Changing Role of Public Sector

The public sector is comprised of various organisations that are owned and managed by the government. These organisations may be partially or completely owned by the federal or state governments. They may also be part of the ministry or formed by a Special Act of Parliament. The government participates in the country’s economic activities through these enterprises.

At the time of independence, it was believed that public sector enterprises would play a key role in accomplishing specific economic goals, either by direct engagement in business or through acting as a catalyst. The public sector would invest in key areas and construct infrastructure for other sectors of the economy. The private sector was unwilling to invest in initiatives that required large sums of investment and had prolonged gestation periods. The government then took the lead to build infrastructure and supplying necessary goods and services to the economy, which results in a transition in the Indian economy. 

The Five Year Plan of the economy in its initial stages gave more importance to the public sector; however, in the late 90s, the policies focused on LPG. Therefore, the role of public sector changed a lot since the time of independence.

Changing Role of Public Sector

Following are some of the changes in the role of public sector of the economy:

1. Infrastructure Development: 

Infrastructure development is a necessity for industrialisation in every country. As basic infrastructure hadn’t been developed prior to independence, industrialisation progressed at a slow pace. The industrialisation process cannot be continued without proper transportation and communication infrastructure, fuel and energy, and basic and heavy industries. Also, the private sector didn’t take initiative in investing in or developing of heavy industries in any way. They lacked the qualified personnel and funds needed to establish heavy industries rapidly, as the economy demanded. 

This problem can only be resolved by the government. Besides, the government has the responsibility of rail, road, air, and sea transport, and with their expansion, the pace of industrialisation has also increased, ensuring future economic growth. 

The public sector firms were supposed to operate in specific areas. Investments were to be made in order to:

• Provide infrastructure to the core sector requiring large capital investments, complicated and updated technology, and large and efficient organisational structures, such as steel plants, civil aviation, railways, petroleum, coal, and so on.
• Take the lead in investing in core sectors where private sector firms are not performing well, such as fertilisers, medicines, petrochemicals, newsprint, and medium and heavy engineering.
• Give directions for future investments such as hotels, project management, consulting, textiles, automobiles, and so on.

2. Regional Balance:

The government is responsible for balancing regional development and eliminating regional disparities. During the pre-independence period, most industrial growth was concentrated in a few locations, such as port cities. After 1951, the government said in its Five Year Plans that special attention would be dedicated to those regions that were lagging behind, and public-sector enterprises were purposefully established. Four big steel manufacturing plants were set up in backward areas to promote economic development, provide jobs, and establish ancillary industries. 

This was achieved to some extent, but there is still much more to be done. One of the main goals of planned development is to improve backward regions in order to achieve regional balance in the country. As a result, the government had to locate new firms in backward areas while also preventing the mushrooming growth of private sector units in already advanced areas.

3. Economies of Scale: 

In places where the setting up of large-scale industries with huge capital outlay is required, the public sector has to step in to take advantage of economies of scale. Some of the large-scale units established by the public sector include Electric power plants, natural gas, petroleum, and the telephone sectors. A larger base was required to function these units economically. It was only possible through government resources and mass manufacturing.

4. Check on Economic Power Concentration:

The public sector works as a check on the private sector. As there are very few industrial companies in the private sector that are ready to engage in heavy industries, money is concentrated in a few hands, which encourages monopolistic practices. This results in income inequality which is harmful to society. To prevent this problem, the public sector established large enterprises that demand major investment. Now the money and advantages that arise from business are shared by a large number of employees and workers (reducing income inequality). Hence, by checking on the economic power concentration, the public sector prevents the complete concentration of wealth and economic power in the hands of the private sector.

5. Import Substitution:

At the time of second and third Five Year Plans, the basic aim of India was to be self-reliant in many areas. At that time, it was difficult for India to obtain foreign exchange and import heavy machinery which could help in building a strong industrial base. Therefore, to help the economy with import substitution, various public sector companies involved in heavy engineering were established. Besides this, various public sector companies (like MMTC, etc.), also played a crucial role in the expansion of exports of the country.

6. Government Policies Towards the Public Sector Since 1991: 

In 1991, the Indian government introduced four major reforms in the public sector as part of its new industrial policy. The following are the key elements of government policy:

1. Restructure and revitalise potentially viable public-sector enterprises.
2. Close down PSUs, which cannot be reviewed.
3. Reduce government equity in all non-strategic PSUs to 26% or less, if necessary and,
4. Fully protect workers’ interests

a) Reduction in the number of industries reserved for the public sector from 17 to 8

In the 1956 Industrial Policy Resolution, 17 industries were designated as public. Only eight industries were reserved for the public sector in 1991, and they were restricted to atomic energy, arms and communication, mining, and railways. Only three industries were exclusively reserved for the public sector in 2001. These are atomic energy, arms and rail transportation. This meant that the private sector could enter all areas (except three), forcing the public sector to compete.

The public sector has been critical to the growth of the economy. However, the private sector is also capable of making significant contributions to the nation-building process. As a result, both the public and private sectors must be viewed as mutually beneficial components of the national sector. Units in the private sector must also take on more public responsibilities. At the same time, the public sector must focus on achieving more in a highly competitive market.

b) Disinvestment of Shares

Disinvestment usually involves selling equity shares to the private sector and the public. The goal was to raise resources and encourage greater public and worker participation in the ownership of these enterprises. The government had chosen to withdraw from the industrial sector and reduce its equity in all undertakings. This was expected to result in improved managerial performance and financial discipline. However, there is still much work left to be done in this area.

Objectives of Privatising Public Sector Enterprises 

• Releasing the large amounts of public resources held in non-strategic Public Sector Enterprises (PSEs) so that they can be used for other social purposes. Priority areas include primary education, family welfare, and basic health care.
• Reducing the public debt and interest burden.
• Transferring commercial risk to the private sector in order to invest funds in viable projects.
• Freeing these businesses from government control and implementing corporate governance.
• In many areas where the government had a monopoly. 

c) Policy regarding sick units to be the same as that for the Private Sector

All public sector units were referred to the Board of Industrial and Financial Reconstruction to determine whether a sick unit should be restructured or closed down. The Board has reconsidered revival and rehabilitation schemes for some cases, as well as the closure of a number of units. There is a lot of resentment among the workers of the units that will be closed down. The government established the National Renewal Fund to retrain or redeploy retrenched labour and to compensate public sector employees seeking voluntary retirement.

Many enterprises are sick and cannot be revived because they have accumulated massive losses. With public finances under severe pressure both the central and state governments simply cannot sustain them for much longer. In such cases, the government’s only option is to close these businesses after providing a safety net for the employees and workers. The National Renewal Fund’s resources have not been sufficient to cover the costs of the Voluntary Separation Scheme or the Voluntary Retirement Scheme.

d) Memorandum of Understanding

Performance enhancement via an MoU (Memorandum of Understanding) system in which management is granted more autonomy but held accountable for specific results. Under this system, public sector units were given specific goals and operational autonomy to accomplish those objectives. The MoU defined the relationship and autonomy of the specific public sector unit and their administrative ministries. For example: In the telecom sector, consumers have benefited from more options, lower prices, and higher product and service quality.