Public Sector Evolution, Reforms, and Performance – UPSC Economy Notes

The evolution, reforms, and performance of the public sector constitute a pivotal aspect of modern governance, shaping the trajectory of nations and impacting the lives of their citizens. Over the decades, the public sector has undergone significant transformation, driven by shifts in political, economic, and social landscapes. From its traditional role as a provider of essential services to increasingly being viewed as an enabler of socio-economic development, the public sector has adapted to meet the evolving needs and challenges of society. Reforms have been a constant feature, aimed at enhancing efficiency, transparency, and accountability while responding to emerging complexities such as globalization, technological advancements, and demographic changes. Amidst these changes, evaluating the performance of the public sector has become crucial in assessing its effectiveness in achieving societal goals and delivering value to citizens. This introductory paragraph sets the stage for an exploration into the dynamic realm of public sector evolution, reforms, and performance, underscoring its significance in contemporary governance paradigms.

Public Sector Undertakings (PSUs):

Definition: Public Sector Undertakings (PSUs) are government-owned companies where the majority stake (51% or more) is held by the government, either at the central or state level.

Key Points:

1. Ownership: The majority of the equity (51% or more) is owned by the government, which can be the federal (central) government, union government, state governments, or a combination of these.
2. Purpose: PSUs play a crucial role in providing public services and contributing to the overall welfare of society.
3. Number of PSUs: As of January 2022, there are 181 scheduled Central Public Sector Enterprises (CPSEs) in India.

Examples of PSUs:

• Bharat Heavy Electrical Limited (BHEL)
• Steel Authority of India Limited (SAIL)
• Gas Authority of India Limited (GAIL)
• Power Finance Corporation (PFC) Limited

Background of PSUs:

• Post-Independence Challenges: After independence, India faced various challenges, including income disparity, unemployment, and regional economic imbalances.
• Weak Industrial Base: Lack of infrastructure, investments, trained human resources, and technological development led to a weak industrial base.
• Role of PSUs: In a planned economic development approach, the public sector was considered a key driver of economic growth.
• Focus Areas: PSUs were established with a focus on industrialization and the development of capital goods industries.

PSUs have been instrumental in addressing economic challenges and promoting balanced growth across various sectors in India.

Forms of Public Sector Enterprises (PSEs):

1. Departmental Undertakings:
   • Definition: Units set up by executive decisions of the government, managed by civil servants, and financed through annual budgets.
   • Examples: Railways, Postal Department.
   • Characteristics: Integral part of the government, lack separate finances, fulfill public utility functions.
2. Statutory Corporations:
   • Definition: Enterprises engaged in economic or manufacturing activities, established by an act of legislature, enjoy legal autonomy.
   • Examples: ONGC, IOC.
   • Characteristics: Separate legal entities, defined objectives and functions specified in the Parliamentary Act, financial autonomy.
3. Control Boards:
   • Definition: Entities established to manage government projects, e.g., river valley projects managed by the Bhakra Management Board.
4. Government Companies:
   • Definition: Companies in which the government owns 50% plus one or more of the paid-up capital.
   • Characteristics: Governed by the Companies Act, 2013.
5. Cooperative Societies:
   • Definition: Rare form of PSEs in the form of cooperative societies supporting cooperative movements.
   • Examples: IFFCO, KRIBHCO.
   • Characteristics: Registered under the Multi-State Cooperative Societies Act.

Role of Public Sector Enterprises (PSEs) in India:

• Historical Significance: PSEs played a pivotal role in India’s socio-economic planning post-Independence.
• Economic Domains: Government emphasized PSEs in infrastructure and basic industries like heavy engineering, power, and metals.
• Industrial Policies: PSE dominance evident in the Industrial Policy Statement of 1948 and Industrial Policy Resolution of 1956.
• Government Rationale: Adoption of PSEs driven by the need to rapidly achieve planning goals and the private sector’s limited presence in manufacturing.

In the subsequent sections, we’ll explore the evolution, reforms, and performance of public sector enterprises in India.

Performance of Public Sector Undertakings (PSUs):

Since the initiation of planning in 1951, the public sector has been a crucial driver of inclusive growth in India. The performance of Public Sector Undertakings (PSUs) is regularly assessed, and the Department of Public Enterprises (DPE), Ministry of Heavy Industries & Public Enterprises, Government of India, releases the Public Sector Enterprises Survey to evaluate the performance of Central Public Sector Enterprises (CPSEs) annually.

Key Highlights from the Public Enterprises Survey 2018-19:

1. Number of CPSEs: As of March 31, 2019, there were a total of 348 CPSEs. Out of these, 249 were operational, 86 were under construction, and 13 were under closure or liquidation.
2. Financial Performance:
   • Profit of 178 profit-making CPSEs amounted to Rs. 1,75,000 crore during 2018-19.
   • Loss of 70 loss-making CPSEs stood at Rs. 3,1,635 crore in 2018-19.
   • Overall net profit of operating CPSEs during 2018-19 was Rs. 1,43,000 crore.
3. Contribution to Exchequer:
   • Contribution to the central exchequer by CPSEs, including excise duty, customs duty, GST, corporate tax, interest on Central Government loans, dividend, and other duties and taxes, stood at Rs. 3,69,000 crore.
4. Foreign Exchange Transactions:
   • Foreign exchange earnings of 79 CPSEs through exports of goods and services amounted to Rs. 1,43,000 crore.
   • Foreign exchange expenditure of 144 CPSEs on imports and other expenditures stood at Rs. 6,65,000 crore.
5. Contribution to National Economy:
   • CPSEs significantly contribute to the national economy through payments like dividend, interest, corporate taxes, and duties.

Importance of Public Sector Enterprises (PSEs):

• PSUs have a commendable track record in supplying essential goods and services such as coal, transport, and power.
• They serve as model employers, providing facilities like education and housing.
• PSUs contribute to reducing regional economic imbalances by establishing industries in various regions.
• The non-inflationary growth process is facilitated as prices of PSU goods and services can be administered.

Challenges and Concerns:

• Many PSUs face locational disadvantages, administered pricing, lack of access to cutting-edge technology, excess manpower, and operate in areas not primarily for profit.
• Challenges include resource crunch, erosion of net worth due to continuous losses, reluctance of financial institutions to provide funds, outdated infrastructure, and weak marketing strategies.
• Inadequate autonomy, populism, and the absence of rational pricing contribute to low efficiency levels in PSUs.

The evaluation of PSUs involves recognizing the challenges they face while appreciating their significant contributions to the national economy.

Public Sector and Economic Reforms:

Economic reforms were deemed essential to enhance the competitiveness of the economy through market forces. The objective was to achieve higher growth rates, increase productivity in industries, and utilize profits and taxes for poverty alleviation. One crucial aspect of these reforms was introducing competition in the public sector to unlock its potential. To achieve this, domestic and foreign capital was invited to compel Public Sector Enterprises (PSEs) to compete and perform efficiently.

Key Reforms in the Public Sector:

1. Recognition of Need for Reforms (7th FYP, 1985-1990): The government identified the necessity for reforms in the public sector during the 7th Five-Year Plan (FYP) from 1985 to 1990.
2. New Industrial Policy 1991:
   • De-reserving of Areas: The policy de-reserved many areas, leaving only three sectors reserved for the public sector by 2019.
   • Equity Disinvestment: One significant reform was the initiation of equity disinvestment in PSUs.
   • Managerial Revamp with Autonomy: There was a managerial revamp, providing greater autonomy to PSUs.
3. Pruning of Reserved Industries (2019):
   • The list of industries reserved for the public sector was pruned down to only three:
     1. Atomic Energy
     2. Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order, 1953.
     3. Railway passenger transport.
4. Atma Nirbhar Policy (2020):
   • A new classification and policy emerged in 2020 as part of the Atma Nirbhar (Self-Reliant) policy.
5. Union Budget 2021-22:
   • The Atma Nirbhar policy crystallized in the Union Budget for 2021-22.

These reforms aimed to enhance the efficiency and competitiveness of PSUs by introducing market forces, providing managerial autonomy, and encouraging private and foreign capital participation. The evolution of policies, from the New Industrial Policy 1991 to the Atma Nirbhar policy, signifies the ongoing efforts to align the public sector with the changing economic landscape.

New Public Sector Policy 2021:

In May 2020, amid the pandemic, the Indian government introduced the new Public Sector Enterprise (PSE) policy as part of the Atma Nirbhar Bharat initiative. This policy classifies public sector commercial enterprises into strategic and non-strategic sectors. Here are the key features of the policy:

1. Strategic and Non-Strategic Sectors:
   • Strategic Sectors: There are 18 sectors classified as strategic. In these sectors, the government will retain only a limited presence, with a minimum of one unit and a maximum of four public sector units operating.
   • Non-Strategic Sectors: Enterprises in non-strategic sectors will be privatized.
2. Four Strategic Sectors:
   • The Union Budget for 2021-22 announced that the government would maintain a minimal presence in only four strategic sectors:
     • Atomic energy, space, and defense.
     • Transport and telecommunications.
     • Power, petroleum, coal, and other minerals.
     • Banking, insurance, and financial services.
3. Privatization Targets (2021-22):
   • The government outlined its plans to privatize firms in the non-strategic sector during 2021-22. Some of the firms slated for privatization include Bharat Petroleum Corp Ltd, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, Bharat Earth Movers Ltd, and Pawan Hans.
4. Role of NITI Aayog:
   • NITI Aayog will make representations regarding CPSEs under strategic sectors.
   • Recommendations from NITI Aayog will be considered by a core group of secretaries on divestment.
   • The alternative mechanism for strategic divestment will approve actions on CPSEs.
5. Focus on ‘Strategic Sectors’:
   • The initiative aims to bring healthy competition to sectors while allowing the government to focus extensively on ‘strategic sectors.’
6. Historical Significance:
   • This policy marks the first time since 1956 that the government has declared it will not have state-owned companies in the non-strategic sector, and the number in strategic sectors will be reduced.
7. Reforms Since 1991:
   • The period since 1991 has witnessed numerous reforms in the functioning of PSEs, including disinvestment, strategic sales, market discipline through stock exchange listings, globalization, liberal FDI norms, performance-based criteria, autonomy for competitive global positioning, and the introduction of Navaratnas, Miniratnas, and Maharatnas.
8. Performance Improvement:
   • The implemented reforms have yielded positive results, contributing to improved performance in the public sector.

This policy represents a significant step toward modernizing and streamlining the public sector, aligning it with contemporary economic needs and global competition.

FAQs

Q: What is public sector evolution, and why is it important?

Answer: Public sector evolution refers to the ongoing changes and transformations within governmental institutions, policies, and practices over time. It’s essential because it ensures that the public sector remains adaptive and responsive to societal needs, technological advancements, and economic shifts. Evolution allows governments to improve service delivery, enhance efficiency, and maintain relevance in a dynamic environment.

Q: What are some common reforms in the public sector?

Answer: Common reforms include decentralization, privatization, deregulation, and digitalization. Decentralization involves shifting decision-making authority and resources from central government to local authorities. Privatization entails transferring government-owned enterprises to private ownership. Deregulation reduces government intervention in markets to foster competition and innovation. Digitalization involves leveraging technology to streamline processes, improve transparency, and enhance citizen engagement.

Q: How do public sector reforms impact performance?

Answer: Public sector reforms can significantly impact performance by improving efficiency, accountability, and service delivery. For instance, decentralization can empower local authorities to tailor services to community needs, leading to better outcomes. Privatization can introduce competition and innovation, driving efficiency gains. Deregulation can stimulate economic growth by removing barriers to entry. Digitalization can enhance transparency and accessibility of government services, increasing citizen satisfaction and trust.

Q: What challenges do governments face when implementing reforms?

Answer: Challenges include resistance to change from vested interests, bureaucratic inertia, inadequate resources, and political opposition. Reforms may also exacerbate inequalities or lead to unintended consequences if not carefully planned and implemented. Additionally, ensuring stakeholder buy-in and building capacity within the public sector are crucial for successful reform outcomes.

Q: How can the performance of the public sector be measured?

Answer: Performance measurement in the public sector typically involves assessing outcomes, outputs, and efficiency. Key indicators may include service quality, citizen satisfaction, budget execution, and compliance with regulatory standards. Additionally, performance metrics can be aligned with organizational goals and objectives to track progress over time. Regular evaluations and feedback mechanisms help identify areas for improvement and inform future decision-making.

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