Today, the government has emerged as an active regulator, promoter, and participant in the country’s economic affairs in the public interest. Modern governments are expected to play a regulatory, promotional, and entrepreneurial role. Public Sector Enterprises play an important role in India.
Importance of Public Sector Enterprises
Public sector enterprises play a dominant role in India. Their contributions are a strong industrial base, export promotion and import substitution, generation of employment, and reduction in income inequalities.
They are owned and controlled by the government.
The main aim of the public sector is to maximize social welfare. It stresses more on the production of capital goods. The rapid industrialization during the first three decades after Independence was mainly because of this sector. It has generated lakhs of new jobs.
Several public sector enterprises have been suffering huge losses because of certain problems and shortcomings. These are
- Lack of incentive: There is a difference between the performance of a government servant and a person working in a private enterprise. Promotion is awarded by seniority and not by merit for government servants. They are not concerned with the profit of the enterprises.
- Delay in completion: It has been observed that many of the projects could not be completed within the stipulated period. Delay in completion of the project is an unnecessary burden on the economy.
- Capital intensive industries: To establish basic and key industries in the country, public sector enterprises were directed to adopt large-scale techniques of production which have shown to be capital intensive. As a result, priorities to generate employment and to encourage small-scale industries lagged.
- Price policy: Private sector enterprises are operated solely on the aim of profit maximisation, and prices are determined at a level which would cover total cost and provide sufficient net returns. However, for public sector enterprises, they are not guided by the principle of profit maximisation.
Privatization refers to any process which discourages the participation of the state public sector in the economic activities of an economy. Its main objective is to make the best possible use of privately owned resources for the collective welfare of the people.
Privatization of public sector undertakings by selling off a part of their equity to the public is known as
disinvestment. In privatization, there is a vital role for private capital and enterprise in the function of an economy. It may take place because of the following reasons:
- Opening more industrial areas to the private sector
- Restrictions on further expansion of the public sector
Privatization may occur in the event of decentralization, but it does not lead to denationalization. Denationalization is the transfer of ownership from public enterprise to private enterprise. It leads to privatization.
The State and Economic Development