Evolution of Public Sector in India

Before independence, there was almost no "Public sector" in Indian economy. The only instances worthy of mention were Railways, The Post & Telegraph. The Port Trust, The Ordnance and the Aircraft factories and few Government controlled under takings.

After independence India adopted the road of planned economic development through Five year plans.  In this India opted for dominance of the Public Sector firmly believing that Political independence without economic self-reliance would not enable the Government to fulfill the aspirations of the countrymen. The passage of Industrial Policy Resolution of 1956 and adoption of socialist pattern of society as the national economic goal of the country built the foundation of the dominant public sector as we see it today. It was believed that a dominant public sector would reduce the inequality of income and wealth and advance the general prosperity of the nation.

The main objectives of setting up the Public Sector enterprises as stated in Industrial policy Resolution of 1956 were:

• To help in the rapid economic growth and Industrialisation of the country and create necessary infrastructure for economic development.
• To earn return on investment and utilise generate resources for development.
• To promote redistribution of income and wealth.
• To create employment opportunities.
• To promote balanced regional development.
• To promote import substitutions, save and earn foreign exchanges for the economy.

The 2nd Five year Plan document clearly stated that "all industries of basic and strategic importance, or in the nature 'of public utility services should be in the public sector. Other industries, which are essential and require investment on a scale, which only the state, in the present circumstances, could provide have also to be in the public sector". If further emphasized that, "the public sector has to expand rapidly. It has not only to initiate developments which the private sector is either unwilling or unable to undertake, it has to play the dominant role in shaping the entire pattern of investment in the economy". The investment in public sector enterprises has grown from Rs. 29 Crore in 5 PSU on 01.04.1951 to Rs.2,52,554 Crore in 240 PSU on 31.03.2000.

Genesis of Disinvestment in India.

Disenchantment with public sector started in 1970s. It was observed in many countries that the performance of tile public enterprises was far below the expectations. The weakness and defects of public enterprises started manifesting with grave danger to Government and economy in many countries, with no solution in sight. So there started, the reversal of trend in this decade. By the mid 1980 globally the political opinion was veering round to the view that the proportion of GNP due to Government economic activity should be reduced to the extent possible and business activities should be left to private sector as far as possible.

During the 1980s, collapse of the socialist economy of the Soviet block, introduction of economic reform by Russia, East European countries and China knocked the bottom out of protagonists of Government intervention in every commercial activity for the benefit of the masses. 

India, for almost four decades was pursuing a path of development in which public sector was expected to be the engine of growth. But by mid-eighties their short comings and weaknesses started manifesting in the form of low capacity utilisation, low efficiency, lack of motivation, over-manning, huge time and cost overrun, inability to innovate and take quick decision, large scale political and bureaucratic interference in decision making, etc. But instead of trying to remove these defects and to increase the rate of growth of national economy, gradually the concept of self-reliant growth was given a quiet burial. The Government started to deregulate the imports by reducing or withdrawing import duty in phases. This resulted in dwindling of precious foreign exchange reserve to abysmally low level. The foreign debt repayment crisis compelled Government of India to raise loan from IMF against physical deposit of RBI gold reserve, on conditions harmful to the interest of the country.

Thus started the reversal of policies towards PSU. The Industrial policy of 1991 started the process of delicensing and except 18 industries, Industrial licensing was withdrawn. The market was opened up to domestic private capital and foreign capital was provided free entry upto 51% equity in high technology areas. The aim of economic liberalisation was to enlarge competition and allowing new firms to enter the market. Thus the emphasis shifted from PSEs to liberalisation, of economy and gradual disinvestment of PSEs. A paradigm shift of Government's economic policy orientation originated in 1991 from a foreign debt servicing crisis.

Rationale for Disinvestment.

Because of burgeoning revenue deficit in Central Budget year after year on account of current revenue expenditure on items such as interest payments, wages and salaries of Government employees and subsidies, the Government is left with hardly any surplus for capital expenditure on social and physical infrastructure. Huge amount of public resources are blocked in several non-strategic PSEs giving meagre return Government is forced to commit further resources for sustenance of many non viable PSEs in absence of exit route. Above all it has to service huge amount of outstanding debt before any money is available for investment in infrastructure. All these Government economic woes led to an obviously straight forward option of divestment of Government stake in PSEs.

The primary objectives for privatising the PSEs are:

• Releasing large amount of public resources locked up in non-strategic PSEs.
• Stopping further outflow of resources for sustaining unviable PSEs.
• Reducing burgeoning public debt.
• Transferring commercial risk to private sector.

• Disinvested companies would be exposed to market discipline and they would become more efficient and survive or will cease on their own.
• Disinvestment would have a beneficial effect on the capital market.
• New private Investor will put in more money in privatised PSEs and economic activity will increase.
• Consumers will be benefited as they would have more choices and cheaper and better quality products and services.

The quantum of divestment of equity in PSEs was gradually increased from 20% to 49% to 76% and 100% in some cases. From divestment of Government stake to other PSEs, Financial Institutions etc., Government has now adopted the path of strategic sale of PSEs to private industrialists.

• The main features of Government's present Policy towards Public sector are:
• Restructure and revive potentially viable PSEs.
• Close down PSEs which cannot be revived.
• Bring down Government equity in all Non-strategic PSEs to 26% or lower, if necessary.
• Fully protect the interests of workers.

The issues regarding disinvestment which are still being debated and which will remain relevant in the coming days are:

• Which areas should not be divested.
• Whether defence production & services should be disinvested and to what extent it is desirable in view of national security.
• To what extent the method of divestment can be made open and transparent.
• Out of the various methods of divestment which path will lead to fulfillment of declared objectives.
• Should the foreign private investors be allowed to acquire controlling interest in PSEs.
• How the social security net be instituted to train and re-employ active and able employees retiring under VRS.

The Government sold minority shareholdings in central. PSEs in earlier years of disinvestment. It generated an income of Rs.18000 crores till 1999. The Government has completed strategic sales in four central PSEs in 2000.;2001. The attempt of the Government to sell Shares of PSEs in open market has not been successful due to lack of depth of Indian share market. Even when PSE shares were sold in Indian market most of it had to be bought by Indian Financial Institutions. This merely transferred public sector risk from one hand to another. UTI bought about Rs.6400 crores worth of PSE shares, which resulted in a net loss of about Rs.5050 crores to the UTI.

Criticism

Ten years have elapsed since India commenced its journey in 1991 towards economic liberalisation and globalisation. A political consensus has emerged by now towards the necessity of economic reform programme. But difference of opinion still persist about the depth, coverage, and effect of the Government's economic reform programme.

Many questions are being asked at different levels regarding the consequences of economic reform; Has the common man received any benefit of economic reform during the last ten years? Is there any rapid progress towards meeting the basic needs of the people like safe drinking water, balanced food, primary education, health and shelter? 

Is there any epoch-making progress towards providing infrastructure like-transport, fuel, electricity, power, roads etc.? Communication is really revolutioned, but has the purchasing power of people gone up? A small group of people are enjoying the fruits of globalisation. But vast majority of people are suffering from financial crisis, helplessness and uncertainty. Is not the rich-poor divide accentuating? The land reform programme should have been extended and deepened to release the forces of production, and then public sector should have been gradually exposed to market competition with private entrepreneurs. This would have benefitted large section of the people. Our economic reform programme should be directed towards the aim of increasing the purchasing power of the huge number of village population, industrial labor and agricultural labour and thereby develop the domestic market. Assistance of Advanced technology and development of the creativity of 1 million people-joining of these twin forces can be the guarantee of national economic progress.

A section of Politicians and bureaucrat instantly interfered in tile affairs of the PSEs and misused their authority to make the management subservient to Government. Thus they made many PSEs unprofitable. Now the managers and employees are being blamed for all the ills of PSEs and disinvestment is being touted as the only cure. It is like "give the dog a bad name and then hang it."

If at all the Government is to extract good value for PSEs, then they must be restructured, made profitable and then sold. Otherwise it may turn out to be distress-sale at throwaway price. The salaries and wages of PSEs are now being seen as the sole cause of unprofitability of PSEs. So there is a concerted move at reduction of manpower through VRS before divestment or closure.

During the last few years lakhs of People have been retrenched under VRS from public sector organisations. This has aggravated unemployment problem which is already very grave due to negative growth of employment in public sector. 

Economists are crying that for the last few years, country is going through demand crisis. This is the root of all problems. The main problem of our domestic industry is inadequate demand in the market for the produced goods Bountiful production of food grains and record storage of these in F.C.I. godowns has not enabled the Government to distribute it to the people because of lack of purchasing power of a great many number of poor people.

Under these circumstances, disinvestment is going to aggravated the problem of unemployment. The whole world is going through a wave of retrenchment - as if labour is the primary culprit of all ills. But if lakhs and lakhs of earning persons suddenly become newly unemployed who will purchase the goods produced in mills and fields?

Conclusion

None of us can foresee, twenty, thirty or fifty years, hence what shape the Indian economy will take. But it is certain that the process of Government moving away from economic activities, which has started allover the globe and in India too will have a far reaching consequence. The basic principle of welfare economy is greatest good of the greatest numbers. Will the man ever move away from this aim? There is no end to the search for the path of universal welfare. So human society will progress through the clash of opinions about ways and means. A harmonious combination of both market and Government-is what is needed for economic welfare of man.

Government has finally made a beginning towards attainment of the disinvestment target of mobilising Rs.12,000 crore for the current financial year. As part of the first privatisation deal, it finalised sale of majority stake in CMC Ltd. and Hindustan Teleprinters Ltd. (HTL). The Cabinet Committee on Disinvestment (CCD), headed by Prime Minister Atal Bihari Vajpayee, approved the sole bidder Tata Sons for sale of 51 per cent stake in CMC for Rs.152 crore at Rs.197 a share. CCD also chose Himachal Futuristic Communicaton Ltd. (HFC) for selling its 74 per cent equity in HTL. HFCL had made a price bid of Rs.55 crore. Consequently, the government would get a Total of Rs.207 crore upon transfer of its equity to the new strategic partners.

In case of CMC, government would also sell over 6 per cent of its equity to employees under the stock option scheme at one third of the market price. This will bring down government equity to 26 per cent each in CMC and HTL. These are the first privatisation cases since sale of 51 per cent equity in Bharat Aluminum Company (BALCO) to Sterlite Industries for a total of Rs.551.5 crore in the last financial year.

Disinvestment in CMC and HTL came after the Cabinet Committee on Disinvestment (CCD) at its meeting decided on disinvestment timetable for sale of equity in 13 public enterprises during the current financial year. During this meeting, CCD also shelved the proposal for transferring all the PSEs scheduled for disinvestment to the Finance Ministry for cutting down the delays. Prime Minister Vajpayee, in fact, made it a personal responsibility of the secretaries of concerned administrative ministries to ensure that all the problems and issues coming in the way of disinvestment of identified PSEs were taken care of in accordance with the disinvestment timetable.

The PSEs for which disinvestment time table finalised by CCD are CMC, HTL, Hotel Corporation of India, Maruti Udyog, Hindustan Zinc, eight hotels of ITDC, Jessop and Company Ltd., Indian Petrochemicals Corpn. Ltd., IBP Company Ltd., Videsh Sanchar Nigam, Bharat Heavy Plates and Vessels, Instrument Control Valves of Kerala and Nepal. 

In case of Maruti, CCD decided on three way valuation mechanism wherein a valuer will be appointed each by government and Suzuki Motor Corporation, the two partners, besides a third valuer with mutual consent. Initially, MUL would come up with a preferential issue of Rs.400 crore, in which government would sell its rights to highest bidder. This would bring down the government equity to below 50 per cent, depending on the premium at which preferential shares are offered. Subsequently the government will sell it remaining stake either to public or financial institutions.

CCD also decided to appoint a group of ministers for finalising the approach for disinvestment in IPCL after rescinding its earlier decision to sell the corporation's Baroda plant to Indian Oil Corporation on a negotiated price following differences on valuation. In yet another decision government decided to offer 30 per cent of its equity in National Aluminum Company (NALCO) to public bring down its stake to 57 percent.

On his part, Finance Minister, Mr. Yashwant Sinha has clarified that though disinvestment target for current financial year has been pegged at Rs.12,000 crore, he was taking credit for only Rs. 7,000 crore in his revenue calculations. The remaining was to be transferred for additional plan expenditure. Towards meeting the disinvestment target for the year, the government also decided to convene the meeting of the Cabinet Committee on Disinvestment every month to monitor progress in line with the set timetable. CCD had earlier this fiscal listed out a total of 27 PSEs for starting the process of disinvestment. After disinvestment during the current financial year, the remaining Puss would be taken up over the next two years.

Recently, Government has also decided to put Shipping Corporation of India (SCI) on the block. However, it has been agreed to that government would bring down Its equity from 80 percent to 26 percent by offering 51 per cent to strategic buyer and another 3 percent to employees.

(By Arrangement with Kaleidoscope)