(Sample Material) Gist of IIPA Journal: Public Sector in Independent India Suresh Kumar

(Sample Material) Gist of Important Articles from IIPA Journal

Topic: Public Sector in Independent India Suresh Kumar


The public sector in India, as in most other countries of the world, has been the principal instrument for fulfilling the role of the State as an entrepreneur. State intervention in the market arises out of two main reasons. Either, the market does not exist at all, as was the case with most developing countries who had acquired independence from colonial rule in the second half of the 20th Century, mainly located in Asia-Africa and Latin America; or, there were cases of severe market failures which required governments to intervene decisively in public interest as was the case in many developing and even developed economics, like the UK, France, Italy, etc.

Mixed Economy Model

In the50s and 60s and even 70s, the economic development in most of the less developed countries and the newly independent nations took place either on a mixed economy model or an autarkic State controlled model. In India, as far back as in 1956, through a parliamentary resolution, a mixed economy model was adopted which gave the public sector a strategic and pivotal role in the process of development. In pursuit of the objective of development by direct intervention in strategic areas, massive investments were made over the past four decades to build a public sector which was expected to acquire a commanding role in the economy, at least in the size and scale of operation and especially in the economic infrastructure area.

Public Sector’s Commanding Role and Reasonable Return for Investment

The commanding role, however, assumed a level of efficiency on the part of public sector which will generate resources which would be made available to other sectors. However, this did not happen. On the other hand, there is no doubt in the minds of informed observers of Indian Economy currently that although the Public Sector has played an important and critical role in economic development of the country all these years, the current benefits from it are not (and have not been) commensurate with the investment made. Its cost of maintenance is high and it is now a net burden on the Economy. This investment is of the order of about $ 50 to 70 billion. The return on this investment has varied between a poor two to five per cent in the last few years. Considering that the investment funds must have come out of savings which are being serviced by the government at about 12 per cent, a return of two to five per cent would appear to be too paltry to enable servicing of the equity as well as the loan content of that investment adequately. Quite obviously, the government is using budgetary resources (or further savings) to service both equity and debt.

It must be considered fair for any nation to expect a reasonable return from public investment. Consequently, the categorical need for restructuring such investments is clearly unavoidable, based on a closer re-look at their initial objectives, their current structure and their likely future, despite the fact that in the past this was avoided for various reasons of public policy which are no longer valid and, therefore, no longer avoidable in the light of the new policy of plugging the Indian economy into the global market on the premise of its efficiency and competitiveness.

Rapid Expansion of Public Sector Despite Poor Performance

In India, like in most developing countries, 60s and 70s were characterised by interventions by the State in the market place and the public sector seems to have grown at a rapid pace. The almost euphoric expansion of Public Sector in India in this period led even to interventions in areas which were not at all strategic, like hotels and manufacture of consumer goods, like scooters, soft drinks, bread, etc.

Even though the Indian public sector attracted the best human resource in brains, talents and skills, the problem of poor performance, lack of competitiveness and low productivity was entirely due to management control structure characterised by multiple principals and multiple goals, which forced them into a bureaucratic rather than commercial mode of behaviour characteristic of which was lack of autonomy and accountability. Therefore, there was need on the part of government for both the strategies, i.e. (i) of being able to let go, and (ii) to fashion an administrative interface between itself and the enterprise that optimised their commercial performance by tackling the problems highlighted above. The new policy package, which emerged in 1991 out of the unique Taxonomic Examination and Performance Contracting System, effectively addressed these issues and requirements by focusing on a dual strategy, and, therefore, could be termed as being both flexible and comprehensive.

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