After reading this article you will learn about the working of public sector enterprises. Also learn about its defects, tests and suggestions for improvement.

Public sector has been growing by leaps and bounds both in terms of the size on investments and diversity of its activities. At the start of the First Plan the investments in public enterprises totalled only Rs. 29 crores in 5 undertakings of the Central Government, whereas it has now reached a figure of more than Rs. 5,000 crores. In 1971-72 the total investment in public undertaking rose to Rs. 5,052 crores covering 101 undertakings.

Latest position of public sector working is given in Table – 1:

Working of Public Sector Undertaking

The Central Public Sector enterprises were established to achieve certain laid down objectives and to develop a sound agricultural and industrial base for the removal of poverty, better distribution of income, expansion of employment potential, removal of regional imbalances, accelerated growth of agricultural and industrial production and a wide ownership of economic power to prevent concentration of wealth in few hands.


In terms of activities, it covers in addition to the entire core sector, most of the basic and strategic industries considered vital for economic security and national self-reliance It also refers to the equipment need of sectors like railways, telecommunication, nuclear power, defence, etc. over the last 4 decades there has been phenomenal increase in the size of Central Public Sector enterprises in terms of number. Its size grew from a mere 5 enterprises as on 1.4.1951 to 248 enterprises as on 31.3.1990 with an investment of Rs.29 crores to Rs. 103000 crores, respectively.

The gross turnover has been growing steadily from Rs. 23,290 crores in 1979- 80 to Rs 93,122 crores in 1988-89. The major share of the gross turnover is from petroleum (Rs. 36,512 crores), trading and marketing (Rs. 14,840 crores), steel (Rs. 7,535 crores) and coal and lignite (Rs 6,634 crores).

The Central PSEs earned a net profit of Rs. 2,981 crores in 1988-89 which is the highest quantum of net profit ever achieved by the enterprises put together in any year. The quantum of gross margin and gross profits have also shown impressive increases during the year. During the last 10 years, there has been an impressive improvement in the quantum of gross margin which has progressively increased form Rs. 2,054.66 crores in 1979-80 to Rs 13,429.84 crores in 1988-89, showing an increase of 553.38 per cent.


The ratio of gross margin to capital employed has also increased from 12.70 per cent in 1979-80 to 19.88 per cent in 1988-89, despite an increase of Rs 51,353 crores in the quantum of capital employed during this period. After providing for depreciation, amortisation and deferred revenue expenditure written off, the gross profit of the group as a whole also recorded impressive upward movement from Rs. 1,229.16 crores in 1979-80 to Rs.. 8,545- 35 crores in 1988-89, an increase of 592.22 percent.

The gross profit when viewed as a percentage of capital employed also shows the marked improvement from 7.60 per cent in 1979-80 to 12.65 in 1988-89. In terms of overall net profit after tax, the picture is better.

From a loss of situation of Rs. 74.29 crores in 1979-80, the public enterprises have recorded an overall net profit of Rs 2,980.96 crores in 1988-89 despite a net loss of Rs. 543.15 crores incurred by sick nationalised units taken over from the private sector. In terms of net return on investment, i.e. the ratio of net profit to capital employed, the increase is from (-) 0.46 per cent in 1979-80 to 4.41 per cent in 1988-89.

The Central public sector enterprises have to depend on their ability to generate resources internally for financing their own expansion and development activities. In the context of resource crunch being faced by the country, the generation of internal resources by the public sector has assumed much greater importance since in addition to financing their own plans they are also expected to generate surplus for financing needs of other priority sectors.


In this context, it is encouraging to note that public enterprises have succeeded in increasing their internal resources generation over the years. The gross internal resources generated by operating enterprises during the Third Plan period was of the order of Rs. 287 crores whereas during the Forth Plan period, i.e., 1969-70 to 1974-75, the corresponding amount was Rs. 1260 crores.

During the Fifth Plan period, i.e., between 1974-75 and 1978-79 resources generated amounted to Rs.3,439 crores. During 1979-80, the gross internal resources generated by 113 operating public enterprises amounted to Rs. 1,029.91 crores. During the Sixth Plan period, operation enterprises have generated gross internal resources to the tune of Rs. 13,767.71 crores.

The Seventh Five Year Plan envisages generation of internal resources by Central Public Enterprises (including DVC and major ports but excluding Railways and P & T) to the tune of Rs.31,500 crores.

In addition, they are also expected to contribute, through additional resources mobilisation measures an amount of Rs. 11,490 crores towards the financing the Plan outlay apart from generation of internal resources of the Central Government through payment of dividends, corporate taxes, excise duty, customers duty and other duties, thereby helping the mobilisation of funds for financing the needs for planned development of the country. During 1988-89, such contribution amounted to Rs 16,331 crores as against Rs 15,132 crores during 1987-88.


In the context of the balance of payments position in the country, the public sector is called upon to play a major role in easing the position. During 1988-89, the export earning of the public sector was Rs. 4,898 crores.

The total inventory in the public sector as on 31.3.89 was Rs. 19,794 crores which represented 86 days value of cost of production. This has been a significant decline in the inventory levels in the public sector. It was 113 days in 1979-80 and dropped to 86 days in 1988-89. Efforts in import substitution also continued with BHEL (Rs. 24.18 crores) and SAIL (Rs. 19.22 crores) leading the, list.

The total employment in the central public sector was 23 lakhs at the end of 1988-89. Large scale employment generation by the public sector enterprises over the years have led to a situation where the enterprises are saddled with over­ employment or excess man-power. The scheme of voluntary retirement has been introduced in 1988 to shed the excess man-power.

Simultaneously, training and retraining programmes are being given substantial uplift, the average per capita emoluments of the public sector vary widely, depending on the sector. The average annual emoluments in 1988-89 were Rs. 39,513.


The public sector enterprises act as a model employer and apart from complying with various acts of social and industrial legislation for protection of workmen and also undertaking other activities towards this end. Quite a few of the projects are located in green-field areas away from towns and villages resulting in development of backward areas.

The public sector Scheduled Castes and Scheduled Tribes is being implemented and as per reports received from 220 operating enterprises, 29.7 per cent of the total employment in the public sector as on 31.3.1989 is filled by Scheduled Castes and Scheduled Tribes.

Defects in the Working of Public Sector Enterprises:

The public enterprises operating in India suffer from some grave administrative lapses.

Those defects can be briefly pin-pointed as follows:


1. Imperfect Production Planning:

One of the aims of enterprises in public sector is to achieve the to production targets laid down in the plans. They are expected to supply goods, equipment, machinery, etc. as per schedule so as to lead the other sectors in the economy. But production programmes of many of the public enterprises in India have not kept up to the schedule.

This is due to absence of scientific and realistic planning of production schedules and targets. In some cases targets are too high and in others they are very meager. Planning of production has not also been related with the plant capacity thus resulting either in excess capacity or in shortfall of production. Under utilisation of capacity leads to wastages and inefficiency.

2. Delay in Execution of the Project:


Sometimes the projects are held up for a long time in their execution stage only. The actual start of production is delayed with obvious adverse effects on our resources position. Trombay and Bokaro Steel are the examples.

3. Over Capitalisation:

Many projects are found to have been over-capitalised at their very inception. Capital expenditure has been abnormal and not at all related to the productive capacity supposed to be created thereby. Hindustan Steel Ltd., Heavy Engineering Corporation, Heavy Electricals, Hindustan Aeronautics, Fertiliser Corporation, Indian.

Drugs and Pharmaceuticals are some major enterprises where capital expenditure is found to be superfluous, leading to unfavourable input- output ratio and accumulation of losses. Faulty planning, non-competitive prices in purchases of materials, plan, expensive contracts, bad location of projects, delay in execution of the projects etc. are the reasons of over-capitalisation.

4. Extravagant Overhead Costs:

Overhead costs are disproportionately incurred on non-productive items like administrative buildings, guest houses, housing, township development etc., resulting in uncovered cost-gaps.


5. Overstaffing:

In a number of enterprises it has been observed man-power requirements were also not correctly estimated. In many units excess staff was appointed than was required for actual operations and servicing.

6. Defective Personnel Policy:

Public enterprises have not evolved progressive personnel policies comparable to private enterprises. Methods of recruitment and training of personnel have not been sufficiently systematised on scientific lines. The top executive positions have not been filled with people of ability, experience and initiative. In respect of other personnel also, recruitment procedures are old and outmoded and there seems to be rampant favouritism in employee selection, promotions etc.

Absence of healthy labour-management relations is also another drawback. Public enterprises, except some concerns like Hindustan Machine Tools, have not been ideal employers as evidenced by numbers strikes, lockouts, violence, defiance of authority etc. in many big undertakings.

7. Price-Policy:


Even in respect of quality of goods and pricing public enterprises have not proved to be conducive to the interests of consumers. Prices are often very high and due to absence of proper control over costs they are frequently raised to the detriment of the consumers. For example railways, transport corporations. Utility services meant to benefit the community have been increasing their rates often.

8. No Adequate Return on Capital:

Although huge capital is invested by the state and many concessions are offered, the state enterprises have failed to generate adequate surplus to meet their costs, to finance the expansion schemes, let alone their contribution to the national exchequer.

Prices charged are higher but losses have not been avoided, except in case of a few enterprises.

9. Organisational Structure:

Organisational structure of the enterprises is marked by pre-ponderance of official directors. Government officers inducted into the Boards of Management and appointed to key posts in public enterprises lack independent initiative and entrepreneurial skill.


Autonomy has been reduced to a sham and the public enterprises are in practice toeing the official line dictated by the ministers concerned. Minister’s interference in the management has robbed the enterprises of their independence as commercial units.

10. Ineffective Parliamentary Control:

Inspite of ministerial interference, parliamentary control over public enterprises has not been meaningful. Interference has to be avoided but control cannot be ruled out. There is no effective machinery by which performance of public sector in terms of its economic and social objectives can be evaluated. Many instances of wastages, losses, policy-lapses have gone unnoticed.

The Tests for Public Enterprises:

Public enterprises have to conform to the following tests if they are to serve as a lead-sector in priming the pump of economic growth as well as in promoting social justice:

(a) Fulfilment of non-commercial objectives as specified by the Government.

(b) Fulfilment of Commercial objectives and maximisation of profits within the constraints imposed by the Government.


(c) Improving the quality of products and services.

(d) Effecting economy and efficiency in the use of resources.

(e) Safeguarding the interests of labours.

Suggestions for Improvement in the Working of State Enterprises:

Following steps should be observed for streamlining the working and administration of the State Enterprises:

(i) They should function on commercial principles in all strictness. Yardstick of commercial efficiency should be scrupulously applied to the activities of these enterprises. Demand and its changing trends should be forecast and production should be planned in relation to the installed capacity and in response to the estimated demand. Scientific management techniques of planning, time and motion studies, cost and budget control should be adopted.

(ii) Autonomy of public enterprises should be honoured and suitable incentives should be provided for the achievement of efficiency and display of bold initiative. Government pressurization and interference in management should be avoided.


(iii) The Board of Management of the State Enterprises should be inclusive of all interests. Particularly, the experts, experienced and talented persons should be appointed on the Board so that the Board can give positive direction to the men at the operational level.

(iv) State enterprises should devise model employer techniques – labour consultation, participation, fair remuneration, profit sharing, bonus etc. so that productivity of labour is maintained and increased.

(v) By increasing efficiency, cost-control, materials management these enterprises should seek to generate sizeable surpluses without exploiting the consumers.

(vi) Performance of public enterprises should be evaluated by Parliament, or its committees. There should be constant watch over the utilisation of funds, propriety of expenditure, justifiability of costs and comparative appraisal of the contribution to the production of goods or services.