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Business Studies > Private, Public and Global Enterprises > Changing Role of Public Sector
Private, Public and Global Enterprises

Changing Role of Public Sector

When India gained independence in 1947, the economic condition of the country was very poor. There were hardly any public sector enterprises other than the Railways and the Postal Services. It was determined that going forward public sector would play a big hand in our economic development. And then again in the 1990’s the trend changed again. So let us take a more detailed look at the changing role of public sector.

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Changing Role of Public Sector

As we know that in 1991 India opened up its economy and started the process of globalization. But also, through the same changes in economic policies, we embraced privatization. Up until then in the post-independence period, the public sector was an integral part of the development and progress of our country.

The government took the responsibility of investing huge capital in infrastructure and manufacturing industries. The private sector was not equipped to handle such immense projects with heavy capital inflow and long gestation periods. So the central and state governments relied on public enterprises to provide thee services to the economy.

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The first few Five Year Plans were all designed to promote and safeguard the public sector. But then came the era of privatization and globalization in 1991. The role of public sector companies was reevaluated. Now the public sector was to actively participate in a competitive market with the private enterprises. Inefficiency and uninspired management were not tolerated.

The public sector was also held responsible for the huge losses of their companies. And so the role of public sector in our economy saw an overhaul. Let us take a look at the Changing Role of Public Sector.

Role of Public Sector

(Source: purpledrive)

Importance of the Public Sector

Let us first understand the importance and role of public sector undertakings in our economy. These are the reasons that till early 1990, the public sector dominated our economy over the private sector.

  • Developing Infrastructure: In a newly independent country, with a nascent economy, it is not suitable for private enterprises to invest huge capitals into infrastructure projects. So this responsibility falls to the public sector. And the development of infrastructure is absolutely essential for the development o an economy. For example, all the rail, road, and air transport projects were carried out by public sector undertakings in the post-independence era.
  • Regional Balance: Private sector companies tend to focus on industrial areas. This results in the backward areas and the smaller towns and villages to be excluded from economic growth. But the government can ensure that growth happens throughout the country in a balanced manner. Public sectors set up units and factories in backward areas bring employment opportunities and economic development to such areas.
  • Check on the Concentration of Economic Power: When the private sector sometimes the wealth gets concentrated in the hands of a few. This may lead to monopolistic tendencies and concentration of economic power. The public sector helps keep this in check. The income generated by a public enterprise is shared by a large number of employees and also the public at large. this helps restore some economic equality.

Change in Government Policy

In the overhaul of our economic policies and reforms in 1991, the government of India introduced four major changes regarding the public sector. These four changes forever changed the role of public sector in our country

1] Reduction in Industries Reserved for the Public Sector

In the first Five Year Plan, the government had reserved seventeen industries for the public sector. This meant that only the government could operate in these industries, no private capital would be involved. But by 1991 this number was down to 8. And now there are only 3, which include the railways and atomic energy.

While the public sector must be credited with developing these industries, now the private sector is quite capable of taking them forward. Now the private and public companies co-exist and compliment each other in these industries, for example, mining, air transport etc.

2] Disinvestment

Disinvestment from the public sector means to sell equity shares in public companies to the private sector and the public at large. Also, disinvestment allows for the new influx of capital and better efficiency and financial discipline in private hands. It also ensures that the government has additional funds to invest in social programs and causes, things such as public health and sanitation.

Disinvestment also shifts the commercial and financial risks to the private sector. It brings the companies under the purview of corporate governance and reduces the amount of public debt. In some cases such as the telecom industries, disinvestment has also benefitted the consumers by raising competition and lowering prices.

3] Closure of Sick Units

After the change in policies, all public sector units were to be reviewed by the Board of Industrial and Financial Reconstruction. This board would review the condition of the units and decide whether they were capable of rehabilitation or were to be shut down permanently. But this upset the workers and employees of the sick units that were shut down.

Since the government was not able to sustain such sick units they had to be shut down. The workers were provided with a safety net as to their loss of income. A National Renewal Fund was set up to finance Voluntary Separation Scheme and Voluntary Retirement Scheme for such workers. But in the end, they were insufficient measures.

4] Memorandum of Understanding

This was a system to give the public sector units a chance at revival. The management of the unit and the concerned government authorities would sign a MoU. Clear standards will be given for the enterprise to meet. If the targets were met the company would continue. Otherwise, it would be shut down or disinvested.

Solved Question for You

Q: Just like in air transport, public companies can also invest in rail transport of India. True or False?

Ans: The given statement is false. Railways is still a reserved industry in the Public Sector, along with atomic energy. This means only the government is allowed to operate in these particular sectors. Private companies or private capital is not permissible.

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