Public Sector Undertakings

Different aspects of Public sector undertaking in India

Public sector undertaking means it is basically a “Government Company” defined under Section 2 (45) of the Companies Act, 2013. The term “public sector undertaking in India” refers to government-run businesses that collect fees for their services. Tariff rates and surcharges may be set by the market or incentivised. Railway, Postal, Military Establishments, and Banks are typically owned, controlled and administered by the government. Public sector undertakings in India are incorporated under the Companies Act, 1956, that are primarily owned by the government and controlled by a Chairperson and General Manager designated by the government. In both the domestic and global markets, public sector undertakings frequently engage with private sector businesses. 

How did PSUs in India come into existence?

After independence, India faced major socioeconomic and fiscal problems as a result of prolonged days of slavery. With the Industrial Policy Resolution of 1956, India took a sharp turn toward socialism. Many new public sector companies were formed, and many companies in industries such as coal, airlines, banking, and insurance were nationalised. Industrial licensing was implemented in the Soviet Union-style. Inefficient public enterprises fostered inefficiency and corruption. During this time, public sector investment accounted for more than half of total investment. As a result, India’s GDP growth remained low, averaging only 3.5 per cent between 1950 and 1980, with per capita GDP growing at only 1.3 per cent on average in the first three decades after independence. Henceforth, India’s poverty increased, and the country fell behind many other countries in terms of social and economic indicators. Internal liberalisation was pursued in the 1980s, but it was insufficient to address the economy’s growing problems. It took a balance-of-payments crisis in 1991 for the political establishment to recognise the need for reform. 

Greater independence for profitable PSUs in India

In the 1990s, India implemented an industrial policy that paid attention to delicensing, greater independence for PSUs that are profitable, and restructuring firms making continuous losses through the Bureau of Industrial Financing and Restructuring (BIFR). Other aspects of liberalisation included the free entry of private sector firms into industries previously reserved exclusively for PSUs, disinvesting a small portion of the government’s shareholding, and listing PSUs on stock exchanges.

Advocating against Privatisation

Privatisation was not aggressively pursued between 1992 and 1998. One PSU was sold to another, but the transaction was more akin to consolidation than outright privatisation. The BIFR was established to monitor PSU performance and advise them on investment and restructuring, particularly the sick ones. PSUs were divided into three categories and given names: Maharatnas, Navratnas, and Miniratnas, and performance contracts (MOU) were signed with the government to create incentives for better performance. 

The extant evidence on PSU performance

Almost half of the PSUs were losing money in the 1990s, but with the period of high growth beginning in 2002-2003 and better MOUs being implemented to more of them and increased private equity, the number of loss-making PSUs fell to about a quarter of the total. However, since growth slowed after 2012, the share of losers has increased to nearly one-third of the total. As measured by profits over total sales, the profitability of PSUs has also increased from an abysmal 2% in 1990 to around 3% by 2001, then peaked at nearly 9% between 2003-2004 and 2006-2007 and has since fallen to between 5 and 6 per cent. 

The main features of a public sector undertaking in India include the following points:

Ownership

The government has the ownership of the business. It could be in the form of central, state, or municipal government ownership.

Control

The government oversees both the administration and operation of public enterprises. The government is directly accountable for overseeing the enterprise’s operations via numerous strategies and exerting influence upon it.

Public Accountability

They are funded with public funds. That’s why public undertakings owe people accountability. The Comptroller and Auditor General and other professional authorities contribute to this accountability.

Autonomy

Public sector undertakings in India perform with maximal flexibility underneath specific settings. 

Coverage

The public sector undertaking in India covers all regions and operations. There isn’t a single sphere of activity that isn’t impacted by public-sector undertaking.

Conclusion

A bolder roadmap for gradually removing the government from the business must be developed and a close examination of the real economic benefits from some of the profit-making state-owned enterprises. For the time being, India could leave the Maharatnas, which control roughly one-third of all PSU assets, in state hands, but with a plan to transform them into world-class corporations, how this could be done in the case of public R&D laboratories. However, the remainder, particularly those in the service sectors, may be privatised or sold for their assets. This could raise up to $250 billion in capital over the next ten years for other purposes such as public infrastructure investment.