According to the Industrial Policy Resolution (1956)

 ‘the adoption of the socialist pattern of society as the national objective, as well as the need for planned and rapid development, requires that all industries of basic and strategic importance, or in the nature of public-utility services, should be in the public sector”.

The state has, therefore, to assume direct responsibility for the future development of industries over a wider area.

Aims of PSUs

• Socializing the means of production in strategic areas (industries of basic and strategic importance or in the nature of public utility services).
• Providing a countervailing power to the growth of large business houses.
• Bringing about a balanced regional development.
• Generation of economic surplus.
• Encouraging the development of wide range of ancillary industries.
• For promoting investment was that the private sector did not have the ability to mobilize huge resources required for the development of basic and infrastructure industries.

Besides, Mahalanobis argued that as for rapid industrialization of less developed countries, it would be desirable to keep the cost of capital goods as low as possible, the Govt. should have complete control over the heavy machinery industries so as to be able to fix prices to suit national needs.

Achievements

• Growth of public investment has provided important gains to the economy.
• PSEs created the large infrastructure for economic development, and served as an important source of demand for he private sector.
• This helped to channelize some private investment into socially desirable directions.
• The public sector contributed, to some extent, in controlling the monopoly power of the private sector and to reducing regional imbalances.
• Fair wages and liberal welfare provisions in PSEs enabled the working class in the organized sector to improve their living standards and to set an example for the private sector enterprises.
• PSEs also contributed significantly to an increase in output in the case sectors of the economy.

Failures

The most conspicuous failure of PSEs has been in the financial area. PSU have accumulated huge loses which started draining the budgetary resources. PSEs have been high cost units essentially because of the capital outlay has been too high due to following reasons:

(a) Investment in project includes cost of building up a township with roads, water supply, housing, schools and hospitals. Industries located in backward, under-developed areas - and such a location was a result of national objective viz., promotion of regional development - had to make a disproportionately high outlay on developing these facilities.

(b) Often projects financed through bilateral credits, which ruled out international competition and opportunity to buy plant and machinery from the cheapest sources;

(c) Cost escalation due to time overrun due to labyrinth of decision-making process. Besides, an important shortcoming has been the relatively low level of capacity, utilization in many enterprises. This has increased the capital-output ratio, and reduced efficiency in the use of capital. The poor financial performance of several enterprises is traceable to a large extent to poor investment decisions.

(d)  Apart from national objectives and changing plan priorities, public sector investment was also influenced by incidental and accidental factors, such as the Govt. foraged into the hotel industry by setting up Ashoka Hotel when on Maulana Azad’s invitation for UNESCO Session in New Delhi, accommodation of adequate standard, for delegates, was to be made available in record time. PSEs were also asked to assume several other responsibilities, including those relating to trade and services. As a result of this indiscriminate expansion, the public sector covers widely different types of enterprises, with investment ranging from a few hundred crores in some cases to a few hundred thousand in others.

Other factors include are:

• Inappropriate location (e.g. Nagaland Paper Project)
• Inappropriate technology (e.g. the surgical equipment plant).
• An irrational product mix (e.g. the Salem Steel Plant)
• Imposed marketing arrangements (e.g. Kudremukh Iron Ore Project) .

The Central Govt. alone has established 290 commercial enterprises, not counting the public financial institutions, insurance companies and railways. These include enterprises in construction, services, and manufacturing. The total capital employed in these enterprises is Rs. 1000000 crores (at historical cost), most of it contributed by the Government. The net profit out of central Public sector enterprises is around Rs. 1.5 lakh crores.

Public Sector Reforms in India

To improve the performance of the public sector, the Government of India announced in July 1991 the new Industrial Policy, which contained the following decisions pertaining to the public sector:

1.   Portfolio of public sector investment will be reviewed with a view to focus the public sector on strategic, hi-tech and essential infrastructure. Whereas some reservation for the public sector is being retained, there would be no bar for area of exclusivity to be opened up to the private sector selectively. Similarly the public sector will be allowed entry in areas not reserved for it.

2.   Public enterprises which are chronically sick and which are unlikely to be turned around will, for the formulation of revival/rehabilitation schemes, be referred to the Board for Industrial and Financial Reconstruction (BIFR), or other similar high level institutions created for the purpose.

3.   In order to raise resources and encourage wider public participation, a part of the government’s share-holding in the public sector would be offered to mutual funds, financial institutions, general public and workers.

4.   Boards of public sector companies would be made more professional and given greater powers. The Government had been making an effort to shed the load of excess workers in the public sector. It initially toyed with the idea of exit policy but abandoned it due to the strong resistance by the trade unions. It followed a policy of offering a package for voluntary retirement scheme (VRS).

5.   There will be a greater thrust on performance improvement through the Memoranda of Understanding (MOU) system through which managements would be granted greater autonomy and will be held accountable. The Government on the recommendations of the “Committee to Review the Policy for the Public Enterprises (Arjun Sengupta Committee (1985) has entered into Memoranda of Understanding (MOUs) with a number of PSUs. The main aim of the MOU is to bring about a balance between autonomy and accountability. Leaving the public enterprises, which were to be referred to the BIFR, the Industrial Policy (1991) extended the scope of Memorandum of Understanding (MOU) to all public sector enterprises (PSEs).

Disinvestment

The public sector has played a vital role in the development of our economy. However, the nature of this role cannot remain frozen to what it was conceived fifty years ago - a time when the technological landscape, and the national and international economic environment were so very different. The private sector in India has come of age, contributing substantially to our nation-building process. Therefore, both the public sector and private sector need to be viewed as mutually complementary parts of the national sector. The private sector must assume greater public responsibilities just as the public sector needs to focus more on achieving results in a highly competitive market. While some public enterprises are making profits, quite a few have accumulated huge losses. With public finances under intense pressure, Governments are just not able to sustain them much longer. Accordingly, the Centre as well as several State Governments are compelled to embark on a programme of disinvestment.

The Government’s approach to PSUs has a three-fold objective:

• revival of potentially viable enterprises;
• closing down of those PSUs that cannot be revived; and
• bringing down Government equity in non-strategic PSUs to 26 percent or lower.
• Fully protect the interests of workers.

The main objective of disinvestment is to put national resources and assets to optimal use and in particular to unleash the productive potential inherent in our public sector enterprises. The policy of disinvestment specifically aims at:

• Modernization and Upgradation of Public Sector Enterprises;
• Creation of new assets;
• Generating of employment; and
• Retiring of public debt.

The disinvestment process, which began in 1991-92 with the sale of minority stakes in some public sector undertakings (PSU’s) shifted focus to strategic sales during 1999-2000 to 2003-04.

1991-1996

The Government has gone in for a programme of disinvestment of public sector enterprises. The 1991 Industrial Policy Statement envisaged the disinvestment of a part of the Government shareholding in selected PSUs to provide financial discipline and improve their performance. Initially It was been decided that Government would disinvest up to 20 per cent of its equity in selected public sector undertakings, in favour of mutual funds and financial or investment institutions in the public sector. The Government constituted the Committee on Disinvestment of Shares in November 1992 with Mr. C. Rangarajan as its Chairman.

Rangarajan Committee

Rangarajan Committee recommendations (April 1993) emphasised the need for substantial disinvestment. It stated that the percentage of equity to be divested could be up to 49% for industries explicitly reserved for the public sector. It recommended that in exceptional cases, such as the enterprises, which had a dominant market share or where separate identity had to be maintained for strategic reasons, the target public ownership level could be kept at 26%, that is, disinvestment could take place to the extent of 74%. In all other cases, it recommended 100% divestment of Government stake. Holding of 51% or more equity by the Government was recommended only for 6 Schedule industries, namely:

i )   Coal and Lignite

ii)   Mineral Oils

iii)  Arms, ammunition and defence equipment

iv)  Atomic energy

v )  Radioactive minerals, &

vi)        Railway transport

However, the Government did not take any decision on the recommendations of the Rangarajan Committee.

1996-1999

Disinvestment Commission

The Government set up the Disinvestment Commission in August 1996 to advice on the extent, strategy, methodology and timing for disinvestment in each PSU. By August 1999, it submitted 13 reports and made recommendations on 58 PSEs. The recommendations indicated a shift from public offerings to strategic / trade sales, with transfer of management.

Strategic Sale Method

Under the strategic sale method, the management of the PSE is handed over to the strategic buyer, who buys the block of shares put up for sale by the Government. Additionally, the buyer has to make an open offer to at least 20 per cent of the remaining shareholders at the same price.

1999-2001

Strategic & Non-strategic Classification

On 16th March 1999, the Government classified the Public Sector Enterprises into strategic and non-strategic areas for the purpose of disinvestment. It was decided that the Strategic Public Sector Enterprises would be those in the areas of:

• Arms and ammunitions and the allied items of defence equipment, defence aircrafts and warships;
• Atomic energy (except in the areas related to the generation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries);
• Railway transport.

All other Public Sector Enterprises were to be considered non-strategic. For the non-strategic Public Sector Enterprises, it was decided that the reduction of Government stake to 26% would not be automatic and the manner and pace of doing so would be worked out on a case-to-case basis. A decision in regard to the percentage of disinvestment i.e., Government stake going down to less than 51% or to 26%, would be taken on the following considerations:

• Whether the industrial sector requires the presence of the public sector as a countervailing force to prevent concentration of power in private hands, and
• Whether the industrial sector requires a proper regulatory mechanism to protect the consumer interests before Public Sector Enterprises are privatised.

Department for Disinvestment

Government established a new Department for Disinvestment in 2000 to establish a systematic policy approach to disinvestment and privatisation and to give a fresh impetus to this programme, which will emphasize increasingly on strategic sales of identified PSUs.  Government equity in all non-strategic PSUs will be reduced to 26% or less and the interests of the workers will be fully protected.  The entire receipt from disinvestment and privatisation will be used for meeting expenditure in social sectors, restructuring of PSUs and retiring public debt.”

2001-2005

Disinvestment commission

In late August 2001 the Government set up a new disinvestment commission almost 20 months after its predecessor was wound up.

National Investment Fund (NIF)

In 2005, it was decided that National Investment Fund would be set up. It was set up in 2007.

Major Objectives

• •  The proceeds from disinvestment of CPSUs will be channelised into NIF which is to be maintained outside the Conso1idated Fund of India
• •  NIF will be professionally managed to provide sustainable returns to the Government, without depleting the corpus. Selected Public Sector Mutual Funds will be entrusted with the management of the corpus of NIF.
• •  75% of the annual income of NIP will be used to finance selected social sector schemes, which promote education, health and employment. The residual 25% of the annual income of the Fund will be used to meet the capital investment requirements of profitable and revivable CPSUs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification.

However, in view of the difficult economic situation caused by the global slowdown of 2008-09 arid a severe drought in 2009, GOI decided to give a one-time exemption to utilization of proceeds from disinvestment of CPSEs for a period of three years, till 2012 – i.e. disinvestment proceeds during this period would be available in full for meeting the capital expenditure requirements of selected social sector programmes decided by the Planning Commission/Department of Expenditure. It has been further extended to 2014.Safety net for the workers

The Government has taken two major initiatives to improve the safety net for the workers of PSUs. The first enhanced VRS benefits in those PSUs where wage revision had not taken place in 1992 or 1997. The second increased training opportunities for self-employment for workers retiring under VRS.”

2005 onwards

The disinvestment policy has been continued by existing government and there have been recent disinvestments in public enterprises like Coal India, NHPC etc.