PUBLIC SECTOR IN INDIA

At the time of independence, India was backward and underdeveloped – basically

an agrarian economy with weak industrial base, high rate of unemployment, low
level of savings and investment and near absence of infrastructural facilities.
Indian economy needed a big push. This push could not come from the private
sector because of the lack of funds and their inability to take risk with large long-
gestation investments.  As such, government intervention through public sector
was necessary for self-reliant economic growth, to diversify the economy and to
overcome economic and social backwardness.

OBJECTIVES: The public sector aims at achieving the following objectives:

i. To promote rapid economic development through creation and expansion of

infrastructure
ii. To generate financial resources for development
iii. To promote redistribution of income and wealth
iv. To create employment opportunities
v. To promote balanced regional growth
vi. To encourage the development of small-scale and ancillary industries, and
vii. To promote exports on the one side and import substitution, on the other.

Role of Public Sector: The public sector has been playing a vital role in the
economic development of the country. Public sector is considered a powerful
engine of economic development and an important instrument of self-reliance. The
main contributions of public enterprises to the country's economy may be
described as follows:

1. Filling the Gaps in Capital Goods: At the time of independence, there existed
serious gaps in the industrial structure of the country, particularly in the fields of
heavy industries such as steel, heavy machine tools, exploration and refining of oil,
heavy Electrical and equipment, chemicals and fertilizers, defense equipment, etc.
Public sector has helped to fill up these gaps. The basic infrastructure required for
rapid industrialisation has been built up, through the production of strategic capital
goods. In this way the public sector has considerably widened the industrial base of
the country.

2. Employment: Public sector has created millions of jobs to tackle the

unemployment problem in the country. Public sector accounts for about two-thirds
of the total employment in the organised industrial sector in India. By taking over
many sick units, the public sector has protected the employment of millions. Public
sector has also contributed a lot towards the improvement of working and living
conditions of workers by serving as a model employer.

3. Balanced Regional Development: Public sector undertakings have located their

plants in backward and untrodden parts of the county. These areas lacked basic
industrial and civic facilities like electricity, water supply, township and
manpower. Public enterprises have developed these facilities thereby bringing
about complete transformation in the socio-economic life of the people in these
regions. Steel plants of Bhilai, Rourkela and Durgapur; fertilizer factory at Sindri,
are few examples of the development of backward regions by the public sector.

4. Contribution to Public Exchequer: Apart from generation of internal

resources and payment of dividend, public enterprises have been making
substantial contribution to the Government exchequer through payment of
corporate taxes, excise duty, custom duty etc. In this way they help in mobilizing
funds for financing the needs for the planned development of the country. In recent
years, the total contribution from the public enterprises has increased considerably,
between the periods 2002-03 to 2004-05 the contribution increased by Rs 81,438
crores on the average.

5. Export Promotion and Foreign Exchange Earnings: Some public enterprises

have done much to promote India’s export. The State Trading Corporation (STC),
the Minerals and Metals Trading Corporation (MMTC), Hindustan Steel Ltd., the
Bharat Electronics Ltd., the Hindustan Machine Tools, etc., have done very well in
export promotion. The foreign exchange earnings of the public sector enterprises
have been rising from Rs 35 crores in 1965-66 to Rs 42,264 crores in 2004-05.

6. Import Substitution: Some public sector enterprises were started specifically to

produce goods which were formerly imported and thus to save foreign exchange.
The Hindustan Antibiotics Ltd., the Indian Drugs and Pharmaceuticals Ltd.
(IDPL), the Oil and Natural Gas Commission (ONGC), the Indian Oil Corporation
Ltd., the Bharat Electronics Ltd., etc., have saved foreign exchange by way of
import substitution.

7. Research and Development: As most of the public enterprises are engaged in

high technology and heavy industries, they have undertaken research and
development programmes in a big way. Public sector has laid strong and wide base
for self-reliance in the field of technical know-how, maintenance and repair of
sophisticated industrial plants, machinery and equipment in the country. Through
the development of technological skill, public enterprises have reduced
dependence on foreign knowhow. With the help of the technological capability,
public sector undertakings have successfully competed in the international market.

In addition to the above, the public sector has played an important role in the
achievement of constitutional goals like reducing concentration of economic power
in private hands, increasing public control over the national economy, creating a
socialistic pattern of society, etc. With all its linkages the public sector has made
solid contributions to national self-reliance.

 Limitations: Despite their impressive role, Public enterprises in India suffer from
several problems and shortcomings. Some of these are described below:

1. Poor Project Planning: Investment decisions in many public enterprises are not
based upon proper evaluation of demand and supply, cost benefit analysis and
technical feasibility. Lack of a precise criterion and flaws in planning have caused
undue delays and inflated costs in the commissioning of projects. Many projects in
the public sector have not been finished according to the time schedule.

 2. Over-capitalization: Due to inefficient financial planning, lack of effective

financial control and easy availability of money from the government, several
public enterprises suffer from over-capitalization The Administrative Reforms
Commission found that Hindustan Aeronautics, Heavy Engineering Corporation
and Indian Drugs and Pharmaceuticals Ltd were over-capitalized. Such over-
capitalization resulted in high capital-output ratio and wastage of scare capital
resources.

3. Excessive Overheads: Public enterprises incur heavy expenditure on social 

overheads like townships, schools, hospitals, etc. In many cases such establishment
expenditure amounted to 10 percent of the total project cost. Recurring expenditure
is required for the maintenance of such overhead and welfare facilities. Hindustan
Steel alone incurred an outlay of Rs. 78.2 crore on townships. Such amenities may
be desirable but the expenditure on them should not be unreasonably high.

4. Overstaffing: Manpower planning is not effective due to which several public

enterprises like Bhilai Steel have excess manpower. Recruitment is not based on
sound labour projections. On the other hand, posts of Chief Executives remain
unfilled for years despite the availability of required personnel.
5. Under-utilisation of Capacity: One serious problem of the public sector has
been low utilisation of installed capacity. In the absence of definite targets of
production, effective production planning and control and proper assessment of
future needs  many undertakings have failed to make full use of their fixed assets.
There is considerable idle capacity. In some cases productivity is low on account
of poor materials management or ineffective inventory control.

6. Lack of a Proper Price Policy: There is no clear-cut price policy for public
enterprises and the Government has not laid down guidelines for the rate of return
to be earned by different undertakings. Public enterprises are expected to achieve
various socio-economic objectives and in the absence of a clear directive, pricing
decisions are not always based on rational analysis. In addition to dogmatic price
policy, there is lack of cost-consciousness, quality consciousness, and effective
control on waste and efficiency.

7. Inefficient Management : The management of public enterprises in our country

leaves much to be desired. Managerial efficiency and effectiveness have been low
due to inept management, uninspiring leadership, too much centralisation, frequent
transfers and lack of personal stake. Civil servants who are deputed to manage the
enterprises often lack proper training and use bureaucratic practices. Political
interference in day-to-day affairs, rigid bureaucratic control and ineffective
delegation of authority hamper initiative, flexibility and quick decisions.
Motivations and morale of both executives and workers are low due to the lack of
appropriate incentives.

Causes for the expansion of public enterprise

At the time of independence, India was backward and underdeveloped – basically

an agrarian economy with weak industrial base, high rate of unemployment, low
level of savings and investment and near absence of infrastructural facilities.
Indian economy needed a big push. This push could not come from the private
sector because of the lack of funds and their inability to take risk with large long-
gestation investments.  As such, government intervention through public sector
was necessary for self-reliant economic growth, to diversify the economy and to
overcome economic and social backwardness.

Let us discuss the rationale or causes for the expansion of public sector enterprises
in India.

1. Rate of Economic Development and Public Enterprises: The justification for

public enterprises in India was based on the fact that the targeted rate of economic
growth planned by the government was much higher than could be achieved by the
private sector alone. In other words, the public sector was essential to realize the
target of  high growth rate deliberately fixed by the government.

2. Pattern of Resource Allocation and Public Enterprises: Another reason for

the expansion of the public sector lies in the pattern of resources allocation decided
upon under the plans. In the Second Plan the emphasis was shifted to industries
and mining, mainly basic capital goods industries to be developed under the aegis
of the public sector. Thus more resources for industrialization were funneled
through the public sector.

3. Removal of Regional Disparities through Public Enterprises: Another

important reason for the expansion of the public sector was the need for balanced
development in different parts of the country and to see that there were no serious
regional disparities. Public enterprises were set up in those regions which were
underdeveloped  and where local resources were not adequate. Good examples are
the setting up of the three steel plants of Bhillai, Rourkela and Durgapur and the
Neyveli Project in Madras which were meant to help industrialise the regions
surrounding the projects.

4. Sources of Funds for Economic Development: Initially, state was an important

source of funds for development. The surplus of government enterprises could be
re-invested in the same industries or used for the establishment and expansion of
other industries. Profits of public sector industries can be directly used for capital
formation which is necessary for the rapid development of the country.

5. Socialistic Pattern of Society: The socialistic pattern of society envisaged in

the Constitution calls for expansion of public sector. For one thing, production will
have to be centrally planned as regards the type of goods to be produced, the
volume of output and the timing of their production. Besides, one of the objectives
of the directive principles of the Indian Constitution is to bring about reduction of
the inequalities of income and wealth and to establish an egalitarian society. The
Five Year Plans have taken this up as a major objective of planning. The public
enterprises were used as major instruments for the reduction of inequalities of
income and to bring about a more equitable distribution of income in several ways.

6. Limitations and Abuses of the Private Sector: The behavior and attitude of
the private sector itself was an important factor responsible for the expansion of the
public sector in the country. In many cases the private sector could not take
initiatives because of the lack of funds and their inability to take risk with large
long-gestation investments. In a number of cases, the government was forced to
take over a private sector industry or industrial units either in the interest of
workers or to prevent excessive exploitation of consumers. Very often the private
sector did not function as it should and did not carry out its social responsibilities.
Accordingly, the government was forced to take over or nationalize the private
sector units.

To sum up, the expansion of the public sector was aimed at the fulfillment of our
national goals, viz., the removal of poverty, the attainment of self-reliance,
reduction in inequalities of income, expansion of employment opportunities,
removal of regional imbalances, acceleration of the pace of agricultural and
industrial development, to reduce concentration of ownership and prevent growth
of monopolistic tendencies by acting as effective countervailing power to the
private sector, to make the country self-reliant in modern technology and create
professional, technological and managerial cadres so as to ultimately rid the
country from dependence on foreign aid.