The logic behind public sector undertakings was that private entrepreneurs were always in search of profit and this motive urged them to move in fields where the returns were high and certain.
In a developing or in an underdeveloped country, this tendency had many drawbacks. Firstly, as more and more capital was injected in the same type of business, competition increased and with it the costs went up.
With increasing costs the prices also increased and markets were hit. Before the introduction of planning in India most businessmen invested their money in traditional industries like jute or cotton or in iron and steel.
One of the arguments in favour of public sector was that government was better capable of controlling the greatest brains by virtue of the stability and status that went with government jobs. The government also had at its disposal the country’s resources, men and materials, besides money. It was the government that could stand losses in one direction and cover them from gains in the other.
Also, the government could float an undertaking on the principle of minimum profits or on a no-profit-no-loss basis. Such a policy fell beyond the purview of private business and hence government undertakings in industry were desirable or rather necessary in an underdeveloped economy.
In other words, the economy of such a country needs to be duly controlled and unless and until capital acquires free movement and-diverse channels to cater for higher tastes and better standards of living, a free economy could not work without dissent.
For a successful public sector enterprise, the selection of the manager has to be wisely made. If the manager happens to be a lazy official, or if he is not a patriot, or if he is money crazy, the public sector enterprise is likely to be a failure.
But if the manager is selected from amongst professionals, and can ensure efficient functioning in accordance with the priorities fixed by the higher professionals in authority, a public sector firm has very good chances of achieving success. Without the support of public enterprise system, the development of basic industries in an underdeveloped country is not possible.
It is only the government which has the power to raise funds, the like of which can never be achieved even by talented private businessmen, without upsetting the basic economic democracy or without causing undue concentration of wealth. The development of public sector firm is usually carried out in a phased plan of action based on priorities in accordance with the requirements of the economy.
The whole economic sphere is brought under control without causing disincentives to the labour force. Economic democracy must accompany political democracy and all development activities in the state coordinated with political ideologies and in accordance of the will of the people.
In any country it is to the advantage of businessmen and groups to achieve monopoly powers and many have attempted to do so. But the public interest lies in competition and the power of the government is sometimes invoked by the common people to bring out the competitive character of the economic system.
The private enterprise system would create multiple hazards for those who are dependent on it, such as lesser income from employment, intolerable burden of debt from business failure, old age insecurity, etc. The government steps in to moderate these hazards even in advanced countries by providing unemployment insurance, old age pension, and bankruptcy laws which remove the debt burden.
The private enterprise system also causes severe conflict of interests between groups. Workers and employers face each other in self-bargaining over the terms of employment.
Failure to come to terms in their private disputes can interrupt production and inconvenience. The government intervenes to minimise the strains and stresses.
One of the shortcomings of the private enterprise system is that it does not operate at a steady level. It generates cycles of prosperity and depression in which the people who are fully employed may suddenly slacken or falter in its pace. When workers become unemployed and unproductive, the equipment of a business house stands idle.
The uncertainty of steady employment and the hardships which arise when unemployment strikes become a feature of the system which arouses the greatest popular discontent. Government is called upon to minimise their hazards. For these reasons the general public has increasingly demanded the government to intervene in economic affairs.
Even in advanced countries it is becoming common practice to introduce mixed economy which means that a large amount of government economic activity is intermixed with private business activity.
The extent of this inter-mixture is indeed quite great in all mixed economies like those of the UK, USA, and India, and it becomes highly artificial to distinguish sharply between “political and economic activity.”
The existence of a system of private enterprise is supported by a changing state of the popular will, politically expressed (in India by the demand for democratic socialism) and agreed to by the ruling political parties as per its Industrial Policies of 1948 and 1956.
Government intervenes in the economy at many points. It sets the basic social rights, provides a monetary system and uses that system to influence the economy, provides directly those public services which are generally demanded: (i) moderate conflicts among economic groups, (ii) decentralise economic power by necessary legislation, and (iii) take steps to ease the impact of both personal economic hazards and the overall instability of the economic system.
The government invariably plays a leading role in certain sectors like defence production, heavy industries and basic mineral extractions besides the public utilities, roads, railways and communications.
In modern times the free private enterprise system can be thought of as a mixed economy, a blend of public and private activity. The public sector has over the years not only grown in size but has also developed enough expertise. In 1991, it employed 22.21 lakh employees with an average salary of Rs. 32,239 per annum.
The gross profit of public enterprises touched Rs. 10,246 crore. The R&D expenditure of the public undertakings was Rs. 208 crore in 1990. It has large designing and engineering trained manpower and extended to “high-tech” industries Iik6 telecommunications, computers, micro-electronics, ceramics and biotechnology.
The analysis of rate of return in the public sector does not show a bright picture. The total percentage of net profit to capital employed in the public sector is 3.42 and 3.76 in the two years 1989 and 1990, whereas comparatively speaking, it is usually 8.14% in the private sector. But let us not forget the social aspects of the public sector in the country.
After the initial exuberance of public sector entering into new areas of industrial production, providing technical services, trading, financial and services sectors, the public enterprises started facing various problems, some of which were due to historical reasons, while others were related to poor project management, over-staffing, obsolete technology, poor order booking positions, etc.
All these put together, the public sector as a whole started showing results far below the desired level of comparison to investments made in them.
The Government announced a new Industrial Policy on July 24, 1991 which envisaged liberalisation and competitive environment. The new policy laid down certain specific areas to be emphasized to make certain public sector undertakings realise their duty to be better performers and more competitive.
Under the policy, the Government of India disinvested varying parts of its shareholdings in some PSUs. By the year 1996, the shares of 39 PSUs were disinvected in favour of the financial institutions, mutual funds, banks, foreign institutional investors, and the public.
This resulted in disinvestment of 154 crore shares in 39 undertakings realising the sum of Rs. 9,962 crore till 1995-96. In 1996-97, the Government of India disinvested the Videsh Sanchar Nigam Limited (VSNL) through its GDR issue and sold over a lakh of shares with a net realisation of Rs. 379 crore. The shares of these companies were then listed on the stock exchanges.
The valuation of the equity of these enterprises on the stock exchanges reflected the perceptions of the public in general and investors in particular, of the performance and expectations of the public from these enterprises. Besides, the Government also offered a part of its equity holdings in some of these enterprises in favour of the employees.