Page 220 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Indian Economic Policy

Notes 18.2.4 Shortcomings of the Public Sector
It would be unreasonable to argue that all is well in the public undertakings. There is much scope for
improving the efficiency and working of public sector enterprises. The main points which merit
consideration are :
(i) Mounting losses : A review of the working of public sector enterprises reveals that either the
profits in them have been deplorably low or that they have been making losses. As compared
with the performance of the Central Government, however, the State Governments are having
perennial loss-makers like irrigation works, State Electricity Boards and State Road Transport.
The biggest losses are made by SEBs. It is estimated that the losses incurred by SEBs rose from
` 4,117 crores in 1991-92 to ` 30,606 crores in 2005-06– these losses were incurred because power
was supplied at a mere 240 paise per unit as against the production and distribution cost of 350
paise per unit.
(ii) Political factors influence decision about location : It has been noted that in many situations,
political factors influence decisions about location of projects. Powerful ministers in the ruling
party make promises about the future location of projects in a state irrespective of the results of
the feasibility study about costs. This approach leads to a considerable wastage of capital
resources. A classic instance of this political but irrational approach is the decision of the Central
Government to break up the MIG aircraft project into two parts to be located in two separate
states. These two locations--Nasik and Koraput—are over 900 km apart. This was done to satisfy
two powerful political bosses from two states.
(iii) Delays in completion and increase in costs of construction : Many reports on the working of
public sector projects have pointed out that many of the projects took longer time to complete
than was initially envisaged. Not only that, the cost of the projects was also revised upwards.
For instance, in the case of Trombay Fertilizer Project, it took 6-7 years to complete against the
original estimate of 3 years. Most of the delay in construction time-schedule and increase in
costs can be traced to poor and inadequate project planning. It is very necessary to prepare
comprehensive construction plans so that the avoidable delays and increases in costs should
not put additional burden on the scarce resources.
(iv) Over-capitalisation : Public sector projects are charged with over-capitalisation. In other words,
the input-output ratio obtaining in many projects was unfavourable. The Study Team found
several undertakings, viz., Heavy Engineering Corporation, Hindustan Aeronautics, Fertilizers
Corporation (Trombay Projects), etc. over-capitalised. In this connection the Study Team
mentioned: “The causes leading to over-capitalisation can be traced to inadequate planning,
delays and avoidable expenditure during construction, surplus machine capacity, tied aid
resulting in the compulsion to purchase imported equipment on a non-competitive basis,
expensive turn-key contracts, bad location of projects and the provision of housing and other
amenities on liberal scale.”
(v) Price Policy : The pricing policies of the public sector undertakings are not guided solely by the
profit maximisation principle, but are under the regulation and control of the Government.
Most of the public enterprises produce products which serve as inputs for other sectors of the
economy. It would be suicidal from the point of view of the overall growth of the economy if
the prices of steel, oil, fertilisers or coal are fixed very high. The public sector has to keep in
mind the social implications of its price policy. In this connection, it is important to remember
that in many cases, under public pressure, prices are kept low even when costs and prices have
been rising. This naturally affects commercial profitability.
(vi) Use of manpower resources in excess of actual requirements : It has been brought out that in
most public enterprises, manpower is in excess of actual requirements. There is poor manpower
planning and this is clearly reflected in the inadequate arrangements for training and education
of workers. The unsatisfactory salary and wage rates and the absence of incentives to staff have
resulted in the flight of personnel from the public sector to the private sector. The Sixth Pay
Commission has Substantially raised the emoluments of executives and thus prevent their shift
to private sector. It has been suggested that top position in a public sector undertaking should

214 LOVELY PROFESSIONAL UNIVERSITY