Government Policy towards Public Sector since 1991

What is Public Sector?

The public sector is comprised of various organisations that are owned and managed by the government.  These organisations may be partially or completely owned by the federal or state governments. They may also be part of the ministry or formed by a Special Act of Parliament. The government participates in the country’s economic activities through these enterprises.

Government Policies Towards the Public Sector Since 1991

In 1991, the Indian government introduced four major reforms in the public sector as part of its new industrial policy. The following are the key elements of government policy :

1. Restructure and revitalise potentially viable public-sector enterprises
2. Close down PSUs, which cannot be reviewed
3. Reduce government equity in all non-strategic PSUs to 26% or less, if necessary and,
4. Fully protect workers’ interests

a) Reduction in the number of industries reserved for the public sector from 17 to 8

In the 1956 Industrial Policy Resolution, 17 industries were designated as public. Only eight industries were reserved for the public sector in 1991, and they were restricted to atomic energy, arms and communication, mining, and railways. Only three industries were exclusively reserved for the public sector in 2001. These are atomic energy, arms, and rail transportation. This meant that the private sector could enter all areas (except three), forcing the public sector to compete.

The public sector has been critical to the growth of the economy. However, the private sector is also capable of making significant contributions to the nation-building process. As a result, both the public and private sectors must be viewed as mutually beneficial components of the national sector. Units in the private sector must also take on more public responsibilities. At the same time, the public sector must focus on achieving more in a highly competitive market.

b) Disinvestment of shares

Disinvestment usually involves selling equity shares to the private sector and the public. The goal was to raise resources and encourage greater public and worker participation in the ownership of these enterprises. The government had chosen to withdraw from the industrial sector and reduce its equity in all undertakings. This was expected to result in improved managerial performance and financial discipline. However, there is still much work left to be done in this area.

Objectives of privatising public sector enterprises 

• Releasing the large amounts of public resources held in non-strategic Public Sector Enterprises (PSEs) so that they can be used for other social purposes. Priority areas include primary education, family welfare, and basic health care.
• Reducing the public debt and interest burden.
• Transferring commercial risk to the private sector in order to invest funds in viable projects.
• Freeing these businesses from government control and implementing corporate governance.
• In many areas where the government had a monopoly. 

c) Policy regarding sick units to be the same as that for the private sector

All public sector units were referred to the Board of Industrial and Financial Reconstruction to determine whether a sick unit should be restructured or closed down. The Board has reconsidered revival and rehabilitation schemes for some cases, as well as the closure of a number of units. There is a lot of resentment among the workers of the units that will be closed down. The government established the National Renewal Fund to retrain or redeploy retrenched labour and to compensate public sector employees seeking voluntary retirement.

Many enterprises are sick and cannot be revived because they have accumulated massive losses. With public finances under severe pressure, both the central and state governments simply cannot sustain them for much longer. In such cases, the government’s only option is to close these businesses after providing a safety net for the employees and workers. The National Renewal Fund’s resources have not been sufficient to cover the costs of the Voluntary Separation Scheme or the Voluntary Retirement Scheme.

d) Memorandum of Understanding

Performance enhancement via an MoU (Memorandum of Understanding) system in which management is granted more autonomy but held accountable for specific results. Under this system, public sector units were given specific goals and operational autonomy to accomplish those objectives. The MoU defined the relationship and autonomy of the specific public sector unit and their administrative ministries. For example: In the telecom sector, consumers have benefited from more options, lower prices, and higher product and service quality.