Are Public Sector Undertakings Drag On Indias Economy?

Col. Pramod Singh 11233 Lt. Col. Sanjay Kumar 11243 Virendra Pareek 11264 Shatmanyu Singh - 11270

Definition

government owned corporation is Undertaking

termed as a Public Sector

(PSU). It refers to companies in which the

government (either the federal Union Govt or the State or Territorial Govts or both) own a

majority (51% or more) of the company

equity.

What is the public sector?

Air India SAIL BHEL BSNL Indian Oil Corporation Hindustan Motors

Need for Public Sector

To promote rapid economic development through creation and expansion of infrastructure To generate financial resources for development To promote redistribution of income and wealth To create employment opportunities To promote balanced regional growth To encourage the development of small-scale and ancillary industries, and To promote exports on the one side and import substitution, on the other.

Role Of Public Sector

Filling the Gaps in Capital Goods Employment Balanced Regional Development Contribution to Public Exchequer Export Promotion and Foreign Exchange Earnings Import Substitution Research and Development

Performance of Public Sector

Share in GDP rose from 8% in 1960 to over 25% in 1993/94 In 94 more than 1000 public sector enterprises, 800 of which owned by state

Problems faced by Public Sector

Poor Project Planning Over-capitalization Excessive Overheads Overstaffing Failure to generate adequate profits Low Capacity Utilisation Lack of Professional management Lack of a Proper Price Policy

To some, a well-performing PSU is an oxymoron. The root cause, it is argued, lies in their ownership structure. The argument goes like this: a private sector owner treats the business as his own. Thus, the private sector is efficient and performs well. Therefore, the panacea to all that troubles the public sector is privatisation.

The issues are far more complex. First, if the ownership structure is the root cause of all inefficiencies, then how do we explain away the performance of Singapore Airlines and SingTel, which are in effect PSUs. The second issue: most successful global corporations have dispersed ownership with no dominant owner. Third, there are numerous poorperforming private sector companies. Indeed, some of the PSUs of today were ailing private sector units of yesterday. And last, the recent financial prairie fire in the US was sparked by the private sector. Ironically, the massive rescue package came from the US government. The notion that the private sector is innately efficient and the public sector is inherently inefficient needs a second look.

Singapore Airlines is a PSU. It is profitable, efficient and well performing. The largest shareholder in Volkswagen is the state of Lower Saxony in Germany. The case of Pohang Iron and Steel Company (Posco) is even more startling. The World Bank rejected the loan application of the Korean government for setting up a steel plant in Pohang then a fishing village. No wonder, Korea neither had deposits of iron ore nor coking coal. The Korean government took the help of a consortium of Japanese bankers and set up Posco as a State Owned Enterprise (SOE). It is now the third largest producer of steel and doubtlessly one of the most efficient. It was only in 2000 that the company was fully privatised.

Many of todays success stories in the developing world began life as SOEs. Even in the developed world France, for instance, Renault, Alcatel, EdF, Thomson and Elf were SOEs for a long time, as were Rolls Royce and British Aerospace in the UK.

There is little difference between Singapore Airlines and Air-India in their ownership structures. The difference lies in the governance, style of management, empowerment, attitude to customer service and results produced by its leadership teams.

Red tapes, bureaucracy, risk aversion, administered pricing systems, ineffective governance structures, inability to hire the best talent because of poor compensation, political interference, absence of objectivity in appointments of managers and corruption are among the many reasons that cause PSUs to underperform.

To sum it all up, we can say that bureaucracy is the real drag on Indias economy and not PSUs. As shown by the previous example, they have the capability to outshine everyone else, they just need some good leaders at the top/

Thank you.