Wednesday, May 18, 2011

Does the structure and growth of public sector matches with its objectives?

Does the structure and growth of public sector matches with its objectives? Explain with the help of an example.

Answer. Before independence, there was almost no 'Public Sector' in the Indian economy. The only instances worthy of mention were the Railways, the Posts and Telegraphs, the Port Trust, the Ordnance and the Aircraft factories and few Government managed undertakings like the Government salt factories, quinine factories etc. After independence and with the advent of planning, India opted for the dominance of the public sector, firmly believing that political independence without economic self-reliance was not good for the country. The passage of Industrial Policy Resolution of 1956 and adoption of the socialist pattern of the society led to a deliberate enlargement of our public sector. It was believed that a dominant public sector would reduce the inequality of income and wealth, and advance the general prosperity of the nation. The planners also seemed to believe that by placing the management and workers in public enterprises in a position of responsibility and trust, they would be so imbued with a sense of the public good that their actions and aspirations would naturally reflect what was best for the country. The main objectives for setting up the Public Sector Enterprises as stated in the Industrial Policy Resolution of 1956 were:
‰ To help in the rapid economic growth and industrialization of the country and create the necessary infrastructure for economic development;
‰ To earn return on investment and thus generate resources for development;
‰ To promote redistribution of income and wealth; • To create employment opportunities;
‰ To promote balanced regional development;
‰ To assist the development of small-scale and ancillary industries; and
‰ To promote import substitutions, save and earn foreign exchange for the economy.

In tune with the widespread belief at that time, the 2nd Five Year Plan stated very clearly that ' the adoption of socialist pattern of society as the national objective, as well as the need for planned and rapid development, require that all industries of basic and strategic importance, or in the nature of public utility services, should be in the public sector. Other industries, which are essential and require investment on a scale, which only the state, in the present circumstances, could provide, have also to be in the public sector. The state has, therefore, to assume direct responsibility for the future development of industries over a wider area '.

The Second Plan further emphasized that ' the public sector has to expand rapidly. It has not only to initiate developments which the private sector is either unwilling or unable to undertake, it has to play the dominant role in shaping the entire pattern of investment in the economy, whether it makes the investments directly or whether these are made by the private sector. The private sector has to play its part within the framework of the comprehensive plan accepted by the community.'

Investment in Public Sector Enterprises

Particulars Total Investment Enterprises

At the commencement of the 1st 5-Year



Plan (1.4.1951)

At the commencement of the 2nd 5-Year

Plan (1.4.1956)

At the commencement of the 3rd 5-Year

Plan (1.4.1961)

At the end of the 3rd 5-Year Plan


At the commencement of the 4th 5-Year

Plan (1.4.1969)

At the commencement of the 5th 5-Year

Plan (1.4.1974)

29 5

81 21

948 47

2,410 73

3,897 84

6,237 122

At the end of 5th 5-Year Plan (31.3.1979) 15,534 169

At the commencement of the 6th 5-Year

Plan (1.4.1980)

18,150 179

At the commencement of the 7th 5-Year

Plan (1.4.1985)

42,673 215

At the end of 7th 5-Year Plan (31.3.1990) 99,329 244

At the commencement of the 8th 5-Year

Plan (1.4.1992)

1,35,445 246

At the end of 8th 5-Year Plan (31.3.1997) 2,13,610 242

As in 1998 2,31,024 240

As in 1999 2,39,167 240

As in 2000 2,52,554 240

At the end of 9th Five Year Plan As on


324614 240

As on 31.3.2003 335647 240

As on 31.3.2004 349994 242

As on 31.3.2005 357849 237

Source: Department of public enterprises

At the beginning of the 1990’s, the public sector was dominant in many industries. The PSEs contributed the entire output in the vase of petroleum, lignite, copper and primary lead, about 98 percent of zinc, with over 90% of coal, more than half of steel and aluminum and about one-third of fertilizers.

However, a large number of PSEs, including several monopolies, have made huge losses. Despite the huge losses incurred by a number of enterprises, the PSEs as a whole could make profits mainly because of the enormous profits made by several public sector monopolies.

Several of the loss making PSEs have been either in non-priority sectors or in sectors where the private sector proved to be more efficient. A number of loss making units are sick units.

A variety of factors have been identified for the unsatisfactory performance of a large number of public enterprises. While the project formulation has improved over the years, huge cost and time over-runs continued to take place in project implementation. This was on account of problems of land acquisition, procurement of equipment, civil work and other imponderables.

A number of other problems including allocation of resources, delays in the filling up of top level posts, tight regulations and procedures for investment and restrictions on functional autonomy of the enterprises (e.g., in respect of labour and wage policy), etc. have for long been noticed as serious constrains on PSE operational efficiency.

The public sector is generally criticized for inadequate generation of internal resources. The department of public enterprises points out that generation of internal resources by public enterprises is constrained by the following factors.
‰ PSEs were set up not only for commercial consideration but also for factors such as generation of employment, promoting balanced regional development, etc.
‰ Low return on investment on account of price constraints imposed on certain infrastructural goods and services of public enterprises.
‰ A number of sick units in the private sector facing closure had to be taken over by the government and these units form sizeable part of central public sector.
‰ Number of industries promoted in the public sector with long gestation period.
‰ The impact of escalation in the prizes of various inputs and periodical wage revision.

No comments:

Post a Comment

Blog Archive