Public Sector Reforms in India – UPSC

• In India, a government-owned corporation is called a public sector undertaking (PSU).
• The term covers companies in which the Union Government, one or more State or territorial governments, or both together hold a majority, 51% or more, of the equity.
  • The Companies Act, 2013 defines a government company in the same way, and includes its subsidiaries.
• PSUs are a major part of the Indian economy. Together with public services, they provide services that benefit the whole society.
• Public sector reform is the changed role of these enterprises since 1991: fewer reserved sectors, more autonomy, market discipline, and government stake sales.

The Public Sector

Three Major Classifications

• Departmental undertaking: managed directly by the ministry or department concerned, such as Railways and Posts.
• Non-departmental undertaking: a PSU proper, such as HPCL and IOCL.
• Financial institution: such as SBI, UTI and LIC.
• The ownership classification sets public sector industries beside private, joint and co-operative ones.
  • Organisations outside the public sector form the private sector, which works to raise profit for the firm.
• The rationale for PSUs was industrialisation, especially capital goods and basic industries.
  • Private capital was neither ready nor able to fund large capital-intensive plants after independence.
  • The Second Plan and the Industrial Policy Resolution of 1956 gave the public sector the key role in basic and heavy industry.
  • State-owned steel plants at Durgapur, Rourkela and Bhilai, the Chittaranjan locomotive works and Hindustan Machine Tools came in this phase. Steel Authority of India was formed in the Fifth Plan period.
  • A joint sector of firms held by private owners and the State, such as Gujarat Alkalies and Oil India, grew beside it.

Objectives of Setting Up PSUs

• To create an industrial base in the country.
• To generate a better quality of employment.
• To develop basic infrastructure.
• To provide resources to the government.
• To promote exports and reduce imports.
• To reduce inequalities and speed up economic growth and development.

Why Public Sector Enterprises

• Public enterprises help rapid economic growth.
• They create the infrastructure needed for economic development.
• They earn a return on investment and generate resources for development.
• They promote redistribution of income and wealth.
• They generate employment.
• They promote balanced regional development. Steel plants at Durgapur, Rourkela, Bhilai and Bokaro became new nuclei in backward areas.
• They assist small-scale and ancillary industries.
• They earn foreign exchange for the economy.
• Investment in public sector enterprises during the Plans is given in the following table:

The Public Sector Today

• The Public Enterprises Survey 2024-25 (published 15 December 2025) covers central public sector enterprises (CPSEs). It leaves out departmental enterprises, banks and insurance companies.

• Revenue: gross revenue of operating CPSEs reached ₹37.01 lakh crore, up from ₹36.09 lakh crore.
  • Manufacturing, processing and generation gave 70.1% of it.
  • Petroleum refining and marketing alone gave 54.5%.
  • Indian Oil, Bharat Petroleum, Hindustan Petroleum, Food Corporation of India and NTPC earned the most.
• Profit: profit-making CPSEs earned ₹3.09 lakh crore, down 10.1% from ₹3.43 lakh crore, mainly because of petroleum companies. ONGC, NTPC, Power Finance Corporation, Coal India and REC earned the most.
• Employment mix: in 2024-25, regular employees fell to 7,83,728, while casual and contract workers rose to 7,58,611.
• Closures: 75 CPSEs were under closure, liquidation or non-operating.
• Losses: loss-making CPSEs lost ₹0.18 lakh crore in all. BSNL cut its loss from ₹5,371 crore to ₹2,247 crore, and Rashtriya Ispat Nigam from ₹4,849 crore to ₹1,389 crore.
• Contribution: ₹4.94 lakh crore to the central exchequer, ₹1.39 lakh crore in dividends, and ₹1.57 lakh crore in foreign exchange earnings through exports.

Role of the Public Sector in the Upliftment of Society

• Capital formation: the public sector has been a major source of capital generation in the economy.
• Employment opportunities: it has opened jobs across many domains, and so helped uplift economy and society.
• Development of different regions: major factories and plants have raised local socio-economic development, with electricity, water supply and townships for the people of the region.
• Research and development: units have invested in advanced technology, automated equipment and instruments, with the aim of lowering the overall cost of production.

Why Reform Came

Problems of PSUs

• Inappropriate investment decisions.
• Improper pricing policy.
• Excessive overhead cost, including heavy social overheads in plants such as steel.
• Lack of autonomy and accountability.
• Overstaffing.
• Trade unionism and poor labour relations.
• Under-utilisation of capacity.

Need for Public Sector Reforms

• Lack of competition: profit stayed low compared with the private sector, owing to over-protection.
• Over-employment: manpower beyond need led to inefficiency and disguised unemployment.
• Long gestation period: projects normally took much longer than expected.
• Over-capitalisation: actual cost often exceeded the original cost, through mismanagement and bureaucratic hurdles.
• Inefficient management: weak management and planning created many problems.
• No appropriate pricing policy: this, with social objectives to meet, brought inefficiency and low competitiveness.
• Shortage of efficient and trained staff: a lack of skilled manpower reduced production and efficiency.

Reservation for the Public Sector Over Time

• The list has kept shrinking. Most accounts give 17 reserved industries under the 1956 Resolution, 8 after 1991, and 3 by about 2001. Accounts of the current position name only atomic energy and railway operations. Defence production opened to private firms in the early 2000s.
• The SHANTI Act, 2025 provides for licensing private Indian companies to build and run nuclear power plants, while sensitive fuel activities stay with government.

The Reforms

Economic Reform Policy for the Public Sector

• The present policy, including disinvestment, began with the New Industrial Policy of 1991 (24 July), the core of the economic reforms. It changed the working of PSUs widely.
• Those changes covered the sectors for PSUs, removal of reservation in most sectors, restructuring with market-oriented practices, sale of loss-making units, and lower government ownership.
  • Licensing was removed for most industries, and the area reserved for the public sector was reduced.
  • The outcome: PSUs no longer occupy the commanding heights of the economy, and compete with the private sector on an equal footing.
• The policy separated strategic and non-strategic areas. Government would concentrate on the first, and efficiency and competitive business practice became the answer to losses.
• Main reform measures of 1991:
  • The public sector will focus on strategic, high-tech and essential infrastructure areas.
  • Chronically sick PSUs are to be considered for reconstruction, through the Board for Industrial and Financial Reconstruction.
  • To mobilise resources, part of the shareholding goes to mutual funds, financial institutions, the general public and workers, often described as disinvestment policy.
  • Boards will be more professional and hold more powers.
  • Managements get autonomy through Memoranda of Understanding with government, a system in use since 1986-87.
• Main areas for the public sector under the 1991 policy:
  • Essential infrastructure goods and services.
  • Finding and extracting oil and minerals.
  • Technology and manufacturing capability vital to long-term growth, where private money falls short.
  • Goods of strategic weight, such as defence equipment.
• Public sector policy and disinvestment thus derive from the 1991 policy, which gave enterprises a restructuring plan and a changed role.
• Later bodies and steps: the Board for Reconstruction of Public Sector Enterprises worked alongside the older Board from 2004. Sick CPSEs by its count fell from 81 in 2004-05 to 58 in 2013-14.
  • A Rajya Sabha committee warned in 2006 that two bodies deciding revival could bring conflicting opinions, appeals and costly delays.
• Reporting: the yearly Public Enterprises Survey dates from 1960-61, and the 2024-25 edition is its 65th.

Strategic and Non-Strategic Areas, 1999

• On 16 March 1999, the Government classified enterprises into strategic and non-strategic, for disinvestment. Strategic enterprises were those in:
  • Arms and ammunition and allied defence equipment, defence aircraft and warships.
  • Atomic energy, except nuclear power generation and uses of radiation and radio-isotopes in agriculture, medicine and non-strategic industries.
  • Railway transport.
• All others were non-strategic. Cutting the government stake to 26% would not be automatic, and the manner and pace would be set case by case.
• The choice between going below 51% and down to 26% would turn on two questions:
  • Does the sector need the public sector as a countervailing force against concentration of power in private hands?
  • Does it need a regulatory mechanism to protect consumers before privatisation?

New Public Sector Enterprise Policy, 2021

• Notified on 4 February 2021 with Cabinet approval, it aims to minimise government’s presence in enterprises across all sectors.
• Four strategic sectors:
  • Atomic energy, space and defence.
  • Transport and telecommunications.
  • Power, petroleum, coal and other minerals.
  • Banking, insurance and financial services.
• In strategic sectors: a bare minimum of holding companies stays under government control. The rest are considered for privatisation, merger, subsidiarisation or closure.
• In non-strategic sectors: enterprises are considered for privatisation where feasible, or else for closure.
• Exempt: not-for-profit companies, and those supporting vulnerable groups or holding developmental roles.
• Follow-up: guidelines on 13 December 2021, and a Cabinet decision of 18 May 2022 that lets boards recommend closure or disinvestment of their subsidiaries, units or joint ventures.

Positions on Reform

Categories of Public Sector Enterprises

• A status system gives enterprises graded powers. The Department of Public Enterprises list in its annual report (December 2025) shows 14 Maharatna, 26 Navratna and 58 Miniratna enterprises.

Maharatna CPSEs

• The Maharatna category was introduced in 2009, and announced in February 2010, to help mega CPSEs expand their operations and emerge as global giants or Indian multinational companies (MNCs).
• Criteria:
  • Having Navratna status.
  • Listed on an Indian stock exchange, with the minimum public shareholding under SEBI regulations.
  • Average annual turnover of more than ₹25,000 crore over the last 3 years.
  • Average annual net worth of more than ₹15,000 crore over the last 3 years.
  • Average annual net profit after tax of more than ₹5,000 crore over the last 3 years.
  • Significant global presence or international operations.
• An older list of seven: Bharat Heavy Electricals Limited, Coal India Limited, GAIL (India) Limited, Indian Oil Corporation Limited, NTPC Limited, Oil & Natural Gas Corporation Limited, Steel Authority of India Limited.
• Added since: Bharat Petroleum, Hindustan Petroleum, Power Finance Corporation, Power Grid, REC and Oil India. Hindustan Aeronautics became the 14th in October 2024.

Navratna CPSEs

• The Government introduced the Navratna scheme in 1997, to identify CPSEs with comparative advantages and support them towards becoming global giants.
• Criteria: Miniratna Category I and Schedule A CPSEs with an “excellent” or “very good” rating under the Memorandum of Understanding system in three of the last five years, and a composite score of 60 or above on six parameters:
  • Net profit to net worth (maximum 25).
  • Manpower cost to cost of production or services (maximum 15).
  • PBDIT (gross margin) to capital employed (maximum 15).
  • PBIT (gross profit) to turnover (maximum 15).
  • Earnings per share (maximum 10).
  • Inter-sectoral comparison of performance (maximum 20).
• An older list of 16: Bharat Electronics Limited (BEL), Container Corporation of India Limited, Engineers India Limited, Hindustan Aeronautics Limited, Hindustan Petroleum Corporation Limited, Mahanagar Telephone Nigam Limited, National Aluminium Company Limited, National Buildings Construction Corporation Limited, NMDC Limited, Neyveli Lignite Corporation Limited, Oil India Limited, Power Finance Corporation Limited, Power Grid Corporation of India Limited, Rashtriya Ispat Nigam Limited, Rural Electrification Corporation Limited, Shipping Corporation of India Limited.
  • Six of these have since become Maharatna. National Buildings Construction Corporation is now NBCC (India), and Neyveli Lignite is NLC India.
• Newer names include Indian Railway Finance Corporation, IRCTC, RITES, Ircon, Rail Vikas Nigam, RailTel, NHPC, SJVN, Mazagon Dock and Solar Energy Corporation of India. Garden Reach Shipbuilders was added on 19 June 2026.

Miniratna CPSEs

• CPSEs with profits in each of the last three years and a positive net worth may be considered for Miniratna status. They must not have defaulted on government loans, or depend on budgetary support or government guarantees.
• Two categories:
  • Category I: continuous profit for three years, with pre-tax profit of ₹30 crore or more in at least one of them, and positive net worth.
  • Category II: continuous profit for three years and positive net worth.
• Numbers over time: 61 in 2002, and 71 in an older count, against 58 in the December 2025 list (49 in Category I and 9 in Category II).

Effects

Impact of Public Sector Reforms

• Research: research and development activity has increased, to make Indian PSUs globally competitive.
• High-level networks: schemes like Digital India and the optical fibre network have added to communication networks and efficiency.
• Consultancy: consultancy services have multiplied in the country as a result of the reforms.
• Training: a focus on skill development serves the public sector’s need to become more competitive.