The Role of Public Sector Enterprises in the Indian Economy.

Public Sector in the India Economy

What is Public Sector: A Brief Profile

The public sector in India is composed of a number of segments

The Importance/Presence of the Public Sector in the Indian Economy

Role of the Public Sector in the Indian Economy

Problems Associated with Public Sector

Public Sector Reforms in India, 1991

The Statement on Industrial Policy, of July 24, 1991, recognised the many problems that have manifested themselves in many of the public enterprises and sought to rectify these problems. It noted that many public enterprises have become a burden rather than being an asset to the Government. The statement proposed “it is time therefore that the Government adopt a new approach to public enterprises”.

  1. The areas reserved for the public sector were reduced drastically from 17 to 8(and later to 6). In manufacturing, the only areas which continue to be reserved for the public sector are those related to defence, strategic concerns and petroleum. Even, here there is no bar to the Government inviting the private sector to participate.
  2. Specific attention was given to the issue of industrial sickness in public enterprises and a commitment was made to refer all sick public enterprises to the Board of Industrial and Financial Reconstruction (BIFR) or similar body so that appropriate decisions could be taken on the rehabilitation of these enterprises after examination on a case by case basis.
  3. A commitment was made to provide greater autonomy to remaining public enterprises through the strengthening of the MOU (Memorandum of Understanding) system and by providing greater professional expertise in the Boards of these enterprises.
  4. The decision to dis‑invest equity in the public sector enterprises was also announced in the Statement on Industrial Policy.
  5. To sum up, the intention behind the announcements made in the Statement of Industrial Policy was to undertake a wide ranging public sector reform. The objective was to induce greater efficiency, productivity and competitiveness in the public sector. The enterprises currently in the public sector were to be strengthened so that they are enabled to participate profitably in the new competitive environment that now exists in both the domestic and international economy. If this involves disinvestment or privatisation, it must be accomplished purposively and quickly.

The Reforms Done so far

  1. De-reservation:
  • In the manufacturing sector, the reserved areas for the public sector now only include defence production and mineral oils.
  • In the case of mineral oils (petroleum exploration, petroleum refining, etc.), however, private investment including foreign investment is being actively invited, but on a discretionary basis.
  • The other reserved areas are in respect of atomic energy, minerals related to atomic energy, coal and lignite, and railway transport. Mining of iron ore, manganese ore, chrome ore, etc., and mining of non‑ferrous metals, which was earlier reserved for the public sector was further dereserved in 1993.
  • Thus, from the original list of 17 (see Annex III) now only 6 areas still remain reserved for the public sector.
  • The public sector enterprises are now open to competition from new entry in all areas of manufacturing except in defence production.

Revamping of SICK PSU’s

  • The Sick Industrial Companies Act (SICA) has been amended to make mandatory the referral of sick public sector enterprises to the BIFR.
  • Hence, all sick (bankrupt) public sector industrial firms now have to be restructured through revival, rehabilitation, or closure if found to be unviable. Once the bankrupt public sector firms are referred to the BIFR, the government has, by necessity, to make decisions that result from the orders of this Board.
  • After referral to the BIFR the Board first has to decide whether a firm has been correctly referred to them in terms of the definition of sickness (a firm is defined as sick if its net worth has been totally eroded, if it has made losses for two consecutive years and if it has been in existence for more than five years).
  • Once a firm is accepted by the Board for further enquiry, the firm itself is usually asked to put forward its own proposal for a restructuring programme. If this is not found to be satisfactory an operating agency (OA) is usually appointed in order to examine its viability or otherwise.

Establishment of the National Renewal Fund.

The National Renewal Fund was established in 1992 to provide a social safety net for workers affected by industrial restructuring. As various enterprises (in both the public and private sectors) undertake a restructuring process, workers would need focused assistance for re‑training, re‑deployment, skill upgradation and other kinds of employment counselling.

The intention behind the NRF was

  1. to provide compensation to workers who would be affected by industrial restructuring;
  2. to assist such workers in re‑training and re‑deployment;
  3. to provide resources for employment generation in areas affected by industrial restructuring. It also had provision for compensating workers who opt to take voluntary retirement from existing public sector enterprises.

Greater Autonomy to Public Enterprises

In the statement on Industrial Policy, a commitment had been made to provide greater autonomy to remaining public enterprises through the strengthening of the Memorandum of Understanding (MOU) system and by providing greater professional expertise in the boards of these enterprises.


Himanshu Arora
Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru University
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Revisiting the Basics

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