Public Sector Undertaking - Indian Economy Notes

Public Sector Undertakings (PSUs) are government owned companies where the governments such as Federal, Union governments or the many state or territorial governments, or both own a majority stake of 51% or more of the company equity. Some of the well known PSUs are Bharat Heavy Electrical Limited (BHEL), Steel Authority of India Limited (SAIL), Gas Authority of India Limited (GAIL) and Power Finance Corporation (PFC) Limited. This article discusses various aspects associated with public sector enterprises that are essential for UPSC aspirants.

What are Public Sector Undertakings (PSUs)?

• Public Sector Undertakings comprise one of the core elements of the Indian economy that provide public services and benefit the entire society.
• They can be owned by the central or the state government in which 51% or more than 51% of paid up share capital is owned by the government.
• As of Jan 2022, there are 181 scheduled Central Public Sector Enterprises (CPSEs).
• Examples: Bharat Heavy Electrical Limited (BHEL), Steel Authority of India Limited (SAIL), Gas Authority of India Limited (GAIL) and Power Finance Corporation (PFC) Limited.

Public Sector Undertakings (PSUs) - Background

• After independence various financial and socio-economic issues emerged such as income gap, increased unemployment, imbalance in regional economic growth, etc.
• Lack of infrastructure and investments, lead to a weak industrial base. These problems were further amplified due to untrained human resources and a lack of technological development.
• Therefore, the public sector was seen as the main pillar of economic growth in a planned economic development approach.
• Industrialisation and the formation of Capital Goods Industries were the driving forces behind the establishment of PSUs.

Importance of Public Sector Undertakings

• To facilitate rapid economic growth
• For the creation of necessary infrastructure for economic growth and development.
• For the generation of resources to enable development earn return on investment.
• To enable equitable redistribution of income and wealth.
• To generate employment opportunities for individuals.
• To ensure balanced regional development in the country.
• To enable the development of small-scale industries.
• To earn foreign exchange revenue for the economy.

Types of Public Sector Undertakings

The public sector undertakings can be divided into the following types :

Departmental Undertaking

They are directly managed by a concerned ministry or department for instance Railways, Posts, etc.

Non-Departmental Undertaking

They are also known as Non-departmental Commercial Undertakings (NDCUs), which comprise government companies and subsidiaries of government companies as well as statutory corporations set up under special enactments of Parliament or State Legislatures (such as Oil and Natural Gas– PSU. e.g. HPCL, IOCL, etc.

Financial Institution

These are Public sector banks and insurance companies which are owned and managed by the government to ensure the financial services reaches the last mile. e.g. SBI, UTI, LIC, etc.

Categories of Public Sector Undertakings in India

Maharatna PSEs

PSUs in India are also classified based on their non-financial goals and are registered under Section 8 of the Companies Act, 2013. (erstwhile Section 25 of Companies Act, 1956). The government established a higher Maharatna category in 2010. Bharat Heavy Electricals Limited, Coal India Limited, Indian Oil Corporation Limited are a few examples of Maharatna PSEs.

Maharatna status is granted to companies that fulfil the following criteria:

• Such organizations should already have a Navratna status.
• They should be listed on the Indian stock exchange with minimum prescribed public shareholding under SEBI regulations.
• Their average annual turnover should be more than Rs. 25,000 crore especially for the last 3 years.
• Their average annual net worth should be more than Rs. 15,000 crore, during the last 3 years.
• Average annual net profit after tax of more than Rs. 5,000 crore, during the last 3 years.
• Such organizations should have a significant global presence or international operations.

*Click here to read more about the Maharatna PSEs.

Navratna PSEs

Similar to Maharatnas, the Navaratnas has certain eligibility criteria which are calculated as a composite score. Container Corporation of India Limited, Engineers India Limited, and Hindustan Aeronautics Limited are a few examples of Navratna PSEs.The eligibility requirements are:

• Navratnas are those who have come under Miniratna Category – I and Schedule A CPSEs, which have obtained ‘excellent’ or ‘very good’ rating under the Memorandum of Understanding system in three of the last five years,
• It should have a composite score of 60 or above in the following six selected performance parameters :
  1. The net profit to net worth.
  2. Cost of manpower to total cost of production/services.
  3. Profit earned before depreciation, interest and taxes to capital employed.
  4. Profit earned before interest and taxes to turnover.
  5. The earnings per share.
  6. Inter-sectoral performance.

*Click here to read more about the Navratna PSEs.

Miniratna PSEs

• Miniratna CPSEs are those which have made profits in the last continuous three years and have positive net worth, which can be considered to be eligible criteria for granting Miniratna status.
• At present, there are 74 Miniratnas in total. The Miniratnas are divided into two categories – I and II.

*Click here to read more about the Miniratna PSEs.

Problems associated with Public Sector Undertakings

• Arbitrary investment decisions and improper pricing policy decisions.
• Decreased transparency due to lack of autonomy and accountability.
• There is an increased amount of overstaffing and trade unionism issues and underutilization of capacity.
• Long gestation periods for the completion of projects lead to an increase in overhead costs.
• Limitations of skilled manpower in the Public Sector Enterprises can lead to a decrease in production and efficiency.

Various Reforms Carried Out for Public Sector Undertakings

• Major changes in the working of public sector enterprises were brought in by New Industrial Policy, which was the core policy behind economic reforms.
• Reforms under the new economic policy included removal of reservations for PSUs in most sectors, restructuring by adopting market-oriented practices, selling of loss making PSUs, reduction of government ownership through disinvestment etc.
• For resource mobilization, a part of the shareholding of PSUs was to be given to the mutual funds, financial institutions and the general public and to the workers
• Identification of strategic and non-strategic areas for the public sector undertakings, infusing competitive business practices, etc.
• Strategic sectors included arms and ammunition and the allied items of defence equipment, defence aircraft; atomic energy; railway transport, etc.
• All other public sector enterprises were identified as non-strategic sectors.

Conclusion

After independence, the emergence of public sector undertakings served as one of the major pillars for economic growth and development. Removal of restrictions and deregulation served in resource mobilization, increase in investments from abroad, etc. Gradually in order to ease restrictions government divided the sectors into strategic and non-strategic sectors.

FAQs

MCQs

1. What percentage of government ownership qualifies an enterprise as a Public Sector Undertaking (PSU)?

A. 25%
B. 51%
C. 75%
D. 90%

2. Which of the following is an example of a Central Public Sector Enterprise (CPSE)?

A. Tata Motors
B. Indian Oil Corporation
C. Infosys
D. Adani Group

3. What was the primary objective of economic reforms introduced in 1991 for PSUs?

A. Complete nationalization of all industries
B. Reducing the fiscal burden and improving efficiency
C. Increasing subsidies for PSUs
D. Expanding government ownership in the private sector

4. Which sector is a major focus for employment generation by PSUs?

A. Agriculture
B. Real Estate
C. Energy and Infrastructure
D. IT and Software

5. What is the primary reason for the technological obsolescence in some PSUs?

A. Over-reliance on foreign technology
B. Lack of investment in modern technology
C. Privatization
D. Excessive profit-making

GS Mains Questions and Model Answers

1. Examine the role of Public Sector Undertakings (PSUs) in promoting economic development in India. What reforms are necessary to improve their performance?

Answer: Public Sector Undertakings (PSUs) have been instrumental in promoting economic development in India, especially in strategic sectors like energy, infrastructure, and defense. They have helped create employment opportunities, provided essential services, and contributed to self-reliance by reducing dependency on imports. PSUs have played a key role in industrialization and regional development by setting up industries in less developed areas. However, PSUs face challenges like operational inefficiency, technological obsolescence, and political interference. To improve their performance, reforms such as disinvestment, corporatization, and promoting public-private partnerships (PPPs) are necessary. Additionally, investing in modern technology and reducing bureaucratic control will help PSUs become more competitive and efficient in the global market.

2. Discuss the impact of disinvestment on the performance of Public Sector Undertakings in India.

Answer: Disinvestment refers to the process of selling the government's stake in PSUs to private investors. It has been a crucial tool in reducing the fiscal burden on the government and enhancing the performance of PSUs by introducing private sector efficiency. The impact of disinvestment has been mixed. In some cases, PSUs like Maruti Suzuki have thrived after privatization, becoming more competitive and efficient. In other cases, disinvestment has faced resistance due to concerns over job losses and strategic control. To maximize the benefits of disinvestment, the government needs to focus on strategic disinvestment where PSUs in non-core sectors are privatized, while maintaining control in critical areas like defense and energy. A transparent and phased approach to disinvestment will also ensure better outcomes.

3. Analyze the challenges faced by Public Sector Banks (PSBs) in India and suggest measures to address these challenges.

Answer: Public Sector Banks (PSBs) in India face several challenges, including rising non-performing assets (NPAs), inefficiency, poor governance, and excessive government interference. The large-scale default on loans has significantly affected the profitability and stability of PSBs. Additionally, the lack of autonomy in decision-making has hindered their ability to compete with private sector banks. To address these challenges, measures such as banking reforms, capital infusion, and improving governance are essential. The government’s Indradhanush plan and recapitalization efforts have aimed to address some of these issues, but further reforms like merger and consolidation of PSBs and the introduction of modern banking practices are required. Strengthening regulatory oversight and ensuring autonomy for PSBs will also help improve their performance.

Previous Year Questions on Public Sector Undertakings (PSUs)

1. UPSC CSE Prelims 2020

Question: Which of the following refers to the process of reducing the government's stake in Public Sector Undertakings (PSUs)?
A. Nationalization
B. Disinvestment
C. Liberalization
D. Privatization

Answer: B

Explanation: Disinvestment refers to the process of reducing the government’s stake in PSUs by selling shares to private investors, either partially or fully.

2. UPSC CSE Mains 2019 (GS Paper 3)

Question: Critically examine the role of Public Sector Undertakings (PSUs) in India’s economic development. What are the challenges they face in the current economic scenario?

Answer: Public Sector Undertakings (PSUs) have played a pivotal role in India’s economic development by promoting industrialization, providing essential services, and creating employment opportunities. PSUs in sectors like energy, defense, and transportation have contributed significantly to the country’s self-reliance. However, they face challenges like operational inefficiencies, technological obsolescence, and political interference, which affect their competitiveness in the global market. The process of disinvestment and privatization has been initiated to address these issues, but it must be implemented carefully to ensure that PSUs continue to contribute to national development while becoming more efficient and competitive.