(IGP) GS Paper 1 - Economic & Social Development - "Public Sector"

Integrated Guidance Programme of General Studies for IAS (Pre)

Subject - Economic and Social Development
Chapter - Public Sector

Public Sector Enterprise

In a public sector enterprise, the majority of equity shares is owned by the government directly or indirectly through governmental institutions and the government has decision making control. Public sector enterprise normally has the following forms of organisational structure

  • departmental undertakings

  • statutory corporations

  • companies registered under the Companies Act 1956

  • Boards

  • cooperatives

The Objectives of the PSUs are:

  • To build a self reliant economy

  • To prevent/reduce concentration of private economic power

  • Establish sound economic infra-structure

Advantages & Disadvantages of Public Sector

In the last about 55 years of planned economic development, the public sector lived upto the expectations as can be seen below:

  • There are about 244 Central PSUs today (excluding insurance, finance and other companies) providing, the country with infrastructure in steel, cement, transport, communication , power and so on.

  • The record of the PSUs in supplying many goods and services like coal, transport, power, irrigation and so on is commendable

  • The PSUs are a model employer providing various facilities like education, housing and so on.

  • Establishing industries in MP, Rajasthan, Bihar and so on, the efforts of the PSUs to reduce regional economic imbalances are not insignificant

  • Non-inflationary growth process is facilitated because of the PSEs as prices of their goods and services can be administered:

Public Sector and Economic Reforms

The New Industrial Policy 1991 made significant changes like dereserving many areas with only 3 areas being reserved today ; equity disinvestment; managerial revamp with greater autonomy; referring a sick PSU to the Board of Industrial and Financial Reconstruction (BIFR) and so on.

List of industries reserved for the public sector-

  • Atomic Energy

  • Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order, 1953

  • Railway transport. Service Tax and Indian Constitution


Disinvestment is the sale of shares of the Government to the retail public or employees or mutual funds or the FIIs. In other words, in disinvestment (divestment), there is no change in the management from public to private hands because either the government holds majority equity (51%) or even if the government holds less than 5l% of equity, rest of it is sold to various individuals and institutions none of whom holds enough to take over management. It is essentially money-raising exercise with some accompanying benefits.

Advantages of Disinvestment / Privatization

  • it raises finances for the government that can be spent on restructuring the PSEs

  • makes additional finances available for the social sector priorities

  • exposes the enterprises to market discipline, thereby forcing them to become more efficient and survive on their own financial and economic strength

  • when units become more professionalized and profitable, budgetary support for them can be minimized freeing resources for social and infrastructural needs

  • results in wider distribution of wealth through offering of shares to small investors and employees.

  • beneficial effect on the capital market; the increase in floating stock would give the market more depth and liquidity and facilitate raising of funds by the PSEs for their projects or expansion, in future.

Government Policy on Disinvestment/ Privatization

As a part of reforming the PSEs, Government’s policy on disinvestment and privatization is evolving since the beginning of the reforms in 1991.Its main elements are

  • Divest to raise money and other advantages

  • Profit-making PSUs will not be privatized

  • List the unlisted companies

  • Making shares available to a wider section of the public

  • Restructure and revive potentially viable PSUs;

  • Close down PSUs which cannot be revived;

  • Fully protect the interests of workers.

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The government has a quantitative system to confer the status of “Navaratna” on PSE. According to the system, every PSE is rated on the following 6 parameters

  • Net Profit to Net Worth

  • Total Manpower Cost as a Percentage of Total cost of Production

  • Profit before Depreciation, Interest and Taxes (PBDIT) on Capital Employed

  • PBDIT on turnover

  • Earning per Share &

  • Inter-sectoral performance

  • To gain Navaratna status, a PSE must score atleast 60 out of 100 based on these 6 parameters.

  • Additionally, a company must first be a miniratna and must have four independent directors on its board before it can be made a Navaratna.


There are two types of miniratna companies: Type I and II.

Miniratnas can also enter into joint ventures, set subsidiary companies and overseas offices but with certain conditions:

Category I Miniratna

They are that have made profits continuously for the last three years and earned a net profit of Rs 30 crores or more in one of the three years. These miniratnas are granted certain autonomy like incurring capital expenditure without government approval up to Rs. 500 crores or equal to their net worth, whichever is lower.

Category II Miniratna

This category include those which have made profits for the last three years continuously and should have a positive net worth. Category II miniratnas have autonomy to incurring the capital expenditure without government approval up to Rs 300 crores or up to 50% of their net worth whichever is lower.

Maharatna Companies

  • The five state-owned units which were accorded the status were ONGC, NTPC and BHEL, IOC and SAIL.
  • To be eligible for the grant of the Maharatna status, the company should have an average turnover of over Rs 25,000 crore, average annual net worth of more than Rs 15,000 crore and average annual net profit of over Rs 5,000 crore during the last three years.
  • Besides, it should be a Navratna firm, should be listed on the Indian Stock Exchange with minimum prescribed public shareholding under the SEBI regulations and have global presence
  • Once a company gets the Maharatna status, its board would not be required to take the government’s permission for investments up to Rs 5,000 crore in a joint venture project or wholly-owned subsidiary. For the Navratna companies, the limit is Rs 1,000 crore.
  • The main objective of the Maharatna scheme is to empower mega-Central public sector enterprises to expand their operations and emerge as global giants.
    On the direct tax front, the reforms are the following

MOU (Memorandum of Understanding)

  • The beginning of the policy of Memorandum of Understanding can be traced to the report of the Arjun Sengupta Committee in mid eighties. One of the recommendations of this committee was for the introduction of the system of MOU for measurement of performance of public enterprises. The MOU system was introduced on an experimental basis in 1987-88.
  • The MOU system has been adopted as it was felt that PSEs are unable to perform at efficient levels because of multi-point accountability. Also, there was no clarity of objectives. Absence of functional autonomy also hampered their performance
  • MOU is a freely negotiated agreement between the public enterprise and the administrative ministry. Under the agreement, the enterprises undertake to achieve the targets set in the agreement at the beginning of the year. The MOU covers both financial performance as well as non-financial performance. Under this system performance of the company is categorized into five categories namely: excellent, very good, good, fair, and poor.
  • The objectives of the MOU system are to improve the performance of public enterprises by increasing autonomy and accountability of the management etc.

National Investment Fund

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

Objectives of NIF are:

  • The proceeds from disinvestment of CPSUs will be channelised into NIF, which is to be maintained outside the Consolidated 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.

Use of Disinvestment Proceeds

The income from the Fund is to be used for the following broad investment objectives

  • 75% to finance selected social sector schemes which promote education, health and employment
  • 25% to meet the capital investment requirements of profitable and revivable CPSEs that yield adequate returns, in order to enlarge their capital base to finance expansion /diversification
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