ROLE OF PUBLIC

SECTOR
BY- MEGHA GARG

B.TECH- 7TH SEM

UNIT-2 (PART 8)
MEANING:

The public sector is the portion of the economy that the government controls and manages. It consists of entities that offer public
goods and services, including national defense, law enforcement, public education, health care, social welfare, and infrastructure
development. Its purpose is to provide essential goods and services to the general public and ensure the well-being of the society
as a whole.
Key qualities of the public sector are as follows:
• Organizations in the public sector are owned and governed by the government, as opposed to private persons or businesses.
• Such organizations are often not driven by profit but rather by the desire to provide the public with essential products and
services.
• This sector provides critical commodities and services for the well-being of individuals, including education, healthcare, and
infrastructure.
• This sector is financed by taxes citizens pay instead of profits from selling products and services.
• The government regulates the private sector through rules and regulations to guarantee that it functions in the best interest of
residents.
IMPORTANCE

Importance of the Public Sector in the Economy

• Developing Infrastructure: In a newly independent country, with a nascent economy, it is not suitable for private enterprises to
invest huge capitals into infrastructure projects. So this responsibility falls to the public sector and the development of
infrastructure is absolutely essential for the development of an economy. For example, all the rail, road, and air transport
projects were carried out by public sector undertakings in the post-independence era.
• Regional Balance: Private sector companies tend to focus on industrial areas. This results in the backward areas and the
smaller towns and villages to be excluded from economic growth. But the government can ensure that growth happens
throughout the country in a balanced manner. Public sectors set up units and factories in backward areas bring employment
opportunities and economic development to such areas.
• Check on the Concentration of Economic Power: When the private sector sometimes the wealth gets concentrated in the
hands of a few. This may lead to monopolistic tendencies and concentration of economic power. The public sector helps keep
this in check. The income generated by a public enterprise is shared by a large number of employees and also the public at
large this helps restore some economic equality.
OBJECTIVES OF INDIAN PUBLIC SECTOR:

The objectives of the public sector in India can be divided into three categories:
• Social Objectives: The public sector aims at providing basic goods and services to the citizens.
It also provides employment opportunities and promotes economic development.
• Economic Objectives: The public sector plays a key role in the development of infrastructure
and encourages private investment.
• Political Objectives: The public sector protects the interests of weaker sections of society
and promotes exports.
• The public sector has always been aimed at achieving certain socio-economic objectives.
However, its performance over the years has not been up to the mark.
CHANGE IN GOVERNMENT POLICY TOWARDS
PUBLIC SECTOR
• Reduction in Industries Reserved for the Public Sector

In the first Five Year Plan, the government had reserved seventeen industries for the public sector. This meant that only the government could operate in
these industries, no private capital would be involved. But by 1991 this number was down to 8. And now there are only 3, which include the railways
and atomic energy.

• Disinvestment

Disinvestment from the public sector means to sell equity shares in public companies to the private sector and the public at large. Also, disinvestment
allows for the new influx of capital and better efficiency and financial discipline in private hands. It also ensures that the government has additional
funds to invest in social programs and causes, things such as public health and sanitation.

• Closure of Sick Units

After the change in policies, all public sector units were to be reviewed by the Board of Industrial and Financial Reconstruction. This board would
review the condition of the units and decide whether they were capable of rehabilitation or were to be shut down permanently. But this upset the
workers and employees of the sick units that were shut down.

• Memorandum of Understanding

This was a system to give the public sector units a chance at revival. The management of the unit and the concerned government authorities would sign
a MoU. Clear standards will be given for the enterprise to meet. If the targets were met the company would continue. Otherwise, it would be shut down
or disinvested.
PROBLEMS ASSOCIATED WITH PRIVATIZATION

• 1) Natural Monopoly

Privatization in some sectors where there is low competition may lead to the monopoly of a single private firm. Having complete monopoly over a particular sector, the
firm gets a free hand to compromise its quality and fix higher price rates, etc., to churn out large profits. On the other hand, a government-run agency would have
prioritized public interest over profit.

• 2) Decline in Public Interest

Private companies dealing mainly in public welfare sectors like health, education, and others are more profit-oriented than welfare-oriented. This dearly costs the
common person in the form of excessive taxes, higher prices, and a poor state of quality and services.

• 3) Lack of Regulations

Privatization slips the power of financial and other managerial decisions out of the government into private hands. This means that the government has limited or no say
in the company’s decisions; neither can the government impose much regulation over the functioning of the company or its policies.

• 4) Low Future Investment

Private firms, out of the government’s regulation and control, may look out for short-term gains, compromising the long-term future projects. This forces the companies to
invest in short-term beneficial projects rather than long-term ones.

• 5) Fragmentation of Companies

Privatization might lead to the breaking up of one giant company into several other rather small enterprises. This fragmentation ultimately decreases the efficiency and
also reduces the accountability in the management. Companies throw the responsibility for any losses onto each other and try to escape responsibility.
DISINVESTMENT

Disinvestment by the government means the market activity through which the government conducts sale
or liquidation (full or partial) of government-owned assets. Disinvestment was first introduced in India in
the budget speech of FY1991-92..Starting with the projected disinvestment of Rs 2500 crore in 1991-92,
Indian government has set a disinvestment target of Rs65,000 crore for the financial year 2022-23.
Why does government disinvests its assets?
1. To reduce the financial burden on the government
2. To improve public finances
3. To encourage a wider share of ownership
4. To introduce competition and market discipline
5. To fund growth
6. To initiate the diversification and expansion programmes
ISSUES IN DISINVESTMENT POLICY:

1. There are controversies about the prices at which some of the initial shares were sold, even though all the
disinvestment has been done through an auction process.
2. It has been just a resource raising exercise by the government than reforming PSU.
3. The valuation of shares is affected by the decision not to reduce government holdings to less than 51 per cent.
4. With the continuing majority ownership of the government the disinvested public enterprises would continue to
operate within the constraints of the public sector.
5. Loss making units don’t attract investment so easily.
6. It may lead to emergence of private monopolies.
7. Mere change of ownership from public to private does not ensure higher efficiency and productivity.
8. It may lead to loss of jobs of many workers. Private sector governed by profit motive has a tendency to use capital
intensive techniques which will worsen unemployment problem in India.
FUTURE OF ECONOMIC REFORMS 30 YEARS AFTER
“BATA TERI RAZA KYA HAI (WHAT'S YOUR WISH?),"
As a cherry on top of the cake, the Morgan Stanley Report on India 2023 has predicted an economic
boom for India, which will make it the third-largest country in the world by the year 2027. The
report predicted that the GDP could double from the current $3.5 trillion to over $7.5 trillion by
2031. The way of realizing this prediction is prescribed through the three pillars of growth:
increasing global offshoring, nationwide digitalization, and an efficient energy transition. The way
of realizing this prediction is prescribed through the three pillars of growth: increasing global
offshoring, nationwide digitalization, and an efficient energy transition.
• Global Offshoring
In the years between 2001 and 2013, India faced a service sector boom as the world was
introduced to a cheap yet skilled labor market, giving it recognition as the software hub of the
world and investors' favorite choice for offshoring secondary service areas. India's service sector
accounts for more than 35% of the total GDP. In other words, there is less absorption of labor in
the service sector. India will be left with a growing population and a significant percentage of this
population unemployed. India’s performance is on par with the Morgan Stanley Report, which would
require it to have a strong fiscal policy towards job creation in the manufacturing sector while at
the same time having an advantageous position in the global market with its high-value-added
finished products.
CONTINUED………

• Digitalization
UPI plans on going global, which can drastically reduce cross-ocean transactions and remittances
and open up international markets for India. Digitalization has brought up an almost cashless world,
which has improved money tracking, and empirical evidence has suggested that this has saved
almost $34 billion from being corrupt money. It is suggested that India must focus on expanding
internet access and ensuring balanced development in rural regions. The electronic transformation
of public administration ought to be carried out effectively as well to increase paperless and
hassle-free functioning.
• Energy Transition
India is moving towards more sustainable and renewable fuels. When it comes to the automobile
industry, India is the third-largest in the world, ahead of Germany and Japan. India sets its target to
electrify 30% of the total vehicle. The charging infrastructure is being expanded with investments
from both the government and private companies in setting up charging stations. Tapping into e-
vehicles and shifting from conventional fuels, which eat up a huge chunk of foreign reserves, will
release a significant amount that can be reallocated efficiently.