Essay on Public Sector Enterprises – Reasons for Their Failure. Public Sector is the sector underGovernment control funded...
ones under the State control have flattered to deceive and are total drains on the exchequerbringing the total sector into...
The project took 7 years to complete instead of the original projection of 3 years due to whichthe cost also shot up by 50...
private business enter¬prise and hence governmental undertakings in industry are desirable^ oi- rathernecessary, in an und...
of the profits shown during 1976-77.The total resources generated by the public sector enterprises during the fourth plan ...
wholly inconsistent with the needs of the sector. Most of the over 50,000 managers now have the righttraining and backgrou...
arc different levels of participation which have to be attainted nrogressively and there are no short cuts..The stages in ...
Indias public sector means less for moreBy Kunal KumduMUMBAI - The Economic Model of India assigned a pivotal role to its ...
Loss of revenue/sale proceeds of Rs 690 million in 18 cases due to delay in realization/non-realizationof debts, purchase ...
available audit report), of the 268 central PSUs in India for which they could carry out the audit, only 139earned profit....
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Essay on public sector enterprises


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  • can you please upload the 'next part' of your essay (as mentioned in the conclusion)...which I'm assuming would be on SPEs. I'm writing UPSC exam with public admin as my optional subject and found your essay very helpful...It will be very kind if you could put up another essay on SPEs.
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Essay on public sector enterprises

  1. 1. Essay on Public Sector Enterprises – Reasons for Their Failure. Public Sector is the sector underGovernment control funded by the tax paying public and for the benefit of the nation.Prior to our Independence, we had essential services like Railways, Telephone, Posts andTelegraphs, Ordnance, Port Trusts etc. under Public sector. It was an age of discipline and strictethical management. These are the stalwarts and forerunners which we inherited, immaculatelyformulated, run and maintained.Post-independence, we had a Government and the Constitution which was working towards anegalitarian society and the public sector was thought of as a way towards achieving self-reliance.Economic growth to develop a sound agricultural and industrial base, diversifying the economyand overcome economic and social backwardness. To add plausible excuses to this idea, thegovernment forwarded the following ones: To protect employment – resulted in take over the sick units. To have countervailing power on the operation of private monopolies in selected areas resulted in steel, fertilizer and chemical units. To serve the needs of spare parts and equipment for strategically important sectors like Defence, Railways, and Telecommunications etc. To check prices of important articles resulted in setting up of consumer oriented industries.Over a period of time, we find several public sector units some with good intentions, some withintentions which were inherently bad and self-motivated and others with no excuses at all. Withthe situation that in 1950-51 we had 5 number of public sector units with an investment of aboutRs. 30 crores to the present number of 240 units with an investment of Rs. 252554 crores. Thebulk of the investment is in basic industries like Steel, Coal, Power and Petroleum, Fertilizersetc. which is about 50 percent.The Public sector employment has two categories – the first being administration, defence,health, education, research and activities to promote economic development. The secondcategory is that of economic enterprises owned by the Centre, State and Union Territories. In1971 the total number of employees in the Public Sector stood at 71 lakhs which grew to about200 lakhs in 2000. the share vis-à-vis the private sector in transport, power, gas andcommunications stood at 95 percent in the public sector. The overall percentage of employmentis 70% in the organized sector.Thus the Public sector has fulfilled one of the prime ideas behind it, that is generatingemployment but at what cost to the exchequer – a factor which needs to be thoroughly analysedand one of the prime reasons for failure.Apart from generation of internal resources and payment of dividend, this sector has madesubstantial contribution to the exchequer through payment of corporate taxes, excise and customsduty and other duties. During the period 1997-2000 the Public Sector has contributed Rs. 48,000crores to the economy thus occupying a prominent place in the economy and definitely growingin importance. These facts relate mostly to enterprises under the Central Government. But the
  2. 2. ones under the State control have flattered to deceive and are total drains on the exchequerbringing the total sector into disrepute.Compared to the performance of centrally controlled units, these State controlled ones havegiven deplorable returns, mostly in the negative. Enterprises in State Electricity Board, StateTransport and Irrigation are the biggest culprits, but why? Primarily because of corruption. Theyare treated like nobody’s children to be used for the personal benefit of the staff. Engineersbelonging to these units have slush money to the tune of crores. The working quality andservices rendered by them are indeed condemnable. This poor quality is again due to callous andindifferent work culture inculcated in them, since their inception in the Public Sector. They havebecome only sources of receiving illegal gratification, theft and harassment. Complaints filed inconsumer forums all over the country point an accusing finger to the blatant collusion of staffwith power thieves. The same units under private companies like Martin & Burn were extremelyefficient and image conscious. What is needed is stricter administration, fixation of responsibilityand forthright officials, able to call the spade a spade.The idea of privatization of these loss making units “would not be of any help so long as there isthis crisis of good management”, PHD Chamber of Commerce and Industry has put the problemin the right perspective. The point is that there is a serious crisis of management that has plaguedthe public as well as private sector. If we succeed in enduring an efficient management cultureand practices, probably the issue of privatization will be irrevalent, since in that environmentboth the Public Sector and the Private Sector would the working efficiently.The reasons for failure of Public Sector Units are many and need to be categorized properly. Anexercise in this regard highlights the following, the most important being: Man-power far inexcess of actual requirement, inadequate training and education of workers due to poormanpower planning. The top management should be open to employees of the undertakings andtechnical persons should be given proper training in management. Indiscipline amongst workers,poor management-labor relations and the lack of law enforcement agencies add to the woes.Ineffective management is another major factor which is the cause of inefficiency in the overallperformance of Public Sector enterprises. Responsibilities are ill-defined and the officers takeundue advantage of this. Bureaucrats are appointed as chairmen, managing directors andmanagers. Most of them are ill-qualified to do the job. To top this, the States have inculcated thepractice of appointing defeated, over the hill, politicians to these posts, in most cases theirqualifications are nil except proximity to power centers. What is needed is clearly definedresponsibilities, the diminution of red-tape, power to take operational decisions and professionalmanagement.Political factors influence decisions from location of plant, passing of tenders to appointment ofemployees and management. In most of the cases those lead to considerable wastage ofresources. This is also one of the reasons for delays in completion of the projects and over run inoriginal estimated costs. Tied-aid was also responsible for over-runs as the compulsion to buyimported equipment on a non-competitive basis together with expensive twin-key contracts tothe aid providers shot the original estimates. A survey conducted found most of the Public Sectorunits over-capitalized as an example of which the Trombay Fertilizer Project was showcased.
  3. 3. The project took 7 years to complete instead of the original projection of 3 years due to whichthe cost also shot up by 50 percent.Another factor responsible for mounting losses is the pricing policy. Due to persistent demandfrom vested interests and political compulsions, the price of products are kept abysmally low, ofcourse, inferior quality is another reason, due to which commercial profitability is affected.Keeping all these factors in mind, the investments in Public Sectors appear to be a suicidal stepfor national economy and disinvestments in loss making units may be the right approach. Theycould be made profitable if the politicians, bureaucrats and employees stop treating these units asa milching cow and milch it as nobody’s concern. “Units of a Lesser God” would be apt.The public sector, with more than 130 Government of India Undertakings today, occupies a key positionin the economy of the country. It has already grown into an industrial giant with more than Rs. 20,000crores of investment. About one-fourth of it fin the railways, but steel, heavy electricals and oilindustries also have a sizeable portion of the total investment.The private entrepreneurs are always in search of profit and this motive urges them to move in fieldswhere the returns are high and certain. In a developing country or in an under-developed country, thistendency has many drawbacks. First, as more and more capital is injected in to the same type ofbusiness, competition increases and with it the costs go up. With increasing costs, prices also increaseand markets arc hit. Second, development in an under-developed country is usually lopsided and only incertain directions. It is never equitably distributed over various regions of production. Consequently,people are seldom self-sufficient in respect of their needs and remain virtually slaves to outside orforeign traders. Before the introduction of planning in India, Indian businessmen put their money mainlyin traditional business like jute and cotton, or in iron and steel. Jute and cotton was pre¬ferred becauseof their greater demand in foreign markets and iron and steel because of greater domesticpotentialities. During the British regime, industry in India was yoked to subserve the needs of the Britishoverlords and was, therefore, encouraged in branches or iieids which helped the British rulers. Even inthose lields industrial development was carried out in a haphazard manner. It was only when thegovernment entered the economic lields after independence and divided the country’s economicactivity in three fields, heavy and basic industries, concurrent in¬dustries and private enterpriseindustries, that an all-round planned development was envisaged. The government alone was of coursenot in a position to plan socially and adjust their actions to make improvements, in all aspects of thecitizen’s life so that social welfare and national as well as per capita incomes could be maxi¬mised. Oneof the vital arguments in favour of the public sector is that the government is better capable ofcontrolling the greatest brains by virtue of the stability and status that go with government jobs. Thegovernment also has at it disposal the country’s resources, men and material, besides money It is thegovernment that can stand losses in one direction and cover them from gains hi another. Lastly, thegovernment can float an undertakingon the principle of minimum profits, or on a no-loss basis. These activities fall beyond the purview of
  4. 4. private business enter¬prise and hence governmental undertakings in industry are desirable^ oi- rathernecessary, in an under-developed country. In other words, the economy of such a country needs to beduly controlled and unless and until capital acquires free movement and diverse channels to cater forhighest tastes and improve the standards ol living, a free economy in a country would not work well.By any standards, the growth of the public sector in India lias been phenomenal, having by now beenable to invest its own productive assets, recruit and train its own staff and manage¬ment and conceiveand execute its own products. This record has justified the people’s faith in the public sector as aninstrument of national growth.The public sector is playing a prominent role in a wide rauge oLindustries, including steel, powergeneration, aircraft, computer and machine tools, coal, petroleum, copper, aluminium, financial infra-structure consumer items and even films. Each year, the public secter consolidates its gain, spreads outto new fields and sends shivers down the back of the private sector.Alongwith the increase in output and diversification1 of pro¬ducts has come a new outlook inmanagement and internal relations in the public sector. Better utilisation of installed capacity, improvedinventory and materials management, economy in the use of working capital,new monitoring systems,and quick handling to labour problems have inculcated* a sense of belonging among the employees.The public sector is now poised for a significant. break¬through. Since 1972-73, it has been showing netprofit. This may not have been commensurate with the huge investment, but the future prospects arebright. In the year 1976-77 the Public , Sector has made a gross profit of over Rs.400 crores.fill now, the main profiteering concerns were commercial ones like the Indian Oil Corporation, the FoodCorportion of India and the State Trading Corporation. Now others, like the Bharat Heavy Electricals,have also begun to show profit.Though the concept of public sector was seriously initiated in 1956, it assumed a new direction in 1969when the then Prime Minister Mrs. Gandhi embarked on the path of democratic advance.At the beginning of the first plan, there were only 5 public sector undertakings with a total investmentof Rs. 290 million, their number increased to 74 at the end of the third plan with a total investment ofRs. 28,410 million.Since the public sector helps to strength economic indepen¬dence of the countrythrough modernising economy, it has become the main obstacle in the way of multinationals whichwant to gain foothold in the country.The public sector has been a subject of ideological and politi¬cal controversy over the past manydecades.-^Tn the post-indepen¬dence period, when the importance of the public sector underlined inthe industrial policy resolutions of 1948 and 1956. the big indu-trial houses and their politicalrepresentatives came out heavily against it. Big business houses continued to make efforts tounder¬play the role of the public sector.Special Relevance to Developing CountriesIn developing countries, which are struggling overcome then economic backwardness, the public sectorplays a most important role in their socio-economic progress. India today occupies a lead¬ing positionamong these developing countries primarily due to its economic achievements through the publicsector.The report of the Bureau of Public Enterprises on the work¬ing of the public sector industrial projectsduring 1973-74 showed that the public sector had attained steady a growth in critical indus¬trial sectors.The criticism against public sector that it is a continuous drain oil the exchequer is no longer valid in view
  5. 5. of the profits shown during 1976-77.The total resources generated by the public sector enterprises during the fourth plan period came to Rs.4,380 crorc. Out of this, Rs. 70 crore by way of dividends. Rs. 564 crore as interest on Government loans,Rs. 230 crore as income tax and Rs. 2.256 crore, as excise duty.In 1973-74, 73 enterprises showed a total net profit, of Rs. 160.75 crore, while 41 enterprieses showed aloss of 91.62 crore. Thus, the working results of the 144 running enterprises showed a collective netprofit of Rs. 64.42 crorc as against Rs. 17.74 crores in 1972-73. In 1971-72, the net working results hadshown a loss of Rs. 19.02 crore.This improved performance was without an upward revision of prices of their products. The betterresults were due to better maintenance of plants and equipment, proper materials management andcomparatively better labour management relations.The yeat> 1973-74 was also the [ast year of the fourth plan. The plan had set a target of Rs. 1.265 croreof internal resources to be generated by the public sector. As against this, the achieve¬ment at the endof 1973-74 was Rs. 1.260 crorc or 99.6 per cent of the target. The actual generation of internal resourcesat the end of the third plan was only Rs. 2S7 crorc.The yearwise growth of internal resources by the public sector enterprises during the fourth plan bringsout certain interesting points. In 1969-70, the first year of the fourth plan, internal resource generationwas to the tune of Rs. 194 crorc. In 1970-71, it rose to Rs. 204 crore or by 5.2 per cent, in 1971-72 to Rs.215 crorc or by 5.4 per cent in 1972-73 to Rs. 260 crore or by 20.9 per cent and in 1973-74 to Rs, 387crore or by 48.8 per cent.Compared to 1968-69, the last year of the third plan, the increase in the first year of the fourth plan was36.6 per cent. The last two years of the fourth plan were again marked by a spurt in the growth rate ofinternal resources. This directly attributed to sustained improvement in the financial performance ofpublic enter¬prises during these years.Deployment of ResourcesSome of the internal resources generated have been ploughed back by the public sector enterprises forfinancing renewals, replace¬ments, monernisation and capital improvements. The extent ofde¬ployment of internal resources for capital expenditure averaged about 27 per cent in respect of 41enterprises. The extent of self-finan¬cing of growth has been over Rs. 50 crore each in respect of theHindustan Steel, Indian Oil, Fertiliser Corporation, Shipping Cor¬poration, of India, Oil and Natural GasCommission, Hindustan Aeronautics and Air India.The capacity utilisation in the manufacturing group of indus¬tries registered a significant improvement.Forty-five units recor¬ded a capacity utilisation of more than 75 per cent, as against 41 in the previousyear. In 23 units, it ranged between 50 per cent to 75 per cent as against 16 in the previous year. Only16 units opera¬ted below 50 per cent capacity ultilisation during 1973-74 as against 25 in the previousyear.All these facts indicate that public sector undertakings are becoming economically viable. Bystrengthening the independent economic base of the country, they are helping it to consolidate itspolitical independence.Efforts are being made to professionalise the entire senior management cadre., At one time, top postswere given away as political rewards or to find billets for those who had outlived their usefulness inother spheres. These men had been conditioned by years of file pushing to a kind of management
  6. 6. wholly inconsistent with the needs of the sector. Most of the over 50,000 managers now have the righttraining and background.The public sector units have not only ceased to be a drain on the public exchequer but actuallygenerated resources to the tune of Rs. 1,260 crore for the fourth plan, which was 99.6 per* cent of thetarget.vOne of the significant achievements of the public sector has been taking over to many “sick” units whichhad been incurring heavy losses and putting them on the tails again.The public sector’s contribution in meeting India’s industrial needs is considerable now. The HeavyEngineering Corporation has facilities to set up a one million ton capacity steel plant a year. -The BharatHeavy Electricals can supply all the power generating equipment the county’s needs.It is admitted that one of the banes of the public sector— underutilisation of capacity—remains to besolved. Vital capital resources go waste as a result of unused capacity, leading to heavy losses. But nowan attempt is being made to introduce flexibility by manufacturing different types of equipment basedon substan¬tially the same fabricating faciliy with only slightly more invest¬ment.‘ Towards Participative ManagementNew schemes for ‘workers’ association” in industry is one of the points included in the then PrimeMinister Indira Gandhi’s July 1975 package for economic regeneration. The ruling party’s -electionmanifesto had also emphasised ‘workers’ participation’ in management. As a matter of fact, the secondFive Year Plan had stressed the importance of ‘increased association of labour’ wUh management.Earlier, the Industrial Disputes Act had con¬ferred statutory status on Works Committees which hasexisted in certain industrial units on a voluntary basis.However, despite these efforts to encourage clear association of labour with management, concreteresults achieved in this direc¬tion so far have not been encouraging. Even after two decades, since theidea was first mooted in the second plan document, the scheme has at best remained a windowdressing, although it does exist fn some form or the other in every industry.A scheme of participative management with direct role for employees has been introduced by theGovernment in the nationa¬lised commercial banks. Under the scheme, union representatives havebeen appointed on the boards of directors, but the placement of employees on the boards has notconstituted workers’ participa¬tion in the true sense of the term. The statutory committees, thevoluntary bodies and composite boards have become a kind of form for each side exhoriting the otherto ‘do its duty’. These expedi¬ents have not been able to resolve the conflict in the interests of labourand management.The reasons for the failure of these attempts to forge a fruit¬ful partnership between labour andmanagement are not far to seek.In the first place, the concept has neither been spell out in clear terms nor has it been preciselyunderstood. Secondly, there has been a mutual distrust between management and the labour.’ the/ealouslv guarding its prerogative to take decisions affecting the future oflhe enterprise and the latterbeing apprehensive that involvement might blnnt their militancy to press for higher emolu¬ments ormore amenities.Inherent in this failure is lack of appreciation of the fact that labour participation in management is aprocess starting with cons¬ultation proceeding to delegation and culminating in decision making. There
  7. 7. arc different levels of participation which have to be attainted nrogressively and there are no short cuts..The stages in which ture participation can be acheived are : (a) informative participation leading toconsultation ; (b) associa¬tive participation leading to involvement in administrative process, and (c)decisive participation resulting m decision resulting in deci-.sion making at the board level.Right from the shop level, participation should permeate throughout the organisation to its apex. Thebases of participation are economic psychological and social. Economically, there must be willingacceptance of the idea of partnership involving an obli¬gation to increase productivity and thecorresponding right to share the gain* Psychologically, there must be a sense of belonging. And socially,there must be a faith in the concept of industry as a social institution in which the employer, theemployees as well as the community, have equal and inter-dependent interests.The public sector thus poses a challenge because of the large sums of money inverted in it.and in thecourse of time, as is eviden¬ced by the present trends, it should be able to yield fair returns for linancingfuture development. As is the lot of the public sector, some of”these returns may be in the form ofnonmeasurable social benefits which raise the productivity of the nation and its taxable capacity. At thesame time, there are other undertakings which yield direct returns to enable the building up of theirown funds for further expansion or pay higher dividends to the public exche¬quer for investment inother critical areas. With this hope the bug¬bear of lack of resources, which Ins plagued the economy,should be a thing of the past.Public Sector ManagersFor quite a few years, recruitment to the public sector mana¬gerial cadre, particularly at the higherlevels, had to be made either from the government services, or from the private sector. This wasunderstandable. 1 he ‘requirements of a rapidly growing public sec¬tor, scheduled to constitute the“commanding heights” of the economy, had to be met urgently. The Industrial Management Pool, set upfor providing managers on a long term basis, was built around a nucleus of highly qualified peoplechosen through a rigorous process. For a variety of reasons, however, the IMP remained stagnant—andwas eventually disbanded. The per¬sonnel needs of public sector units were met on an ad hoc basis withsome of the larger ones left free to persue their own policies for recruitment and training of managersat different levels. There was no cohesive scheme. With the sector now employing some 50,000managers of different categories, of whom nearly 3.000 be-long to the senior echelons, the units cannotobviously be left to fend for themselves. It is particularly necessary to foster interaction and a measureof mobility among the undertakings to prevent managers from stagnating.Apparently, some of these considerations have weighed with the Bureau of Public Enterprises which isnow considering a nine-point action plan for the speedy development of managerial talent from withinthe enterprises for manning the top posts. The plan, drawn up after discussions at a recent seminar, isintended to make the sector self-sufficient in its managerial resources. The seminar has recommended afuller utilisation of the training facilities—part¬icularly those of the larger undertakings—within thesector and not a proliferation of training institutes. This approach has the great merit of giving themanagers an insight into the peculiar problems of the sector as a whole, which would facilitate inter-plant mobility. The seminar has also called upon the Bureau to institute a standing advisory group onmanagement training and development. This is a sector measure long overdue and will go a long way increating a public a management cadre in the place of the novr defunct IMP.
  8. 8. Indias public sector means less for moreBy Kunal KumduMUMBAI - The Economic Model of India assigned a pivotal role to its public sector, which came to control"commanding heights" of the economy after the Indian parliament adopted a resolution in 1956 to achievea "socialistic pattern of society" as a national goal.In pursuance to this goal, a large number of public sector units (PSUs) were set up in different sectors ofthe economy. Unfortunately, however, the expansion of the public sector took place not in the direction ofthe traditional, theoretically correct provision of public goods and infrastructure, but to non-traditionalcommand over the economy, in particular: (a) Nationalization to occupy the "commanding heights" of theeconomy and regulations to protect them from internal and foreign competition, (b) Widespread subsidies,explicit and implicit, and (c) Administered prices and related regulations.By the close of the 1970s, it became evident the countries that had adopted the Soviet economic modelsucceeded neither in attaining growth nor alleviating poverty (eg, South Asian countries), while those thathad followed essentially free-enterprise policies progressed at enviable rates and reduced povertyimpressively (eg, East Asian countries). Having witnessed that outcome, a number of countries startedbacktracking. To mention a few: a drastic tax cut (from a 55% marginal income tax rate to 28%) in theUnited States under president Ronald Reagan (1981-89); privatization in the United Kingdom duringMargaret Thatchers rule (1979-90); denationalization in France under its socialist government (1980s);and extensive open-market experiments in communist China under the leadership of Deng Xiaoping(1979-1997). Those economies that stuck to their command policies scarcely climbed out of the hole. Theclimax was reached in 1991 when the Soviet economic model collapsed in its own land and the SovietUnion disintegrated.It may be asserted, in this connection, that it is not the size of the public sector as such, but the non-traditional functions that it has been required to perform that proved to be their bane.Implicit InefficienciesApart from measurable losses, opportunity costs, and deadweight losses, PSUs are plagued by severalimmeasurable inefficiencies. The latter are among the sources of measurable losses but also causeadditional damages. On the one hand, the PSUs are invariably managed by senior bureaucrats, whosetenures are protected by civil service rules, which are scarcely affected by their productivity or the level ofperformance in the PSU concerned. These also reflect on the quality of management.The observations of Indias Comptroller & Auditor General (CAG) for the period 2001-02 highlightdeficiencies in the countrys management of PSUs, which resulted in serious financial implications. Theirregularities pointed out are broadly of the following nature: Unproductive expenditure/imprudent investment and loss of interest, financing charges amounting toRs 7.13 billion (US$154 million) in 39 cases due to bad investments, pay and allowances for idle labor,injudicious import of components etc. Excess/irregular payment of Rs 2.90 billion in 12 cases was made to PSU staff of ex gratia, bonus,salaries, wages, extending benefits in excess of norms etc. Avoidable expenditure of Rs 1.46 billion in 32 cases due to use of unproven technology, delay ininstallation of equipment, failure to ensure correct specification of material, import/procurement of sparesat higher rates, detention of vessel beyond lay time, power factor surcharge, poor cash management,payment of demurrage, customs duty, excise duty etc. Loss of Rs 1.03 billion occurred in 24 cases on account of undue favor to parties, defectiveagreement/contract terms, unrealistic feasibility study, wrong estimates, failure to obtain bank guarantee,delay in award of work, failure to make counter offer, failure to take financial safeguards, forfeiture ofearnest money deposit etc.
  9. 9. Loss of revenue/sale proceeds of Rs 690 million in 18 cases due to delay in realization/non-realizationof debts, purchase without working out parity calculations, unnecessary borrowings, manufacture ofmachines without order, unwarranted restriction on production, loss of generation of power, prematuredeal to sell an aircraft, non recovery of lease rentals etc. Avoidable loss of Rs 570 million in 11 cases due to delay in finalization of tenders, failure to invoke riskclause, non-compliance of terms of the contract, non-adherence to delivery schedule, finalization ofcontract documents without clients approval etc. Loss of Rs 300 million in 10 cases due to adoption of incorrect tariff, excess settlement of claims, non-realization of royalty etc.This takes the total estimated loss to Rs 14.07 billion for that year alone due to managerial inefficiencies.Then there are laws that loss-making PSUs cannot be shut down. Workers cannot be fired. The PSUlosses are taken care of by the government. These conditions create the notorious incentive problem withregard to improving the health of the organization. On the other hand, the inefficiency problem is furtherexacerbated by continual political interference in the affairs of PSUs. Outside interference frustratesinternal efforts to increase efficiency and productivity. Among the consequences of political interference,the following are prominent:Excess employmentPolitical favors are done/returned by imposing workers on PSUs. As a result, almost all of them sufferfrom excess employment. In India, it is easy to hire a person, but firing one is extremely difficult. Protectedby pro-labor legislation and political clout, not all workers may have the motivation or feel the pressure towork efficiently.Excessive cost per workerIrrespective of the levels and the rates of improvement (or decline) of productivity, in general PSUworkers enjoy better amenities on top of job security. Understandably, they oppose privatization tooth andnail.Requirement of social services from commercial PSUsThere are certain segments (health, education, transport etc) government should play a role in, either dueto a lack of private participation or a lack of reach by private companies. However, we have a situationwhere even commercial PSUs are required to provide social services. Quite often the PSUs end up beingpersonal fiefdoms of the ministers under whose control they happen to be. The ministers not only extracttheir pound of flesh but also force the PSUs to undertake activities in their constituencies for gainingpolitical mileage.The additional cost, however, weakens the competitive position of the PSUs vis-a-vis the private domesticsector and foreign firms. While the requirement relieves the government of levying taxes to pay for socialservices, it is a highly inefficient way of providing the same. It certainly reduces the capacity of PSUs tocompete with private sector firms.Unproductive activitiesFinally, the allegations of enhanced propensity for corruption and unproductive activities when PSUs existcannot be easily brushed aside. Pilferage of electricity, kickbacks for jobs and appointments, sharingprofits with suppliers, rent seeking, and graft and grab in general, are experienced by the common man.The results are for all to see. According to the audit carried out by the CAG in 2001-02 (their latest
  10. 10. available audit report), of the 268 central PSUs in India for which they could carry out the audit, only 139earned profit. Their total profit was to the tune of Rs 469 billion. On the other hand, total loss recorded bythe remaining was Rs 240 billion, which translates into an overall net profit of Rs 229 billion.The total equity investment by the government in these companies was to about Rs 914 billion, out of atotal equity of Rs 1.09 trillion. Thus the governments share of total net profit was Rs 191 billion.Interestingly, during the same period, Indias subsidy to the PSUs (related to administered prices)amounted to Rs 209 billion, much more than the overall net profit attributable to the government. Duringthis period, total dividend received by the government was only Rs 60 billion. Need one say anythingmore to point out the actual state of affairs as far as the return on capital goes.The dismal story does not end there. Of these 268 companies, equity investment in 97 companies hasbeen totally eroded by their accumulated losses. As a result, the accumulated net worth of thesecompanies has become negative to the extent of Rs 477 billion. As a corollary, recovery of the loansextended to these companies by the government becomes doubtful.ConclusionThus, if the objective of PSUs was to create economic surpluses for investment and growth, they havefailed miserably. To the contrary, PSUs have gobbled up large chunks of productive resources, havebecome dens of inefficiency, and are suspected to be the breeding grounds for corruption.The story of the PSUs controlled by the local governments in different states in India is not differenteither, if not more worrying. But thats for the next part.