QUESTIONS RELATING TO ECONOMICS:

REFORM OF PUBLIC SECTOR ENTERPRISES IN INDIA

Please explain the reasons for existence of Public Sector Enterprises as important
Government Owned Public Companies?
The various reasons for the existence of public sector enterprises as Government Owned Public
Companies are enlisted below:
The first and foremost reason is the amount needed for investment (huge investment that can
be done onl b the !overnment" in the various priorit sectors such as the industrial and the
infrastructure sectors# $i! push theor emphasi%es that initial bi! push b the PS&s
(!overnment" is needed for the economic development to start# 'n 'ndia( after 'ndependence(
for the development of 'ndustries various industrial policies stressed the need for Public
Sector enterprises in almost all the industries listed in Schedule )#
The second reason for the existence of PS& (Public Sector &nderta*in!s" is for the service
motive of provision of public !oods which cannot be done b the private enterprises which
wor* on profit motive# Provision of basic amenities such as electricit and telephones( water
and sewera!e sstems cannot be done b the private sector#
The third reason for the existence of Public sector enterprises is the presence of imperfect
markets or missing markets in certain !oods and services# +urin! the time of independence
in 'ndia( for example( the infrastructure and transport sector was in an infant sta!e( so a bi!
push from the part of the Government was needed to connect the different areas( both rural
and urban#
)nother reason is the prevention of monopoly power b the private sector enterprises in
strate!ic and important industrial sectors li*e defense( aero plane( telephone and
communication# This was felt durin! the time of independence when the various strate!ic
industries were at the development sta!e#
)nother important reason is the development orientation in which the role of the PS&,s are
ver important# The industrial policies emphasi%ed the role of basic and heav industries to
stren!then the productive capacit of the econom#
Provision of infrastructure in the *e areas of transport and communication( power and
ener!( -e industries( roads and railwas to connect rural and urban areas has been et
another reason for the promotion of PS&s
'mport Promotion and Export substitution is et another reason for the startin! up o! man
PS&s as the were started with the view of producin! those !oods which were bein!
previousl imported# This helped a lot to save forei!n exchan!e#
.emoval of re!ional disparities has been a reason cited for the promotion of PS&s in the
semi/urban areas thus leadin! to the development of those areas and !eneratin! emploment
opportunities#
.eference: Economics 0anual( 1#G#Publication#
Please explain the reform effected throu!h divestment and corporati%ation of public sector
underta*in!s in 'ndia or South )sia#
Since 'ndependence the countr was emphasi%in! a path of development which !ave prominence
to public sector to be the en!ine of !rowth# 1owever( over the decades( shortcomin!s of the
Public Sector Enterprises (PS&s"( over!rew resultin! in low capacit utili%ation and inefficienc
due to hu!e man/power which led to inabilit in ta*in! 2uic* and timel decisions# These PS&s
were runnin! in losses due to inefficienc and over capitali%ation# Thus in 3443( the 5ew
'ndustrial Polic 5'P as it was called( stressed the need for disinvestment#
The disinvestment process over the ears:
This disinvestment process that be!an in 3443/46( with the idea of disinvestin! in 73 selected
PS&s for .s#7879 crores# ) +isinvestment commission was set up in )u!ust 344:( under the
chairmanship of G#;#.ama-rishna # The settin! up of such a commission was to advice(
supervise and monitor the !radual disinvestment of the PS&s# This commission submitted 37
reports that recommended the privati%ation of <= PS&s# The Chairmanship chan!ed to
+r#.#1#Patil in >ul 6883 and subse2uentl the commission ceased in 0a 688?#
The 5ext sta!e was the settin! up of the +epartment of +isinvestment in +ecember 3444( which
was later renamed as 0inistr of +isinvestment from Sep 6883# @rom 0a 688?( this
department came under the purview of 0inistr of @inance#
There was an a!!re!ate tar!et of .s#<?788 crore that had to be raised from PS& disinvestment
over the period of 3443 to 6883# 1owever the !overnment could raise onl .s#688=4 crore(
which was less than half the tar!eted amount# The annual tar!et was met onl in 7 ears (in the
period of 38 ears"# )nd the proceeds from the PS& disinvestment was overall low# The reasons
cited for such low proceeds are unfavorable mar*et conditions( 5on/attractive offers made b the
!overnment to the private investors( heav opposition in the valuation process( polic on
disinvestment not bein! clear cut( stron! resistance on the side of emploees and trade unions of
these PS&s( Aac* of clearness and political will#
+urin! this period( disinvestment happened mainl b the sale of minorit sta*es of the PS&s#
1owever the value reali%ed throu!h issue of shares even in blue chip companies was low( since
the Government still had the maBor control#
The Period from 6883/86 / 6887/8? witnessed the maximum number of disinvestments# This
involved both strate!ic sales (that effected transfer of control and mana!ement to private plaer"
and offer of sale of shares to the public where the !overnment retained control#
The Period from 2004-05 - 2008-09
'n this period( disinvestment of PS&s remained a controversial issue( as a result of which the
disinvestment schema sta!nated durin! this period# +urin! the < ears from 6887/8? to 6889/84(
the total proceed received from disinvestments was merel .s# 9<3<#47 crore#
2009-10 onwards
@rom 6884/38 onwards( a stead !overnment and better stoc* mar*et conditions primaril led to
a improved drive towards disinvestments# The Government carried on the process of
disinvestment b the sale of minorit sta*es in listed and unlisted (profit/ma*in!" PS&s#
@rom 6833 onwards( disinvestment of PS&s has slowed down a!ain si!nificantl# )s a!ainst a
annual tar!et of .s#?8(888 crore( the Government was able to raise onl .s#3?(888 crore in
6833#
0ain reference: bsepsu#com
Chat is the important contribution of PPP 0odel in ma*in! the Public Sector &nderta*in!s
sustainable?
The Government of 'ndia definition of PPP is the partnership amon! the Public entit or
enterprise which is the sponsor and the Private entit or enterprise which has <3D le!al sta*e for
the creation and mana!ement of infrastructure that is built for public purpose# $efore the
economic reforms of 3443( the development of infrastructure proBects were onl done b the
Government enterprises# 1owever( since the reforms development of infrastructure has been !ive
prominence and sou!ht to be achieved throu!h varied means# 'n the li!ht of 5ew 'ndustrial
Polic of 3443( the industrial and infrastructure sectors were sou!ht to be developed throu!h PPP
models# ;arious polic announcements were made that relate peed( efficient and cost
effective deliver of proBects
The PPP model has plaed an important role in ma*in! the PS&s sustainable in the followin!
was:
The ti!htenin! up of bud!et constraints led the !overnment to harness the merits of private
plaers in providin! infrastructure services# )ccordin!l( Private plaers started enterin! the
scene from the 3448 reforms#
The !lobali%ation of the mar*ets and the openin! up of previousl closed economies helped
the !overnment to create scope for portfolio investment b forei!n and domestic private
companies#
The resources that are needed for the proBect are !enerall shared( with capital and technical
*nowhow bein! shared b both public and private plaers# Thus the !overnment can pour in
capital and the private plaer can brin! in the technical *nowhow( or both can be shared
e2uall#
The ris*s are !enerall shared between the private and public plaers throu!h optimal ris*
mana!ement and ris* transfer#
'n the sphere of desi!n and buildin! up of public infrastructure efficienc has been achieved
which was lac*in! in the context of PS&s# Construction of world/class roads amon! different
states and lin*in! different areas is an example of this#
Cross transfer of s*ills and technical *nowled!e amon! public and private plaers is
achieved throu!h inte!ration and creation of value added sner!ies#
Capacit constraints have been alleviated in the econom as productivit of capital and
labour resources has become well/or!ani%ed and increased# +eliver of proBects has been
lin*ed to deadlines thus ma*in! the proBect much more efficient than those of PS&s#
Contribution of overseas firms in Boint ventures has led to increased construction abilit and
competition#
)ccountabilit in the case of PPP models has made the deliverance of superior public
services throu!h re!ulator commands#