Courses
Courses for Kids
Free study material
Offline Centres
More
Store Icon
Store

Changing Role of the Public Sector

Reviewed by:
ffImage
hightlight icon
highlight icon
highlight icon
share icon
copy icon
SearchIcon

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 the Public Sector

1. What is meant by the 'changing role of the public sector' in India?

The 'changing role of the public sector' refers to the significant shift in its objectives and functions, especially after the New Economic Policy of 1991. Initially, the public sector was the primary driver of industrialisation and infrastructure development. Its role has now evolved from being a direct producer to a facilitator, regulator, and provider of essential social services, working alongside a more dominant private sector.

2. What was the primary role of the public sector in India's development before 1991?

Before the 1991 reforms, the public sector was central to India's economic strategy. Its primary roles included:

  • Developing Infrastructure: Building the foundational infrastructure like roads, railways, power plants, and communication networks, which required massive investment beyond the capacity of the nascent private sector.
  • Ensuring Regional Balance: Establishing large-scale industries in backward regions to promote balanced development and create employment opportunities across the country.
  • Capital Formation: Mobilising savings and investing in heavy industries to build a strong industrial base for the nation.
  • Checking Concentration of Economic Power: Preventing the accumulation of wealth and monopolistic control in the hands of a few private entities.

3. Why did the government need to change the role of the public sector after 1991?

The need to change the role of the public sector arose from several persistent problems that were hindering economic growth. Many Public Sector Enterprises (PSEs) suffered from low productivity, inefficiency, and poor financial performance, leading to huge losses that drained the government's resources. The focus shifted towards improving efficiency, encouraging competition, and integrating the Indian economy with the global market, which necessitated a more limited and strategic role for the public sector.

4. What were the main government policies that redefined the public sector's role after 1991?

The government implemented several key policies to redefine the public sector's role. The most important of these were:

  • Disinvestment: The government started selling a part of its equity in PSEs to the private sector and the public. The objective was to improve financial discipline, enhance efficiency, and raise funds for social welfare programs.
  • Deregulation: The number of industries reserved exclusively for the public sector was drastically reduced from 17 to just a few, primarily in strategic areas like atomic energy and defence.
  • Memorandum of Understanding (MoU): This system was introduced to provide greater operational autonomy to PSE management, allowing them to function more independently in return for meeting specific performance targets.
  • Restructuring of Sick Units: A policy was established to review sick or loss-making PSEs. Units deemed potentially viable were restructured, while those considered unrevivable were closed down.

5. What is the importance of the 'Navratna', 'Maharatna', and 'Miniratna' policies for PSUs?

The importance of these policies was to grant high-performing Public Sector Undertakings (PSUs) greater autonomy and empower them to become globally competitive. By classifying PSUs into categories like Navratna (nine jewels), Maharatna, and Miniratna based on their performance, the government gave them more freedom in financial and operational decision-making. This helped them to professionalise their management, expand their operations, and compete effectively with private and international firms.

6. How does the role of the public sector today differ from the private sector in the Indian economy?

The primary difference lies in their core objectives. The public sector today focuses on strategic areas (defence, atomic energy), providing essential public goods (infrastructure, healthcare, education), and acting as a regulator to ensure fair market practices. Its main goal is social welfare. In contrast, the private sector is driven by profit motives. It excels in producing consumer goods, providing services, fostering innovation, and driving economic growth through market competition and efficiency.

7. Does a changing role for the public sector mean it has become unimportant in India?

No, the role of the public sector has not become unimportant; rather, it has evolved to be more strategic. While it no longer dominates industrial production, it remains crucial as a regulator and facilitator of economic activity. It sets the rules for fair competition, protects consumer rights, and invests in critical infrastructure and social sectors where the private sector may not venture. Its presence ensures that economic growth is inclusive and serves the national interest.