Changing Role of Public Sector

Role of the Public Sector

The role of the public sector has changed a lot from where it was in the early 1990s. In 1947, due to poor economic conditions, India was unable to establish a strong industrial base and was still dependent on the agricultural sector. Soon, the government started encouraging public sector enterprises since they had the required wherewithal and financial capacity to get into heavy industries that could bring more revenue. Over the years, their roles have changed from helping in accomplishing price stabilization to competing with global countries.

Importance of Public Sector

Industrial development took a big leap towards success with the help of several public sector enterprises in independent India. In 1991, their roles were reconsidered, and several instances of inefficiency and unproductive behavior were noticed in the management of public sectors. There were incidents of companies facing huge losses due to incompetence and lack of organization. However, for a long time, public sectors have managed several key areas that were responsible for improving India's economic condition. 

Here's A Brief Overview of The Reasons Why Public Sectors Were Important

  • Development of Infrastructure

Due to a lack of financial support, private sectors were not able to invest a huge chunk of money in infrastructure projects. Therefore, public sectors played a big role in providing infrastructure to industries like steel plants, railways, civil aviation, etc. They also made sure that there is no shortage of money, advanced technology, or even a workforce. 

  • Generation of Employment

Unemployment has been the biggest drawback in the development process, and the role of the public sector in India was to fulfill the requirement of creating sufficient jobs. Workers also benefited from government assistance both in working and living conditions. 

  • Maintaining Regional Balance

While private sectors emphasized the development of industrial areas, public sectors kept their focus on maintaining the regional balance. Small towns and all the backward areas where people were far behind the economic growth were still in poor condition. A country's economic development comes when both the rural and urban areas begin to see improvement. The role of the private sector was visible in providing facilities like water supply, electricity, workforce, etc. to the backward places. Even though these played important roles in restoring the economic power which was lacking initially, with several new government policies, the changing role of the public sector was visible. 

Change in Government Policy

Both the Indian economy and industries saw a significant change in government policies in 1991. However, the process started with the Industrial Revolution of 1956, where around 17 industries were under the public sector. Later, that number was reduced to 8 in 1991. Some other changes are as follows.

  • Disinvestment

Disinvestment was the process of selling equity shares of public sector enterprises to the private sector. There was a positive impact of this as the role of the private sector was to bring about efficiency and better financial discipline to achieve long-term goals. The process helped the government to keep extra funds for social programs and public health and sanitation. Additionally, it also allowed consumers to get products at lower prices. 

  • Memorandum of Understanding

The government introduced this system to provide the public sector units with an opportunity to recover their performance. The criteria were to meet specific targets set by the government, and achieving them would help those industries to regain their positions.

  • Closure of Sick Units

Under this new policy, it was decided that the Board of Industrial and Financial Reconstruction would be reviewing all the public sector units and their condition. The focus was to check whether they will be able to recover from the damaged condition or to be collapsed permanently. Soon it was noticed that those units could not be restructured; hence the workers got a safety net for losing their jobs. 

 

With all these new policies set by the government, people begin to notice the role of the private sector in the Indian economy. Even though a major portion of industrial development has been achieved with the help of public sectors, private sectors are taking a big part in expanding them. With a wide range of services, common people have managed to get rid of unemployment issues. From transportation to retail industries, a prominent role of the private sector can be witnessed in our economy. 

 

While talking about the importance of the private sector in India, the agricultural industry deserves a mention that has been improved drastically. Being the most dominant sector of India, it has got a copious amount of benefits by getting advanced materials, technology, engineering, and electrical goods, etc. 

 

The expansion of the public sector has fulfilled the national goals such as removing regional imbalances, contributing to the public exchequer, developing small industries, etc. However, with the changing role of the public sector and new policies, things have changed for the better, such as removing inefficiency and financial hazards. 

 

Public Sector Undertakings (PSUs) are an important aspect of the Indian economy since they offer services that benefit the whole population. This article discusses the goals of establishing PSUs, their role in societal upliftment, issues they face, and changes they implement.

Classification of Public Sector

There are three major classifications in the public sector.

The public sector is divided into the following categories:

  • Departmental Undertaking - Managed directly by the relevant government or department. (For example, railways, postal services, etc.)

  • PSU – Non-Departmental Undertaking (e.g. HPCL, IOCL, etc.)

  • Monetary institution (e.g. SBI, UTI, LIC, etc.)

Industrialization and the formation of Capital Goods Industries and Basic Industries were the rationales for the foundation of PSUs. Organizations that are not part of the public sector are referred to as the private sector, and they aim to increase profits for the organization.

The Public Sector's Importance

Let us first examine the significance and function of public-sector enterprises in our economy. These are the reasons why the public sector dominated our economy over the private sector until early 1990.


Developing Infrastructure: It is not appropriate for private firms to invest large sums of money in infrastructure projects in a newly independent country with a fledgling economy. As a result, this obligation belongs to the government. And the development of infrastructure is critical to the growth of an economy. In the post-independence era, for example, all rail, road, and aviation transport projects were undertaken by public sector enterprises.


Regional Balance: Private-sector businesses tend to concentrate in industrial zones. As a result, the poorer areas, as well as smaller towns and villages, are excluded from economic expansion. However, the government can ensure that growth occurs in a balanced manner throughout the country. Establishing public-sector units and industries in underserved communities creates job possibilities and economic growth.


Examine the Concentration of Economic Power: In the private sector, wealth can become concentrated in the hands of a few. This may result in monopolistic tendencies and economic power concentration. The public sector contributes to keeping this in check. The revenue created by a public enterprise is shared by a large number of employees as well as the general public. This contributes to the restoration of some economic equality.

Goals of Establishing a Public Sector Unit (PSU)

  • To establish an industrial basis in the country; to improve the quality of employment, and to build basic infrastructure in the country.

  • To give the government with resources in order to increase exports and minimize imports

  • To eliminate inequities and enhance a country's economic growth and development

The Public Sector's Role in Society's Uplift

In a variety of ways, the public sector contributes significantly to the improvement of society's economic status.


The following is an explanation of the public sector's primary role:

  • The public sector and capital formation - This sector has been a key source of capital in the Indian economy. A significant portion of the money originates from India's public sector units.

  • Creation of Employment Opportunities - The public sector has made a significant impact on the country's employment sector. They provide numerous chances in a variety of fields, hence contributing to the growth of the Indian economy and society.

  • Growth of Different Regions — The installation of significant companies and plants has accelerated the socioeconomic development of various regions throughout the country. The provision of utilities such as power, water supply, township, and so on has a favourable influence on the region's residents.

  • Enhancement of Research and Development - The public sector has invested much in the introduction of modern technology, automated equipment, and instruments. This expenditure would raise the entire production cost.

PSUs (Public Sector Undertakings) - Issues

The following are the key issues with power supply units:

  • Inadequate investment decisions

  • Inadequate Pricing Policy

  • Excessive overhead expenses

  • Inadequate Autonomy and Accountability

  • Overstaffing in Labour Unions

  • Insufficient capacity utilisation

Undertakings in the Public Sector – Reforms

The following are the biggest PSU reforms:

  • 1991: New Industrial Policy

  • 1988 Voluntary Retirement Scheme (Golden Handshake)

  • Price Mechanism that is Administered

  • The Navratna policy (Best performing PSUs were dubbed Navaratnas) The government granted them great autonomy in order for them to perform better.

  • Mini Ratnas' policy is as follows: (Presently 60 PSUs have been granted this status)

  • The Maharatnas' policy (category created in 2010)

  • The net profit should be Rs. 2500 crore.

  • Net worth should be in the tens of billions of rupees.

  • The annual revenue should be Rs. 20,000 crore.

  • PSUs must be Navratnas and be listed on the Stock Exchange.

  • PSU must also have a strong worldwide footprint.

  • The government bestowed four Navratna Maharatna awards to ONGC, IOCL, SAIL, and NTPC in 2010. After some time, the government awarded CIL this status.

FAQs on Changing Role of Public Sector

1. Has the role of the public sector changed over the years?

The industrial policy of 1991 brought several changes, and the role of the public sector was changed along with that. A group of industries was reserved for the public sector, which later got reduced. The shares were sold to private sectors, and also the government reviewed the performance of sick units. To achieve better review and improve an overall economic condition, all industries went through privatization which later helped in coping with the market competition.

2. Why are both public and private sectors important for the Indian economy?

The basic infrastructure and core industrial base have been established with the help of public sectors. On the other hand, private sectors have made sure that the main focus remains on revenue, and that does not get compromised to fulfill other requirements. 


With a wide number of Indian private banks and financial services, software companies, etc., private sectors have maintained the economic contribution as well as efficiency. Here the role of public and private sector in Indian economy comes into the picture since both of them have played their roles in bringing financial growth.

3. What was the role of public sectors before 1991?

The public sector was limited to Railways, Port Trusts, Telegraphs, and Posts, and also a few enterprises such as Government Salt Factories, Quinine Factories, etc. Later, with economic development and new trends, the role of public sectors started changing. 


From investing a decent amount of money in manufacturing industries to handling big projects, the public sector got it all covered with a heavy capital flow. Even the government was relying on them to accomplish significant goals like the development of townships and infrastructure.

4. What is the role of the government in India? What is the primary goal of India's public sector?

The public sector is critical to the country's growth and operation. This sector plays a number of significant responsibilities, including:

  • Earnings generation

  • Creating New Job Opportunities

  • Establishment of a solid industrial basis

  • Goods Import and Export

  • Contributes to the country's gross domestic capital creation

  • Aids in the construction of infrastructure


The public sector is concerned with the general welfare of the people and the overall growth of the country. The government relies on the public sector to implement social controls on commerce and industry in order to ensure equal distribution of products and services.

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