Public Sector Reforms in India – UPSC

In this article, You will read the Public Sector Reforms in India – for UPSC (Industry – Geography of India).

Public Sector Undertakings

• In India, a government-owned corporation is termed as a public sector undertaking (PSU).
• This term is used to refer to the companies in which the government (either the federal, Union Government or the many state or territorial governments, or both) own a majority (51 percent or more) of the company equity.
• Public Sector Undertakings are a major part of the Indian economy that comprises public services and enterprises and it provides services that benefit the entire society.

3 Major Classifications of Public Sector

• The public sector can be classified into:-
  • Departmental Undertaking – Directly managed by concerned ministry or department. (e.g. Railways, Posts, etc.)
  • Non-Departmental Undertaking – PSU (e.g. HPCL, IOCL, etc.)
  • Financial Institution (e.g. SBI, UTI, LIC, etc.)
• The rationale behind the establishment of PSU’s was Industrialisation and the establishment of Capital Goods Industries and Basic Industries. The organizations that are not a part of the public sector are termed as private sector that works to raise profit for the organization.

Objectives of Setting up Public Sector Unit (PSU)

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

Why the PSEs (Public Sector Enterprises)

• Public enterprise help in rapid economic growth
• It creates the necessary infrastructure for economic development.
• To earn return on investment and generate resources for development.
• To promote redistribution of income and wealth.
• To generate employment opportunities.
• To promote balanced regional development.
• To assist the development of small-scale industries.
• To earn foreign exchange for the economy.
• Investment in the PSE,s during plans is given in following table:

Role of Public Sector in the Upliftment of Society

• Public sector & capital formation – This sector has been a major reason for the generation of capital in the Indian economy. A large amount of the capital comes from the Public sector Units in India
• Creation of Employment opportunities – Public sector has brought about a major change in the employment sector in the country. They provide a lot of opportunities under various domains and thus helps in uplifting the Indian economy and society.
• Development of Different Regions – The establishment of major factories and plants has boosted the socio-economic development of different regions across the country. Inhabitants of the region are impacted positively concerning the availability of facilities like electricity, water supply, township, etc.
• Upliftment of Research and Development – Public sector units have been investing a lot to introduce advanced technology, automated equipment, and instruments. This investment would result in the overall cost of production.

Public Sector Undertakings (PSU) – Problems

• The major problems of PSUs can be stated below:
  • Inappropriate investment decisions
  • Improper Pricing Policy
  • Excessive overhead cost
  • Lack of Autonomy & Accountability
  • Overstaffing
  • Trade Unionism
  • Under Utilization of capacity

Need for Public Sector Reforms

• Lack of competition: In Public Sector Enterprises, the level of profit is low as compared to the private sector, this was due to lack of competition and over protection to PSEs.
• Over employment: The man power of Public Sector Enterprises has been much more than required which led to the problem of inefficiency and disguised unemployment in PSEs
• Long gestation period: For the completion of any project, the Public Sector Enterprises normally takes much more time than expected.
• Over capitalization: In many cases, the actual cost of the planned project exceeds the original cost due to mismanagement and Bureaucratic hurdles.
• Inefficient management: Lack of management and planning in Public Sector Enterprises has created many issues and challenges for Public Sector Enterprises.
• Absence of appropriate pricing policy and fulfilling of social objectives has marred Public Sector Enterprises with inefficiency and lack of competitiveness
• Lack of efficient and trained staff: Lack of skilled manpower in the Public Sector Enterprises is also one the important issue due the which the production and efficiency have decreased

Industries reserved for PSU’s prior to July 1991

• Arms and ammunition and allied items of defence equipment
• Atomic energy
• Iron and steel
• Heavy casting and forging of steel items
• Heavy plant and machinery required for iron and steel production, for mining, for machine tool manufacturing, such other industries as may be specified by the central government.
• Heavy electrical plant including large hydraulic and steam turbines
• Coal and lignite
• Minerals oils
• Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond.
• Mining and processing of copper, lead, zinc, tin molybdenum and wolfram
• Minerals specified in the schedule to the atomic energy
• (control of production use) order 1953.
• Aircraft
• Air transport
• Rail transport
• Ship building
• Telephones and telephone cables, telegraph and wireless apparatus (excluding radio receiving sets)
• Generation and distribution of electricity

Industries reserved for PSU’s since July 1991

• Arms and ammunition and allied items of defence equipment, defence aircraft and warship
• Atomic energy
• Coal and lignite
• Mineral oils
• Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond
• Mining of cooper, lead, zinc, tin, molybdenum and wolfram
• Minerals specified in the schedule to atomic energy
• (control of production and use) order, 1953
• Railway transport

Industries reserved for PSU’s since December 2002

• Atomic energy
• Minerals specified in the schedule to atomic energy (control of production and use) order, 1953
• Railway transport
• Arms and ammunition

Categories of Public Sector Enterprises in India

MAHARATNA CPSEs

• The “Maharatna” category for CPSEs was introduced in 2009 with objective to empower mega CPSEs to expand their operations and emerge as global giants or become Indian Multinational Companies (MNCs).
• CRITERIA
  • Having Navratna status.
  • Listed on Indian stock exchange with minimum prescribed public shareholding under SEBI regulations.
  • Average annual turnover of more than Rs. 25,000 crore, during the last 3 years.
  • Average annual net worth of more than Rs. 15,000 crore, during the last 3 years.
  • Average annual net profit after tax of more than Rs. 5,000 crore, during the last 3 years.
  • Should have significant global presence/international operations.
• MAHARATNA PSEs
  • 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

NAVRATNA CPSEs

• The Government had introduced the Navratna scheme, in 1997, to identify CPSEs that had comparative advantages and to support them in their drive to become global giants.
• CRITERIA
  • The Miniratna Category – I and Schedule ‘A’ CPSEs, which have obtained ‘excellent’ or ‘very good’ rating under the Memorandum of Understanding system in three of the last five years, and have a composite score of 60 or above in the six selected performance parameters, namely:
    • Net Profit to Net Worth (Maximum: 25)
    • Manpower cost to cost of production or services (Maximum: 15)
    • Gross margin as capital employed (Maximum: 15)
    • Gross profit as Turnover (Maximum: 15)
    • Earnings per Share (Maximum: 10)
    • Inter-Sectoral comparison based on Net profit to net worth (Maximum: 20)
• NAVRATNA CPSEs (16 in Number)
  1. Bharat Electronics Limited (BEL)
  2. Container Corporation of India Limited
  3. Engineers India Limited
  4. Hindustan Aeronautics Limited
  5. Hindustan Petroleum Corporation Limited
  6. Mahanagar Telephone Nigam Limited
  7. National Aluminium Company Limited
  8. National Buildings Construction Corporation Limited
  9. NMDC Limited
  10. Neyveli Lignite Corporation Limited
  11. Oil India Limited
  12. Power Finance Corporation Limited
  13. Power Grid Corporation of India Limited
  14. Rashtriya Ispat Nigam Limited
  15. Rural Electrification Corporation Limited
  16. Shipping Corporation of India Limited

MINIRATNA CPSEs

• The CPSEs that have shown profits in the last continuous three years and have positive net worth can be considered eligible for grant of Miniratna status. Presently, there are 71 Miniratnas in total. The Miniratnas are divided into two categories (I and II).
  • Category One: The PSUs that have made profits in the previous three years or have generated a profit Rs 30 crore or more in one of the preceding three years
  • Category Two: The PSUs that have made profits in the preceding three years and have a positive net worth in all three preceding years.
• CRITERIA
  • The CPSEs which have made profits in the last three years continuously and have positive net worth are eligible to be considered for grant of Miniratna status
• MINIRATNA CPSEs
  • In 2002, there were 61 government enterprises that were awarded Miniratna status. However, at present there are 71 government enterprises that were awarded Miniratna status.

What is the economic reform policy for the public sector?

• The public sector policy followed by the government at present including disinvestment programmes were launched after the New Industrial Policy of 1991. The New Industrial Policy, which acts as core policy behind economic reforms, has brought extensive changes in the working of Public Sector Undertakings (PSUs).
• The changes made by the Industrial Policy 1991 on PSUs were several, starting from sectors where the PSUs to be concentrated, removal of reservation for PSUs in most sectors, their restructuring by adopting market oriented practices, selling of loss making PSUs, reduction of government ownership through disinvestment etc. The sum of these reform was that the PSUs are no more occupying the commanding heights of the economy, rather they have to compete with the private sector on an equal footing.
• First of all, the public sector policy of the 1991 industrial policy has identified strategic areas and non-strategic areas for the public sector. The government decided to concentrate only on the strategic sector by withdrawing the public sector from most of the non-strategic sectors. Adding efficiency and infusing competitive business practices became the main solution to control the losses of the PSUs.
• The following are the main reform measures introduced for the PSUs as part of the 1991 industrial policy.
  • The public sector will focus on strategic, high-tech and essential infrastructure areas.
  • PSUs which are chronically sick are to be considered for reconstruction
  • To encourage resource mobilization in PSUs, a part of the shareholding of PSUs will be given to the mutual funds, financial institutions and general public and to the workers (often this is described as disinvestment policy).
  • Board of PSUs will be made more professional and given more powers.
  • The PSU management will be given autonomy and for this the government will sign Memoranda of Understanding with the PSU Boards.
• Following are the main areas to be engaged by the Public Sector under the 1991 industrial Policy:
  • Essential infrastructure goods and services.
  • Exploration and exploitation of oil and mineral resources.
  • Technology developments and building of manufacturing capabilities in areas which are crucial in the long term development of the economy and where private sector investment is inadequate.
  • Manufacture of products where strategic consideration predominate such as defense equipment.
  • The public sector policy and disinvestment of PSEs are derived from the Industrial Policy of 1991. It has introduced a restructuring plan and changed role for PSEs.
• Strategic and non-strategic areas for public sector
  • On 16th March 1999, the Government classified the Public Sector Enterprises into strategic and non-strategic areas for the purpose of disinvestment. It was decided that the Strategic Public Sector Enterprises would be those in the areas of:
    • Arms and ammunitions and the allied items of defence equipment, defence aircrafts and warships
    • Atomic energy (except in the areas related to the generation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and nonstrategic industries)
    • Railway transport.
  • All other Public Sector Enterprises were to be considered non-strategic. For the non-strategic Public Sector Enterprises, it was decided that the reduction of Government stake to 26% would not be automatic and the manner and pace of doing so would be worked out on a case-to-case basis.
  • A decision in regard to the percentage of disinvestment i.e., Government stake going down to less than 51% or to 26%, would be taken on the following considerations:
    • Whether the industrial sector requires the presence of the public sector as a countervailing force to prevent concentration of power in private hands, and
    • Whether the industrial sector requires a proper regulatory mechanism to protect the consumer interests before Public Sector Enterprises are privatized.

Impact of Public Sector Reforms

• Public Sector Reforms have an impact in following sectors
  • Research: There has been increased in research and development activities after Public Sector Reforms to make Indian PSUs globally competitive.
  • High-level networks: The schemes like Digital India, optical fiber network, etc. have contributed to an increase in communication networks and efficiency.
  • Consultancy: Consultancy services have been mushrooming in the country which is the result of Public Sector Reforms.
  • Training: There has been a focus on skill development to cater to the needs of the Public Sector in order to make it more competitive.