After reading this article you will learn about the price policy of public enterprises in India.
For a long time, there was no definite price policy prescribed for public enterprises in India. Because, until the adoption of planning, the role of the public sector in India was not very significant. Only a few public utility undertakings like Railways and Posts & Telegraphs were run by the Government. Railways were ordained to contribute some amount every year to the national exchequer out of its earnings. Railway rates policy was designed after taking this into account.
Under the Five-Year Plans, public sector in basic industries, public utilities, trading, insurance, banking have been given a pioneering role in shaping a progressive economy.
State undertakings in the First Plan and for the Second Plan were conceived more as agencies of serving public good. Profit was not regarded as the criterion of judging their efficiency. There was no idea of using the public sector as an instrument of financing national development by suitable adjustment of pricing- process.
In the First Five Year Plan it was stated that general pricing policy should be to fix such prices for the products or services as to ensure the desired structure of allocation of resources, consistent with the fulfilment of the targets specified in the Plan.
The Gorwala Committee also was of the view that price policy of public enterprises should be based on no profit no loss principle. “The enterprises taking several years together must make neither loss nor profit”, observed the committee. Shri Gorwala emphasised that public enterprise should avoid dependence on central assistance by earning sufficient revenues as to cover the costs including depreciation, capital replacement, provisions, etc.
If any subsidy is granted by the Government to an undertaking to make up the revenue gap it should be shown separately in the accounts. If the undertaking charges higher price (beyond the costs) and earns profit, the tax element underlying the price should be shown separately. The profit earned by the enterprises according to Gorwala should be appropriated by the Government towards general revenue.
The concerned enterprises should be free to decide about the treatment of accumulated profits, reduction of price, improving quality, ploughing back for further development. The concept of ‘no profit-no loss’ policy has now lost its relevance due to the expansion of public sector in varied directions.
The problem of providing extensive finance to the developmental activities envisaged by the state is looming large. Hence the Government expects public enterprises to contribute resources for financing the country’s five year plans.
The Taxation Enquiry Commission long ago had stressed that the state need not hesitate to utilise its monopolistic position to obtain larger revenues by an appropriate price policy. It is now recognised that state enterprises should not only be content by ‘paving their way’ but generating surplus as a fair return on capital invested and as a contribution to the Government to accelerate the process of capital formation in the country.
Since taxation has a limit and public borrowing imposes interest burden, the resource-creation has to be supplemented by pricing policies of product or services of public undertakings whereby surpluses accrue to the national exchequer. The Third Plan could mobilise a total surplus of Rs. 287 crores from state enterprises.
The Fourth Plan estimated that about Rs. 1,534 crores would be contributed by Central Government undertakings other than Railways and Posts & Telegraphs and Rs. 495 crores by the State Government enterprises by adjustment in their rates. Dr. V.K. R.V. Rao opines that such surpluses should be enlarged as they are inevitable in socialistic transformation of the economy.
Public enterprises should find resources for maintenance and investment expenditure of the Government. Since Government originally provides capital in the form of grants, loans or share participation, naturally the Government can expect its first claim on the net profits earned by the enterprises.
Either the Government, or an independent Price or Rates Tribunal should give proper guidance to the enterprises for shaping their price policies so as to yield sizeable surplus to the exchequer while, of course, not ignoring the public welfare.
The study team on public sector undertaking observed that self-financing for expansion should be taken as a specific obligation of public enterprises in the industrial and manufacturing fields. They should also provide additional resources to the Government by earning profits which may be re-invested in socially useful or productive ventures.
If due to broader social considerations it is not desirable for any enterprise to gain any surplus, at least it should be able to cover the costs calculated on realistic basis.
Criteria of Price Policy:
The study team laid down the following criteria for pricing in public undertakings:
(a) At the very minimum, public enterprises should pay their way and not run in losses unless there are clear and overriding reasons of public interest which are indicated in an open directive issued by the Government.
(b) In the case of public utilities and services greater stress should be laid on output than on return on investment, the former being extended upto a level at which marginal cost is equal to price.
(c) While determining the price structure commensurate with the surplus expected from them, public enterprises should keep the level of output as near the rated capacity as possible subject to the volume of demand for the product.
(d) Public enterprises in industrial and manufacturing field should aim at earning sufficient surpluses to make substantial contribution to capital development with their own earnings.
Public enterprises in India follow different policies as per their financial obligations under the respective Acts, the directives of the Government and trends of demand in the market relative to the available supplies.
Heavy Electricals, H.M.T, Heavy Engineering Corporations, etc. adopt landed cost of similar articles as the basis of fixing fair price. The cost plus formula has been adopted by most of the enterprises whose products are bought mainly by the government. ‘No profit’ basis is chosen by concerns like Hindustan Insecticides, Hindustan Antibiotics while concessional rates for bulk contracts are quoted by Hindustan Locomotive, Hindustan Steel, etc.
Following conclusions can be drawn from the above discussion:
(a) Pricing policy should aim at rational allocation of resources.
(b) It should result in optimal utilisation of the resources.
(c) It should tend to speed up the process of economic growth by contributing to the Government on earned surplus.
(d) It should cover recurring costs, non-recurring costs over a break-even period and provide a reasonable return on capital invested.
(e) It should guarantee fair wages to the personnel employed.
(f) It should enable the enterprise to finance its expansion and enable the Government to undertake new ventures.
(g) It should provide incentives for higher efficiency.
(h) It should be in tune with the prevailing tone of the market.