Friday, 22 April 2011

Changing Role of Public Sector in India

Public Sector in India


Prior to Independence, there were few ‘Public Sector’ Enterprises in the country. These included the Railways, Posts and Telegraphs, Port Trusts, the Ordinance Factories, All India Radio, few enterprises like the Government Salt Factories, Quinine Factories, etc. which were departmentally managed.

Independent India adopted planned economic development policies in a democratic, federal policy. The country was facing problems like in-equalities in income and low levels of employment, regional imbalances in economy.

Public Sector would correct the regional imbalances and create employment. Industrial Policy Resolution of 1948 laid emphasis on the expansion of production, both agricultural and industrial; and in particular on the production of capital equipment and goods satisfying the basic needs of the people, and of commodities the export of which would increase earnings of foreign exchange.

The public sector provided the required thrust to the economy and developed and nurtured the human resources, the vital ingredient for success of any enterprise public or private.


The Public Sector emerged as the driver of economic growth consequent to the industrial revolution in Europe. With the advent of globalization, the public sector faced new challenges in the developed economies. No longer the public sector had the privilege of operating in a seller’s market and had to face competition both from domestic and international competitors. Further, in the second half of the 20th century in the developed economies, the political opinion started swinging towards the views that the intervention as well as investment by Government in commercial activities should be reduced to the extent possible.

Today, both Public Sector & Private Sector have become an integral part of the economy. There may not be much difference in working of these sectors in advanced countries, but in developing countries, the performance of Public Sector has considerable scope for improvement. It is also observed that Pay packages are almost similar in both sectors in developed countries, but large differences exist in remuneration in the two sectors in developing countries, like ours.

 Economic Scenario and Role of Public Sector in India

General perspective

Government of India, as part of its national agenda to promote growth, increase in efficiency and international competitiveness, has been continuously framing policies for industrial growth, fiscal, trade and foreign investment to achieve overall socio-economic development of the country.

The Government realized that a strong and growth oriented nation could be built if India grows as part of the world economy and not in isolation. Thus, liberalising and deregulatory steps were initiated from the year 1991 onwards, which aimed at supporting growth and integration with the global economy. Since then, the thrust of New Economic Policy has been on progressive reforms such as reduction in the scope of industrial licensing, reforms in the Monopolies and Restrictive Trade Practices (MRTP) Act, reduction of areas reserved exclusively for public sector, disinvestment of equity of selected public sector enterprises (PSEs), enhancing limits of foreign equity participation in domestic industrial undertakings, liberalization of trade and exchange rate policies, rationalization and reduction of customs and excise duties and personal and corporate income taxes, promoting the main elements of the present Government policy towards Public Sector enterprises as contained in the National Common Minimum Programme (NCMP) are as below:

1.    To devolve full managerial and commercial autonomy to successful, profit making companies operating in a competitive environment.

2.    Generally , profit-making companies will not be privatized

3.    Every effort will be made to modernize and restructure sick public sector companies and revive sick industry

4.     Chronically loss making companies will either be sold off, or closed, after all workers have got their legitimate dues and compensation.

5.    Private industry will be inducted to turn-around companies that have potential for revival.

6.    Privatization revenues will be used for designated social sector schemes.

7.    Public sector companies and nationalized banks will be encouraged to enter the capital market to raise resources and offer new investment avenues to retail investors.

 Human Resource Management and Personnel Policy

Effective utilization of Human Resources is one of the most important factors for the efficient and profitable functioning of an organization. It has special significance in the management of public sector enterprises. CPSEs employ a large workforce in different disciplines and the successful operation of these enterprises very much depends on the skills and capabilities of the workforce.

Out of around 16 lakhs manpower (as on 31.03.07) deployed presently in CPSEs, about 3.65 lakhs are in the supervisory and managerial cadres which represent about 22.12% of total manpower. In 2005-06, the aggregate amount paid towards salaries & wages and other benefits including Bonus was to the tune of Rs.45,625 crores; and the cost of production was Rs.7,35,964 crores.

Categorization: The public enterprises are categorized into four Schedules namely ‘A’, ‘B’, ‘C’ and ‘D’, based on various quantitative, qualitative and other factors. The quantitative factors are: investment, capital employed, net sales, profit before tax, number of employees, number of units and value added per employee.


Social & Economic Development: Independent India has exhibited more impressive price stability than most developing economies. The inflation rate was, on an average, in the single digit for almost all the years since Independence. On the growth rate, the annual GDP growth in the decade of 1950s was 3.6 percent, in the 1960s it was 4.0 percent, In 1980s it was 5.6 percent and in the 1990’s (excluding the Gulf war crisis year 1991-92) it was 6.3 percent.

In the new millennium, the growth rate accelerated to 6.9 percent; and during the period from 2003-04 to 2006-07 it has averaged 8.6 percent.

The changes in the social and economic developments that have taken place in the country since India became independent are quite substantial. The total outlay of the 1st five year plan (from 1951-56) was Rs.2069 crores, which has increased to Rs. 66632 crores for the 10th five year plan (2002-07).

The population of India in the year 1951 was around 36 crores and has increased to 103 crores as per the 2001 census. The head count ratio of persons below poverty line has declined from the level of 54.9% in the year 1973-74 to 36% in 1993-94. The decline in the urban poverty level from 48% to 36% is significant as it coincides with the period of rapid urbanization. During the period since 1997, successive governments have carried forward the country's economic reforms in Industrial, Trade and Financial sectors.


In the competitive industrial scenario, one of the key components to increase the bottom line in the globalized economy is to find out how an enterprise leverages capability at a global level for procurement, sourcing and delivering all its products and services across markets far more rapidly and takes advantage by cross leveraging between various markets. In this context, Mergers & Acquisitions (M&A) have gained importance during the past few years and a storm of mergers of huge values have been notched-up. In response to the growing business and to release productive energies and to promote creativity of Indian businesses, the regulators have also issued guidelines to facilitate smooth transactions as well as making business restructuring tax neutral. Business consolidation of market share, synergies of operations, reduction of time and money in entering the domestic foreign market, reducing uncertainty of market share, to meet end-to-end solution needs, buying out competition, realization of stock market valuations, create value for shareholders, etc. are some of the reasons leading to spur in M&A activities within India as well as promote overseas acquisitions by Indian companies.