Public Enterprises in India: Evolution, Reforms, and Models

Posted on Dec 28, 2025 in Economy

Rationale and Evolution of Public Enterprises

Question 1: Discuss the rationale and evolution of Public Enterprises in India since independence.

Answer:

Public Enterprises (PEs) in India, also known as Public Sector Undertakings (PSUs), were established with specific rationales that evolved over different phases since independence.

Rationale for Public Enterprises

• Socialistic Pattern of Society: Inspired by the Nehru-Mahalanobis model, PEs were seen as instruments for achieving a socialist society with equitable distribution.
• Capital Intensive Needs: Post-independence India lacked private capital for large infrastructure projects like steel, power, and heavy machinery.
• Balanced Regional Development: PEs were deliberately set up in backward areas to promote industrial growth and reduce regional disparities.
• Employment Generation: To create jobs on a massive scale and develop technical manpower.
• Import Substitution: To reduce dependence on foreign imports and promote self-reliance.
• Prevention of Private Monopolies: To curb concentration of economic power in private hands.
• Strategic Sectors: To maintain government control over defence, atomic energy, and railways for national security.

Evolutionary Phases

• 1947-1956 (Initial Phase): Limited to key sectors like steel (Hindustan Steel), heavy engineering, and utilities.
• 1956-1991 (Expansionary Phase): Based on the Industrial Policy Resolution 1956, which reserved 17 industries for the public sector. Massive expansion occurred during this period.
• 1991-Present (Reform Phase): Post-liberalization, the role changed from “controller” to “facilitator.” Focus shifted to disinvestment, privatization, and PPP models.

Current Status: There are now 10 Maharatna, 14 Navratna, and 73 Miniratna companies, with strategic disinvestment continuing as a key policy.

Types of Public Sector Organizations

Question 2: Distinguish between Departmental Undertaking, Statutory Corporation, and Government Company.

Answer:

Key Insight: The evolution from Departmental to Government Company represents increasing operational autonomy while maintaining public ownership.

The Memorandum of Understanding (MoU) System

Question 3: Explain the Memorandum of Understanding (MoU) system. Discuss its significance in performance appraisal.

Answer:

The Memorandum of Understanding (MoU) system was introduced in 1988-89 based on the Arjun Sengupta Committee recommendations to improve public enterprise performance.

Features of the MoU System

• Contractual Agreement: It is a negotiated document between the PE and the administrative ministry.
• Performance Parameters: Specifies physical and financial targets for the year.
• Autonomy Package: Grants specific freedoms in return for achieving targets.
• Two-Way Commitment: Both government and enterprise make commitments.
• Grading System: Performance is rated as Excellent, Very Good, Good, Fair, or Poor.

Significance in Performance Appraisal

• Shift from Control to Accountability: Moves from detailed control to result-oriented management.
• Objective Evaluation: Provides measurable criteria for assessment.
• Managerial Autonomy: Reduces day-to-day interference from ministries.
• Improved Planning: Forces systematic target setting and resource planning.
• Performance-Linked Rewards: Enables linking managerial rewards to achievements.
• Transparency: Clear expectations for both parties.
• Continuous Monitoring: Regular reviews ensure course correction.
• Comparative Assessment: Allows comparison across similar PSUs.

Challenges: Sometimes targets are set too low; political interference continues; social objectives are hard to quantify.

Challenges and Revival of Public Enterprises

Question 4: What are the major problems faced by Public Enterprises in India? Suggest suitable measures for their revival.

Answer:

Major Problems Faced

• Bureaucratic Delays: Excessive red tape and hierarchical delays in decision-making.
• Political Interference: In appointments, location decisions, and operational matters.
• Overstaffing: Manpower planning is often driven by employment goals rather than needs.
• Low Productivity: Compared to private sector counterparts in similar industries.
• Price Controls: Administered pricing prevents market-based decisions.
• Social vs. Commercial Conflict: Dual objectives often conflict (employment vs. efficiency).
• Obsolete Technology: Slow modernization due to procedural delays.
• Financial Sickness: Many PSUs incur continuous losses.
• Weak Marketing: Poor customer orientation and marketing strategies.
• Industrial Relations: Frequent strikes and union issues.

Proposed Revival Measures

• Strategic Disinvestment: In non-strategic sectors while retaining core areas.
• Professionalization: Appointing professionals through the PESB with fixed tenures.
• Operational Autonomy: Implementing the MoU system effectively with real autonomy.
• Technology Upgradation: Special funds and faster clearance for modernization.
• VRS Schemes: Voluntary Retirement Schemes to right-size the workforce humanely.
• Performance Benchmarking: Comparing with global and domestic best practices.
• Board Reforms: Strengthening independent directors and board committees.
• Marketing Orientation: Training in modern marketing and customer service.
• PPPs in Non-Core Activities: Outsourcing non-essential services.
• Turnaround Specialists: Deploying specialized teams for sick PSUs.

Disinvestment in the Indian Context

Question 5: What is disinvestment? Explain its various methods and objectives in the Indian context.

Answer:

Disinvestment refers to the partial or complete sale of government equity in Public Sector Undertakings.

Objectives of Disinvestment

• Resource Mobilization: To raise funds for budgetary needs and fiscal deficit reduction.
• Improving Efficiency: Bringing market discipline and professional management.
• Wider Share Ownership: Encouraging public participation in PSU ownership.
• Reducing Government Burden: Freeing resources for social sectors.
• Development of Capital Markets: Increasing market depth and liquidity.

Methods of Disinvestment

• Public Offer (FPO/OFS): Selling shares to the public through stock exchanges (e.g., ONGC, Coal India).
• Strategic Sale: Selling a substantial stake (≥51%) to a strategic investor with management control (e.g., BPCL, Air India to Tata).
• Cross-Holding: One PSU buying shares of another PSU.
• Warehousing: Financial institutions buying shares for later sale.
• Golden Share: Retaining a 26% share with veto power in strategic sectors.
• CPSE ETF: Exchange Traded Funds bundling multiple PSU shares (e.g., Bharat-22 ETF).
• Employee Buyout: Offering shares to employees at concessional rates.

DIPAM (Department of Investment and Public Asset Management) is the nodal agency managing disinvestment since 2016.

Public-Private Partnership (PPP) Models

Question 6: Explain Public-Private Partnership (PPP). Discuss different models with examples.

Answer:

A Public-Private Partnership (PPP) is a long-term contractual arrangement between the government and the private sector for providing public assets or services, sharing risks and rewards.

Characteristics of PPPs

• Long-term contracts (typically 15-30 years).
• Risk sharing between partners.
• Private financing and management.
• Performance-based payments.
• Focus on service delivery, not just asset creation.

Major PPP Models in India

• BOT (Build-Operate-Transfer): Private partner builds, operates for a concession period, then transfers to the government (e.g., NHAI highway projects).
• BOOT (Build-Own-Operate-Transfer): Similar to BOT, but the private partner owns the asset during the concession period (e.g., power generation projects).
• BOO (Build-Own-Operate): Private partner permanently owns and operates (e.g., telecom infrastructure).
• DBFOT (Design-Build-Finance-Operate-Transfer): Includes design in the private partner’s scope (e.g., Delhi and Mumbai airport modernization).
• O&M (Operate & Maintain): Private partner operates an existing government asset (e.g., water treatment plants).
• Hybrid Annuity Model (HAM): Government pays 40% during construction, and 60% as an annuity over the operations period (e.g., recent highway projects).

Advantages: Faster implementation, technical innovation, risk transfer, and efficiency gains. Challenges: Complex contracts, renegotiation issues, tariff setting disputes, and regulatory gaps.

Accountability Mechanisms for Public Enterprises

Question 7: Discuss accountability mechanisms for Public Enterprises in India.

Answer:

Public Enterprises in India operate under multiple accountability mechanisms:

1. Parliamentary Accountability: Question Hour discussions, Parliamentary Committees (PAC, COPU), and annual reports laid before Parliament.
2. Administrative Accountability: Through administrative ministries, Board appointments (PESB), and performance monitoring via the MoU system.
3. Financial Accountability: CAG (Comptroller and Auditor General) audits, parliamentary scrutiny of audit reports, and internal audit systems.
4. Judicial Accountability: Writ jurisdiction of High Courts and the Supreme Court, consumer courts, and SEBI regulations for listed PSUs.
5. Social Accountability: Right to Information (RTI) Act 2005, social audits, and Corporate Social Responsibility (CSR) reporting.
6. Market Accountability: Stock exchange regulations, credit rating agencies, and Competition Commission of India (CCI) oversight.

Challenges: Multiple accountability layers can lead to conflicting demands; excessive controls may hamper efficiency.

Impact of Privatization in India

Question 8: Critically examine the need for and impact of privatization in India.

Answer:

The Need for Privatization

• Efficiency Improvement: The private sector is generally more efficient due to the profit motive.
• Reducing Fiscal Burden: Loss-making PSUs drain government resources.
• Technology Upgradation: The private sector brings faster technological change.
• Global Competition: The need for competitiveness in a globalized economy.
• Consumer Benefits: Better quality and lower prices through competition.

Positive and Negative Impacts

• Positive: Improved efficiency (e.g., Maruti), better services in telecom and aviation, and revenue generation (₹4 lakh crore+ raised since 1991).
• Negative: Potential job losses, allegations of asset undervaluation, creation of private monopolies, and neglect of social objectives in backward regions.

Balanced Approach: Strategic sectors (defence, atomic energy, railways) should remain public, while commercial enterprises can be privatized with adequate safeguards.

Organization Structure and Board Roles

Question 9: Describe the organization structure and role of the Board of Directors in Public Enterprises.

Answer:

Typical PSU Organization Structure

• Shareholders: Government of India (majority shareholder).
• Board of Directors: Supreme governing body.
• Chairman & Managing Director (CMD): Chief Executive Officer.
• Functional Directors: Finance, Personnel, Operations, Marketing.
• Independent Directors: Professionals from various fields.
• Government Nominees: Representatives from the administrative ministry.

Responsibilities of the Board of Directors

• Strategic Role: Formulating long-term objectives and approving business plans.
• Governance Role: Ensuring compliance with laws, risk management, and CSR oversight.
• Monitoring Role: Reviewing financial performance and CEO evaluation.
• Stakeholder Interface: Balancing commercial and social objectives.
• Appointment Role: Senior management appointments and succession planning.

Challenges: Excessive government interference and conflicts between commercial and social goals. Recent Reforms: Institution of the PESB for professional selections and mandatory independent directors.

Pricing Challenges and Administered Pricing

Question 10: Explain pricing challenges and administered pricing in Public Enterprises.

Answer:

Pricing Challenges in Public Enterprises

• Dual Objective Conflict: Profit maximization vs. affordable public services.
• Cross-Subsidization: Some products subsidize others (e.g., diesel subsidizing kerosene).
• Political Pressures: Prices kept artificially low for populist reasons.
• Input Cost Volatility: Fluctuations in raw material costs.

Administered Pricing Features and Rationale

Administered pricing refers to prices fixed by the government rather than market forces. It is based on cost-plus formulas or social considerations.

• Examples: Urea prices, essential medicines (DPCO), and railway fares.
• Rationale: Social welfare, inflation control, and addressing market failures.

Problems with Administered Pricing

• Financial Losses: PSUs suffer if costs exceed administered prices.
• Quality Compromise: Cost-cutting affects service quality.
• Fiscal Burden: Government subsidies increase the national deficit.

Recent Trends: Moving toward market-linked pricing (e.g., fuel deregulation) and direct benefit transfers (DBT).