Unit 3 : Public Sector and Disinvestment Policy

The real development of the public sector in India has taken place in the post-independence period. Industrial
policy was announced from 1948 to bring about rapid development of Indian economy. Since then, every
industrial policy announced by the government has sought to increase the expansion of the public sector. Through
the Five-Year Plan, many provisions have been made for the expansion of the private and public sector.

1.1 Role of the public sector in India :-

Public sector plays a very important role in the economic development process of any country. After the
independence of India, the existence of public sector was truly proved. From the Industrial Policy of 1956,
emphasis was placed on the development of the public sector. Due to many limitations on private enterprise in
India, the establishment of industries in the private sector started.
Factories or industries owned by a particular joint venture are called privately owned enterprises. So all the
industries or factories run by the government are public undertakings or sectors.

Definition of Public Sector :-

"An industrial enterprise which is owned by the public instead of the government and is managed and operated by
the government machinery is called a public sector enterprise."
The role of public sector in Indian economy :-
This can be explained by the following point.

1) Share of Public Sector in Employment :-

How much share has the public sector in India achieved in employment generation the matter becomes important in the role
of the public sector. In India, the public sector has made much more satisfactory progress than the private sector. This can be
explained by the following table.
Public and Private Sector Employment in India (Lakhs)
YEAR PUBLIC PRIVATE TOTAL PUBLIC SECTOR
AREAS AREAS WITH THE
TOTAL AREA (%)
1971 111 67 178 62%
2001 191 87 278 69%
2005 180 84 264 68%
2007 190 93 273 65.9%

The above table shows the share of public sector and private sector for the years 1 971, 2001, 2005 and 2007 in
representative form.
From this it can be said that the share of public sector in employment is much higher than that of private sector.

2) Share of Public Sector in Gross National Income :-

The share of Gross National Income (GDP) within the country has been increasing steadily over the last five
decades. Public sector share of GDP was 7.5 percent in 1950-51, increased to 23.6 percent in
1999-2000 and decreased to 20.5 percent in 2007-08. It includes administrative departments, departmental
industries and non- departmental industries.

3) Share of public sector in savings and capital formation .-

The share of public sector savings was 1.7 percent of GDP during the First Plan period from 1951 to 1956. It
reached 4.6 percent during the fifth plan period. Later it declined to 1 .4 percent in 2008-09.

The share of capital formation in the public sector is satisfactory and has increased from 10.7 percent to 24.6
percent during the First to Eighth Plan period. But it declined to 9.4 percent by 2008-09, suggesting that the share
of savings is small. And the share of public sector in capital formation is satisfactory.

4) Role of public sector in export growth :-

The role of public sector in export growth is considered important in terms of Indian economy. 35 crores in the
public sector in 1965-66. 5830 crores of foreign exchange was received in 1984-85 from foreign exchange. While
in 2005-06, there was a substantial increase in it to Rs.43576 crores. Foreign exchange received.

5) Modern Way of Economic Development :-

Economic development can be achieved by increasing the number of industries in the public sector to achieve
rapid growth of the Indian economy. In order to achieve economic development, India decided to follow the
second path of development and accordingly in the Second Five Year Plan priority was given to the establishment
of basic industries. In every five-year plan thereafter, every effort was made to establish and develop basic
industries. That is, the economy of the country can stand on a solid foundation through the public sector.

6) Expansion of Public Sector Industry :-

After the independence of the country, especially after the industrial policy of 1 956, special attention was paid to
the development of Indian industry. In the public sector, nuclear energy, defence weapons and ammunition,
aircraft etc. are reserved for the government. And the remaining industries have been handed over to the private
sector.

7) Emphasis on Government Exchequer :-

The government trying to create a welfare state in India has to spend a lot in all sectors to raise the standard of
living of the people. Funds have to be made available for planned development needs to meet this cost. 69,410
crores in various forms on public utility in the Seventh Five Year Plan in the treasury of the Central Government.
was deposited.

8) Role of public sector in infrastructure :-

The role of public sector is considered important in building infrastructure of the country. Internal resources
include depreciation and retained earnings. In the 1 0th Five Year Plan, internal resources of Rs.395,646 crore
were accumulated by the public sector.

9) Contribution of public sector in important sectors :-

Public sector has played an important role in many important sectors in the Indian economy. From steel, coal,
copper, zinc and other mineral industries to consumer goods, there is a large amount of production in the public
sector. All these industries are considered important from the point of view of economy. In this regard, we can see
the role of public sector.

10) Economic Development of Underdeveloped Regions :-

In the underdeveloped regions of India, the work of providing facilities and concessions required for the
establishment and development of industry as well as business operations is done through the public sector. By
strengthening the foundation of economic and industrial development in various regions, the work of starting
large-scale industries in underdeveloped areas is accomplished through the public sector.

11) Work to control the economy :-

The work of providing sufficient amount of all three types of resources such as natural resources, financial
resources and human resources in the country is done through the public sector for the rapid all- round economic
development of the country. The government has to formulate two types of policies such as fiscal and monetary
(राजकोषीय व मौद्रिक) to gain effective control over the economy and then take measures to implement the
policies.

12) Media of social change :-

Public sector has to play an important role in social change. Due to individual ownership of the industry, the
entire benefit of these industries goes to a handful of people in the society. Many financial problems have arisen
in the society. To solve it, the government has to make various provisions through the public sector. Since there is
a public sector in our country, the government has to do the work of creating a socialist social structure by
creating a democratic system in the society to maintain the security of the country through every five- year plan.
From this perspective, the role of public sector is considered important.
1.2 Shortcomings of Public Sector :-
The role of public sector in Indian economy is considered important in various ways. The public sector has to
shoulder the burden of the entire economy. Obviously, there are many problems facing the public sector. The
shortcomings of some important issue can be explained by the following point.

1) Capital Public Farmer Burden :-

There is a lot of problem in modular development from the sector. Many industries have additional investments.
Industry has a huge burden of benefits, increased production capacity, insufficient investment.

2)Wastage of human resources :-

There is much more wastage of human resources than the public sector. Due to inadequate planning, facilities for
education and training are decreasing. Also, due to the unsatisfactory rate of salary of the workers, lack of labour
security, many shortcomings are being created in the public enterprises. In India, a policy is also being drawn up
to reduce the burden of additional workers.

3) Inefficient Management :-
If there is efficient management of every activity in the economy of any country, then the development of that
country is fast. But in India it is unfortunately lacking in public sector industries in India. There is a highly trained
officer for this. Must be experienced and skilled. But due to inefficient management in the public sector many
problems are coming to the fore.

4) Underutilization of Production Capacity :-

The production capacity in the public sector is underutilized. In India in 2005, out of 203 units, only 103 units
were producing more than 100% of capacity. This is not a satisfactory state of affairs.

5) Pricing Policy :-
How to price the goods and services produced in the public sector is also an important and complex issue. A
fundamental question arises whether public enterprises should make profit or not. Setting up public enterprises to
provide essential services to the society Accelerating industrial development Avoiding centralization of economic
power To meet trade objectives, the pricing policy is hampered by the fact that profits cannot be made.

6) Extravagance in the management of Public Enterprises :-

Most of the public sector enterprises in India are involved in massive wastage.

a) Excessive expenditure is spent on advertising.

b) In the form of donations to political parties.
c) Expenditure on foreign travel.
d) Luxurious rest houses.

In many such matters, extravagance is rampant in the administration of public utilities. In short, although the
above type of problems are in the public sector, the role of the public sector is considered very important in the
Indian economy.

1.3 Rationale of Disinvestment :-

In India Disinvestment policy was adopted from 1991 onwards. Even though the role of public enterprises in
India's economic development is very important, the government has seriously considered this role, instead of
restructuring the loss- making public enterprises, the rulers have sold public enterprises in the name of
disinvestment for their own selfish interests. Not only this, between the years 1999-2000 and 2004-05, 15 public
sector enterprises were divested even when only five enterprises were running at a loss.

The use of the term disinvestment in the real sense is important to denote the process of privatization. That is,
disinvestment is said to be a process of privatization. Many countries in the world, i.e., European countries, China,
Soviet Union, etc., have withdrawn largescale investments from the public sector. Alternatively, India has also
adopted this policy since 1991.

 Objectives of Rational Disinvestment :-

The rational of disinvestment in India has stated the following objectives.
1) Reducing public debt burden.
2) To withdraw funds from non- public sector enterprises and reinvest them in health, family welfare, primary
education.
3) Minimizing unnecessary flow of public resources.
4) Handing over loss-making public enterprises to the private sector.
5) Preference for proper utilization of human resources to give.

1.4 Emergence of Disinvestment Policy :-

The disinvestment policy of the government can be explained through the following points for how the emergence
or emergence of the disinvestment policy in India.

1) Direction of Industrial Policy 1991 :-

New Industrial Policy was announced in India on 24 July 1991. The policy announced that the government would
divest some of its investments in selected public enterprises. Also, clarification was given regarding disinvestment
by any investors. This step was taken to bring market discipline to public enterprises.

2) Rangarajan Committee on Divestment of Shares in Public Enterprises (April 7 1993) :-

According to Rangarajan Committee, up to 49 per cent shares can be sold in the industries reserved for the public
sector and in cases where the enterprises prove their existence in the market, the share of the public sector can be
kept up to 26 per cent i.e., keeping the disinvestment ratio up to 75%. The Rangarajan Committee has said that
100% government share can be disinvested in all other industries.

3) Strategic and Non-Strategic Classification :-

On March 16, 1999, the disinvestment was classified into strategic and non-strategic according to the objective. In
the strategic industry, all industries except ammunition and weapons and biological products, airplanes, ships,
nuclear power, railway transport, which are useful for defence should be considered as non-strategic industries
and the government's share in this should be reduced to 26 percent.

4) Provision in the policy of 2000-2007 :-

In the policy of 2000-2001, the government must be prepared to reduce the share of the government in non-
strategic public enterprises to less than 26 percent if necessary. The policy explained that the funds should be used
for social sector, public debt and restructuring of public enterprises by selling the appropriate product.

5) Provisions in the Policy 2002-2003 :-

Outflows in India since April 7997 (Rs. Crores)
YEAR TARGET ATTAINMENT DIRECT RECEIPT
1991-1992 2500 3038
1992-1993 2500 1913
1993-1994 3500 0
1994-1995 4000 4843
1995-1996 7000 168
1996-1997 5000 5371
1997-1998 4800 910
1998-1999 5000 5371
1999-2000 10000 1860
2000-2001 10000 1871
2001-2002 12000 5658
2002-2003 12000 3348
 2003-2004 14500 15547
2004-2005 4000 2768
2005-2006 NO 1570
2006-2007 NO 0
2007-2008 NO 4181
TOTAL 53423

As per the 2002-2003 policy it was decided that apart from Modern Food Industries Limited only a small portion
would be sold by the government. Therefore, the government needs to reduce this share and raise funds only to
cover the fiscal deficit. In this policy, it was explained that by July 2002, the government would sell
disinvestment in 12 companies in a strategic manner.

From the above table it can be said that from 1991-92 to 2007-2008 the figures of disinvestment in India have
been shown. The total disinvestment is Rs.53423 crores. has been That means 12.3 percent of the total
investment has been received. According to the Ministry of Disinvestment, out of 222 public enterprises of the
state government, disinvestment i.e., privatization has started in 124 enterprises till 2000 and today a total of 30
enterprises have been privatized and 68 enterprises have been closed. Thus, the investment policy in India can
be discussed.

1.5 New Directions of Policy on the Public Sector :-

The work of providing real support to the public sector started with the industrial policy of 1956. Public sector
was given an important place in this policy. As a result, the public sector was expected to work on developing
some important industries and infrastructure. But in the 1980s, the condition of the Indian economy was
becoming very alarming. Indian economy was losing competitiveness with other countries. The question of
devaluation of the rupee had arisen. The economy was burdened by foreign debt. To get out of all these crises
there was no option but economic reform, so in 1991 a new economic reform program was undertaken. And
India had to adopt a policy of liberalization, globalization and privatization. Also many changes were made in the
Industrial Policy of 1991 . Some new directions were set for the public sector.

On July 24, 1991, the Prime Minister of India Shri. Narasimha Rao adopted a new industrial policy in the same
year when announced a new industrial policy.

An overview of the directions set for the public sector in this new industrial policy can be explained through the
following point.

1) After assessing all the industries under the public sector, it was decided that special attention would be given
to three things such as strengthening of public sector industries, privatization of less important industries and
rehabilitation of weak industries in India.

2) In order to improve the performance of public sector enterprises, the way of revitalization of industries,
financial restructuring, proper utilization of manpower, proper maintenance of public sector enterprises will be
adopted.

3) Efforts will be made to commercialize large public sector enterprises. He was fully empowered in this regard.

4) A compromise resolution was adopted by the central government from 1998 to give more autonomy to public
sector enterprises. Its main objective was to bring reforms in public sector undertakings.

5) Special attention should be given to increase investment in public sector. In 1 951 there were only 5 public
sector enterprises. His investment is only Rs. 29 crores. was As on March 31, 2012, there were 250 industries
and their investment as on March 31, 2011 is Rs.18018 crores. Also in 2012-13 public sector investment was
Rs.24000 crores. done This has been mentioned in the revised budget.

6) Disinvestment policy was adopted in India. On 2 August 2013, the government decided to disinvest three
public sector enterprises, including State Trade Corporation, Tourism Development Corporation of India, Naively
Lignite Corporation. The government got Rs 395 crore from the disinvestment of these three companies.

7) At present only three industries (Nuclear Energy, Nuclear Minerals, Railway Transport) are reserved in public
sector.
8) To make public sector enterprises more efficient since 2010 public sector enterprises have been awarded the
status of Maharatnam, Navaratnam and Mini Ratna.

9) After the industrial policy of 1991, efforts are being made to increase the share of public sector employment.
This share is currently 21.9 percent.

10) Govt of India Sept. By taking a decision in 2012, the limit of foreign direct investment in various sectors of
public enterprises has been increased as follows.
a) Single brand retail – 100%
B) In multi brand retail – 51%
a) In air transport – 49%
d) In electrical exchanges – 49%

11) In the restructuring of loss making Public Sector Undertakings, the Central Government, in December 2004,
launched a comprehensive restructuring plan.

12) Voluntary retirement scheme has been introduced in 1999-2000 in small profit making industry organization
in public sector.

13) National Renovation Fund has been created in 1992 for modernization of public sector industry, technical
upgrading, protection of workers interests.

14) 75% of the amount collected in the National Investment Fund will be used for social sectors like education
and health and 25% for investment in public sector enterprises.

1 5) Licensing system has been laid down for five public sector industries. It includes alcohol- drugs, tobacco,
cigarettes, defence industry, industries of flammable materials like cigarettes, hazardous chemicals etc.

1 6) National Investment Fund has been established on 1st April 2005 to pool the funds received from public
sector disinvestment.

In short, since the implementation of the Economic Reforms Program (1991), several reform programs have
been implemented in the public sector. This has helped to increase the productivity and efficiency of the public
sector. Even today, the share of the public sector in gross domestic product has increased significantly.
Therefore, the role of public sector in the country’s economy is considered important.