Relevance: GS-3: Effects of liberalization on the economy, changes in industrial policy, and their effects on industrial growth.

Key Phrases: Public Sector Undertakings, social empowerment, Balanced Regional Development, gross domestic capital formation, nationalization of banks, divestment.

Why in News?

• There are reports that the government could introduce a Bill in the upcoming monsoon session of Parliament to facilitate the privatization of public sector banks with an exit clause for the Central government. There has, however, been no formal statement by the government in this regard.
• The opposition has raised concern that If the Union government completely exits public sector banks after they are privatized, it will have “dangerous repercussions for the Indian economy”.

What is a PSU?

• PSUs (Public Sector Undertakings) are the government-owned corporations in India, in which 51% or more than 51% of the paid-up share capital is owned by the government of India.
• However, it can be only the central government or only the state government of any state or central government with any state government or state governments.

Why these are conceived?

• When India achieved independence in 1947, it was primarily an agrarian entity, with a weak industrial base.
• To counter these problems and put India on the development track a plan for Public Sector Undertakings was prepared.
• India adopted the planned economic development policies, which envisaged the development of PSUs.
• India’s first Prime Minister Pt. Nehru believed that the establishment of basic and heavy industry was fundamental to the development and modernization of the Indian economy.
• India's second five-year plan (1956–60) and the Industrial Policy Resolution of 1956 emphasized the development of public sector enterprises to meet Pt. Nehru's national industrialization policy.
• His vision was carried forward by Dr. V. Krishnamurthy known as the "Father of Public sector undertakings in India".
• Thus, govt decided to create core industries in strategic sectors like Oil and Gas Steel, and Power production in the first phase. Thus, PSUs like ONGC, EIL, Indian Oil, and BHEL were founded.
• In 1969, Indira Gandhi's government nationalized fourteen of India's largest private banks, and an additional six in 1980.
• This government-led industrial policy, with corresponding restrictions on private enterprise, was the dominant pattern of Indian economic development until the 1991 Indian economic crisis.
• After the crisis, the government began divesting its ownership of several PSUs to raise capital and privatize companies facing poor financial performance and low efficiency.

Benefits of PSU:

• Employment Generation:
  • Public sector has created millions of jobs to tackle the unemployment problem in the country.
• Balanced Regional Development:
  • Public sector undertakings have located their plants in backward parts of the county.
  • These areas lacked basic industrial and civic facilities like electricity, water supply, township, and manpower.
• Contribution to Public Exchequer:
  • Apart from the generation of internal resources and payment of dividends, public enterprises have been making a substantial contribution to the Government exchequer through payment of corporate taxes, excise duty, customs duty, etc.
• Infrastructure development:
  • Infrastructure investment by the public sector in areas such as power, transportation, communication, basic and heavy industries, irrigation, canals, education, technical training, and so on has set the way for the country’s agricultural and industrial development, resulting in overall economic growth.
• Strong industrial foundation:
  • With the expansion of public sector enterprises in diverse disciplines such as iron and steel, coal, heavy engineering, heavy electrical machinery, petroleum and natural gas, fertilizers, chemicals, and medicines, the economy’s industrial basis has been significantly strengthened.
• Formation of Capital:
  • The share of public sector capital formation in gross domestic capital formation was merely 35% at the beginning of the first five-year plan (1950-51). However, it was raised to more than 50% during the 70s and remained steady in later years.
• Export Promotion and Import Substitution:
  • Some public sector firms have a track record of attaining import substitution and thereby saving the country’s valuable foreign exchange.
• Promotion of Research and Development:
  • Public sector has laid the strong and wide base for self-reliance in the field of technical know-how, maintenance, and operation of sophisticated industrial plants, machinery, and equipment in the country. Expenditure on research and development reduced the cost of production over time for PSUs.

Problems of the Public Sector Enterprises in India

• Arbitrary investment decisions and improper pricing policy decisions.
• Under-utilisation of the production capacities
• Increased amount of overstaffing and trade unionism issues and underutilization of capacity.
• Technological gap to adopt up-to-date technologies in their production system leading to high unit costs and lower yield.
• Much government interference leads to a reduction in the degree of autonomy of the management in respect of employment, pricing, purchase, etc.
• Operational and managerial inadequacies and inefficiencies leading to huge wastages and leakages of funds.
• Evil competition between the public sector and private sector units leads to sabotaging of public sector units on a large scale.
• Problem of surplus manpower which is creating drainage of resources unnecessarily leading to an increase in the unit cost of production.

Their social service performance:

• PSUs do not solely work for profit-making. They balance this goal with social welfare.
• Establishment in backward regions of public enterprises has developed civic facilities thereby bringing about a complete transformation in the socio-economic life of the people in these regions. Steel plants of Bhilai, Rourkela, and Durgapur; fertilizer factory at Sindri, are a few examples of the development of backward regions by the public sector.
• Various CSR activities including education, healthcare, improving infrastructure, social empowerment, vocational training, and environmental protection.
• PSU like National Seed Corporation stands tall in its contribution to providing rice and wheat crops to the rural and poor of the country and preventing the country from any illegal price fluctuation and inflation.
• PSUs act as shields to protect the common man against any activity that is essential for survival.
• It has ensured financial inclusion and provided banking services at the doorsteps of remote locations in India.
• The PSU provides national security, self-reliance, export promotion, regional equality, and employment opportunities.
• It has helped promote the redistribution of income and wealth.

Conclusion:

• In short, the Indian economy could lose its vitality without public sector enterprises considering the country's existing socio-economic structure.
• But there is an urgent requirement to address inefficiencies and limitations in the sector.
• Mere privatization of all public sector units could not be the only solution to it.
• Rather, there is a need to have a fresh look at the role of public sector enterprises in the Indian economy and the need to realign the policies accordingly.

Source: The Hindu

Mains Question:

Q. What are the benefits of Public Sector Undertakings (PSUs) and explain how it has been the vehicle of social empowerment over the years?