Sunday, September 9, 2012

Public Sector Undertakings: Public sector in modern India; Forms of Public Sector Undertakings; Problems of autonomy, accountability and control; Impact of liberalization and privatization.


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In India, a government-owned corporation is termed as a Public Sector Undertaking (PSU). This term is used to refer to companies in which the government (either the federal Union Government or the many state or territorial governments, or both) own a majority (51 percent or more) of the company equity.

During the British Rule the presence of factories and enterprises was conspicuous,however they were mostly built and used for vested interests of colonialism and thus did little good to India and its people.
Post Independence due to the above as well as other factors, India was in deep socio-economic issues. There was grave underdevelopment,along with disparities in income,unemployment,lack of trained manpower and a weak industrial base and investments,unacceptable infrastructural facilities,etc.
Therefore in order to self sustain and become self reliant the Public Sector Undertaking blueprint was developed under Planned Economic Development model of Socialist countries that would address all the above problems.

PSUs have laid a strong foundation for the Industrial development of the country as it is not interested in profit making but nation building.
They leverage the government through major shareholding in the Industries to intervene in the economy in a major way thus helping in achieving the desired socio-economic objectives and long term goals.
They help in pushing the agricultural economy on to the progressive pathway and rural development as well as providing basic infrastructural facilities,educational and employment opportunities.

In the beginning these PSUs were confined to those core and strategic industries that would not be touched by the private players like Railways,Coal and Oil,Heavy Industries,Forest industries,etc. due to heavy investment required along with a lot of time to complete and humongous risks involved that could lead to heavy loss if went wrong and also the private players lacked the expertise for the same.
Therefore,the public sector(govt.) entered the same and began the development.
The later or second phase witnessed steps like nationalisation of industries,sick units being taken over by private players,and the public sector entering into many other fields like manufacturing consumer goods,consultancy,contracting and transportation,etc.

Thus according to Industrial Policies taken out from time to time, there were three categories that industries were classified into with respect to the State's role:
i) Schedule A category was reserved for the future development of those industries that would be the exclusive responsibility of State.
ii) Schedule B category included Enterprises whose initiative of development would be driven principally by the State and then private participation would be allowed to supplement the efforts.
iii) Schedule C included remaining industries left to the private sector.

The latest Industrial policy of  1991 has thus under collapse of socialist model of development,non fulfillment of stated objectives of the State of PSUs leading to low growth,underdevelopment and Liberalisation,privatisation and globalisation principles brought in fundamental changes in the approach of public sector responsibilities and priorities where the role of the State is rolled back and restrictions removed along with New Public Management,Public Choice theory and Public-Private Partnership theories and practices taking over.

i) Public Sector Enterprises - Where government (state or central or both) hold at least 51% shares. Its forms of organisation are Departments,Corporations,Company,Joint Enterprise,Development corporation. For details please refer to the classifications of the above mentioned in a previous post on this blog titled "Organisations"- ( ) and also refer to conferring of statuses

ii) Central Public Sector Enterprises - Classified into Strategic and Non Strategic. Their areas are: Arms and Ammunitions and allied items of defence equipments,defence aircrafts and warships. Atomic energy(except in the areas related to the operation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries). Railways transport. Further conferred with Maharatna,Navratna,Miniratna status,refer

iii) Public Sector Banks - Banks where government holds more than 50% or majority stake. Refer

iv) Section 25 Companies -
Public Sector Enterprises having objects to promote commerce, art, science, religion, charity or any other useful purpose and not having any profit motive can be registered as non-profit company under section 25 of the Companies Act, 1956.
This section empowers the Central Government to grant a licence directing that such an association may be registered as a company with limited liability, without the addition of the words `Limited' or `Private Limited' to its name.
Such companies are also called as the Non-profit or 'No Profit - No Loss' companies.

Their elevated status as drivers as economy was romanticist in approach and thus led to issues like over staffing ,corruption,wasteful practices,lack of work culture and motivation were unchecked and systematically ignored by the government and led to the subsidisation of these concerns by them. This led to permanent drainage on the exchequer. thus instead of socialist attitude these PSUs were developing an attitude of Statism with all its dangers.

Many reports and committees followed to understand the issue and these were the results:
i) Persistently loss making units that are irretrievable and either need to be disposed off or handed over to private sector for overhaul.

ii) Diversification into activities like producing bread and foot wear,where public enterprise intervention is superfluous.

iii) High wage bills to the total neglect of productivity.

iv) Under utilisation of capacities

v) Hasty nationalisation of sick concerns that ultimately turned out as an incentive for unscrupulous capitalists to bleed the enterprise white in the hope that once sick,the Govt's intensive care unit would automatically jump to rescue.

vi) Unprofessional personnel practices

vii) Appointment of politicians as part time chairmen

viii) Low calibre of senior executives

ix) Excessive rules and regulations causing red tapism

x) Non cooperation from controlling economic ministers residing in New Delhi

xi) Poor infrastructural linkages among various segments like power,coal,steel,cement,irrigation,transport and communication.

xii) Wrong product mix which saddles the public sector with unsold stock.

xiii) Obsolete technology

xiv) Unclear definition of objectives.

xv) Low profitability which is an impediment to successful plan implementations. THis is because of contradictions and dilemma in the socio economic objectives of the PSUs due their obligation to provide employment to a large base instead of profitability as well.

xvi) They are not permitted to change their economic prices for the services they render and goods they supply.

i) Chief executives of the PSUs not given a fixed tenure thus hampering policy stability and continuity in a definite manner.

ii) Minister allotted to the undertaking has full authority to terminate Chairman or Director or Chief Executive.

iii) Due to a short tenure (As per a Standing conference on Public Enterprise the average tenure is only 2 years) the Chief Executive is under constant pressure to show short term results at the cost of long term disadvantages.

iv) Many Committees have recommended that the procedure of contract termination of a CEO should be same as the appointment procedure,i.e. by an appointment committee of the cabinet's recommendation. This recommendation has been somewhat implemented by the Central government but with certain conditions.

v) Directors appointed by the government to the Board of Directors of PSUs try to influence the decision making process of the board without accepting responsibility at the end creating a lot of interference in their independent functioning and economical inititatives.

vi) Control from above is a big impediment in the functioning of PSUs as whenever a new project is taken up by a PSU it has to go through Expenditure Finance Committee and Project Investment Board which is very cumbersome and causes unnecessary delay and authoritarianism.

vii) No definite criteria for evaluation of performance of PSUs. On the basis of The Sen Gupta Committee recommendations certain memoranda of understanding have been signed with the PSUs and Central Govt. and State Govt. Recent one is between the Central Govt. and SAIL.

viii) Nepotism and favourability in PSU appointments by politicians leading to inefficiency and incompetency in functioning. Therefore merit should only be the criteria for selection.

ix) No proper retention policies for retaining competent staff from the lure of lucrative private offers.
x) Lack of corporate planning,inventory management,paucity of resources,not up to the mark pay scales,delay in project implementations.

xi) Lack of authority in taking a commercial mode in areas where opportunities exist for profit making and thus gets caught in bureaucratic and political red tapism thus keeping it bureaucratic in nature instead of a complementing approach of profitability and social obligations.

Another very good and effective measure to increase autonomy of PSUs introduced is the conferring of Navratna,Maharatna and Miniratna status to them.

The Parliamentary Committee on Public Undertakings since 1963 is a mechanism of accountability and control of parliament over the PSUs. Every year,it submits 6 reports that educate the public opinion but that is all what they seem to do. The latest device invoked to enforce accountability is a memorandum of understanding between the PSU/PSE and its undertaking Ministry. Since 1989 PSE in India had been put under a notice as it were to show results and in 1990 and 91 about 95 enterprises have signed MoUs. Latest is SAIL MoU with the Central Govt.
This has given these Undertakings and Enterprises necessary freedom as well as a clear defined objective to follow that are practical as well as the necessary control and accountability of PSUs to the people through the Parliament thus avoiding misuse of their powers.

on 24th July 1991,the New Economic Policy was announced to be followed from there on that has been advocating for public sector reforms.

Under collapse of socialist model of development,non fulfillment of stated objectives of the State of PSUs leading to low growth,underdevelopment and Liberalisation,privatisation and globalisation principles brought in fundamental changes in the approach of public sector responsibilities and priorities where the role of the State is rolled back and restrictions removed along with New Public Management,Public Choice theory and Public-Private Partenership theories and practices taking over.

All theorists and experts have been propagating the need for the above mentioned. Also under the new economic policy,1991, there has been massive restructuring organisational set up,financial restructuring,introduction of modern management practices,greater autonomy for PSUs,disinvestments of public enterprises to raise resources for other needs and encourage wider citizen and worker participation in the ownership of industries that were under govt. monopoly,MoUs signed between PSU & PSE and centre and state govts greater efficiency,autonomy and accountability,and privatization.

There will be no further nationalisation pf private sector industries. Sick units are being referred to the Board Of Infrastructure,Finance and Reconstruction and consequent to this policy the Sick Industrial COmpanies Act 1985 was amended in 1991 to implement the same. As on March 1996, 56 sick units have been referred to the BIFR. To provide safety to these sick units' employees, the govt. created the National Renewal Fund under administrative control of the Ministry Of Finance.

Full finance and operational autonomy has been granted by Union govt to the nine leading PSUs through the Navratna status and the lesser autonomy status conferred on others under the Maharatna and Miniratnas status. These are only granted to profit making PSUs and Undertakings thus saving them from red tapism and process of going through the Expenditure Finance Committee and Project Investment Board (EFC & PIB) and will be free to raise resources domestically as well as internationally and enter into financial and technical joint ventures with them.

Even though the PSUs would continue to be audited by CAG and Parliamentary Scrutiny,there will be appointment of eminent part time directors to their boards to reduce the domination of government nominees.

Thus LPG into the economy has definitely helped the efficiency and growth of PSUs in India. However,private support under guidance and facilitation of State is more needed then privatisation of public enterprises as that will lead to a total domination of market in our economy which is not favourable. There is still a need to reduce bureaucratic way of functioning and upgrading the techniques of management and technology and also more effective accountability,retention and pay policies.

PSUs are still very important as they play a very important role in neutral and impartial implementation of a planned economy as well as socio-economic development and justice and regulating the monies in the economy efficiently.


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The next post on this blog will cover:

Union Government and Administration:
Executive, Parliament, Judiciary - structure,
functions, work processes; Recent trends;
Intragovernmental relations; Cabinet Secretariat;
Prime Minister’s Office; Central
Secretariat; Ministries and Departments;
Boards; Commissions; Attached offices;
Field organizations.


  1. Sir, When will be the tentative date, that all updates will be done?
    And if you have any Flow Charts, Tables, diagrams, etc., Plz upload them too...
    Thanks for the good work....!

  2. @Vijay : We are looking at a tentative date of 25th sept here.
    In the meantime, keep studying and revising all the previous articles/posts on this blog to be thorough with all the concepts and contemporary trends regarding the same.

  3. Thank you very much. Your blogs are very useful. Closely targeted towards UPSC syllabus.

    One small request, if you find articles which you think is linked to the topics covered here and would help us in exam, can you please post the link or even the article. Just the way you did for PSU, where in you gave the link to DNA article on PSU.

    Because of your experience you would be the best person to guide us to the right sources of materials which would make our studies efficient.

    Thank you

    1. @Sathvik: Your positive feedback is much appreciated. Articles/links pertaining to the topic in question have always been a regular feature on this blog's posts as and when required,and all the readers can be rest assured that this helpful practice would be taken forward. Wish you success in your endeavors.

  4. Hi,

    Great Post!I appreciate your efforts. This blog is ever informative. Thanks....!!

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  6. this is highly informative article sir.
    respect to your efforts.
    I have one request,please update article with "ROONGTA PANEL REPORT".
    Thank you.

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