STUDY MATERIAL FOR CLASS X

SUBJECT – ECONOMIC APPLICATIONS

TOPIC- THE STATE AND ECONOMIC DEVELOPMENT (Part II)

Role of Public Sector

Meaning of Public sector
Public sector refers to the sector that is owned, managed, financed
and controlled by the Government at the Central level, State level or
by local authorities like municipal corporation, committees etc.
The Public Sector in the country is comprising of the following
structure/types:

1. Departmental Undertakings:
A Departmental Undertaking is the oldest and traditional form of an
organization of the public sector enterprise. It is organized, financed and
controlled in such a manner as any other government organization, under
the direction of the Minister concerned who is responsible to the parliament.
Examples include:
(a) The Indian Post and Telegraph Department (Ministry of
communication)
(b) The Indian Railways (Ministry of railways)
(c) Doordarshan (Ministry of information and broadcasting)
(d) All India Radio etc.

2. Statutory Corporations or Public Corporations:

Statutory Corporations are created by a special Act of Parliament or State
Legislature. The Act defines their powers, functions, rules and regulations of
governing them. These have a separate legal existence and have to act in

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their own name. These are backed by the power of government and have
considerable flexibility as these are corporate bodies.
The entire capital of statutory corporation is financed by Government and
these also have right to borrow from public.
Examples include:
i. Life Insurance Corporation of India (LIC)
ii. Reserve Bank of India (RBI)
iii. Oil & Natural Gas Commission (ONGC)
iv. Employee State Insurance Corporation (ESIC) etc.
3. Government Companies:
The Companies Act, 2013 defines a Government Company thus- “A
Government Company means any company in which not less than 51% of
the paid-up capital is held by Central Government or by any State
Government or partly by Central Government and partly by one or more
State Governments.”
A Government company is established under the Indian Companies Act, and
is managed by provisions of this act. These companies are established for
business purpose and these can compete with companies in private sector.
The government is the majority shareholder in these enterprises and it
exercises full control over paid up capital of the company. Its shares are
purchased in the name of President of India.

Examples include:
(i) Steel Authority of India Ltd. (SAIL)
(ii) Hindustan Machine Tools Ltd (HMT)
(iii) Bharat Heavy Electricals Ltd (BHEL)
(iv) Gas Authority of India Ltd (GAIL) etc.

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 Comparison chart

Public sector occupied a worthy place for achieving systematic and planned
development in a developing country like India. In order to provide the
necessary support to the development strategy of the country, the public
sector offers the necessary minimum push for bringing the economy to a
path of self-sustained growth.
Following is some of the important roles of the public sector in the
economic development of a country like India:
1. Generation of Income:
Public sector in India has been playing a definite positive role in generating
income in the economy.
The administrative departments, including defence, Post and Telegraph etc.
including state monopoly such as the railways add to the GDP of the nation.
But the largest share of public sector GVA, comes from the non-
departmental enterprises (NDEs), producing many private goods and

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services, but mainly from utilities and infrastructure, owned and operated
by the central, state and local governments.

2. Capital Formation:
Capital formation is often required to play a lead role in economic
development in the developing countries like India. This is on account of the
reason that the supply of cooperant factors in these countries often depends
on the supply of capital. As the rate of capital formation increases, it exerts
an interacting and cumulative effect on the economy of the country leading
to a growth in national income, a higher rate of capital formation leading to
a still higher rate of growth of national income. Public sector has been
playing an important role in the gross domestic capital formation of the
country. In India, the public sector’s share in gross domestic capital
formation has risen from 3.5 percent in the First five years’ plan to 9.2
percent in the Eighth five years plan., however there has been a declining
trend that has been noted in recent years.
3. Employment:
Public sector is playing an important role in generating employment in the
country.
Public sector employments are of two categories, i.e:
(a) Public sector employment in government administration, defence and
other government services and
(b) Employment in public sector economic enterprises of both Centre,
State and Local bodies. Employment in the public sector can also be a
source of resource redistribution. When governments, for example, create
more public sector positions in less affluent areas with higher
unemployment and lower salaries, they may be inadvertently draining
resources from more affluent areas of the economy to fund those jobs. This
happens when tax collection is unified and public sector wages become
more uniform. Furthermore, the development of public sector jobs has
significant compositional implications on the economy’s various sectors.
Employment in government administration, defence, and other government
services are available in the public sector.
4. Infrastructure:
Without the development of infrastructural facilities, economic development
is impossible. Public sector investment on infrastructure sector like power,
transportation, communication, basic and heavy industries, irrigation,
education and technical training etc. has paved the way for agricultural and
industrial development of the country leading to the overall development of
the economy as a whole. Private sector investments are also depending on
these infrastructural facilities developed by the public sector of the country.

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 5. Strong Industrial base:
Another important role of the public sector is that it has successfully build
the strong industrial base in the country. The industrial base of the
economy is now considerably strengthened with the development of public
sector industries in various fields like—iron and steel, coal, heavy
engineering, heavy electrical machinery, petroleum and natural gas,
fertilizers, chemicals, drugs etc.
The development of private sector industries is also solely depending on
these industries. Thus, by developing a strong industrial base, the public
sector has developed a suitable base for rapid industrialization in the
country. Moreover, public sector has also been dominating in critical areas
such as petroleum products, coal, copper, lead, hydro and steam turbines
etc.
6. Export Promotion and Import Substitution:
Public sector enterprises have been contributing a lot for the promotion of
India’s exports.
The public sector enterprises which played an important role in this regard
include—Hindustan Steel Limited, Hindustan Machine Tools (HMT) Limited,
Bharat Electronics Ltd., State Trading Corporation (STC) and Metals and
Minerals Trading Corporation.
Some public sector enterprises have shown creditable records in achieving
import substitution and thereby saved precious foreign exchange of the
country. In this regard mention may be made of
Bharat Heavy Electricals Limited (BHEL), Bharat Electronics Ltd., Indian Oil
Corporations, Oil and Natural Gas Commission (ONGC). Hindustan
Antibiotics Ltd. (HAL) etc. which have paved a successful way towards
import substitution in the country.
7. Contribution to Central Exchequer:
The public sector enterprises are contributing a good amount of resources to
the central exchequer regularly in the form of dividend, excise duty, customs
duty, Goods and Services Tax, income tax, corporate tax, dividend, fringe
benefit tax and deferred tax. Though there has been a decline in their
contribution in recent years, but they do form an important part of revenue
receipts in the Revenue account of the Government budget.
8. Reducing disparities in distribution of income and wealth:
Increase in the number of Public sector enterprises checking the
concentration of wealth and economic powers in a fewer hands. Thus, the
public sector can reduce this problem of inequalities through diversion of
profits for the welfare of the poor people, undertaking measures for labour
welfare and also by producing commodities for mass consumption.

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 9. Removal of Regional Disparities:
From the very beginning industrial development in India was very much
skewed towards certain big port cities like Mumbai, Kolkata and Chennai. In
order to remove regional disparities, the public sector tried to disperse
various units towards the backward states like Bihar, Orissa, and Madhya
Pradesh. States like that of Orissa has been one of the successes in this
regard which has shown faster industrial growth in recent times.
Problems faced by the public sector
Following are the role and problems of public sector in an economy:
1. Inefficient Management
It has been found that these enterprises are managed by public servants.
They are not professionally qualified nor experts in the management of
industrial enterprises.
Public enterprises always suffer from delayed decision making. Whereas,
private enterprises are managed by professionals which makes them more
punctual in working.
Managerial dis-economies are there in public enterprises because of the lack
of proper management cadre in the public sector.
Public enterprises are usually managed by the bureaucrat. Organizational
hierarchy, fix up responsibility, the delegation of authority and management
information system is the weak part of public enterprises.
2. Lack of Efficiency
They are not run-on commercial principles. Their main motto is social
welfare, not profit earning.
If a public enterprise in-cursed losses due to efficiency, it is overlooked.
Whereas private enterprises are run for profit. Profitability is the man
criterion of their efficiency. It is assumed by the private sector that
competition can be faced on the basis of efficiency. Lack of competition is
one of the causes of the insufficiency of public enterprises.
3. Delayed Decisions
Delayed in decision making is one of the key problems. Lack of personal
interest No one wanted to take responsibility for making decisions. The loss
in public enterprises is a loss of public. It is not a personal loss.
Therefore, public enterprises have been undergoing losses and the number
of losses is the mounting year after year.
4. Lack of Innovations
Innovations are essential for economic development. Public enterprise lacks
it due to monopoly or lack of competition. The private sector is always busy
with innovating new techniques, new production methods, etc. for the
purpose of cost reduction and profit maximization.

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On the other hand, public sector employees are government employees and
their jobs are secure.
They do not bother about the cost and profit of public enterprises.
5. Excessive Government Control
It has been found that the government is always interfering in the petty
decisions of public enterprise. Decision making takes a long time due to the
complex procedure in public enterprises.
Autonomous corporations were set up to avoid excessive government control
in public enterprises. It is, therefore, suggested that government control
should not be diffused and dispersed over a wide area, but there should be
confined to basic issues and key points.
6. Mounting Losses
A review of the working of PSUs reveals that either their profits are
deplorably low or they are making losses. The losses are mounting year after
year. Although some of the public enterprises are earning profits, the
amount is very thin in comparison to capital employed and our
expectations.
The losses in public enterprises can be justified during the gestation period
but afterward, they must try to wipe out losses and earn profits. The
government should, therefore, make a case by the case study of the loss
incurring enterprises and take remedial, measures.
7. Political Interference
Public enterprises are becoming a means of fulfilling the political objective of
political parties. They have to serve the political interests of the ruling
parties. It has been observed that political factors influence decisions about
the location of projects, appointments, and even daily operations.
The location of the project is decided on the basis of political interest and
not on the basis of the economic viability of the project, resulting in
incurring losses.
This approach leads to considerable wastage of capital resources. Politicians
are nominated on the board of directors of public enterprises.
8. Under Utilization of Capacity
Public enterprise is facing the problems of underutilization of its installed
capacity. Thus, the capital resources are not fully utilized by public
enterprise. Therefore, it is necessary to find the causes of low-capacity
utilization and thus remedy the situation with appropriate measures.
Shortage of power, inadequate demand, equipment breakdowns, inadequate
raw material, managerial inefficiency, etc. Are the major causes of
underutilization of capacity.

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9. Time and Cost Over-Runs
Most of the public sector projects take the long ester time to complete than
was initially envisaged.
The cost of the projects also run upwards due to delay in completion of
projects.
Poor and adequate project planning is the main cause of their delay in the
construction time schedule and an increase in cost.
Therefore, it is essential to prepare the completion of other project and an
increase in cost can be avoided.
10. Problems of Autonomy and Control
There is a need to provide greater functional autonomy in the management
of public enterprises, so that they may work efficiently, economically and
enthusiastically. Therefore, there is a problem of coordination between
control and autonomy.
In order to provide more autonomy in parliament can help by not interfering
in the working of public enterprises.
11. Problems of Price Policy
Profit earning is not the main object of public enterprises. They are operated
for social welfare. If they indulge themselves in profit-making activities then
there will be no difference left between public enterprise.
If they follow the below cost price policy, they have to bear losses and it
cannot be justified. If they charge heavy profits, then the social objective
cannot be fulfilled.
Therefore, they have to keep in mind the social implications of price policy.
In many cases, prices are kept low even then the cost. This naturally affects
their profitability.
12. Over Staffing
It has been noticed that in a most public enterprise, manpower is in excess
of actual requirements. Due to poor manpower planning, public enterprises
are facing the problem of overstaffing. There is a lack of proper education
and training of the employees in the public sector. Therefore, it is suggested
to reduce the staff and top positions should be open to its employees.
13. Problems of Over Capitalisation
Public enterprises are facing problems of overcapitalization. The Input-
output ratio in many projects was unfavourable. Defective project planning,
lack of cost-consciousness, underutilization of capacity, etc. are the main
causes of overcapitalization in public understandings.
14. Lack of Motivation
There is a lack of motivation in public enterprises. Employees get fixed
salaries and other perks. There is no reward for good work and no

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punishment for bad. Thus, efficient and innovative employees are not
motivated to do hard work.
Private sector
The Private Sector enterprises are owned, controlled and managed
either by individuals or business entities mainly for the purpose of
earning profits. It can be small-scale, medium-scale or even large-scale
organisations. These get formed to earn a profit from their business
operations, and they can raise funding from individuals, groups, and the
general public.
The different entities within the private sector include sole proprietorship,
partnership, cooperative societies, companies and multinational
corporations.
Ever since the introduction of the New Economic Policy in 1991 by the
Government of India, almost every industry in the country has opened up to
the private sector. It has led to a phenomenal increase in the size of the
Indian economy and its growth rates. The various types of Private sector
enterprises have been classified as below:

Examples of Private sector companies in India:

a) TATA Motors
b) Reliance Industries Limited.
c) Tata Consultancy Services (TCS)
d) Infosys Technologies Ltd.
e) Wipro Limited.
f) Bharti Tele-Ventures Limited.
g) ITC Limited.

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The main differences between Public and Private Sectors are as follows:
Public Sector Private Sector
Public sector organisations are Private sector organisations are
owned, controlled and managed by owned, controlled and managed by
the government or other state-run individuals, groups or business
bodies. entities.
The ownership of the public sector The ownership of private sector
units can be by central, state or units is by individuals or entities
local government bodies, and this with zero interference from the
ownership is either full or partial. government.
Capital is contributed by Capital is raised through the sale of
Government either from taxes, fees, shares and debentures and loans
fines, bonds, shares etc. from financial institutions.
The main motive of public sector The main motive of the private
organisations is to engage in sector is to earn profits from their
activities that serve the general business operations.
public.

The Public sector enterprises are There is no accountability of private

accountable to the parliament or sector organizations towards
state legislature. parliament or state legislature.
Accounts of PSUs are audited by Accounts of Private sector
Comptroller and Auditor general companies are audited by practising
which is compulsory in all cases. Chartered Accountants which is not
compulsory in all cases

Reasons for Privatization

Meaning of Privatisation
The transfer of ownership, property or business from the government to
the private sector is termed privatization. The government ceases to be
the owner of the entity or business.
Government companies are converted into private companies in two ways :
(i) by withdrawal of the government from ownership and management of
public sector companies and or
(ii) (ii) by outright sale of public sector companies.
Privatisation of the public sector enterprises by selling off part of the
equity of PSEs to the public is known as disinvestment. The purpose of
the sale, according to the government, was mainly to improve financial
discipline and facilitate modernisation. It was also envisaged that private
capital and managerial capabilities could be effectively utilised to improve
the performance of the PSUs.

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The three main features of privatization.

i) Ownership Measures: The ownership of all public enterprises

ultimately shifts to private owners. The denationalization can be
complete or partial
ii) Organizational Measures: This is where we limit the control of the
state in public companies. Some methods include holding company
structuring, leasing. restructuring of the enterprises etc.
iii) Operational Measures: Public organizations and companies were
running into huge losses. So, the efficiency of these companies was
to be increased.
The reasons as to why Privatisation was initiated in India are as follows:

a) Creation of a competitive environment:

Firstly, the current buzzwords are liberalization, privatisation and
Globalisation i.e., LPG. To move in tune with the global situation,
privatisation seems to be the better answer. Hitherto, Indian private
industrialists performed in a sheltered market and remained insulated from
any kind of external competition. This made Indian private sector an
inefficient one. Goods produced by this sector were far below international
standards. Private industrialists kept themselves busy competing among
themselves domestically.
Privatisation will promote private sector culture by introducing competition
so that Indian industrialists can compete with their foreign counterparts
and, hence, generate greater output and improved efficiency.

b) Increase in the efficiency and productivity of operations

First, privatisation will usher in an improvement in efficiency and as
improved performance is concerned with ‘profit-oriented’ decision-making
strategy. Accountability is strictly ensured in a private sector enterprise and
some people are held responsible for any failure. Accountability and
responsibility will definitely tone up the efficiency and greater output of the
private sector.
It is generally considered that a profit-oriented investor operating in a
competitive environment will strive to minimise costs and improve services.

c) Development of Social and Economic Infrastructures by the

Government:
Secondly, government resources for keeping up PSEs may be utilised for the
purposes of social sector development as this sector is starved of financial
resources. Modern governments should spend more on this sector as well as
economic infrastructures as these are the two essential pillars of growth.

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d) Reduce the financial and administrative burden on the public sector
Public management of an enterprise on a day-to-day basis generates a
considerable demand on governmental resources in terms of time and
personnel for what is largely a commercial enterprise. Many of the PSUs run
into heavy losses and Government has to incur large expenditure on subsidy
payment to keep these afloat. This is categorized as unproductive public
expenditure that increases the fiscal deficit in the Government budget.
Thus, privatisation would help to reduce the unproductive expenditure
thereby reducing the fiscal burden of the Government.

e) Greater flexibility and autonomy in making business decisions/

Minimum Government interference in business decisions
Indian PSEs are subject to too much governmental and political
interference thereby making them operationally in-efficient. Private sector
is free from such unavoidable interference. In many cases the PSUs
suffered from losses due to lack of autonomy in making business
decisions. Privatisation would enable freedom and autonomy in taking
managerial decisions related to production and investment. These
decisions on commercial lines will expand the profitability of the
business units as making timely and prudent decisions are the need of
the hour in this competitive environment.
f) Greater investment, employment and income opportunities:
Opening up of those sectors that were earlier under the control of the Public
sector encourages private investment in industries and services. Higher
levels of investment create more employment opportunities and generate
income in the hands of those employed. This can be considered as the
solution of unemployment in our country.

g) Greater inflow of foreign investment

When countries engaged in economic policies favouring private
ownership, they simultaneously attracted much attention from foreign
investors, particularly from multinational corporations, in the form of
foreign direct investment (FDI). This is especially true for developing
countries. FDI brings about many benefits ranging from fund-raising,
new technologies, improvements in human capital, new managerial skills
and improved corporate governance.
h) Gretare market orientation:
Privatisation liberates the economy from state control. Without
government regulations dictating market progression, the market
operates on principles pf price mechanism. Due to a lack of government
interference, the market becomes more dynamic and follows integral
economic values of demand and supply. Those goods that will fetch a
higher price in the market should be produced more. The adoption of
production technology would also involve cost considerations likewise
and capital available in international market at cheaper rates would

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favour capital intensive production technique. Consumer response to a
more dynamic and organically run market is greater and generates
higher revenues.

Revision Questions
1) Explain how an improper price policy results in the poor performance
of public sector enterprises.
2) Explain briefly four problems of Public sector undertakings in India.
3) Explain the important role played by the Public sector in the economic
development of the country.
4) Discuss the various arguments given in favour of privatization.
5) State the classification of Public sector in India.
6) Differentiate between a Public corporation and Government
companies.
7) State the meaning of Private sector. Mention five differences between
public sector and private sector.

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