Public Enterprises: Role of Public Enterprises (PEs) for Society!

The creation and growth of state (public) sector of business is designed as an instrument of social control. For a developing country public enterprises have become a key factor for the planned and balanced growth. A.H. Hanson rightly observes that, “Public enterprise without a plan can achieve something but a plan without public enterprise is likely to remain on paper.”

Public Enterprises

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Public enterprises (PEs) are institution operating service of an economic or social character or behalf of government. The main attributes of public sector enterprises are: state ownership, state control and management, public accountability, non profit motive, state privileges and regulations.

In India, public sector enterprises are of three types: departmental undertaking, public corporation and Government Company. In most of the countries, the roles of PEs are justified from social point of view. In many cases PEs are not economically viable but socially desirable.

At present, the wave of privatization has challenged the PEs’ managers to run the business on economic lines and earning the profit. Definitely in India, now after 50 years of independence there is need of economic viability for PEs. Managers of public sector should serve the society but after running the business on profit.

PEs—thriving for social good:

After the attainment of independence and the advent of planning, there has been a progressive expansion in the scope of public enterprises in our country. The passage of Industrial Policy Resolution of 1956 and the adoption of the socialistic pattern of society as our national goal further led to a deliberate enlargement of the role of public sector.


People in some cases demand nationalization of business enterprises on socialistic grounds in many nations. Democratic governments are compelled for public ownership in a particular factory where workers do not want to work under private capitalists.

Many of the factories in USSR were nationalized on this ground after 1917 during the period of directed capitalism. Many under developed countries are even accepting today the principle of economic planning and are giving greater importance to public ownership.

Plans have been made on the basis of ‘the victory of socialist resolution’, aiming at ‘getting greater, quicker, better and more economical results to build socialism’. Power of local govern­ments in the management of industrial construction and production has been ever increasing in Poland, Yugoslavia and other socialist countries.

Gone are the days when Indian economy was in the hands of the foreign British rulers who exploited us, and they did not think of the good of the teeming millions of India. The idea of self-contained economy came with the Gandhian economics. Prior to 1947, there was no or little ‘public sector’ in the Indian economy.


The only instances worthy of mention were the Railways, the Port Trusts, the Posts and the Telegraphs, the Ordinance, the Broadcasting, the Aircraft Factories and a few state managed undertakings like the government salt factories, quinine factories, etc.

In the constitution of India emphasis has been laid on the socialistic pattern of society. Social and economic justice is recognized for the greatest good of the greatest people. The preamble reads: ‘Justice, social, economic and political and also equality of status and opportunity.’ Since beginning of the planning era in 1951 the growth and expansion of the public sector undertakings has been phenomenal.

Today, they cover a vast and varied range of activities, such as mining and: metallurgy, manufacture of electrical goods, machine tools, chemicals and fertilizers, building of ships, aircrafts and locomotives, industrial financing and undertaking of life insurance, and now they even own and control consumer goods- production. They include a few nationalized units and a variety of new undertakings which have been opened up by the central and state governments and their agencies.

Public enterprises play different roles depending on the motivation and the directive forces which move the state into action in various economic activities. In a fully socialist and communist country, the state resorts to total nationalization. It represents the complete extreme of both government ownership and control.


But now private ownership is permitted in limited sense. The state owns not only the agents of production but also the commodities produced. The distribution of consumer goods is made on the basis of one’s needs without regard to producing ability. Communism does not depend upon individual economic motivation, but upon non-economic, social stimulus for the productive efforts.

There is another case of expanding public enterprises in the form of building-up powerful state capitalism (Fascist or Nazi state). Both Communism and Fascism glorify the state above the individual. The state is supreme, the individual is nothing. Fascism is generally pro-big business, and to make the nation more self-sufficient, essential democratic freedoms are suppressed, first on political fronts, then increasingly, in economic affairs.

Authority of one strong man is the ideal of the Fascist state. Fascism is essentially a political system and is synonymous with dictatorship-Hitler in Germany, Mussolini in Italy, Franco in Spain, etc. In a mixed economy, like ours, public and private enterprises work side by side in coordination with each other.

The state operates in one field and the private sector operates in another. The state and private enterprise both operate in the same field with coordina­tion and/or competition. According to Prof. Arthur M. Schlesinger Jr., ‘A society dominated by the public sector would become rigid, bureaucratic and oppressive.


A society dominated to an excessive degree by the private sector would become exploitative, inequitable and oppressive. The mingling of the two in a mixed society requires social inventiveness.’ Public sector and private sector are not only competitive but also complementary to each other.

The Planning Commission Report 1952 also agrees with this view and comments, ‘The private and public sector cannot be looked upon as anything like two separate entities, they are and must function as parts of single organism.’

PEs—for maximization of human welfare:

Private entrepreneurs judge everything by the sole criterion of profit and would not start enterprises which do not bring profits, however useful they are to the community in general. One of the Government publications (A Handbook of Information on Public Enterprises, Bureau of Public Enterprises, Ministry of Finance, 1970, p. XVI) in this regard reports, ‘As the economists put it, the four factors of production—land, labour, capital and entrepreneurship cooperate in any production process.

The total benefit to the economy accruing from any production process should be measured in terms of the sum of all the four types of related incomes, viz., rent, wages and salaries, interest and profits. A private entrepreneur usually ignores the first three types of income flows.


Although these income flows are clear gains to the economy, a private entre­preneur would regard them only as his costs and ignore them. He is interested only in ‘his’ profits. Because of this narrow outlook, he would refuse to undertake any venture in which “his’ profits are ‘unattractive’—even if the other three flows which accrue to other citizens in society are sizeable. . . .

The great merit of the ‘socialistic approach’s more pronouncedly adopted by the Government since 1956 is that its investment decisions are based not on the narrow considerations relating to the “profits income that would accrue to it, but the total of all incomes and accrue to the society.”

The public enterprises are required to fulfill, “Political, economic and social objectives”, often conflicting in nature. The performance of the enterprise and its role are judged according to the predetermined objectives and goals.

The efficiency of public enterprises is fixed from a larger social angle instead of profit earning purpose. Larger social interest maximization represents the total addition in gross national product (GNP). The contribution of public enterprises is measured in terms of value of goods added to the social pool of goods and services.

Efforts for maximizing social goals:

The expansion of the public sector is aimed at the fulfillment of our national social goals, viz., growth of employment opportunities, development of educational and medical facilities, urbanization, reduction in inequalities of wealth and incomes, removal of regional imbalances, end of class-conflict and industrial unrest working as model employer, conduct of inefficient sick units, establishment of socialistic society, attain­ment of self-reliance, removal of poverty, acceleration of the pace of agricultural, and industrial progress, ensure scientific exploitation of national resources, development of managerial and technical cadre, prevention of monopolistic tendencies, promotion of backward sections of the society, enhance production of essential public utility goods etc.

Performance appraisal from social approach:

Although the public enterprises have grown, come to stay and have attained sufficient strength, yet they are subject to strong criticism by the public, the politicians, the ministers, the Members of Parliament, the academicians and the economists etc., it is pointed out that the investment made in them is a matter of wastage, the labour trouble is rampant in them, the efficiency of the management is highly questionable, the situation would have been much better had they been run in the private sector or other any alternative.

There is a recent talk and trend of privatization of public enterprises for improving their efficiency. But this is much debatable issue. The situation regarding economic efficiency of public enterprises in India also is not so bad as often pointed out. Up to Fourth Five Year Plan, there was no any emphasis on public enterprises to earn profits.

Moreover, profit alone cannot be taken as the measure for judging the efficiency of public enterprises when they are required to fulfill multiple, often conflicting objectives, and are functioning in different segments of industry and society; facing divergent constraints including those of location, non-availability of inputs and infrastructural facilities, inherited industrial sickness from private sector, pricing restrictions etc.

The term profitability should not be used in public sector with a pure commercial sense. They are not permitted to manipulate depreciation or other payments to show higher rate of return. Moreover, they offer much better reward for labour in terms of wages and salaries and other per­quisites in comparison to private sector undertakings.

To judge their performance, an adjustment should, therefore, be made for a higher social rate of return. Even if we look at the profit­ability position of public enterprises in India, we find that the situation is not as alarming as pointed out by many critics.

In fact, neither all PEs are inefficient, nor all private enterprises are efficient. In both sector some organizations are efficient. Since 1981-12, PEs has been continuously making profits. The profit amounted to Rs. 445.00 crores in 1981-82, Rs. 617.85 crores in 1982-83, Rs. 245.00 crores in 1983-84 and Rs. 929.00 crores in 1984-85.


The latest report of the budget also pointed out many notable achievements of public enter­prises in the country. It has been aptly pointed out that profit maximization may not be treated as a positive virtue but it may well be a ‘good whip’ to prevent public enterprises from misbehaving. Thus, the principle of profit earning not the profit maximization should be the goal of PEs. This profit earning should be made through social rationale.

Lack of private entrepreneurship:

The behaviour and attitude of the private sector itself has been an important factor itself for the expansion of the public sector. For instance, when the Americans insisted on the Bokaro Project to be set up in the private sector, Mr. J.R.D. Tata, probably the most enlightened among the private sector entrepreneurs in our country, openly confessed that the private sector was not in a position to mobilize resources to the tune of Rs. 700 crores.

Thus, the private sector does not want to move into certain sectors or if it wants to move in, it does not have the resources capacity. This is undesirable enough, but what about the unwillingness of the private sector to take even the normal risk of business?

During the second plan period and later many of the licences issued for setting up fertilizer units were surrendered while the need for a fertilizer industry was paramount for the country both for an agricultural break-through and for saving precious foreign exchange used for importing fertilizers.

The failure of the private sector drug industry to manufacture antibiotics and the tremendous exploitation of the consumers— to the extent of holding them to ransom—was responsible for the entry of the Government in drug and pharmaceuticals industry. The recent price hike by the private sector drug industry led to a nationwide clamor for the nationalization of the pharmaceutical and drug industry.

In a number of cases, the Government has been forced to take over a private sector industry or industrial units either in the interest of workers or prevent excessive exploitation of consumers. The LIC was taken over by the Government to protect the interests of the insured from the short-sighted and rapacious private enterprises.


The top 20 commercial banks were nationalized, among other things, to prevent bank-funds being used for building up private industrial and commercial empires. The take-over of sick cotton mills is due to the failure of private sector. The point to note is that often the private sector did not function as it should and did not realize its own limitations and social responsibilities.

Generation of employment:

Public enterprises have been providing employment to large number of persons directly as well as indirectly. The number of persons employed has been increasing considerably over the years. In 1970-71, the total number of workers employed in the public enterprises was 6.60 lakhs, but in 1980-81 the number grew to 18.39 lakhs and in 1983-84 to 20.69 lakhs.

The increase in emoluments has been quite considerable, as it increased from Rs. 361 crores in 1970-71 to Rs. 4,485 crores in 1983-84 or about 12.4 times. The per capita emolument has increased from Rs. 5,470 to Rs. 21,677 or about 4 times during the same period. Public enterprises are paying sufficient attention with regard to implementation of reservation of posts for scheduled castes and scheduled tribes.

The increase in total number of employees has been impressive, as it increased from 1856 in 1980 to 2053 in 1984. About one fifth of the employees belongs to SC and one-tenth belongs to ST.

Removal of regional imbalance and wealth concentration:

Since the supreme motive of the state is to serve the people in the best possible way, state-run industry will always try to maintain the quality of its products at a higher standard and reasonable price. And no artificial shortage should be created by public sector which mostly happens in private sector.

The government before locating a new plant will take into accounts not only the economic factors but also social and regional needs. Development of backward areas was the main cause for the nationalization of the Imperial Bank in 1955.


As a large majority of our population lives in villages, public enterprises have been utilized to develop rural areas. The nationalized banks and financial institutions provide loans at specially low rate of interest to the residents of backward areas and Harijan bastis.

Public enterprises are to be set up in those regions which are underdeveloped and where total resources are not adequate. A good example in the setting up of three steel plants at Bhilai, Rourkela and Durgapur and the Nayveli Project in Madras which are meant to help industrialize the regions surrounding the projects.

Pandit Jawaharlal Nehru advocated public enterprises for three reasons: to give control of the commanding heights of the economy; to promote critical development in terms of social gain or strategic value rather than primarily on consideration of profit; and to provide commercial surpluses with which to finance further economic development (speech of P.M. published in A Handbook of Information on Public Enterprises, 1970. p. IX).

Prof. A.H. Hanson, advocating the need and role of public enterprises, said, ‘Developing countries had to resort to public enterprise, for without their aid and assistance to economy cannot be dynamic.’

Prof. B.C. Tandon rightly stated that there is unfortunately a notion prevalent today in government circles that the public sector has come of age now and it will not longer remain a white elephant; and that the emphasis should not be on private sector at the cost of public sector under­takings.

Nothing can be more damaging than this approach to the country’s social welfare and economic growth. We may, thus, conclude that public enterprises are the core of the arch of national economic and social structure but the adequate government policy and implementation is the need for integrated fulfillment of composite goals.