Chapter 32 The Public Sector in India – Indian Economy


The Public Sector in India


The role of the public sector in accelerating the growth of the developing countries cannot be overemphasized. In almost all developing economies including India the private sector is primarily engaged in the production of consumer goods and in plantation and mines. The principal motive of the private sector is to earn profit and not to render services to the society as is the avowed policy of the government-owned public sector. Moreover, the private sector is very reluctant to invest in industries that require huge investments, have long gestation periods and wherein the return on capital is uncertain. Therefore, planners who want to achieve fast-track growth for a developing economy cannot depend on the private sector to accelerate the pace of development. It is imperative under such circumstances that the State plays a decisive role and makes considerable investments in establishing public sector enterprises (PSEs). It is for this reason that in developing countries, the vicious cycle of underdevelopment was sought to be broken by the intervention of the government through PSEs.


In view of the role of the PSEs in both accelerating development and realizing the avowed social objectives of developing countries, PSEs can be expected to fulfil a number of objectives, which are discussed in this section:

  1. Providing public utility services: PSEs have been established in most developing countries including India to provide public utilities especially basic infrastructure facilities such as roads, sea and air transport, railways, electricity, water supply, and postal, telegraph and telephone services. These public utilities help a great deal in the development of the agricultural and industrial sectors of the economy. It can also be learnt from Indian experience that the creation of such overhead capital through public sector undertakings (PSUs) facilitate investments both by the private sector and the public sector in productive activities which in turn promote rapid development of the economy. Foreign direct investment (FDI) which comes to a country with foreign exchange, technology, technical knowhow and managerial expertise can be expected to be substantial only if there are adequate infrastructural facilities along with skilled manpower available in the country.
  2. Developing and using natural resources: Most poor countries are unable to make the best use of their natural resources and remain underdeveloped for a long time. For ensuring faster development, it is imperative for them to develop and use their natural resources in the most efficient manner. Many developing countries including India are gifted with plentiful natural resources but these have not been tapped or exploited to their advantage. At the same time, these natural resources cannot be left to be exploited by the private sector as they often make excessive use of these resources for their own exclusive benefit. The establishment of PSUs in mining, forestry and fisheries may lead to their proper exploitation, the tapping of new resources and research for harnessing them in an efficient manner. For example, a developing country producing minerals can build the domestic base for capital resource and dispense away with imports of industrial raw materials. This will save the country precious foreign exchange which can be used for obtaining technical know-how, plants and equipment.
  3. Developing basic and key industries: Many developing countries like India have relied on the public sector to develop basic and key industries with a view to accelerating their economic development. These basic and often strategic industries include iron and steel, heavy electrical, heavy chemicals, fertilizers, machine tools and so on. These industries which require huge investments and have long gestation periods are not attractive to private entrepreneurs. However, since these industries are very basic and fundamental for the development of the economy, and in the absence of private initiative, they have to be taken by the public sector. Besides, the development of these industries by state enterprises can do away with imports of machinery, equipment, basic and intermediate goods, which will ultimately lead the economy to self-sustained growth.
  4. Helping the private enterprise: The Indian experience has demonstrated that when PSEs have been established, heavy investments in economic and social overheads by them create necessary conditions for the expansion of the private sector. The direct financial assistance provided by PSEs, government-owned banks, especially financial institutions, such as investment trusts, agricultural cooperative banks and industry-specific financial institutions, by way of loans and credit has contributed immensely to the growth of the private sector. Several development banks, financial institutions and mutual funds including the LIC, Unit Trust of India, and IDBI have contributed to the growth of innumerable companies in the private sector. Likewise, several public sector units such as the Hindustan Machine Tools, Bharat Heavy Electrical Limited, etc., have helped private sector units with requisite technology and instrumentation.
  5. Removing exploitation in trade: Small-scale entrepreneurs’ progress in developing countries is constrained by their lacking in marketing facilities and commercial intelligence. As a result, they are exploited by intermediaries and denied remunerative prices for their products. By establishing commercial enterprises in the field of internal and external trade, the state can remove such exploitation of small-scale entrepreneurs by intermediaries. Through these state undertakings, producers receive fair prices for their products which in turn will increase production. In India, for instance, canalizing agencies such as the State Trading Corporation, the Food Corporation of India and the Minerals and Metals Corporation of India play an active role in reducing the exploitation of buyers of the products they deal in by intermediaries. Moreover, reasonable profits earned by the public sector units can be used for further investments in productive channels or for social uplift.
  6. Generating capital: PSEs are an important source of capital formation in developing countries. When they are operated on a commercial basis such as the Railways, and nationalized banks, they earn sufficient profits that can be partly ploughed back for their own growth and partly for use in the development of other utility services by the state. Sometimes, the profit can be entirely ploughed back for the growth of the public sector units themselves. The Neyveli Lignite Corporation (NLC) which was started as a small lignite mining cum power- generating unit has grown to be one of the biggest energy producers in Asia purely by ploughing back its profit for its own development. When public enterprises make profit, it reduces the need for borrowing from external sources and debt servicing and also eliminates the need for deficit financing. Surplus profits accruing from these enterprises which include nine of them known as the Navaratna as they provide ample funds for their improvement, modernization and expansion. Thus, profits of PSEs are very important sources of capital formation for poor countries. However, it must be emphasized here that not all PSEs make profits.

Providing indirect benefits: In a developing country, investment in public sector provides a number of indirect benefits which aid in the development of economy in many ways. In these countries, there is widespread unemployment. When public enterprises are set up, it leads to employment of all kinds of labour-skilled, semi-skilled and unskilled. Moreover, as a matter of public policy to bring about balanced economic growth, governments of developing countries try to develop backward regions by establishing public enterprises there. This leads to balanced regional development, increase in the incomes and standards of living of people and cause an improvement in their productive efficiency. Again, when PSUs are set up in a particular locality, it creates a demand for services such as water, transport, power, education, housing, etc. In fact, one of the reasons adduced for the low performance of PSEs in India is that they have been spending 10–15 per cent of their financial allocations on the development of these public utilities for the regions in which they are located. Development of ancillary industries, trades and small-scale industries in and around the location of large PSUs is another by-product. Several PSEs which provide such basic utilities as water, milk, drugs, gas, postal and transport services at low prices have strong redistribution effects and in turn promote inclusive growth in the region. These public utility services that are offered at subsidized prices enable people to consume them more, spend less money on them and are left with more incomes for buying other goods and services. This in turn raises their real incomes and standard of living. Apart from these indirect benefits, the establishment of PSUs in segments such as transport, power, gas, water, postal, telephone and telegraph services, apart from preventing duplication of efforts and wastage arising therefrom, prevents the emergence of monopolies and concentration of income and wealth in the hands of the few.

Rationale for their Existence

There are several reasons as to why PSUs are preferred over the private sector in low-income countries, especially during the initial phases of economic growth. In the absence of capital, an adequate incentive system, clear-cut and well-defined economic policies, sufficient infrastructural facilities, regular supply of required inputs, a well-developed market structure and other such constraints, private entrepreneurs are wary of investing their scarce funds in nascent industries, particularly in developing countries. Further, governments in developing countries prefer the public sector as the means of industrial development, in particular, and economic growth in general. Given that PSEs and PSUs are government controlled, they can be easily made to follow the government’s dictates, implement its policies; and stick to its agendas, objectives and guidelines. They may be used as agents to carry out the social welfare policies of the government such as equitable distribution of wealth and income, helping to solve problem of unemployment, inclusive growth and balanced regional and sectoral growth by adopting suitable policies and implementing them without worrying about making profits.

Reasons for governments preferring public sector units are discussed below:

  1. Achieving a socialist society: According to the Industrial Policy Resolution of the Government of India issued in 1948 and amended in 1956, industries were placed under two major categories: state monopolies and other public sector industries. Some industries were placed under state monopoly which included arms and ammunitions, atomic energy, railways and air transport. There were many other categories of industries which were allotted to the public sector, but if there were some enterprises already in the private sector, they were allowed to continue. The purpose of these arrangements was to ensure a socialistic pattern of the society in the evolution of which the state would play a predominant role. And public sector being a government organisation, its growth and activities would enable it achieve the socialistic pattern of the society. In such a scheme of things, the private sector had a limited role to play. Moreover, under the socialist approach, investment decisions were based not on narrow consideration of profit maximization, but on the benefit that the society stands to achieve. From this standpoint, the main objectives of the state policy with regard to PSUs are: (a) to reduce income disparities; (b) to prevent concentration of economic power in the hands of few individuals or groups; (c) to achieve economic and technical self-reliance through a process of self-reliant growth, and (d) to generate employment.
  2. Building a strong and viable industrial base: One of the important reasons for the government to give added importance to the public sector at the national level was to establish a strong and viable industrial base. Accordingly, the government placed due emphasis on the setting up of defence industries and industries of strategic importance such as iron and steel, heavy engineering, machine tools and equipment, coal, heavy electrical machinery, petroleum and natural gas, chemicals and drugs, fertilizers, etc. These industries were not favoured by the private sector due to their low profitability. At the same time, these industries were required to be set up because consumer goods industries could grow only if these heavy and basic industries provided them with the required services. This led to the emphasis on the public sector to build a strong industrial base.

    The share of the industrial sector which included manufacturing, construction, electricity, gas and water supply in GDP at factor cost had increased gradually but steadily during the period of planning; it was only 15 per cent in 1951, but it reached 29.3 per cent in the year 1987 (at 1980–81 prices).

    Moreover, the success of the government policy can be gauged from the fact that the industrial base of the Indian economy is now much stronger than what it was during 1950–51. Today, we are not only more self-sufficient in consumer goods industries, but also have made considerable and commendable progress in capital goods industries as well. And for this achievement, credit is due to our PSUs.

  3. Generating capital: Our country has been able to make sizable investments in industrial growth and development in many sectors of the economy such as manufacturing and infrastructure, thanks to the important role played by the public sector. Though the role of the public sector declined thereafter, its efforts in mobilizing and collecting savings and investing them during the entire period of planning has been significant. Moreover, the nationalized banks, the State Bank of India, the IDBI, the IFCI, LIC and State Financial Corporations have all played an important role in mopping up extra savings and mobilizing resources for promoting economic development. As pointed out earlier, these public sector institutions also played a significant role in the growth and development of the private sector that supplemented the contribution of the public sector in promoting national economic development.
  4. Transforming the socio-economic environment: PSEs have been instrumental in bringing about socio-economic transformation in the country. Quite a sizable number of the PSEs have been established in underdeveloped regions, not preferred by the private sector, because of lack of infrastructure facilities and non-availability of critical inputs. Establishment of PSUs in these underdeveloped regions has helped exploitation of natural resources, development of the infrastructure and provision of employment opportunities. Setting up of public enterprises has also accelerated urbanization and development of civic facilities, which in turn also contributed to the growth of education, science and technology and has enabled the hitherto rural masses enter the national mainstream. Thus, the role of the public sector in bringing about the socio-economic transformation in the regions in which they have been set up cannot be overemphasized. Added to these, the employment generated by the public sector, along with the growth of technical and managerial skill development, played it role in ensuring the socio-economic transformation. They have definitely helped in uplifting several million economically and socially backward people, belonging to underprivileged and marginalized sections of society.
  5. Building socio-economic overheads: Faster development of infrastructure is the essential pre-requisite for economic development of an underdeveloped country. For instance, in the absence of growth in irrigation facilities and power supply, growth in agricultural output cannot be ensured. Likewise, industrial growth cannot be sustained in the absence of the required development of transportation and communication facilities, fuel and energy and basic and heavy industries. At the time of independence, the private sector was found incapable of establishing heavy industries with its slender resources in terms of finance, managerial expertise and technology. There were only a few managing agencies belonging to the major industrial houses of Tata and Birla’s who were prominent in a few selected industries of their choice. Therefore, it was found absolutely necessary for the state to participate in the process of industrialization by mobilizing large amount of capital and coordinating industrial construction and training of technicians. Also, the government had to improve and expand the basic infrastructure facilities such as roads, rail, air and sea transport. Thus, the public sector has played a very important role in developing resources for future economic growth, which incidentally also benefited the private sector industries immensely.
  6. Allocating resources optimally: PSEs, by being and acting as instruments of state policies of planned economic development, have contributed to the optimum allocation of resources. Being a developing country, India’s efforts at faster economic growth is constrained by scarcity of capital, technology and other resources. Under such circumstances, if the private sector is allowed an uncontrolled access to its resources, it may fritter them away or over exploit them for their exclusive benefit. Besides, there is bound to be ‘anarchy of production’ wherever private sector is engaged in unplanned decision-making, leading to undesirable economic consequences. But in a planned economy, the Planning Commission by its ‘collective wisdom’ ensures optimum allocation of resources between its various sectors and segments of the economy. A planned economy is said to ensure wise and objective allocation of scarce resources.
  7. Achieving balanced economic growth and regional development: The Government of India has used the policy of establishing PSUs in underdeveloped regions as a measure of removing regional disparities in industrial development. At the time of independence, industries were primarily confined in and around the major port towns of Bombay, Calcutta and Madras, with other parts of the country lagging in industries. Once the country started planned economic development in 1951, the Government of India tried to mitigate this problem of regional disparities by setting up industries in a number of places so far neglected by the private sector. The government concentrated on investing in country’s backward states of Bihar, Orissa, Madhya Pradesh and Uttar Pradesh, whose collective share in public sector investment reached an all-time high of 47 per cent by 1991. Besides, all the four major steel plants set up by the public sector in Bhilai, Rourkela, Durgapur and Bokaro were all in backward states. The  setting up of these huge public sector steel mills in the backward regions promoted and caused economic growth in the hinterland. Such considerations also guided the location of other projects such as machinery and machine tools factories, aircraft manufacturing, transport equipment, fertilizer plants and so on, in the hitherto underdeveloped regions of the country.
  8. Creating investible surpluses: Many PSEs have helped in the creation of surpluses which they have ploughed back in their own expansion and modernization. For instance, the Indian Railways has undertaken with its own surpluses, a mammoth effort in the unification of the gauge systems. Prior to this effort, the Indian Railways did not have a unified railway gauge system, as there were narrow gauges, metre gauges and broad gauges in different parts of the country, which made it impossible to run trains connecting different regions. Likewise, the NLC has created plentiful internal surpluses through which it has expanded its activities and has added additional units not only in Gangaikondan in Tamil Nadu but also in Jharkhand. Likewise, there are many public sector units that have ploughed back their investible surpluses in their schemes of expansion and modernization.
  9. Developing industries that need huge investments: There are certain types of industries that call for huge investments. Industries such as iron and steel, ship building, irrigation and hydroelectric power projects require very large investments. In the early period of planning, especially in the 1950s through 1970s, private entrepreneurs were not in a position to marshal and invest such huge sums of money. Moreover, the licensing policy of the government was such that it took a very long time to get approvals from the state and central governments resulting in heavy cost-runs and time-runs. Such delays in obtaining licenses for projects involving large sums of money and import of technical know-how resulted in huge losses. Obviously, the interest of the private sector waned with the passage of time. Under such circumstances, government which had access to capital and other critical inputs undertook such projects in the public sector.
  10. Developing industries with long gestation periods: A private entrepreneur who borrows capital at a high rate of interest and invests in a large project cannot afford to wait for a long time to get back his investment. He may like to get back his money within 3–4 years, but in the case of projects such as iron and steel, mining, irrigation projects, etc., where the gestation period is long, it requires a very long time for investment to bear fruits. When the period of returns on investment is too long, the private sector will be unwilling to invest in projects even if they are worthwhile otherwise. However, projects such as irrigation and electricity generation are very important for the development of an economy and if the private sector is not willing to play a role the only other option is the involvement of public sector in such activities.
  11. Developing defence and defence-oriented industries govern: In almost all the countries of the world, be they developing or developed, capitalistic or socialistic, defence and defence-oriented industries such as the manufacture of arms and ammunitions, atomic and nuclear energy, etc., are all owned and controlled by the government for obvious reasons. This is because of the facts that, firstly, the safety and security of the country is very important and cannot be left in the hands of profit-seeking private sector. Secondly, if these industries are left to the private sector, the producers of private arms are likely to arm-twist the government and seek higher prices for their products in times of war. Thirdly, it is possible that private entrepreneurs may divulge defence secrets to enemy countries for monetary gains and even smuggle arms and sell them to the enemies of the country. Since the private sector is only interested in making profit by any means, it may sell dangerous weapons even to terrorists who may use them against citizens of the country and cause severe security problems. Besides, with defence industries in the hands of public sector, the government would have better control over the weapons and other war materials. Such a control and coordination is vital and necessary to ensure that the weapons reach the theatres of war on time so as to successfully prosecute the war.
  12. Controlling industries of strategic and national importance: There are certain critical and strategic industries that have to be only in the public sector. The PSEs in India are in command in almost all the strategic sectors of the economy such as coal, iron and steel, oil refining, electricity, paper and newsprint, etc., where they once controlled more than 80 per cent of the total installed capacity. PSEs also hold a dominating position in the production of as many as 50 kinds of industrial goods and services which are of decisive significance for the economic growth of the country. Such a control over the commanding heights will enable the government adopt and implement appropriate policies for assuring faster economic growth.
  13. Developing science and technology: Private sector does not evince much interest in the development of science and technology, especially in investing in fundamental sciences because there is no quick return on investment, unlike in applied sciences. However, investing in the fundamental sciences is of utmost importance to the growth of the economy in which technology and technological innovation are critical inputs. Investment in fundamental sciences is important for the development of applied sciences, technology, and innovation, all of which play a critical role in accelerating industrialization and economic growth.
  14. Providing ‘social goods’: Private sector entrepreneurs do not find any incentive or considerable profit in investing in social goods such as generation and distribution of power, water supply, and sewerage disposal, etc. In all these basic utility services, profitability is not in proportion to the level of investments and in many cases, there is a great deal of uncertainty in obtaining returns on investment within a specified period of time. In many instances, these enterprises may also incur losses. Therefore, by and large, private sector does not come forward to provide social goods. In such cases, governments create public sector units to provide these social goods. Of course, there are honourable exceptions to the unwillingness of the private sector to enter into the provision of social goods. Tata Steel, for instance, has been running the Jamshedpur City Corporation for decades with excellent facilities provided to the citizens. Such kind of private investment in social goods is an exception. Even if the private sector is

    unwilling to invest in social goods for want of good returns, public authorities cannot waive the responsibility in providing social goods. Therefore, corporations, municipalities and state governments have created PSEs that provide social goods.

  15. (xv) Promoting social objectives: PSEs have to discharge certain social functions for promoting social welfare of the community. Many PSUs employ far greater number of employees than their counterparts in the private sector. The government-controlled airlines and Indian Railways employ far greater number of workers in their commercial services than what their competitors in the private sector choose to employ. Indian Railways, for instance, employ more than 1.6 million workers and happens to be the largest single employer in the world. Even in cases, where public enterprises incur huge losses, the government is loath to shutting down such enterprises as it does not want the workers and their families to suffer from poverty and deprivation due to unemployment. The Hindustan Photo Films Limited in Ooty has stopped the production of photo films 6 years ago, but the government has been paying salaries and other benefits to its workers. Likewise, there are many PSUs that protect labour even under extremely adverse conditions. Public sector oil companies price their products much lower than their counterparts in the private sector. Several state electricity boards supply power to the farmers for free and at heavily subsidized rates to people below the poverty line. There are many public utilities such as domestic gas, milk, drinking water and other social goods supplied by PSUs at highly subsidized prices.

    Many PSUs take their Corporate Social Responsibility (CSR) pretty seriously. Therefore, catering to certain social objectives in given situations is one of the major purposes for which public enterprises exist.

  16. (xvi) Avoiding over-exploitation of natural resources: There are innumerable instances wherein private enterprises once given the privilege of exploiting a country’s natural resources, have resorted to over-exploitation that has caused depletion and even complete loss of such resources. This is done by private enterprise purely out of greed and with a view to making profit at the cost of the nation. Mining and quarrying of natural and mineral resources where the private sector is allowed to operate have done this to such an extent that countries find that they have totally exhausted these resources. In case PSEs are entrusted with such task of exploitation of perishable and non-renewable resources, they adopt an attitude of prudence and an acceptable degree of exploitation, so that the resources are not totally exhausted.
  17. Providing infrastructure: Private sector enterprises have no reason to invest in infrastructure development when there is no profit. Besides, their entrepreneurial activities are merely profit driven. On the other hand, PSEs as instruments of government policy have social objectives–commitment to promote the overall welfare of the society. Therefore, even if they have to spend a disproportionate proportion of their financial allocations to the development of the infrastructure in and around their facilities, PSEs continue to spend on them.
  18. Avoiding duplication of efforts and wastage of resources: There are certain segments of the economy wherein intense competition will lead to duplication of efforts and wastage of resources. Railways and postal services are classical examples. For instance, if railways are denationalized and private operators are allowed to compete with one another, it is likely that each will focus on the profit-earning railway routes connecting major cities, ignoring regions that do not yield adequate profits. This will lead not only to duplication, but also to the wastage of resources.


Before Independence, there were few PSEs in the country, including the railways, the posts and telegraphs, the port trusts, the ordinance factories, All India Radio, and a few enterprises such as the government salt and quinine factories, etc., which were departmentally managed.1 After Independence, with the adoption of planned economic development, our leaders drew up a road map for the development of public sector as an instrument for self-reliant economic growth. As mentioned earlier, the industrial policies the nation had adopted then visualized development of core sectors through public enterprises. These policy statements laid special emphasis on the expansion of production, manufacturing of capital equipment and basic goods to cater to the needs of the people and of commodities, the export of which could increase earnings of foreign exchange. The public sector gave the necessary thrust to the economy and developed and nurtured the human resources, so necessary for the success of any enterprise.

The public sector in India encompasses a vast and diversified range of activities such as railways, post and telegraph, currency and mint, forest, hydroelectric projects, multipurpose river valley schemes, road transport, shipping and airlines, locomotives, oil exploration and refining, electric goods, machine tools, chemicals, fertilizers, mining, metallurgy development, banking and industrial financing, nationalized banks and insurance. With the exception of few enterprises such as insurance, nationalized banks, air transport, Hindustan shipyards, Praga Tools, Hindustan Zinc, etc., which were privately owned and managed enterprises before the government nationalized them, the majority of public enterprises were the results of the entrepreneurial efforts of the State. In Table 32.1, we can see the growth of investment in central government enterprises. Table 32.2 gives investments in central government enterprises, and shows the percentage change in it between the years 1951 and 2005–06.

Table 32.1 Growth of Investment in Central Government Enterprises


Indian PSEs are managed in four different ways depending upon the specific legal requirement and situations under which they were formed. These industrial and commercial enterprises in public sector are classified as follows:

  1. Departmental: Apart from railways and post and telegraph, PSEs run directly by the departments or executive agencies of the Government of India include the Indian Security Press, Delhi Milk Scheme, Kolar gold mines, etc. Indian Railways, and post and telegraph function as the departments of the Government of India. These public utility services work as the extended arms of the government, and not purely as commercial enterprises. Unlike any other government-owned public enterprise, the Indian Railways even has a budget of its own and contributes a sizable amount of revenue to the public exchequer.
  2. Government companies where at least 50 per cent are owned by it: These are enterprises run by government as companies registered in accordance with the provisions of the Indian Companies Act, 1956. These include Hindustan Machine Tools Limited, NTPC Ltd, the 20  nationalized banks, etc.
  3. Public corporations or statutory corporations: Enterprises run by statutory corporations organized for a specific purpose include the Life Insurance Corporation of India, Central Warehousing Corporation, Indian Airlines, Oil and Natural Commission, Food Corporation of India, etc.
  4. Other forms: Port Trusts, Coffee Board, Silk Board, etc., are some of the public enterprises that are run by forms of business organizations other than what have been mentioned under the three categories discussed above.

Moreover, the public sector companies can be owned by any level of government (i.e., centre, state or local). Up to data on most aspects of this wide spectrum of PSEs are not readily available. The Public Enterprises Survey published annually presents data only with respect to industrial and commercial undertakings of the central government covering statutory corporations and companies registered under the Companies Act. It does not cover the departmentally managed undertakings, nationalized banks and government-owned all India financial institutions. In fact, a CMIE study, published in 1991, revealed that the enterprises covered under the Public Enterprises Survey accounted for only 23 per cent of the total number of persons employed in all the non-departmental PSEs.

A study of government companies shows that the central government companies, though fewer in number, contributed largely to the dominance of government companies in the total paid-up capital of the company sector. A CMIE study reveals that of the total 1,029 government companies in 1989– 90, only 232 were the central government companies while as many as 792 were state government companies (the remaining 5 were owned jointly). However, the share of central government companies was as high as 90 per cent while the share of state government companies was just 10 per cent. This shows that central government companies have a much wider capital base. In fact, in most of the discussion on PSEs in India, it is only the central government PSEs that are considered. This is because more elaborate data for these enterprises are available over a period of time which makes access to their performance easier, while on the other hand, only scanty and patchy information regarding state government enterprises is available.


PSEs, established with public money, are subject to executive scrutiny of the government. It exercises its control on PSUs by (a) evolving guidelines governing the functioning of PSEs; (b) appointing the top management and most members of their boards of directors; (c) making it mandatory for PSUs to seek government approval for long-term investment and for making major policy changes; (d) calling for progress reports periodically to evaluate the performance of the enterprises; and (e) causing the professional auditing of the enterprises. With regard to accountability to the Parliament, it is made possible primarily by Parliamentary Committees, the most important of which is the Committee on Public Undertakings (CPU) established in May 1964. Additionally, the Bureau of Public Enterprises (BPE) was set up in April 1965 with the responsibility of monitoring the growth and performance of PSEs.

Committee on Public Undertakings

The CPU comprises members drawn from both the Houses of Parliament. The CPU performs the following functions: (i) examines the reports and accounts of PSEs; (ii) examines reports, if any, of the Comptroller and Auditor General (CAG) of India on PSEs; (iii) examines whether PSEs are managed as per sound business principles and viable commercial practices; and (iv) performs such other functions as are provided for in the Public Accounts Committee and the Estimates Committee relating to PSEs. The Committee is neither empowered to go into matters of day-to-day administration relating to PSEs, nor does it consider any issue for the resolution of which there is already the machinery under the statute for setting the concerned PSE. The Committee is not empowered to pursue and investigate matters pertaining to matters of major government policies, while examining business or commercial functions of PSUs.

The CPU submits a report with recommendations to the Parliament after examining in detail the working of selected PSUs and suggesting improvements in their performance. The CPU also makes a detailed study of specific issues relating to PSUs such as the role assigned to them and their achievements, personnel policy, need and scope for foreign collaboration and matters concerning financial management.

The Parliament’s control over PSUs also is extended in terms of the latter’s responsibility to submit annual reports and balanced sheets within a specified period from the close of the accounting year to both the Houses. Besides PSE’s own reports, audit reports for various PSUs are prepared by Audit Boards which function under the Comptroller and Auditor General (CAG). These annual exercises are also submitted to the Parliament with comments of the CAG.

Bureau of Public Enterprises

The BPE was established in 1965 within the Ministry of Finance as a focal point of reference and consultation on certain core issues of management pertaining to central PSUs. The Bureau’s objectives are: (i) to help the Finance Minister and the Ministry concerned with the PSE in evaluating project reports and feasibility studies; (ii) to help the ministries in regulating expenditure with regard to residential and administrative buildings, townships and related facilities so as to ensure uniformity in the provision of amenities to labour; (iii) to work out terms and conditions of service to workers with a view to ensuring a measure of uniformity of employment in PSEs; (iv) to present to the government and the Parliament periodic reports on the functioning of PSEs; (v) to act as a source of authentic data and as a clearing house of information on matters of common interest to PSEs especially with reference to pricing policies and organizational structure; (vi) to coordinate the work relating to evaluation of PSUs by parliamentary committees; (vii) to liaise with the Department of Administrative Reforms on matters pertaining to work studies, operations research and reporting systems; (viii) to help the concerned administrative ministries in making appointments to the Boards of Public Undertakings (BPU) through Public Enterprises Selection Board (PESB); (ix) to coordinate the arrangements for training the top brass of PSEs; and (x) to render the required advice to PSEs when sought for.

The exhaustive enumeration of the objectives and functions of BPE show that it operates on a very broad front. The Bureau determining uniform norms of labour use them for all enterprises. The set of guidelines issued by it are in two volumes and run into 1,100 pages. Its powers of scrutiny of PSUs cover such wide ranging areas as project planning, cost estimates, control of project establishments, manpower planning, improving productivity, demand projections and so on. In fact, there is hardly any aspect of modem management practices of PSUs in which BPE does not dabble in. Its control of PSUs is so widespread and all-encompassing that it ‘leads to a sense of insecurity and indecision in top management circles and a lot of time that could be utilized more productively is wasted on drawing up explanations to convince persons who matter2 in government circles, Parliament and other apex institutions connected with them’. This in turn has led to a clamour of PSE management for functional autonomy. Such functional autonomy is vital for a commercial enterprise to take on-the-spot decision on issues that arise in the midst of day-to-day operations. It is an indisputable fact that though PSUs have superior technical and managerial capability, they are advised and directed by civil servants of the Bureau who are ill-equipped to render professional advice and guidance.

The government, in view of this peculiar situation in the PSUs in the matter of decision-making and the demoralizing effect it has on PSU managements, had agreed to grant autonomy to them. This government decision was reinforced by the recommendations of the Arjun Sengupta Committee set up in 1985, known as the Committee to Review the Policy for Public Enterprises. As per the Committee’s advice, the government introduced the concept of the Memorandum of Understanding (MOU) with the PSEs, aiming to reduce control, grant autonomy to managements and improve the quality of accountability. These MOUs, instead of encouraging government interference in day-to-day affairs, help PSEs negotiate with the government and agree upon objectives. To prove the point, the government has granted considerable financial and operational autonomy to several PSEs referred to as Navaratnas and Miniratnas.

Policies Since 1991

As we have seen earlier, the new economic policy brought a new policy perspective with regard to PSUs. The policy laid emphasis on a set of four measures with a view to making PSUs justify their existing as commercial enterprises. The 1991 Industrial Policy envisaged to (i) reduce the number of reserved industries for PSE from 17 to 6 and allow competition within the reserved area; (ii) with a view to raising resources and to encourage wider participation of the workers and the general public in the ownership of PSEs, disinvest shares of a select set of PSUs; (iii) adopt uniform policy both for private and public sectors relating to sick enterprises; and (iv) grant of greater autonomy and accountability by entering into MOUs with PSEs primarily with a view to bringing about an improvement in their performance.


Although the Industrial Policy Resolution of 1956 had reserved 17 industries for the public sector, the 1991 industrial policy reduced this number to 8. This list includes (i) arms and ammunition; (ii) atomic energy; (iii) coal and lignite; (iv) mineral oils; (v) mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond; (vi) mining of copper, lead, zinc, tin, molybdenum and wolfram; (vii) minerals specified in the schedule to the atomic energy (Control of Production and Use Order), 1953 and (viii) rail transport in 1993; industries in (v) and (vi) were deleted from the reserved list, retaining only 6 industries for the public sector. Thus, out of the 17 industries reserved for the public sector from 1956, as many as 11 are now open to the private sector. As a result of the poor performance of the public sector and the government being awakened to the new realities, the public sector lost its pre-eminent position in the industrial structure of the country.

Policy Regarding Sick Units

The industrial policy of 1991 removed the pre-eminent position of the public sector units and equated them with the private sector units. Poorly performing PSUs have also been brought within the jurisdiction of the Board for Industrial and Financial Reconstruction (BIFR). Thus, BIFR is now vested with the power to decide whether a sick PSU can be effectively restructured or better closed down. PSEs which have become chronically sick and which are not likely to be revived are to be referred to BIFR or other similar high level institutions created for the purpose. Following this decision, the Government of India constituted the Board for Reconstruction of Central Public Sector Enterprises (BRCPSE) on 3 December 2004. BRCPSE has the following functions to perform: (i) To render appropriate advice to the government as to how to strengthen PSEs and make them more autonomous and professional; (ii) to find out ways and means of restructuring PSEs financially, organizationally and business-wise including diversification, joint ventures with strategic partners, and mergers and acquisitions; and (iii) to propose to government schemes on disinvestment, closure or sale fully or partially of loss-making PSUs that are beyond revival.

The possibility of shifting down the sick PSUs has obviously created deep resentment among the workers of these units as the danger of retrenchment of labour has become a stark reality. To avoid a confrontation with labour on this issue, the government has established a National Renewal Fund (NRF). This Fund is to be used for retraining and redeployment of retrenched labour and to provide compensation to employees of PSEs seeking voluntary retirement.

Memorandum of Understanding (MOU)

The concept of MOU was introduced in 1988. The main objective of an MOU is to reduce the quantity of control and increase the quality of accountability. The emphasis is on achieving a negotiated and agreed objective rather than interfering in the day-to-day affairs. However, the MOU system has already lost its sheen. A World Bank study commented that the system is ‘ineffective in improving the return on assets, labour productivity and total factor productivity’ of the companies.3 Yielding to critics, government gave a two-way thrust to be given to make the system workable. One, the accent is on giving clear targets to the management of PSUs and to make them focus on financial efficiency and fiscal discipline in the MOUs by giving 60 per cent weightage to financial performance. Two, assigning 75 per cent weightage to MOU performance in the annual confidential reports of the PSU chiefs.4

‘Navaratnas’ Among PSUs

In 1997–98, the Finance Minister in his budget speech referred to nine well-performing PSEs as Navaratnas (i) Indian Oil Corporation (IOC), (ii) Oil and Natural Gas Corporation (ONGC), (iii) Hindustan Petroleum Corporation Limited (HPCL), (iv) Bharat Petroleum Corporation Limited (BPCL), (v) Indian Petrochemicals Corporation Limited (IPCL), (vi) Videsh Sanchar Nigam Limited (VSNL), (vii) Bharat Heavy Electricals Ltd. (BHEL), (viii) Steel Authority of India Limited (SAIL) and (ix) The National Thermal Power Corporation (NTPC) all of which were to be granted full financial and managerial autonomy with a view to making them global mega corporations. These nine high performing PSEs accounted for nearly 75 per cent of the profits of all PSEs. On 4 July1997, an ‘autonomy package’ was announced by the government for these enterprises. The package allows these nine PSUs the freedom, (i) to undertake all capital expenditure without any ceiling; (ii) to raise debt from the domestic or global markets; (iii) to enter into technology joint ventures and wholly owned subsidiaries with equity investment up to INR 2 billion; (iv) to restructure their boards by appointing hand-picked eminent non-official part-time directors; (v) to bring about organizational restructuring including establishment of profit centres, opening of offices in India and abroad; and (vi) to put in place and implement schemes relating to human resources management and personnel.

Following the success of policies regarding navaratnas, the government announced a package of financial and operational autonomy for another 97 profit-making public enterprises called miniratnas in October 1997. The chosen enterprises have been given powers to incur capital expenditure, enter into joint ventures, and work out their own manpower policies.

Disinvestment of Shares

The thrust of the privatization programme in India has been the disinvestment of government equity in a few chosen profit-earning public enterprises. The objective behind this programme is to raise non-inflationary form of finance for the budget; all other objectives are subservient to this main purpose. The programme commenced in 1991–92 and till 1995–96 the government had mobilized resources worth INR 104.62 billion through disinvestment. The shares were initially offered to selected financial institutions and mutual funds, but since 1992–93 they are being offered to the public as well. The government is also planning to offer shares of PSEs to the workers of these enterprises. In the 1998–99 Budget, the government has also declared its intention to bring down its shareholding in non-strategic PSEs to 26 per cent. However, in PSEs involving strategic considerations, it will continue to retain majority shareholding.

Table 32.2 given below shows disinvestment of equity in PSEs between 2010–11 and 2012–13.

Table 32.2 Disinvestment of Equity in PSEs of Central Government


Under-pricing of Shares

The government has been severely criticized in some quarters for carrying out the whole exercise of disinvestment in a hasty, haphazard and halting manner. Thus, it failed to realize not only the real worth of disinvestment, but also of the other objectives of the disinvestment programme. It launched the programme without creating the required conditions for its take-off. It did not get public enterprises listed as recommended by the Ramakrishna Committee on the stock exchange.

Concerted efforts were not made to build-up the much needed linkage between the PSEs on the one hand and the capital market on the other. Appropriate methods to oversee the disinvestment of public sector shareholdings were not adhered to. The Department of Public Enterprises and the Finance Ministry adopted techniques and methods which resulted in far lower realizations than justified.5

The Comptroller and Auditor General of India worked out in Report No. 14 of 1993, the extent of loss to the government due to the under-pricing of shares in first two tranches. The extent of loss to the government in percentage terms varied from 127 per cent in the case of HPCL to as high as 616 per cent in the case of NLC. The average loss consequent upon the low pricing works out to about 256 per cent. If this is applied to the disinvestment proceeds 1991–92 and 1992–93, the potential proceeds would have been INR 125.54 billion as against the actual realization of only INR 49.04  billion. The same problem of under-pricing continued in later rounds also. This shows that during the entire divestiture programme, the public sector equity has been sold for a fraction of what it is worth or even what it could actually fetch.6

Squandering Away Assets to Finance Deficits

Many critics have objected to the manner in which the sale proceeds from disinvestment are being used. The government has utilized this capital receipts to square up the shortfalls in revenue receipts and thus reduce the fiscal deficit which it was required to do as a part of the IMF stabilization package. The disinvestment of government’s equity in profitable PSEs and using the money realized for current consumption needs amounts to squandering away of valuable public assets. The correct policy would have been to allow the PSUs themselves to use the resources they generate via the disinvestment programme. This would have helped them rejuvenate and expand their activities.

Central Public Sector Enterprises

On 1 April 1951, at the time of the commencement of the planning process, there were only five central government public enterprises with a capital stock of just INR 295 million. In a period of four decades, i.e., by 31 March 1991, their number had risen to 246 with a capital stock of INR 1138.96  billion. In 1998–99, the number of running central government public enterprises was 235 with a total capital employed of INR 2736.97 billion. In 2005–06, there were 225 running enterprises with the total capital employed amounting to INR 5812.50 billion and a turnover of INR 88,325.84  billion.8 There were 242 Central Public Sector Enterprises (CPSEs) under the administrative control of various ministries/departments as on 3 March, 2008. The cumulative investment (paid-up capital plus long terms loans) in all the CPSEs stood at INR 4554.09 billion as on 3 March 2008. The largest share in this investment belonged to the service sectors (40.40 per cent) followed by electricity (27.95 per cent), manufacturing (22.23 per cent), mining sector (8.83 per cent) and agriculture (0.04 per cent). The remaining 0.55 per cent belonged to CPSEs under construction. While ‘investment’ in all the CPSEs grew by 8.31 per cent in 2007–08 over 2006–07, capital employed in all the CPSEs went up by 15.63 per cent during the same period. A great deal of investment in CPSEs is being made through internal resources rather than through investment from outside.

Thus, there has been a substantial expansion of central government public enterprises during the period of planning in terms of capital stock, though the number has been dwindling due to the closure of some of the chronically sick companies and the strategic sale of some others. As for the composition, enterprises producing goods accounted for 68.6 per cent of total investment in 1998–99 while services enterprises, steel, fertilizers, coal and lignite, and minerals and metals were the priority sectors, together claiming about 68 per cent of the total investment in these enterprises as on 1 April 1980. Thereafter, priorities changed with power and petroleum receiving massive investments. In 1998–99 power, steel, coal and lignite and petroleum, in that order, became the major claimants. These sectors together claimed 49.6 per cent of total investment in central government public enterprises and 72 per cent of investment in enterprises producing goods. Among the enterprises rendering services, transport received the highest priority in 1979–80, but in subsequent years financial services received precedence over it. In 1998–99 financial services received 16.2 per cent of total investment in central government public enterprises and 55 per cent of investment in service enterprises.

As far as the share in national production is concerned, central government PSEs play a pivotal role in the production of fuels, basic metal industries, non-ferrous metal industries, fertilizers and communication equipment. This would be clear from the fact that PSEs contributed almost 90 per cent of the country’s production of coal, lignite and petroleum in 1998–99. Their contribution in the case of non-ferrous metals, viz., aluminium, copper, primary lead and zinc exceeded two-thirds in the same year.

CPSEs earned foreign exchange amounting to INR 742.830 billion during 2007–08. The total foreign exchange outgo (INR 368.196 billion) clearly exceeded the foreign exchange earnings. The net profit of profit-making CPSEs numbering 160 stood at INR 910.83 billion in 2007–08. The net loss of loss making enterprises numbering 53 on the other hand, stood at INR 112.740 billion; this includes accounting losses of closed units like the Fertilizers Corporation of India (INR 15.040  billion and Hindustan Fertilizers Corporation (INR 11.020 billion). The Food Corporation of India (FCI) and Artificial Limbs Manufacturing Corporation of India (ALIMCO), etc., are CPSEs that have been laying greater emphasis on non-financial/social objectives. The year also witnessed severe financial under-recoveries by public sector oil marketing companies (OMCs) as they had to keep the prices low in the domestic market on sale of petroleum products.

It is to be noted that notwithstanding the creditable performances of many CPSEs, public opinion and the view of the government is in favour of government withdrawing from the control and running of these enterprises and in favour of the private sector organising and running of industrial and business enterprises.


Though the PSEs have often been criticized for being inefficient and for causing huge losses to the exchequer, their contribution to the overall growth of the economy cannot be underestimated.

The achievements of the PSEs are discussed below:

  1. Rapid industrialization: Even a cursory glance at the performance of public enterprises reveals that they have contributed significantly to the rapid industrialization in the first three decades after the adoption of the Five Year Plans. The Industrial Policy Resolutions of 1948 and 1956 had reserved industries such as atomic energy, ammunition and armaments, aircraft manufacturing, etc., with the government with a view to protecting national security. The State also took the responsibility for the development of key industries including coal, iron and steel, ship building, etc. The private sector was given the rest of the industries, especially in the consumer goods sector. But the experience of the first three plans revealed clearly that the private sector was not able to play its assigned role in promoting industrial development due to certain inherent handicaps. Moreover, it was found necessary to bring about a diversified development in industry to make the economy self-sustained. Therefore, it was left to the government to play a more proactive role to undertake the development of basic and strategic industries, capital goods industries and even some essential consumer goods industries. This proactive role of the government through the instrument of the public sector has helped build a strong industrial base, though there are still a number of weaknesses and lacunae in the industrial structure of the country. For this achievement of laying a strong industrial base and for ensuring rapid industrialization, due credit should be given to the public sector.
  2. Diversification of country’s industrial structure: If the Indian industrial structure is fairly diversified today compared to what is available in other developing nations, it is in no small measure due to the contribution of the public sector. Because of it, we have a fairly widespread and diversified industrial structure. We have PSEs producing consumer goods and capital goods, iron and steel, power, coal and lignite, petroleum, fertilizers, chemicals and pharmaceuticals, engineering, minerals and metals, while some are engaged in textiles, transport industries and agro-based industries. There are PSEs engaged in financial services, development finance and technical services, transportation and communication services. We have also enterprises which cater to the domestic market while there are others which cater to export markets. Thus, PSEs have contributed to the country’s diversified industrial structure in every respect.
  3. Sizeable contribution to the country’s export earnings: While a large number of government companies is engaged in the production and distribution of goods and cater to the needs of the domestic economy, some others have been promoting the country’s exports. The State Trading Corporation and the Minerals and Metals Trading Corporation as canalizing agencies have contributed immensely to export promotion in all parts of the world especially in the East European countries. They have been pushing the exports of metal ores, Indian handicrafts, light engineering goods and many other novel items hitherto not being exported. Companies such as Hindustan Steel Ltd., the Bharat Electronics Ltd. and the Hindustan Machine Tools Ltd., are some of the public enterprises which have been exporting more and more of their output and earnings for the country’s pool of precious foreign exchange. Additionally, public enterprises also bring in foreign exchange from services rendered by airlines and shipping companies. They also make a significant impact on India’s balance of payments. With a small beginning of foreign exchange earnings of INR 350 million in 1965–66, government enterprises have increased their earnings substantially to INR 742.83 billion in 2007–08. This spectacular growth in the earning of foreign exchange has been kept up in recent years demonstrates the fact that our PSEs have been performing commendably in the area of export promotion.
  4. Cutting down imports: If some PSEs have been helping the country’s export earnings, some others have been instrumental in reducing our dependence on imports through adopting measures of import substitution. In fact, some enterprises were started in the public sector primarily to produce within the country goods which were once imported in order to save foreign exchange. For instance, the Hindustan Antibiotic Ltd and the Indian Drugs and Pharmaceuticals Ltd went into the production of drugs and pharmaceuticals with a view to checkmating the monopolistic control over these products by MNCs. This helped India save foreign exchange which would have been otherwise used for importing these items. In a similar fashion, government controlled-oil companies, such as the Oil and Natural Gas Commission and the IOC Ltd. have been attempting to enhance self-reliance of the country and reduce our dependence on imports of oil. Another public sector enterprise, the BHEL has also helped the country save foreign exchange by way of import substitution. All these efforts of public enterprises have helped the country save precious foreign exchange which could be used for more important purposes.
  5. Significant contribution to balanced economic development: PSEs have also made significant contribution in ensuring balanced economic development. Many PSEs have been established in relatively backward regions such as Bihar, Uttar Pradesh, Orissa and Madhya Pradesh. Many government companies have come up in many ‘no-industry’ districts. Many hitherto unconnected regions have been linked, as has been done by Konkan Railways. Salem Steel Plant and NLC are two examples that can be cited to prove how PSEs by being set up in backward regions have helped the growth of such underdeveloped areas. In addition to these direct efforts at rectifying regional disparities, state-owned development financial institutions such as the IFC, IDBI and SFCs provide financial assistance and loans at concessional rates to the private sector to set up productive enterprises in the backward regions of the country.
  6. Significant increase in employment opportunities: The steady and speedy growth of PSEs has brought about a considerable increase in employment. In 2003, of the total employment in the organized sector, public sector accounted for 68.81 per cent, while the share of the private sector was only 31.19 per cent. Of this, 52 per cent of the total employment in the public sector was in government administration, community and personal services, and the remaining 48 per cent was spread in other economic enterprises owned by the central, state and local governments. It is of interest to note that the public sector is a big employer engaging in its service as much as 69 per cent of the total work-force in the organized sector of the Indian economy. In terms of numbers, about 1.87 million workers are employed in the central PSEs. The industrial sectors that have a considerable number of employees in the public sector include coal, steel, textiles, and heavy, medium, and light engineering. Another interesting fact about PSEs is that the average compensation paid to their employees is higher than that in the private sector. Apart from higher remuneration, PSEs employees get several perquisites such as residential accommodation, medical, subsidized canteen, transport and education facilities.
  7. Growth in generation of internal resources/capital formation: One of the significant achievements of PSEs has been their generation of the internal resources and contribution towards capital formation. Internal resources comprise depreciation and retained profits. The PSEs were able to mobilize increasing amount of internal resources with every Five Year plan. For instance, during the Sixth Plan, they generated INR 29.40 billion per annum on an average. During the Seventh Plan, INR 297.50 billion was generated by PSEs as internal resources. During the Eighth Five Year Plan, they generated internal resources of the order of INR 1012.12  billion. During 2004–05, PSU-generated internal resources amounted to INR 838.54 billion. It is indeed noteworthy to find the Central public enterprises have succeeded in improving the internal generation of resources over the years. Gross Domestic Capital Formation (GDCF) which was just 10.7 per cent of GNP in the First Five Year Plan rose to 24.6 per cent during the Eighth Five Year Plan. Of this, the share of the public sector increased from 3.5 per cent during the First Plan to 9.2 per cent during the Eighth Five Year Plan. ‘The share of the public sector, which accounted for one-third of capital formation during the First Plan gradually increased to about one-half during the Sixth Plan, and has thereafter declined to about 26.5 per cent in 2003–04.’8 The three basic reasons for the declining share of the public sector in the country’s total savings were: (a) Rapid increase in the State expenditure over and above State revenues; (b) Failure of PSEs to generate internal surplus in consonance with the increase in the capital stock, as a consequence of the inefficiency and poor working of PSEs, and (c) Easy resort to deficit financing by the government through excessive borrowing from the banking sector. It is because of these reasons that the share of public sector in GDCF which was 41.5 per cent during 1970–75 had come down to 31.7 per cent during 1992–97. Notwithstanding the poor contribution of PSEs post-1991 reforms, it cannot be denied that they have made a tremendous contribution in enhancing Gross Fixed Capital Formation, more especially in the capital goods sector and, thus have made a strong foundation for the industrial base in India.
  8. Substantial contribution to the central government revenues: Another achievement of the PSEs has been the substantial contribution they have been making to the central government exchequer. They have been doing this through payments of excise duty, customs duty, corporate taxes, etc,. and helping the government in mobilizing resources for financing the development projects of the country. The Public Enterprises Survey 2004–05 mentioned that Public Enterprises contributed INR 275.70 billion during the five years of the Sixth Plan. The  contribution shot up to a phenomenal INR 1337.80 billion during the Eighth Plan. On the basis of annual average of contribution by the PSEs to the central government, it was INR 55.10 billion in the Sixth Plan, INR 538.22 billion in the Ninth Plan and INR 814.38  billion between the period 2002–03 and 2004–05. The contribution of the central PSEs to the central exchequer was INR 1,487.89 billion in 2006–07, and INR 1659.94 billion in 2007–08, an increase of 11.6 per cent,9 Thus the contribution of the PSEs to the central government has not only been substantial but also have been increasing every year.
  9. Implementing the country’s objectives: The PSEs, being government-owned and controlled commercial enterprises, have the moral responsibility to follow the policy perspectives and objectives of the government’s economic policy. Government’s objectives of economic policy relate to the imperatives of faster economic growth, reduction in inequalities of income, price and economic stability, balance of payments equilibrium and realization of full employment. PSEs have been playing a significant role in all these areas and in helping the government achieve as much of these objectives as possible. Their diversified activities in production, both agricultural and industrial, development finance, export promotion and import substitution have all been organized with the country’s objectives in mind.
  10. Judicious use of the country’s resources: PSEs which are engaged in mining and quarrying and exploitation of the country’s other natural resources including water for drinking and irrigation have been exploiting and using them in a judicious manner unlike private sector organizations. They have not been overexploiting the country’s resources for making huge profits. PSEs objective is to render service to the society and the nation rather than making quick profit and make sure the resources of the country are not overexploited. Even when some of the natural and mineral resources such as iron ore are exported, they ensure that this is done within the overall framework of the country’s future development.
  11. Broadening the technological base: The contribution of the public sector in introducing modem technology and developing indigenous content while using it has being significant in the development of Indian industry. In the area of drugs and pharmaceuticals, oil prospecting and refining crude oil, chemicals and fertilizers, etc., PSEs have not only played a major role in providing appropriate technology to the industries but also helped to broaden the same for the benefit of the private sector. Innumerable private sector industries have generously drawn on the technological expertise available with PSEs. Many private sector enterprises would not have grown to the extent they have but for the financial and technological support provided by these government enterprises. PSEs have also played significant role in developing some of the labour-intensive and intermediate technologies taking cognizance of the special needs of the country to create employment. These technologies have also been passed on to some of the developing countries which are in dire need of them as they cannot afford to use the capital intensive technologies of the West.
  12. Availability of key products: As we have seen earlier, PSEs provide a long range of products which include coal, iron and steel, transport facilities of all kinds and drugs and pharmaceuticals. They are also into postal services and communication. Moreover, states-run PSEs provide public utility services including generation and distribution of power, drinking water and sewerage disposal and maintenance of basic infrastructure within their regions. These are very vital goods and services which are required both for promoting economic growth and rising living standards of people while also ensuring hygiene and public health. One significant advantage PSEs bring to the benefit of the public is when these basic goods are produced and distributed, their prices are not raised often and their supply is regular. Had these key products been with the private sector, their prices would have been raised too often and supplies uncertain. Market fluctuations, which are often subject to manipulations, would bring about price changes and demand–supply mismatches.
  13. Meeting social obligations: Since PSEs are government-owned commercial entities, they help the realization of certain objectives the government wants to achieve. Providing employment opportunities, reducing inequalities in income and wealth, uplifting the lot of the poor and the downtrodden, and provision of certain public utility services at minimum costs are some of the social objectives that are held in common both by the government and the PSEs. The Food Corporation of India and the Artificial Limbs Manufacturing Corporation of India, both of which are Central PSUs and loss-making units, have been laying greater emphasis on social objectives. Since PSEs work not merely for making profit but also for rendering services to society, there is no conflict between their objectives and activities. Even though many PSEs have incurred losses, they have been rendering valuable service to communities in and around their factories and facilities.
  14. Helping the development of socio-economic overheads: PSEs have been helping substantially in the development of socio-economic overheads wherever they are located. Most of the production units among PSEs have vast stretches of land wherein they provide housing, educational institutions, sports and recreation facilities for the workers and their families. They also help in the improvement of roads and public transport for the benefit of local communities. Many of them have their own extension townships, with all the civic facilities, and they maintain hospitals, parks and places of amusement. Thus, PSEs help in the development of socio-economic overheads of regions, where they are engaged in commercial activities.
  15. Providing capital, infrastructure and technology for the growth of private sector: Any analytical study of the growth of the private sector in India cannot dispute the great contribution made by the public sector to its growth. Many government-owned development financial institutions that have been set up by the government, RBI and nationalized banks have helped private sector make project reports, feasibility studies and provide finance both for the establishment of industries and for their working capital needs. Some of the PSEs have also helped them find raw materials and identify markets both within the country and abroad. Likewise, the transport and infrastructural needs of the private sector have been taken care of by public sector units such as Indian Railways and state transport corporations. Private sector enterprises also draw from the reservoir of facilities from the PSEs and share them to their advantage. Government-owned banks and financial institutions take care of most of their financial requirements. It is no exaggeration to say that the growth of the private sector in India has been generously underwritten by the public sector.

Causes of Poor Performance

Public sector controls a commanding position in the credit and investment system of the country. However, the returns on investment have been a measly less than 3 per cent despite several public enterprises being social monopolies. The following factors are responsible for the poor performance of PSUs:

  1. Under-utilization of installed capacity: Underutilization of installed capacity has been one of the major drawbacks in the working of the PSEs. Underutilization of created capacity causes obviously low level of profitability or even losses. During the year 2003–04, 87  public sector units or 52 per cent of all manufacturing units had recorded capacity utilization of just around 75 per cent, while 32 PSEs operated with the capacity utilization ranging from 50 to 75 per cent and 47 units functioned below 50 per cent of the rated capacity. The  result of underutilization of capacity leads to cost overrun such as interest and depreciation of capital along with huge wage bills and adversely tells upon the capacity of the enterprises to continue as viable units. Had such a situation prevailed in private sector units, they would have to face serious consequences from their shareholders and may even have to close down. In the case of PSUs, the losses incurred by the units due to underutilization are borne by the tax payer. Capacity utilization of units owned by the States is still worse. The State electricity boards which are owned and managed by the State governments have capacity utilization of less than 45 per cent which is responsible for the poor power supply position in the country. There are many reasons for the under-utilization of capacity in public sector units. These are (a)  inefficient and poor management; (b) political interference in their day-to-day working; (c) labour disputes; (d) lack of foresightedness on the part of government in creating units of unsustainable capacities; (e) public authorities mandating units to meet immediate or ad hoc demands for large quantity of goods for political or other reasons; (f) putting up plants in economically backward regions with no assured supply of inputs; (g) using locally available, poor quality raw materials and (h) nationalizing sick private sector units with a view to maintaining production and protecting employment as in the case of units of National Textile Corporation, which is the conglomeration of 70 and odd failed private sector textile mills.
  2. Rising labour costs: Most PSEs have been suffering from over-staffing of unskilled labour due to political interference and payment of higher wages than in the private sector to such inefficient labour. Since PSEs do not follow an imaginative management policy, they are not able to retain skilled personnel who are weaned away by the private sector. As a result, they are left with a large number of unskilled and inefficient workforce and a lot of deadwood. Rising labour costs are also attributed to wrong personnel policies being pursued by government companies. Many are appointed to executive and even top management positions based on criteria other than professional competence, and suitability for the posts. Their continuance in the organization has not only resulted in inefficient management but also increased the cost of running the organization.
  3. Persistent labour troubles: The 40-year period between 1951 and 1991 was characterized by a substantial growth in the number of PSEs. It also witnessed persistent labour problems in them. Public enterprises became strongholds of leaders with strong political affiliations like George Fernandes, Datta Samant, Gurudas Das Gupta and others. These leaders brought unwarranted political sentiments and feelings into the work culture of PSEs which caused terrible conflicts of interest amongst workers. Such a politics-based militant culture also militated against the peaceful atmosphere needed to work in industry. Moreover, many public sector units are plagued with multiplicity of trade unions leading to inter-union and intra-union rivalries. These units also became fertile grounds for the trade unions owing allegiance to political parties. Political infighting became common in these unions and became part of the functioning of the units, disrupting work. Often times, simple labour issues get politicized, and magnified, defying straightforward solutions. During this period, India also earned the dubious distinction of having the largest number of strikes and lockouts in the world and losing millions of man-days. In recent years, labour indiscipline coupled with the poor management of PSEs contributed significantly to strikes and lockouts. Inefficient management of labour relations coupled with workers’ indiscipline have caused irreparable damages to many of the large government enterprises. Added to this, supervising some of the huge sized PSEs made it all the more difficult.
  4. Shortage of power and raw materials: The poor performance of many PSEs can be directly attributed to the incessant shortage of power and raw materials. At the onset of summer every year, many states, especially those in the South, experience service power outages, official and undeclared power cuts. Even captive power generation, a facility which some of them have, costs three to four times higher than the power supplied from the grid, and cannot be resorted to often due to non-availability and high cost of diesel. Added to this power shortage, non-availability of raw materials, some of which are imported, compound the problem.
  5. Inefficient materials management: One of the major weaknesses of PSUs has been their poor and inefficient materials management. A recent study of 73 PSUs showed that they had inventories equal to 7 months’ cost of production, while in the private sector the corresponding figure was only 3 months. This would not only raise the cost of power generation, but also push up their working capital requirements. One of the reasons as to why coal-based power generating PSUs are working below the rated capacity is their poor handling of materials; either they have too much of coal, which results in the locking up of working capital, or too little of it which results in the unit being shut down once the coal reserves get exhausted.
  6. General increase in price level/ad hoc pricing: PSEs are known for inefficient and often unsustainable pricing of their products and services. Unlike in the private sector, the pricing policy of the public sector is not guided by the profit maximization principle but by the direction and regulation of the government. Prices of public sector products such as steel, oil, fertilizers, coal, etc., which constitute inputs or raw materials for other industries, known as administered prices are kept artificially low for political considerations, even while their cost of production has been going up. This naturally affects adversely the commercial viability of the units. There is a considerable amount of lack of clarity among government circles as to what constitutes an appropriate price policy for PSEs. Political considerations and electoral politics make government adopt ad hoc and piecemeal policies which bring losses to the enterprises. Pricing of petroleum-based products is one example where government policies to subsidize petrol, diesel, domestic gas and kerosene adversely impact oil companies which lose huge amounts of money on the sale of these products. For instance, IOC, BPCL and HPCL were estimated to suffer over INR 1500 billion revenue loss on fuel sales in 2009–10 against INR 1032.92 billion in 2008–09.10 However in recent years, these PSEs have been permitted to fix prices based on international market conditions and when they do so, have been attracting considerable criticism from their consumers, opposition parties and the public.
  7. Considerable capital outlay on infrastructure: Several surveys on the working of PSEs have pointed out that they spend around 10–15 per cent of their outlay in developing infrastructure in and around their facilities, which has no direct bearing on their performance or their efficiency. Most PSEs have made considerable outlays on housing, medical care and educational facilities for their employees. They have been providing linking roads, water supply and other  facilities to their immediate neighbourhoods. Most of them take their CSR seriously and invest substantially on projects to promote social welfare. Indian Oil, ONGC, NTPC Ltd and Chennai Petroleum Corporation Limited (CPCL) are some of the PSUs, which are committed to CSR deeply and spend considerable amount of resources on promoting social welfare.
  8. Defective management, lack of autonomy and accountability: Many of India’s PSUs suffer from defective and inefficient management, lack of autonomy and accountability. It is very important that operational decisions are taken quickly and promptly if business and industrial enterprises have to be efficient and profitable. This calls for a good deal of autonomy and flexibility of operations. Another quality of a good business enterprise is the delegation of authority and elasticity in working, but in PSUs, these characteristics are mostly absent. Responsibilities and duties are not clearly defined by their managements. Men who can influence politicians are chosen to fill vacancies without any relevance to the suitability for the jobs or expertise and experience essential for the posts. Experienced bureaucrats of the Indian Administrate Service are often chosen as chairmen and managing directors of PSUs. Most of them do not have the expertise, the inclination, or the experience required to run industrial and commercial enterprises. This obviously adversely affects the managerial efficiency and effectiveness of PSUs. Security of service that civil servants enjoy makes them adopt a kind of ‘who cares?’ attitude.
  9. No proper market surveys: One of the reasons for low capacity utilization and general poor performance of several PSEs has been the fact that most of them have been established without any market survey or feasibility study. Normally, when a large business enterprise is being set up, the promoters would undertake a feasibility study and commission professionals to take up market surveys. Only when they get positive feedbacks from these studies that they would commit their funds for the establishment of enterprises. But this kind of procedure was rarely followed in case of PSEs. Most enterprises were set up for political considerations and as trade-offs in electoral politics. Many public sector units are located in wrong places with no availability of critical inputs. Sugar mills in the public sector have been established in places hundreds of miles away from sugarcane-growing fields. More than four unviable steel mills were set up in Salem, Visakhapatnam and elsewhere as a follow-up of Indira Gandhi’s election promise. No wonder these PSEs have not been able to perform well.
  10. Not enough thought to production schedules: Complacency and bureaucratic manner of operation have been responsible for many of the PSEs not giving enough thought to production schedules. Managements of these units, being government controlled with assured salary and security of service, do not operate under pressure and do not have the competitive spirit and killer instinct of private sector managers. They are not bothered even if they are unable to stick to production schedules and thereby lose their orders. They know they are not going to be fired or their salaries curtailed. If rewards for better performance act as catalysts for achieving greater efficiency, penalties for poor performance will carry the message that the inefficient will fall by the wayside. It will act as a spur for better performance.
  11. Unsatisfactory location of many projects: As we have seen elsewhere, several PSEs are set up in unsuited or unsatisfactory locations. Private sector units will hardly be set up in places ‘far from the madding crowd,’ even if governments offer a good deal of incentives. They will look for places that have the supply of raw materials and a hinterland to ensure their regular supply, financial institutions that provide capital, trained labour, adequate infrastructure, a network of transport, a reasonably developed market and adequate civic facilities to attract and retain its workforce. Many PSEs have been located in underdeveloped regions with no such facilities due to political pressure. This resulted in huge expenditure for the development of these facilities and ultimately the PSEs are unable to make profits.
  12. No proper check on the performance of these units: PSEs are by and large managed by bureaucrats who go by procedures even at the expense of performance. Even if the outcome is not positive, it is fine with them, but the procedure should not be violated. This is hardly workable in a profit-seeking commercial enterprise. Moreover, there is no system of incentives in PSEs to ensure better responsive and responsible administration. Only when violators are penalized and good performers rewarded that managements can monitor performance. But such a system and procedure are absent in PSEs and the net result is inadequate check on the performance of these government enterprises.
  13. Complacency due to absence of competition: A good number of PSEs are social monopolies and as such there is total or substantial absence of competition. Absence of competition breeds complacence. Indian Railways, Posts and Telegraphs, LIC, etc., have been social monopolies with no competition in sight. They were favoured by the government. Their poor performance was condoned and losses made good by the tax payers’ money. Many PSEs have started putting in place good management practices only after they are exposed to competition in the market place.
  14. Lack of skilled manpower, over-staffing, overcapitalization and heavy inventory: PSEs have several problems relating to human resources, overcapitalization and heavy inventory. Recruitment of personnel is done haphazardly and unscientifically. Nepotism and political interference are rampant and result in recruiting people unsuitable for jobs. To fill up the vacancy of one skilled person, several unskilled workers with no specialized skills are employed which culminate in overstaffing. Often over-capacities are created unwarranted by the requirement. Likewise, huge inventories are built up without proper scientific evaluation of the needs of the units. All these push up cost of production. This ultimately results in inefficiency and loss.
  15. Too much dependence on imported machinery, spares and components: Many PSEs which were established in the early 1950s and 1960s had imported machinery and plants imported on turnkey basis and some in knocked down condition since the country’s capital goods sector had not developed then. These plants and equipment have become outdated and need extensive repairs and maintenance. The PSEs also need to import spares and components at a very high cost. Many of the PSEs with imported machinery are unable to import spares and components because the countries from where the PSEs imported them do not produce these components anymore because of obsolescence. All these problems add to the woes of the loss-making public sector units.
  16. Political interference: It is common knowledge that political interference has been one of the severest problems that eternally haunt PSEs in India. Politicians try to influence recruitment of personnel, recommend promotions of their favourites out of turn and force the top management to appoint their friends, relatives or associates to executive posts. The pressure from them on ministries is much severe when appointments to senior positions such as chairman or managing director are being considered. These political influences have serious repercussions on the functioning of the PSEs. Many a time more than three-fourth of the top management positions remain unfilled at any point of time because of competitive political pulls and pressures. As a result, many PSUs remain headless, and therefore, directionless.
  17. Too much of bureaucratization: It is a well-known fact that PSEs which are run by civil servants lend themselves to too much of bureaucratization. Red-tapism, nepotism and favouritism are the characteristic features of bureaucratization. Efficiency and profitability are secondary to following procedure. Decisions get procrastinated and implementation of decisions gets delayed. The net result is that the PSEs are too bureaucratized to deliver results on time.

Presently, because of these numerous problems of PSUs, economists and the general public, except workers and socialists, would like these enterprises privatized or disinvested to enable the government exit from running business enterprises that have become virtual white elephants, which keep going with the tax payers’ money by means of budgetary support.

Any balanced discussion of public sector in the Indian context has to take into account both its merits and demerits. As we have seen earlier, the Indian public sector has contributed immensely to the country’s economic growth to begin with. It laid a strong foundation for industrial development, helped to reduce regional disparities to the extent feasible and provided considerable support to the fledgling industries in the private sector. However, the public sector has not been an unmixed blessing. In government-owned companies, politicians claimed kinship with them and caused havoc with their efficient functioning. The colossal losses they made year after year, especially after 1991, only proved their inherent inefficiency. But then, disposing off not only the loss-making PSUs, but disinvesting in ever profit-making ones in the Indian context has not been easy. The erstwhile National Democratic Alliance government’s sale of Modern Foods, BALCO, IPCL, Centaur and a few stand-alone ITDC hotels at throwaway prices smelt a rat. ‘At a time when a single bungalow in Lutyens’ Delhi was selling for more than INR 1 billion, the sprawling Lodhi Hotel complex nearby was auctioned for just INR 720 million. The official valuation made of BALCO, sold to Sterlite Vedanta for INR 5.50 billion was a scandal, as was that of IPCL, a fact noted by the CAG’.11 Even assuming PSUs have an inherent weakness to perform inefficiently, a point to be noted is that that the empirical data of the post-1990 period suggest that those PSUs which were granted greater functional autonomy and public accountability through mechanisms such as listing in stock markets and professional boards have definitely improved their performance. Thus, whenever the government seriously considers privatization and disinvestment, it will do well to keep this fact in mind.

Case 32.1: Public Sector White Elephants!!

PSU’s aggregate net worth becomes negative in 2005: Unable to face intense competition from the private sector in a free-for-all liberalized environment, 88 PSUs incurred huge losses till March 2005. ‘Their (88 companies) accumulated losses were INR 820.01 billion against investment of INR 14,469 crore as on March, 2005, making their net worth negative’, the CAG said in its report.1 Given the aggregate net worth, 88 PSUs have become negative to the tune of INR 648.00  billion and the recovery of loans amounting to INR 342.95 billion given by the government to 58 companies was highly doubtful. The total losses of 125 PSUs rose by INR 35.71 billion to INR 853.57 billion till 2004–05 as most of the PSU that grew in a closed market faced difficulty in the competitive world after the liberalization of the economy.

Unacceptable mismanagement practices: In a mismanagement of enormous proportions in government-run companies, BSNL failed to return a government loan of INR 75.00 billion when it had a disposable reserve of more than INR 1,800.00 billion, resulting in the company paying an interest of over INR 100.00 billion. BSNL has parked its surplus funds in banks to earn an interest of 6–7 per cent when it was already paying interest of 14.5 per cent of the loan.2 K. Ranganath, Chairman and managing director of State-owned mining company, KIOCL, was alleged by his own Ministry that the CMD who held the post in INR 14.54 billion PSU for less than 10 months, has caused losses of billions of rupees to the company by taking ad hoc and reckless decisions.3

PSUs routinely understate liabilities, overstate assets to window-dress their accounts: Even as the government termed the forgery of about INR 100.00 billion in Satyam as ‘an aberration’, a report by the CAG points to huge irregularities in the accounts of PSUs, including NTPC, BHEL, MTNL and BSNL. According to the CAG, the public sector accounts were replete with irregularities of all kinds. The CAG found several PSUs operating with ‘marginal inefficiencies’ anomalies such as undue payment to employees, wasteful expenditure, non-compliance to law, idle investment and blocking of funds and irregularities which added up to a whopping INR 18.47 billion in just their 2007–08 accounts. The report pointed out that NTPC had overstated profits by INR 9,383 billion during 2007–08 while the assets were understated by INR 260  million. There was an understatement of liabilities to the tune of INR 340 million in the case of MTLNL, while BSNL had overstated its assets by INR 2.13 billion.4 Sick PSUs, such as HMT watches and NTC which depend on regular government assistance, were also found to have understated their losses. These are indicated figures. Among the key lacunae in operations, the CAG pointed out that ONGC had made an extra expenditure of INR 1.94 billion in 2004 by ignoring the prevailing crude oil price for evaluation of an offer that led to rejection of that offer and consequent re-tendering in 2005. NLC procured unnecessary equipment for INR 260  million. The merged AI-IA entity lost INR 50 billion in 2008–09 and its accumulated losses till 31 March 2009 was likely to be INR 720 billion.5 Ailing NACIL which is better known as Air India, also made avoidable expenses of about INR 130 million on account of expensive catering services and buying additional electricity load. ‘Such expenses were needless for the company which is in huge losses’, NACIL was estimated to have suffered a loss of INR 40  billion in 2008–09, almost double of that in the previous year. The CAG also pointed out that the equity of 72 out of 413 audited PSEs has been completely eroded as they accumulated losses of INR 944.28 billion by the end of 2007–08. The report stated the 72 companies had a negative net worth of INR 786.65 billion.6

While some PSUs are struggling to survive by adapting to the changing environment, a sizeable number of them is beset with serious problems such as slow growth, inefficient management, low productivity, inadequate R&D, lack of marketing and paucity of working capital. Loss-making PSUs face challenges to cut costs, increase productivity, market products and services aggressively, increase profitability and generate surplus by using assets properly, by making technological innovations and efficient HR management. The PSUs which cannot rise to these challenges incur losses.7

What is the way out? The way out could be to set up an apex autonomous statutory regulator such as the RBI or SEBI, whose job would be to monitor the functioning of all the PSUs, recruit professional staff without any interference from politicians, fill up the top positions, overlook mergers and possible disinvestment as well as have the powers to close down or sell off the units which are perpetually running into losses. The inefficiency of these PSUs and budgetary support to the loss-making units is perhaps the biggest scandal which is to be dealt with at all cost. There is no point in treating the PSUs as sacred cows. They must run efficiently and show profits as any other commercial organization has to. This was also the original idea of setting up these units.8 Because of the huge losses of PSUs, the fiscal deficit projected at 6.8 per cent, but the actual deficit reckoning for the States and under-recoveries may be close to 12–13 per cent,9 with all its attendant evils such as inflation and widening inequalities of income.

Abbreviations: BHEL—Bharat Heavy Electricals Limited, BSNL—Bharat Sanchar Nigam Limited, HMT—Hindustan Machine Tools, KIOCL—Kudremukh Iron Ore Company Limited, MTNL—Mahanagar Telephone Nigam Limited, Nacil—National Aviation Company of India Ltd., NTC—National Textile Corporation, NTPC—National Thermal Power Corporation, ONGC—Oil and Natural Gas Commission.


1. PTI (2006), ‘Heavy Accommodation of Losses Erodes 88 PSU’s Net Worth, CAG’, The  Financial Express, 30 May.

2. CAG (2009), ‘BSNL Mismanaged Government Loan’, The Times of India, New Delhi, 14 July.

3. Siddhanta, P. (2009), ‘Ministry Accuses PSU Chief of Causing Loss’, The Indian Express, 23 April.

4. FE Bureau (2009), ‘PSUs are Routinely Understanding Liabilities, Overstating Assets: CAG’, The Financial Express, 10 July.

5. ‘AI-IA Loss at INR 7200 cr; Patel’, The Economic Times, New Delhi, 15 July 2009.

6. FE Bureau (2009), ‘PSUs Are Routinely Understating Liabilities, Overstating Assets; CAG’, The Financial Express, 10 July.

7. PTI (2006), ‘Heavy Accumulation of Losses Erodes 88 PSUs’ Net Worth: CAG’, The Financial Express, 30 May.

8. Mehra, V. (2007), ‘Public Sector Companies, Look Beyond Disinvestments’, New Delhi, 26 December 2007.

9. Singh, N. K. (2009), ‘Budget Afterthoughts’, The Economic Times, New Delhi, 14 July.

Case 32.2: Losses of Public Sector Units Increase

Despite the Centre increasing its spending in reviving CPSEs, the losses of State-owned units in the last fiscal, of the 242 units, 53 incurred losses worth INR 11.274 billion in 2007–08 against INR 84.57 billion in the previous fiscal, said the Economic Survey 2008–09. It was the National Aviation Company of India (NACIL) which runs the national carrier Air India that persisted with its poorest performance.

Investments up: ‘The loss of loss-making CPSEs increased mainly due to loss incurred by NACIL (INR. 2.2.26 billion) during 2007–08 as compared to INR 6.88 billion loss incurred by Air India and Indian Airlines together during 2006–07’, the Survey said.

However, a total of 160 CPSEs made profit worth INR 910.83 billion last fiscal against INR 895.78 billion in 2007–08. CPSE investments also grew by 8.31 per cent in 2007–08 at INR 4,550 billion against INR 4,200 billion in the previous year. Most of the investment was from internal generation by these firms which seemed to have taken advantage of the robust economic activity till 2007–08. ‘The year also witnessed severe financial under-recoveries by public sector oil marketing companies as they had to keep the prices low in the domestic market on sale of the petroleum products’, the Survey added.

Sources: Special Correspondent, ‘Losses of Public Sector Units Increase’, The Hindu Business Line, New Delhi, 03 July, 2009.

Discussion Questions

32.1. What are the problems of public sector enterprises in India? Would you advocate privatization as a remedy for the same?

32.2. Critically examine the contribution of public sector enterprises in some of the macro-economic indicators of growth in the Indian economy.

32.3. What measures have been taken under Industrial Policy Resolution, 1991 to reform the public sector in India?

32.4. ‘Public sector in India is a mixed bag of failures and successes.’ Comment.


1. ‘Public Sector in India: Overview & Profile’, Pay Revision/ Chapter-1-Overview%20&%20Profile_Final.pdf.

2. Misra, S. K. and Puri, V. K. (2008), Economic Environment of Business ( Mumbai, India: Himalaya Publishing House).

3. Dhingra, Ishwar C. (2006), The Indian Economy, Environment and Policy (New Delhi, India: Sultan Chand & Sons).

4. Ibid.

5. Mishra, R. K., Nandagopal, R. and Lateef Syed Mohammed, A. (1993), ‘Sale of Public Enterprise Shares: Frittering Away Nation’s Wealth’, Economic and Political Weekly, 27 November, p. M-168.

6. Kothari, S. P. (1994), ‘PSU Divestment: Underselling’, The Economic Times, 7 November, p. 8.

7. Tata Services Limited (2008), Tata Statistical Outline of India 2007–2013 ( Mumbai, India: Tata Services Limited).

8. Datt, R. and Sundharam, K. P. M. (2007), Indian Economy (New Delhi, India: Sultan Chand and Company).

9. Central Public Sector Enterprises,

10. Agencies (2009), ‘Oil PSUs May Lose INR 15, 000 crore in FYIO’, Express India, 3 May,

11. Varadarajan, S. (2009), ‘Go Easy with the Family Silver’, The Hindu, 9 July.

Suggested Readings

32.1. Ahluwalia, M. S. (1999), Perspectives on India’s Reforms (New Delhi, India: Oxford University Press).

32.2. Bagchi, A. K. (1998), ‘Public Sector Industry and the Political Economy of the Indian Development’, in Byres, Terence J. (ed), The State, Development Planning and Liberalization in India (New Delhi, India: Oxford University Press).

32.3. Bhagwati, J. N. and Desai, P. (1970), India Planning for Industrialisation (London, UK: Oxford University Press).

32.4. Chaudhury, P. (1979), The Indian Economy, Poverty and Development (New Delhi, India: Vikas Publishing House).

32.5. Datt, R. (1989), Public Sector. The Changing Scenario, Economic and Social Change (New York, NY: Oxford University Press).

32.6. Gokam, S., Sen, A. and Vaidya, Rajendra R. (eds) (2004), The Structure of Indian Industry (New Delhi, India: Oxford University Press).

32.7. Government of India (2008–09, 2013–14), Economic Survey, 2008–09, 2013–14.

32.8. Hanson, A. H. (1965), Public Enterprises and Economic Development (London, UK: Routledge and Kegan Paul).

32.9. Hazari, R. K. and Oza, A. N. ‘The Public Sector in India’, in Robinson, E. A. G. and Mochael Kidron (eds), Economic Development in South Asia (London, UK: Macmillan).

32.10. Jalan, Bimal (1966), India’s Economic Policy: Preparing for the Twenty-first Century (New Delhi, India: Viking).

32.11. Jha, Raghbendra (ed) (2003), Indian Economic Reforms. (Hampshire, UK: Palgrave-Macmillan).

32.12. Joshi, V. and Little, I. (eds) (2002), Indian Economic Reforms /99/-2001 (New Delhi, India: Oxford University Press).

32.13. Kelkar, V. (2001), ‘Indian Economic Reforms Agenda: Micro, Meso and Macro Economic Reforms’, Fourth Annual Fellows’ Lecture, Centre for the Advanced Study of India, University of Pennsylvania.

32.14. Mooij, J. (2005), The Politics of Economic Reforms in India. (New Delhi, India: Sage Publications).

32.15. Ramanadhan, V. V., The Structure of Public Enterprises in India.

32.16. Rao, V. K. R. V. (1979), ‘The Public Sector in Indian Socialism, Indian Economic Development and Policy’, in Brahmananda, P. R. and V. R. Panchamukhi (eds) (New Delhi, India: Vikas Publishing House).

32.17. Shirokov, G. K. (1973), Industrialization of India, Problems of the Third World Series (Moscow, Russia: Progress Publishers).

32.18. World Bank (2005), Economic Growth in the 1990s-Learning from a Decade of Reforms (Washington DC: World Bank).