Page 219 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 18: Issues and Problems of Public Sector

sector. We may quote the Second Five-Year Plan here : “The adoption of the socialistic pattern of Notes
society as the national objective, as well as the need for planned and rapid development, require
that all industries of basic and strategic importance, or in the nature of public utility services, should
be in the public sector. Other industries which are essential and require investment on a scale which
only the state, in present circumstances, could provide, have also to be in the public sector.”
(vi) Limitations and Abuses of the Private Sector : The behaviour and attitude of the private sector
itself was an important factor responsible for the expansion of the public sector in the country.
When the Americans insisted on the Bokaro Project to be set up in the private sector, Mr. J.R.D.
Tata openly confessed that the private sector was not in a position to mobilise resources to the
tune of ` 700 crores. Thus, the private sector did not want to move into certain sectors or if it
wanted to move in, it did not have the necessry resources. This was understandable but the
private sector was unwilling to take even the normal risks of business. During the Second Plan
period and later, many of the licences issued to the private sector for setting up fertiliser units
were surrendered when the need for fertiliser production was paramount for the country to
push an agricultural breakthrough. To give another example, the business recession of 1966-67
frightened the private sector cement industry from expansion, even though it had given an
undertaking to the Government to expand. To safeguard the long-term prospects of the economy,
the Government had to set up the Cement Corporation of India to boost the production of
cement. The failure of the private sector drug industry to manufacture antibiotics and at the
same, its tremendous exploitation of the consumers--to the extent of holding them to ransom--
was responsible for the entry of the Government in drugs and pharmaceuticals industry.
18.2.3 Performance of Public Sector Undertakings

While the Government has been pushing ahead with more and more public sector undertakings,
there has been considerable criticism about the poor performance and in some cases utter failure of
government undertakings in the country. Some economists have argued that profit should not be
used as a criterion for judging the performance of public enterprises According to them, public
enterprises are guided by a variety of considerations in determining prices and it would not be
appropriate to use profit as a criterion of their efficiency. This is particularly so in social utility services,
like railways, posts and telegraphs, supply of water, electric energy, etc. The State should not raise
the prices of these services, even though costs may have risen. Similarly, the public enterprises have
a bulk of their investment in heavy and basic enterprises. Such enterprises have long gestation period
and a part of the investment may be under construction. It would, therefore, be appropriate to calculate
the rate of return on effective capital employed and thus not include the capital employed in
undertakings under construction or in expansion or capital work-in-progress.

“The profitability” of the running concerns alone should be the index of their performance.

Besides, the term ‘profitability’ should not always be used in a business or a pure commercial sense
with reference to public enterprises which are not permitted to manipulate depreciation or other
payments to show higher rate of return. Moreover, PSUs offer much better reward for labour in
terms of wages and salaries and other perquisites in comparison with small and medium enterprises
in the private sector. To judge their performance, an adjustment should, therefore, be made for a
higher social rate of return. The concept of total surplus generated in the form of declared profits,
retained profits and depreciation becomes more relevant in the case of private sector enterprises and
not for PSUs. This is not to suggest that profitability should not be considered as an index of efficiency,
but to emphasize that the problem should be viewed in a proper perspective.
Although profit maximisation (or in the case of public enterprises, the generation of surplus) may not
be the sole criterion to judge their performance, yet it cannot be denied that it would be a folly to
ignore it altogether. It has been aptly pointed out that profit maximisation may not be treated as a
positive virtue but it may well be a ’good whip’ to prevent the public enterprises from misbehaving.
Thus the principle of profit maximisation has a negative virtue that it impels enterprises to reduce
wastes of resources and inefficiency arising there from. From this point of view, the argument for
generation of surplus by public enterprises to be used for economic development has a great force.

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