Public Sector Enterprises

Public Sector Undertakings (PSUs), are companies that are owned by the central or state government. In these companies, the majority share of 51% or more is owned by the government. For example, Life Insurance Corporation (LIC), NTPC, Oil and Natural Gas Ltd (ONGC) etc. The Department of Public Enterprises (DPE), under the Ministry of Finance, is the nodal department for CPSEs. The Government of India has laid down some specific criteria for grant of Maharatna (introduced in 2010), Navratna (1997) and Miniratna (1997) status to a CPSE. As part of LPG reform, the Government of India started divesting from some PSUs. C Rangarajan Committee was formed which recommended disinvestment based on which guidelines were laid out by the Finance Ministry. Every year in the Budget, a target is set out by the government for disinvestment however there have been challenges in reaching this goal.

After gaining independence from British Rule, India was facing problems like poverty, poor industrial development, a lack of modern technology, etc. To deal with these issues, India needed economic planning, which was most suitable for dealing with the situation. Hence, there was a broad agreement on adopting a ‘mixed economy’ model for India. In this model, both the state and private sectors would work to increase production and generate jobs in the country. Thus, Public Sector Enterprises (PSEs) were created to boost production in the country, for example, Coal India Ltd., Steel Authority of India, etc. During the 1970s, banks were also nationalised to increase the access to credit for all. Since then, PSUs have played a crucial role in creating key infrastructure, industrial development, employment generation, and social and regional development. But, in the late 1980s, India started facing economic problems such as high inflation, a fiscal deficit, high public debt, etc which put the economy in crisis. After the disintegration of the USSR, India started facing a balance of payment crisis. To deal with this situation, India introduced LPG (Liberalisation, Privatisation and Globalisation) reforms in 1991. Following this, the government adopted a policy of privatisation and divested from many PSUs in favour of the private sector. Still, the government maintains a substantial presence in some strategically important sectors, such as defence, banking, energy, etc.

Public Sector Enterprises: Also known as Public Sector Undertakings (PSUs), are companies that are owned by the central or state government. In these companies, the majority share of 51% or more is owned by the government. For example, Life Insurance Corporation (LIC), NTPC, Oil and Natural Gas Ltd (ONGC) etc.

Central Public Sector Enterprises (CPSEs) are the companies that are owned by the Central Government or any other CPSEs. In these companies, the government owns 51% or more of the shares. The Department of Public Enterprises (DPE), under the Ministry of Finance, is the nodal department for CPSEs. It formulates policy guidelines with regards to performance enhancements, evaluation, personal management, and various other issues.

The Government of India has laid down some specific criteria for grant of Maharatna (introduced in 2010), Navratna (1997) and Miniratna (1997) status to a CPSE.

• Balanced regional development.
• Social obligation fulfilled.
• Creation of important infrastructure.
• Redistribution of income and wealth and effective utilisation of resources.
• Huge employment generation.
• Huge equity dividends provide non-tax revenue for the government.
• Strategic importance, such as defence PSUs.

• There are some inefficiencies due to the management and work culture.
• Overstaffing and decreased productivity are due to trade unionism and red tape.
• Lack of investment in modern technologies.
• Governmental intervention and Parliamentary oversight in working and business decisions decrease the autonomy of PSUs.
• Huge investment, a long gestation period, and operational delays lead to increased costs and low profitability.
• Huge human capital deficit in PSUs, which hinders healthy competition between the private and public sectors.
• Unpredictable policy framework by the government.

Privatisation: This generally refers to a transfer of ownership from a public enterprise to private hands. But privatisation can also refer to broad terms such as liberalisation and deregulation. Just transferring ownership may not lead to competition in the market unless it is followed by free and fair regulations.

• Privatisation involves the transfer of ownership and the control of the entity. Whereas, Divestment is dilution of ownership.
• Divestment can be:
  • Minority divestment: Government maintains the majority of shares ie 51% or more and management control. For example, recent IPO of LIC
  • Strategic divestment: Sale of 50% or more and transfer of management control.
  • Complete disinvestment: Complete sale of share and transfer of management control. For example: Sale of Air India

Rationale behind Privatisation

• Monopoly status of PSUs may infuse inefficiency in their working and operation.
• Reduced competition in the market may lead to underperformance.
• Privatisation increases investor confidence in the country. Some international financing agencies consider the pace of privatisation while providing credit.
• International experience of privatisation has been largely positive.

Techniques of Privatisation

Benefits of Privatisation

• Private investment may bring productivity in the company and employment generation will increase.
• Reduce public debt incurred due to interest payments and other capital infusions in the PSUs.
• Consumers may benefit owing to the increased competition in the market.
• Private control will create a healthy work environment, and there will be an incentive for executives to improve performance and increase the efficiency of the company.
• Privatisation may introduce cutting edge technologies in the sector and foster innovation throughout the economy.

As part of LPG reform, the Government of India started divesting from some PSUs. A committee under the chairmanship of C. Rangarajan was formed to formulate strategies for disinvestment in PSUs. Among other recommendations, a major recommendation of divestment of up to 49% of industries that are reserved for the public sector.

These guidelines were released by the Ministry of Finance. Key highlights of these guidelines are:

• DPE will identify the CPSEs for privatisation and convey its decision to the Cabinet Committee on Economic Affairs, which will take the final decision.
• After approval, the whole divestment procedure must be completed within 7 months.

This policy classifies CPSEs into two categories:

1. Strategic Sectors: Based on criteria such as national security, energy security, critical infrastructure, provision of financial services and availability of important minerals following strategic sectors have been identified:
   1. Atomic energy, Space and Defence;
   2. Transport and Telecommunications;
   3. Power, Petroleum, Coal and other minerals;
   4. Banking, Insurance and Financial Services.
   
   

Bare minimum presence of existing public sector commercial enterprise holdings may be retained by the government, remaining enterprises may be considered for divestment.

2. Non-Strategic Sectors: PSEs in non-strategic sectors may be considered for privatisation, where feasible; otherwise, such enterprises may be considered for closure.

• Opposition from employees and trade unions
• Extent of divestment
• Mode or preference of selling
• Price discovery for the entity
• Selection of CPSE
• Political will

“Government has no business being in business”, by this declaration, the Government has put forward its clear vision regarding privatisation. It is widely agreed that privatisation can transform the economy and put the country firmly on the path of economic prosperity. The process of privatisation that started after the LPG reforms has continued till now with varying pace. The Government’s presence in strategic sectors is essential for the country. But, apart from these, some sectors like healthcare, railways, etc may also require some level of government presence. The Government needs a thorough evaluation of sectors that may be privatised. But, mere exchange of ownership would not be the panacea. The Government must work as a facilitator for market forces so that there is comprehensive and rapid development in the economy.