Role of Public Sector in

UNIT 1 ROLE OF PUBLIC SECTOR IN Development

DEVELOPMENT
Structure
1.1 Introduction
1.2 Public Sector: Concept and Significance
1.3 Need of the Public Sector
1.4 Contribution of Public Sector to Development
1.5 Problems of Public Sector
1.6 Measures to Improve Performance of the Public Sector
1.7 Decline of State Role and Emergence of Free Market
1.8 Let Us Sum Up
1.9 References and Selected Readings
1.10 Check Your Progress – Possible Answers

1.1 INTRODUCTION
The public sector is that sector which is controlled by national, state or provincial,
and local governments. In the United States, the public sector encompasses
universal, critical services such as national defense, homeland security, police
protection, fire fighting, urban planning, corrections, taxation, and various social
programs. In India, it consists of defense, police, taxation, railways, roads and
bridges, postal services. The Industrial policy resolution- 1956 classified
industries into three categories. The first category comprises of industries included
in schedule of the resolution and to remain exclusively under the domain of the
government. These included inter alia, railways, air transport, arms and
ammunition, iron and steel and atomic energy. The spectrum of public sector
covers a wide range of industries and products such as steel, coal, copper, zinc,
drugs fertilizer, consumer goods like food production, packaged goods, clothing,
automobiles and electronics.
After studying this unit you should be able to:
• explain the concept, need and significance of public sector
• examine the role of Public Sector
• discuss the contribution of Public sector to development
• list out the problems of public sector in India
• describe the measures to improve the performance of the public sector
• discuss the decline in the role of the state and emergence of free market

1.2 PUBLIC SECTOR: CONCEPT AND

SIGNIFICANCE
1.2.1 Meaning of Public Sector
The Public Sector is referred to as the state sector. It is a part of the state that
deals with either production, delivery and allocation of goods and services by
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Role of Public, Private and and for the government (or for its citizens), whether national, regional or local/
Service Sector in
Development municipal. Examples of public sector activities ranges from delivering social
security, administering urban planning and organizing national defenses, etc.. The
part of the economy concerned with providing basic government services. The
composition of the public sector varies by country, but in most countries the
public sector includes such services as the police, military, public roads, public
transit, primary education and healthcare for the poor. The public sector might
provide services that non-payer cannot be excluded from (such as street lighting),
services which benefit all of society rather than just the individual who uses the
service (such as public education), and services that encourage equal opportunity.

In 1991, when the government decided to shift to a liberalized economy with

greater reliance upon market forces, a larger role for the private sector was
envisaged. Since then the policy thrust has been on 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).

Central Public Sector Enterprises (CPSEs) were classified into two categories -
strategic and non-strategic. Strategic CPSEs were identified in the areas of:
• Arms & Ammunition and the allied items of defense equipments, defense
air-crafts and warships
• Atomic Energy (except in the areas related to the operation of nuclear power
and applications of radiation and radio-isotopes to agriculture, medicine
and non-strategic industries).
• Railway transport
All other public sector enterprises were considered as non-strategic. Industrial
licensing by the Central Government has been almost abolished except for a few
hazardous and environmentally sensitive industries.

The industries reserved for the public sector and where private companies
cannot enter are:
• Atomic energy.
• The substances specified in the scheduled to the notification of the Government
of India in the Department of Atomic Energy number S.O.212(E), dated the
15th March, 1995.
• Railway transport.
In India, public-sector undertaking (PSU) is a term used for a government-owned
corporation (company in the public sector). The term is used to refer to companies
in which the government (either the Union Government or state or territorial
governments, or both) owned a majority (51 percent or more) of the company
equity. GOCs can be fully owned or partially owned by Government. As a
definitional issue, it is difficult to determine categorically what level of state
ownership would qualify an entity to be considered as “state-owned”, since
governments can also own regular stock, without implying any special interference.
They are mainly in the sectors of defense and power. These include inter alia:
• Balmer Lawrie
6
• Mazagon Dock Limited Role of Public Sector in
Development
• National Thermal Power Corporation
• Hindustan Aeronautics Limited
• Bharat Electronics Limited
• Hindustan Machine Tools and many other like:
SAIL, BHEL, LIC, ONGC, SBI, UTI, Oil India, GIC, Shipping Corp. DTC, FCI,
Fertilizer Corp, Coal India Ltd, Cotton Corp. Cement Corp, BSNL, Airport
Authority, Heavy Engg. Corp. NALCO, HPCL, Hindustan Paper, Hindustan
Copper, National Jute Corp, Hindustan Cables, IREDA, NIC, National Seed Corp.
The grouping of Public Sector enterprises is given in the following chart below.

Public Sector Enterprises in India

Public Sector Enterprise (PSEs)

Financial Financial

Financial Non-
Financial

Utility Manufacture
Departmental
∗ Electricity ∗ Tradable goods like
∗ Railways
∗ Gas machinery, textiles,
∗ Post & Telegraph
∗ water basic metals, transport,
equipments, etc.
Source: J. Flexi Raj, Indian Economy, Economic Ideas, Development and Financial Reforms,
Deep and Deep Publications, New Delhi-2008.

1.3 NEED OF THE PUBLIC SECTOR

The scope of the public sector and state sector are often the biggest distinction
regarding the economic positions of socialist, liberal and libertarian political
philosophy. In general, socialists favor a large state sector consisting of state
projects and enterprises, at least in the commanding heights or fundamental sectors
of the economy. Social democrats tend to favor a medium-sized public sector that
is limited to the provision of universal programs and public services. Economic
libertarians and monarchists favor a small public sector with the state being
relegated to protecting property rights, creating and enforcing laws and settling
disputes, a “night watchman state”.

7
Role of Public, Private and Public sector has played an important role in the industrial development of India.
Service Sector in
Development
Before independence there were a few public sector enterprises in India such as
Railways, the Posts and Telegraphs, the Port Trusts, the Ordinance Factories,
and All India Radio etc. In the early years of independence, capital was scarce
and the entrepreneurial resource was not strong enough. Therefore, the 1956
Industrial Policy Resolution gave primacy to the role of the State which was
directly responsible for industrial development. The public sector provided the
required thrust to the economy and developed and nurtured the human resources.
During this era public sector enterprises came to be known as the commanding
heights of the Indian economy. According to Prof. Tendulkar, the distinct reference
for the public sector in this strategy can be traced to the following reasons.

First, the concentration of economic power that would result from the uncontrolled
operation of the market forces can be reduced through the extension in the public
ownership of means of production.

Secondly, private investors may demand a higher risk premium for investment in
certain industries than would be socially justified. Offshore drilling of oil is one
example in this connection.

Thirdly, the scale of investment efforts in certain heavy industries may be beyond
the capital-raising capacity of the private sector e.g., steel mills, heavy electrical
machinery.

Fourthly, the public sector, through the appropriate price policy for its output
will generate investible surpluses for further investment in the economy.

Fifthly, by production as well as distribution of certain universal intermediate

inputs like coal, steel, electricity, etc., the State will be able to control the
composition of private economic activity in a socially desirable direction.

Finally, the public sector would assume the role of a model employer and its
employment and wage policies would have a moderating influence on the
corresponding policies in the private sector.

Analyzing these reasons, one finds that public sector was expected to fulfill varied
and sometimes conflicting objectives. The generation of investible surplus was
bound to conflict with subsidies involved in keeping the prices of certain universal
intermediates at low levels as well as the public sector’s role as model employer.

1.4 CONTRIBUTION OF PUBLIC SECTOR TO

DEVELOPMENT
The public sector has been playing a vital role in the economic development of
the country. In fact the public sector has come to occupy such an important place
in our economy that on its effective performance depends largely on the achievement
of the country’s economic and social goals. 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 maybe
described as follows:

8
i) Strong Industrial Base Role of Public Sector in
Development
Public sector has significantly contributed to the GDP at factor cost. The
share of industrial sector (comprising of manufacturing, construction,
electricity, gas, water supply has steadily increased during the planning
decades. The government has strengthened the industrial base considerably
by placing due emphasis on setting up of industries like iron and steel,
heavy engineering, coal, heavy electrical machinery, petroleum, chemical,
natural gas, chemicals, drugs fertilizers etc. Because of low profitability
potential, theses industries do not find favour with private entrepreneurs in
India. The total investment by public sector has increased from 29 crores to
1171844 crores after independence as illustrated in the table-1.

Table 1 Investment in PSUs

Year No of Units Total Investment(Rs Crores)
1951 5 29
1961 47 950
1980 179 18,150
1990 244 99,330
2001 242 274,198
2004 242 349,209
2015-2016 244 1171844
Source: Government of India, Public Enterprise Survey, 2015-16

Table 2: No. of Operating Public Sector Enterprises

Year No. of Operating Enterprises
2004-05 227
2005-06 226
2006-07 217
2007-08 214
2008-09 213
2009-10 217
2010-11 220
2011-12 225
2012-13 230
2013-14 234
2015-2016 244
Source: Public Enterprises Survey 2015-16, Vol. 1

ii) Capital Formation

The public sector fosters a powerful process of capital formation. It can
collect the savings and make them investment in the productive channels. It 9
Role of Public, Private and is evident from Indian case. During two decades of our planning about 54%
Service Sector in
Development
of total investment of India was done by the public sector. Rest was done by
the private sector. Of course now the share of investment of public sector is
falling after liberalization. It has become now about 30% in the ninth plan.
The nationalized bank, SBI,IDBI, Industrial finance corporation, State
Finance Corporation, LIC, UTI, etc have played and important role in
collecting savings and mobilization of resources. Yet the share of public
sector in gross domestic capital formation (GDCF) has remained very
significant.

iii) Development of Infrastructure

The infrastructure is the backbone of an economy. The public sector plays
the vital role in the process of infrastructural development. The public
authority adopts the strategy to make sufficient expansion of irrigation
facilities and power and energy, with out which agricultural development is
not possible. Without road, railways, and electricity no industrial
development can be thought of. Public sector has developed the road, rail,
air and sea transport system. The expansion has become manifold only due
to the public sector. The public sector does not contribute much to the
infrastructural development of the country.

iv) Fillings of Gaps

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 an 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 industrialization has been built up, through the production of strategic
capital goods. The public sector has considerably widened the industrial
base of the country. The table-3 below shows the performance of central
public sector enterprises in India

Table 3: Performance of Central Public sector Enterprises

1999 2005 2008 2015-16
Running enterprises 232 226 214 244
Capital employed 302,947 585,484 763,127 1938795
Turnover 389,199 837,295 1081,925 1854667
Source: Misra and Puri (2009) Indian Economy, Himalaya Pub. Mumbai and Public
Enterprises Survey 2015-16, Vol. 1

v) Employment
As on 31.3.2016, the 320 CPSEs employed over 12.34 lakh people (excluding
contract workers). Around 30% of the manpower of CPSEs belongs to
managerial and supervisory cadres. Total number of employees in CPSEs is
declining every year since 2006-07 except during 2011-12, on other hand
per capita emoluments has been increasing. The per capita emolument was
3,25,869 per annum in 2006- 07 and has increased to 10,39,732 per annum
in year 2015-16. The details of employment in CPSEs and per capita
10 emoluments are shown in Table 4.
 Table 4:Public and Private Sector Employment (in Lakhs) in India Role of Public Sector in
Development
Year Employees (in lakh) Total Emoluments Percapita
(Excluding contract (Rs. in crore) Emoluments
workers
2006-2007 16.14 52586 325869
2007-2008 15.65 64306 410898
2008-2009 15.33 83045 541716
2009-2010 14.90 87792 589210
2010-2011 14.40 98402 683347
2011-2012 14.50 105648 728606
2012-2013 14.02 116363 830263
2013-2014 13.49 122322 906665
2014-2015 12.91 127387 986598
2015-2016 12.34 128263 1039732
Source: Public Enterprises Survey 2015-16, Vol. 1

vi) Balanced Regional Development

Public sector undertakings have located their plants in backward and
untrodden parts of the county. There area lacked basic industrial and civic
facilities like electricity, water supply, township and manpower. Public
enterprises have developed these facilities thereby brining about complete
transformation in the socioeconomic life of the people in these regions. Steel
plants of Bhilai, Rourkela and Durgapur; fertilizer factory at Sindri, Machine
Tool plants in Rajasthan, Precision Instruments plants in Kerala and Rajasthan,
etc. are a few examples of the development of backward regions by the
public sector.
vii) Contribution to Public Exchequer
In recent years, the public sector has made increasing contributions to the
public sector in the form of dividend, corporate taxes, excise and customs
duty, etc. Due to increase in contribution of all the components to Central
Exchequer, the total contribution of CPSEs to the Central Exchequer during
the year 2015-16, has increased from 2,00,593 crore in 2014-15 to ‘2,78,075
crore in 2015-16 showing an increase of 38.63%.
Table 5: Contributions of Public Enterprises to Central Exchequer
Plan Total Contribution Average
Sixth Plan(1980-85) 27,570 5510
Seventh(1985-90) 69,410 13,880
Eighth Plan(1992-97) 133,780 26,760
Ninth Plan(1997-2002) 269,110 53,822
2002-2004 170,891 85,445
Twelve Plan (2012-2017) 278075
Source: Government of India, Public Enterprise Survey, 2003-04 11
Role of Public, Private and viii) Foreign Exchange Earnings
Service Sector in
Development Public sector has contributed a great deal in improving the balance of
payments position of the county. The public enterprises have saved valuable
foreign exchange trough import substitution. Hindustan Steel Ltd., the Bharat
Electronics Ltd., the Hindustan Machine Tools, etc are exporting a large
percentage of their output and earning foreign exchange.

ix) Development of Ancillary industries

In order to encourage the development of small scale and medium-sized
industries in the country, the Government of India has launched a national
programme. Public sector ha contributed to this programme by fostering the
growth of ancillary industries and satellite planets. Such plants have been
established around the major public sector undertakings. There is a strong
base of ancillary industries at several centers such as the Bokaro Industrial
Complex, the Bhilai Steel Plant, The Rourkela Steel Complex, the Heavy
Engineering Corporation at Ranchi, Hindustan Machine Tools at Bangalore,
and the units of Bharat Heavy Electrical at Bhopal, Hyderabad and Hardwar.

x) 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 an they have secured turnkey projects in several countries
of the world.

xi) Community Development

Several public sector undertakings have developed townships to provide all
the civic amenities to their employees. These townships consist of houses,
etc. Public enterprises have constructed roads and other infrastructural facility
to link these townships to other parts of the country. Such townships have
been very helpful in improving community life.

xii) Social Justice

Public enterprises have contributed towards the achievement of constitutional
objectives. They have been helpful in reducing the concentration of economic
power in private hands, in curbing anti-social monopolies, in accelerating
public control over the national economy and in bringing about a socialistic
pattern of society. Public sector helps in ensuing inclusive process of
development.

In addition to the foregoing, 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.
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Check Your Progress 1 Role of Public Sector in
Development
Note: a) Write your answer in about 50 words.
b) Check your progress with possible answers given at the end of the
unit.
1) D
1) Define public sector and examine its features.
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2) Give the list of industries reserved for the public sector in India.
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3) How does public sector contribute to Central Exchequer?
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4) Explain how investment under public sector has expanded.
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1.5 PROBLEMS OF PUBLIC SECTOR

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

i) Poor Project Planning: Investment decisions in many public enterprises

not based upon proper evaluation of demand and supply, cost benefit analysis
13
Role of Public, Private and and technical feasibility. Lack of a precise criterion and flaws in planning
Service Sector in
Development
have caused undue delays and inflated costs in the commissioning of projects.
Sometimes, projects are launched without clear-cut objectives and serious
thought. Many projects in the public sector have not been finished according
to the time schedule. Barauni Refinery was commissioned two years behind
schedule and the Tromby fertilizer plant was delayed by three years thereby
causing an increase of Rs. 13 crores in the original cost estimates.

ii) 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 an
wastage of scare capital resources.

iii) Excessive Overheads: Public enterprises incur heavy expenditure on social

on 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.

iv) 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. As many as 26 public sector units were top[less on January 1,
1987.

v) Under-utilization of Capacity: One serious problem of the public sector

has been low utilization of installed capacity. In the absence of definite targets
of production, effective production planning and control, proper assessment
of future needs, adequate supply of power and industrial peace, many
industrial peace, many undertakings have failed to make full use of their
fixed assets. Under utilization of Installed capacity is another reason for low
level of profitability in public sector enterprises. The average capacity
utilization in more than 50 per cent of the public enterprises has been less
than 75 per cent.

Capacity Utilization
Capacity utilization in these reports has been measured based on the installed/
rated capacity. Wherever installed/rated capacity is not available for various
reasons, the assessment of the management vis-à-vis capacity utilization in
the enterprises has been accepted. In the case of multiple product units,
capacity utilization has been worked out with reference to major products.
The detailed enterprises-wise statement, indicating the unit-wise capacity
utilization for major products during the last three years is given in the section.
The table above discusses enterprise-wise rated capacity and extent of
utilization of some of the CPSEs under the various cognate groups.

14
vi) Lack of a Proper Price Policy: There is no clear cut price policy for public Role of Public Sector in
Development
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 socioeconomic 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.

vii) Inefficient Management: The management of public enterprises in our

country leaves much to be desired. Managerial efficiency an effectiveness
have been low due to inept management, uninspiring leadership, too much
centralization, 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.

viii) Unsatisfactory industrial Relations: In several public enterprises relations

between management and labour are far from cordial. There has been serious
and frequent labour trouble in Durgapur Steel Plant, Bharat Heavy Electricals,
Bhopal, and in Bangalore-based undertakings. Millions of mandays and output
worth crores of rupees have been lost due to strikes and gheraos. Wage
disparities have been the main cause of labour trouble in the public sector.
The percentage increase in the per cent emoluments of public sector employees
had been higher than the percentage increase in consumer price index.

ix) Lack of Coordination: Various public enterprises are dependent on one

another as the output of one enterprise is the input of another. For instance,
the efficient functioning of power and steel plants depends on the production
and transportation of coal which n turn is dependent upon supplies of heavy
equipment machinery. Despite such interdependence, materials management
and research has not been achieved. Coordination in the production
programmes of different enterprises at various stages would help to reduce
excess stocks and shortages of vital inputs.
To sum up, the public sector of India encounters the following problems:
1) Inefficient Management
2) Faulty Controls
3) Excess Manpower
4) Capacity underutilization
5) Over capitalization
6) Price Policy
7) Delay in Project completion
8) Mounting Losses
9) Political Factors

15
Role of Public, Private and
Service Sector in 1.6 MEASURES TO IMPROVE PERFORMANCE
Development
OF THE PUBIC SECTOR
1.6.1 Public Sector Policy
The measures to strengthen public sector was spell out in industrial policy
resolution, 1991. The industrial policy, 1991 which envisages steps for
strengthening public sector in India is narrated below.

The public sector has been central to our philosophy of development. In the
pursuit of our development objectives, public ownership and control in critical
sector of the economy has played an important role in preventing the concentration
of economic power, reducing regional disparities and ensuring that planned
development serves the common good.

The Industrial Policy Resolution of 1956 gave the public sector a strategic role
in the economy. Massive investments have been made over the past four decades
to build a public sector which has a commanding role in the economy. Today key
sectors of the economy are dominated by mature public enterprises that have
successfully expanded production, opened up new areas of technology and built
up a reserve of technical competence in a number of areas.

After the initial exuberance of the public sector entering new areas of industrial
and technical competence, a number of problems have begun to manifest
themselves in many of the public enterprises. Serious problems are observed in
the insufficient growth in productivity, poor project management, over-manning,
lack of continuous technological up gradation, and inadequate attention to R&D
and human resource development. In addition, public enterprises have shown a
very low rate of return on the capital invested. This has inhibited their ability to
re-generate themselves in terms of new investments as well as in technology
development. The result is that many of the public enterprises have become a
burden rather than being an asset to the Government. The original concept of the
public sector has also undergone considerable dilution. The most striking example
is the takeover of sick units from the private sector. This category of public
sector units accounts for almost one third of the total losses of central public
enterprises. Another category of public enterprises, which does not fit into the
original idea of the public sector being at the commanding heights of the economy,
is the plethora of public enterprises which are in the consumer goods and services
sectors.

It is time therefore that the Government adopt a new approach to public enterprises.
There must be a greater commitment to the support of public enterprises which
are essential for the operation of the industrial economy. Measures must be taken
to make these enterprises more growth oriented and technically dynamic. Units
which may be faltering at present but are potentially viable must be restructured
and given a new lease of life. The priority areas for growth of public enterprises
in the future will be the following.
• Essential infrastructure goods and services.
• Exploration and exploitation of oil and mineral resources.
• Technology development and building of manufacturing capabilities in areas
16
 which are crucial in the long term development of the economy and where Role of Public Sector in
Development
private sector investment is inadequate.
• Manufacture of products where strategic considerations predominate such
as defense equipment.
At the same time the public sector will not be barred from entering areas not
specifically reserved for it.

In view of these considerations, Government will review the existing portfolio

of public investments with greater realism. This review will be in respect of
industries based on low technology, small scale and non-strategic areas, inefficient
and unproductive areas, areas with low or nil social considerations or public
purpose, and areas where the private sector has developed sufficient expertise
and resources.

Government will strengthen those public enterprises which fall in the reserved
areas of operation or are in high priority areas or are generating good or reasonable
profits. Such enterprises will be provided a much greater degree of management
autonomy through the system of memoranda of understanding. Competition will
also be induced in these areas by inviting private sector participation. In the case
of selected enterprises, part of Government holdings in the equity share capital
of these enterprises will be disinvested in order to provide further market
discipline to the performance of public enterprises. There are a large number of
chronically sick public enterprises incurring heavy losses, operating in a
competitive market and serve little or no public purpose. These need to be attended
to. The country must be proud of the public sector that it owns and it must operate
in the public interest.

1.6.2 Steps to Strengthen Public Sector

i) Portfolio of public sector investments will be reviewed with a view to focus
the public sector on strategic, high-tech and essential infrastructure. Whereas
some reservation for the public sector is being retained there would be no
bar for areas of exclusivity to be opened up to the private sector selectively.
Similarly the public sector will also be allowed entry in areas not reserved
for it.

ii) Public enterprises which are chronically sick and which are unlikely to be
turned around will, for the formulation of revival/rehabilitation schemes, be
referred to the Board for Industrial and Financial Reconstruction (BIFR), or
other similar high level institutions created for the purpose. A social security
mechanism will be created to protect the interests of workers likely to be
affected by such rehabilitation packages.

iii) In order to raise resources and encourage wider public participation, a part
of the government’s shareholding in the public sector would be offered to
mutual funds, financial institutions, general public and workers.

iv) Boards of public sector companies would be made more professional and
given greater powers.

v) There will be a greater thrust on performance improvement through the

Memoranda of understanding (MOU) systems through which managements
17
Role of Public, Private and would be granted greater autonomy and will be held accountable. Technical
Service Sector in
Development
expertise on the part of the Government would be upgraded to make the
MOU negotiations and implementation more effective.

vi) To facilitate a fuller discussion on performance, the MOU signed between

Government and the public enterprise would be placed in Parliament. While
focusing on major management issues, this would also help place matters on
day to day operations of public enterprises in their correct perspective.

1.7 DECLINE OF STATE ROLE AND

EMERGENCE OF FREE MARKET
After adopting the policy of open market, Government of India dismantled its
development strategies and very enthusiastically overhauled its entire economic
system with denationalization, delicensing, devaluation, and disinvestment. Now
the pendulum of economic growth in India is swinging from over commitment of
public sector to over enthusiasm of the private sector. Policy of open market has
now become the global phenomenon. This model has very substantial core of
truth, which spreads the message of over optimism of instant change. It essentially
relates to the external sector and modern industrial-urban sector. This policy
advocates for Liberalization, Privatization and Globalization (LPG) of the
economy. This world wide movement owes its origin to several factors:(1) the
external debt crisis (2) excessive fiscal profligacy and unmanageable foreign
exchange deficit,( 3) disenchantment with the system of central planning,
corruption and inefficiency,(4) rise of Reaganism and Thatcherism,(5) The collapse
of socialist regimes in Eastern Europe and (6) spectacular growth of East and
southeast Asian countries
And Indian economy has the experience of two decades in this development
paradigm.
Table 6: Annual growth rate of National Income and Per Capita Income
Plan National Income % Per-Capita Income%
First 3.6 1.8
Second 4.1 2
Third 2.5 0.2
Fourth 3.3 1
Fifth 5 2.7
Sixth 5.4 3.2
Seventh 5.8 3.6
Eighth 6.7 4.6
Ninth 5.5 3.5
Tenth 7.8 6.1
Eleventh 7.9 6.5
Twelfth 5 3.7
Source: Public Enterprises Survey 2015-16, Vol. 1
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The role of public sector has been steadily decreasing in both industrial sector Role of Public Sector in
Development
and service sector almost in every country of the world. In India the role of
private sector has increased in the service sector like education, health, insurance
and banking.The post liberalization period has marked a distinct upturn of the
growth trajectory. The stagnation of the economy seemed to have been over by
mid seventies.

Table 6 shows annual growth rate of income from first five year plan (3.6%) to
twelfth five year paln (5%)., growth rates have improved and were impressive
in comparison to the pre-reforms period. The Per capita income has progressed
from 1.8 percent to 3.7 percent.

The agricultural sector that lagged behind is now growing and contributes 15.79
percent of GDP. The growth rate in the industrial sector and service sector has
become very impressive. The table 7 shows that the share of agriculture in GDP
has increased from 2011 to 2014 from 14.37% to 15.79 %. Where as the share of
industry is 24.77 percent of the GDP while service sector contributes 59.93 percent
for the same.

Table 7: Contributions to GDP Growth in India

Sectors Contribution to GDP growth (%) Share in
2011-12 2013-14 Real GDP (%)
Agriculture 14.37 15.79 6.1
Industry 26.13 24,77 29.02
Services 54.91 59,93 53.66
Source: Government of India, Public Enterprise Survey, 2015-16

Liberalization regime has provoked widespread restructuring and consolidation

of Indian Industry. The private sector is vigorously restructuring itself to correct
past inefficiencies of pre reforms era and promote competitiveness.

But unfortunately a large part of the economy particularly the agricultural sector
still remains unorganized and backward. This vast unorganized sector can not be
integrated automatically with the mainstream of market-led economy. The problems
and constraints associated with the agricultural sector have not improved under
the new reforms regime. The root of this incompatibility lies in the growing
urban bias and rural neglect.

Check Your Progress 2

Note: a) Write your answer in about 50 words.
b) Check your progress with possible answers given at the end of the
unit.
1) Explain how over capitalization has affected the public sector.
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Role of Public, Private and 2) How public sector suffers from poor project planning?
Service Sector in
Development .....................................................................................................................
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3) What are the shares of agriculture and industry in the GDP?
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4) Discuss how service sector is growing rapidly under free market regime.
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1.8 LET US SUM UP

In this unit we dealt with the definition and significance of public sector in the
process of economic development. We examined the role and performance of
public sector in India. We analyzed the significance of public sector units in
industrial sector and service sector. We analyzed the problems and constraints of
public enterprises of India. We also analyzed the declining trend of public sector
due to the emergence of free market in India.

1.9 REFERENCES AND SELECTED READINGS

Agrawal A. N. (2009), Indian Economy, Wiley, New Delhi

Das Kumar (2009), Sustainable Development, Reference Publication, New Delhi

Datt Ruddar and KPM Sundaram (2009), Indian Economy, S Chand & Company,
New Delhi

Nayyar, Deepak(1997), Industrial Growth and Stagnation, Oxford University

Press

Panchmukhi, P.R. (2000), “Social Impact of Economic Reforms in India”,

Economic and Political Weekly, Vol. 35(10)
20
Parikh, K.S. (1999), India Development Report. IGIDR, Mumbai and Oxford Role of Public Sector in
Development
University Press

Singh, Anurag (2004), Public Sector Reforms in India, APH Publishing, New
Delhi

Sinha, Chandan (2007), Public sector reforms in India 2007, Sage publication,
New Delhi.

1.10 CHECK YOUR PROGRESS – POSSIBLE

ANSWERS
Check Your Progress 1
Answer 1: Public Sector is referred to as the state sector. It is a part of the state
that deals with either the production, delivery and allocation of goods and
services .Public sector activity ranges from delivering social security,
administering urban planning and organizing national defenses. The
composition of the public sector varies by country, but in most countries the
public sector includes such services as the police, military, public roads,
public transit, primary education and healthcare for the poor.
Answer2: The List of industries reserved for the public sector in India is as
follows
• Atomic energy.
• The substances specified in the scheduled to the notification of the
Government of India
• Railway transport.
Answer3: The public sector in India contributes to Central Exchequer very
significantly. Public sector has made increasing contributions to the public
sector in the form of dividend, corporate taxes, excise and customs duty, etc.
The total contribution from the public enterprises to the Exchequer increased
from Rs. 11,074 crores in 1982-83 to Rs. 23, 972 crores in 1986-87.
Answer4: The share of industrial sector (comprising of manufacturing,
construction, electricity, gas, water supply has steadily increased during the
planning decades. The government has strengthened the industrial base
considerably by placing due emphasis on setting up of industries like iron
and steel, heavy engineering, coal, heavy electrical machinery, petroleum,
chemical, natural gas, chemicals, drugs fertilizers etc. Because of low
profitability potential, theses industries do not find favour with private
entrepreneurs in India. The total investement by public sector has increased
from 29 crores to 349209 crores after independence
Check Your Progress 2

Answer1: The over capitalization has really affected the public sector of India.
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.
21
Role of Public, Private and Answer2: The public sector suffer from poor project planning investment
Service Sector in
Development
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.

Answer3: The post liberalization period has marked a distinct upturn of the
growth trajectory. The stagnation of the economy seemed to have been over
by mid seventies. The share of agriculture in GDP has been steadily decreasing
after economic reforms. It has decreased from 28% to 19% from 1994 to
2004. Where as the share of industry has remained at the same level of 26%
of GDP of India

Answer4: The growth rate of Indian economy has improved very impressively
in comparison to the pre-reforms period. The service sector’s growth is 7.5
during that period. The private corporate sector in India has responded
favourably to economic reforms with large investments. The overall post
reforms growth rate of output has been robust at an average of 6.8 percent.
The share of service sector in the GDP has significantly increased to about
55% during last decade.

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