertakings - UPSC PDF Download

lntroduction

• State intervention in the regulation, ownership, and operation of industries and services is an essential aspect of public administration in most countries. This has been particularly significant since the advent of the industrial revolution, which necessitated state involvement in various forms. For instance, during the Great Depression in the early 1930s, the notion that economic development would occur automatically without government interference was disproved, leading to increased state involvement in the United States.
• The degree of state regulation or control of industries differs from country to country, depending on their economic systems. In socialist societies, government ownership of industry is based on the belief that the public sector plays a crucial role in fostering economic development. In capitalist countries, however, there is a conscious effort to minimize government involvement in economic operations as much as possible. In developing countries like India, the public sector is more of a necessity than a choice.
• In this unit, we will explore the concept of the public sector, public enterprise, and the evolution of the public sector in India. We will also examine the objectives of the public sector and discuss its expansion and impact on the economy, touching on aspects such as investment, turnover, employment, and balanced regional development.

Public Sector and Public Enterprise - Meaning

• The public sector refers to all government-controlled activities and enterprises, which play a significant role in a country's economic development. It encompasses various areas such as education, public health, transportation, and communication infrastructure. In a broader sense, the public sector includes government departments, government companies, irrigation and power projects, railways, posts and telegraphs, ordnance factories, and other departmental undertakings. The banking, insurance, financial, and other services also fall under the purview of the public sector.
• In contrast, public enterprises are specific institutions established at the central, state, or local levels for manufacturing goods or providing services at a price. These can be maintained either directly as a departmental organization or through an autonomous body. Public enterprises charge a price for the goods and services they provide, which may or may not cover the entire cost. However, the goal is for the enterprise to at least break even over time. Examples of public enterprises include railways, postal services, and telecommunications, which are managed by their respective departments but are classified as public enterprises due to their break-even objective.
• In summary, the public sector encompasses all government-controlled activities and enterprises, while public enterprises are specific institutions established to provide goods and services at a price. Both the public sector and public enterprises play crucial roles in a country's economic growth and development.

Indian Telephone Industries was the 1st PSU which was opened in 1948

• Thus, while public sector refers in a widest sense to all the economic activities undertaken by the government, public enterprises are those specific forms of institutions or establishments in the public sector, responsible for production of certain goods and services. Public enterprises are also referred as public sector undertakings/units, government controlled enterprises, state economic enterprises. Public enterprises are set up in various forms like corporation, company etc., about which we will discuss in Unit 27.

Evolution of Public Sector in India

• The evolution of the public sector in India can be traced back to the recommendations made by the Indian Finance Commission in 1888, which suggested the development of industries as a remedy for frequent famines. However, it was not until the First World War that the vulnerability of the Indian economy became evident, leading to the appointment of the Industrial Finance Commission in 1916. This commission recommended that the government must play an active part in industrial development and establish key industries. After India gained independence, the government aimed to secure growth at a faster rate and overcome economic and social backwardness by building a sound agricultural and industrial base, which led to the introduction of the public sector.
• The growth of the public sector in India has been guided by Industrial Policy Resolutions made by the government. The Industrial Policy Resolution of 1948 emphasized the growth of industry and expanding production capacity of both the public and private sectors, and recognized that the state must play a progressively active role in the development of industries. The Constitution of India, adopted later, emphasized the role of the state in ensuring better utilization of resources and preventing the concentration of wealth in few hands. The introduction of a planned economy and setting the goal of achieving a socialistic pattern of society further emphasized the need for public sector expansion.
• The Industrial Policy Resolution of 1956 stressed the need for planned and economic development, declaring that all industries of public utility services should be in the public sector. Other industries essential for the development of the country and requiring large-scale investment should also be in the public sector. This policy resulted in the classification of industries into three categories, with the state having exclusive monopoly over the development of certain industries, while others were to be progressively state-owned or developed through the joint efforts of the state and private sector.

In conclusion, the evolution of the public sector in India has been driven by the need to overcome economic and social challenges, as well as to ensure better utilization of resources and prevent wealth concentration. The various Industrial Policy Resolutions and the Constitution of India have played a crucial role in shaping the growth and development of the public sector, leading to its extensive presence in the country's economy today.

Objectives of Public Sector

The objectives of the public sector, as indicated by the United Nations, include providing developmental initiatives, addressing specific priorities and compulsions, supplementing the efforts of the private sector in import substitution and export promotion activities, promoting savings through resource mobilization, developing underprivileged regions, and promoting economic and social justice.

• At the time of India's independence, the economy was primarily agrarian, with a weak industrial base, low levels of savings and investment, and a lack of infrastructure. This necessitated the government's involvement in all sectors of the economy to address issues such as income inequality, low employment opportunities, regional imbalances in economic development, and inadequate trained manpower. The public sector was seen as an instrument for self-reliant economic growth, aimed at developing a strong agricultural and industrial base, diversifying the public economy, and overcoming socio-economic backwardness.
• Some of the key objectives for the need for a public sector include facilitating rapid economic growth and industrialization, creating necessary infrastructure for economic development, earning returns on investment for resource generation, promoting income and wealth redistribution, creating employment opportunities, fostering balanced regional development, supporting the development of small-scale and ancillary industries, and promoting import substitution to save and earn foreign exchange for the economy.
• While these objectives represent the broader goals of the public sector, there has been little effort to establish micro-objectives for individual public enterprises. However, there has been a growing demand for the government to present a white paper on public enterprises and specify the objectives of each enterprise. This would enable the evaluation of the performance of public enterprises in terms of fulfilling their objectives. A recent development in this direction is the signing of a Memorandum of Understanding (MOU) between the government and the enterprise, which establishes clear objectives, targets, evaluation criteria, and a reward system for achievements.

IOCL is a Maharatna and Leading Energy producer of India

Expansion of Public Sector and its Impact on the Economy

• The expansion of the public sector in India has had a significant impact on the country's economy since gaining independence. Before independence, the government's involvement in economic and commercial activities was limited to a few sectors such as railways, ports, posts and telegraphs, and ordnance factories. However, since independence, the public sector has grown immensely, encompassing a wide range of activities and products. These include steel production, coal mining, mineral extraction, crude oil refining, manufacturing of tools, machines, electrical and building equipment, telecommunications, cement, textiles, newsprint, and various consumer, trading, and service activities. In many industries, particularly in basic metal production, fertilizers, and fuel, the public sector dominates the national economy.
• Over the past two decades, there has been continued large investment in the public sector to accelerate the growth of core sectors in the economy, meet the equipment needs of strategically important sectors like railways, telecommunications, defense, and achieve a certain degree of self-sufficiency in critical sectors. Additionally, there has been growth in consumer-oriented industries, such as pharmaceuticals, hotels, and food, to ensure the availability of essential goods and regulate the prices of important products.
• A significant number of public enterprises operate in national and international trade, consultancy, contract and construction activities, and communications. The public sector's scope has expanded, with a considerable proportion of its outlay directed towards various public enterprises. At the start of the First Five-Year Plan, India had only five central government enterprises; by March 1990, this number had increased to 244.
• The growth of public sector enterprises has been remarkable in terms of investment, production, profitability, and range of activities. The need for accelerated economic growth and the achievement of socio-economic goals under planned development has driven the expansion of the public sector.
• This expansion has led to several positive effects on the Indian economy, including increased output, employment opportunities, resource generation, and balanced regional development. In summary, the growth of the public sector in India has played a crucial role in shaping the country's economy and addressing various socio-economic challenges.

Investment

• The investment in central public sector undertakings alone has-grown appreciably overall these years. From Rs. 29 crore as on April 1st 1951 in five enterprises, the investment has gradually increased to Rs. 99,315 crore in 244 operational public enterprises as on March 31, 1990. The plan-wise growth of investment in central public sector enterprises from 1st April 1957 to 31 March, 1990, is given in the table below :
  
• Besides the number of units given in the table above, there are many enterprises which are under the various departments of the government. If those are included, the amount of investment would become tremendous.

Turnover

• The growth of the public sector can also be assessed through the turnover of public enterprises. In 1979-80, the turnover was just Rs. 23,290 crore, but it rose to Rs. 93,122.13 crore in 1988-89. In the past decade, the turnover has grown almost fourfold. The efficiency of fund utilization in any enterprise can be measured by the ratio of net turnover to capital employed. In 1988-89, this ratio was around 127%. The majority of this turnover comes from large enterprises like the Indian Oil Corporation, Oil and Natural Gas Commission, Steel Authority of India, and Food Corporation of India. In fact, the oil and petroleum industry accounts for most of the turnover.
• The public sector's role in India's overall economy has been steadily growing since the inception of planning. Its contribution to the net domestic product, which was once only 3%, has now increased to over 20%. Besides its share in the net domestic product, the public sector's rapid growth is evident in the increase in income. Over the past several decades, the income of public enterprises has grown by Rs. 374 crore, with an annual growth rate of 20%, compared to an 11% growth rate for the private sector in the organized segment of the economy.

Infrastructure Development

Public Sector has contributed significantly to the development of strong infrastructure which is essential for economic development. There has been tremendous improvement in the road, rail, air and sea transport system. There has been sufficient expansion of irrigation facilities, power, energy which has contributed to agricultural and industrial development. Such improvements brought about in the infrastructure by the public sector after Independence have benefited the private sector too.

Balanced Regional Development

• The public sector has played a crucial role in promoting balanced regional development and boosting economic growth in various states and regions across the country. Historically, industrial development had been concentrated in cities like Bombay, Calcutta, and Madras, leading to disparities in economic progress among different regions. However, since 1951, efforts have been made to establish industries in neglected areas, with the Industrial Policy Resolutions of 1956, 1977, and 1980 emphasizing the need for accelerated growth, rapid industrialization, and the removal of developmental imbalances among states and regions. As a result, a significant portion of public sector investment has been directed towards establishing large enterprises in backward regions and remote areas.
• This strategy of focusing on backward areas has led to the establishment of major steel plants in Madhya Pradesh, Orissa, Bihar, and West Bengal, and fertilizer factories in Andhra Pradesh, Bihar, and Assam, among others. The distribution of public sector units across all states and union territories has not only expanded employment opportunities but also facilitated the growth of small-scale and ancillary industries, while simultaneously improving infrastructural facilities. The government's policy of providing preferential treatment to underdeveloped states in terms of public sector investment has been instrumental in achieving balanced regional development.

In summary, the public sector has made significant strides in addressing regional disparities in economic development by investing in industries in previously neglected areas. This has led to the creation of job opportunities, the growth of small-scale industries, and improved infrastructure across various states and regions. By continuing to prioritize investment in underdeveloped areas, the government can further promote balanced regional development and contribute to the overall economic progress of the country.

Employment

• The real strategic-position of public sector can be seen by looking at its shares in employment. The expansion of public sector has witnessed considerable increase in employment. As on March 31, 1989, 232 Central Public Sector enterprises employed 22.93 lakh people which constitutes more than one third of the total employment in the organised sector. During 1978-79, the number of employees in public sector was only 17.03 lakhs. State-wise distribution of employees reveals that Bihar accounted for the largest number of 4.33 lakh employees as on March 31, 1990 followed by West Bengal, Madhya Pradesh, Maharashtra, Uttar Pradesh. The industries, which have a sizeable number of employees in the public sector include coal and lignite followed by steel, textiles, heavy engineering, petroleum etc. The coal and lignite sector alone accounted for more than 30 per cent of the total employees.
• The public sector is becoming a model employer and most of the enterprises have recognised their social responsibility in providing housing, educational, medical, recreational facilities to the employees, especially in cases where the projects are located in towns and villages which are inaccessible. The actual gross investment incurred on township of public sector enterprises (including work in progress) as on March 31, 1990 amounted to Rs. 2,965 crore. Housing is a major contributory factor in bringing about an attachment of employees with their enterprises and in promoting better and balanced industrial development including higher productivity. Keeping in view the need for overall improvement in the productivity of personnel working in various public enterprises attention is being paid towards training and re-training programmes. Public sector has been one of the instruments in bringing about development of human resources.

Internal Resource Generation

Over all these years, public sector has been paying great attention towards generating resources internally for financing their own expansion and for other development activities. In the context of resource crunch being faced by the country, the generation in internal resources by the public sector has assumed greater importance. The gross internal resources generated by the public sector enterprises during the third plan period was of the order of Rs. 287 crore which in the seventh plan period went up to 37,678 crore. The public sector contributes to the government exchequer by way of

• Dividends
• Interest payment on loans
• Income tax
• Excise and other duties.

During the year 1989-90, such contribution amounted to Rs. 18,252 crore as against Rs. 16,352 crore in the previous year, recording an increase of 11.6 per cent.

Import-Substitution and Export Promotion

• In developing economies like India, foreign exchange constraints can pose a significant challenge to the process of industrialization. To address this issue, the public sector has expanded its activities in various areas such as steel, aluminum, and heavy engineering, which has helped to alleviate the problem to some extent. Public enterprises like the Indian Oil Corporation, Oil and Natural Gas Commission, and Bharat Heavy Electricals have played a crucial role in reducing imports and easing the pressure on foreign exchange reserves, thereby contributing to the country's industrial and economic self-reliance.
• Moreover, the public sector has also played a significant role in promoting exports, particularly in products such as metal ores and engineering goods. In addition to the foreign exchange earnings generated by manufacturing enterprises, other public sector entities like air corporations and shipping companies have also contributed to the country's external trade. Over the years, there has been a steady increase in export earnings from public sector enterprises, which reached INR 4,898.07 crores in 1988-89.
• In developing countries, the public sector is an essential agent of economic development. It has been successful in implementing policies for technical, managerial, and economic growth. However, it is important to note that the financial performance of many public enterprises has not been satisfactory. For instance, in India, the net profit amounts to only 4.4% of the capital, and some public enterprises consistently report losses.
• While profitability is crucial, it should not be the only criterion for evaluating the performance of public enterprises in a developing country. Instead, there is a need to efficiently manage all available resources at the disposal of public sector enterprises. In the foreseeable future, it is expected that a significant portion of the country's industrial and economic development will be driven by the public sector, with private sector enterprises complementing and supporting these efforts for overall economic growth.

Conclusion

In conclusion, the public sector has played a crucial role in the economic development of India since its independence. Through its expansion, it has significantly contributed to infrastructure development, balanced regional development, employment generation, internal resource generation, and import-substitution and export promotion. Although some public enterprises face financial challenges, their overall impact on the country's growth and development cannot be overlooked. The public sector will continue to be a key driver of India's progress, working alongside the private sector to achieve the country's socio-economic objectives.

Frequently Asked Questions (FAQs) of Public Sector Undertakings

What is the difference between the public sector and public enterprises?

The public sector refers to all economic activities undertaken by the government, including social, industrial, and commercial activities. Public enterprises, on the other hand, are specific forms of institutions or establishments in the public sector responsible for the production of certain goods and services, with the objective of at least breaking even over a period of time.

How has the public sector evolved in India since Independence?

The expansion of the public sector in India since Independence can be traced to the Industrial Policy Resolutions made by the government. The Industrial Policy Resolutions of 1948 and 1956 emphasized the growth of industry and expanding production capacity of both the public and private sectors, with the State playing a progressively active role in the development of industries.

What are the main objectives of the public sector in India?

The main objectives of the public sector in India include rapid economic growth, industrialization, infrastructure development, balanced regional development, employment generation, promotion of small-scale and ancillary industries, and import substitution and foreign exchange earnings.

How has the expansion of the public sector impacted the Indian economy?

The expansion of the public sector in India has led to significant growth in investment, turnover, employment, infrastructure development, balanced regional development, import-substitution, and export promotion. The public sector's role in the total economy of India has been rapidly expanding since the beginning of planning, with its contribution to the Net Domestic Product increasing to over 20%.

How has the public sector contributed to employment generation in India?

As of March 31, 1989, 232 Central Public Sector enterprises employed 22.93 lakh people, constituting more than one-third of the total employment in the organized sector. The public sector is becoming a model employer, providing housing, educational, medical, and recreational facilities to employees, especially in cases where projects are located in inaccessible towns and villages.