Public Sector Undertakings/Enterprises

Public Sector Undertakings (PSUs), also known as Public Sector Enterprises (PSEs), refer to government-owned corporations or companies in which the Union or State Government holds a majority (at least 51%) of the paid-up share capital. They were established to play a strategic role in India’s economic development by promoting industrialisation, ensuring regional balance, and providing public goods and essential services where private investment was either inadequate or absent.

Background and Evolution

The origins of Public Sector Undertakings in India date back to the post-independence period, when the government adopted a mixed economy model. The Industrial Policy Resolution of 1948 recognised the importance of both public and private sectors, while the Industrial Policy Resolution of 1956 formally laid down the framework for a socialist pattern of society, reserving key industries for the public sector.
In the early Five-Year Plans, PSUs were envisaged as the engines of economic growth and self-reliance. The Second Five-Year Plan, based on the Mahalanobis model, emphasised the development of basic and heavy industries under state ownership to build the country’s industrial base.
Initially, PSUs were concentrated in sectors such as steel, heavy machinery, mining, transport, energy, and communications. Over time, their presence expanded into consumer goods, financial services, engineering, and technology.
The liberalisation reforms of 1991 marked a major shift in the role of PSUs. The focus moved from expansion and state monopoly to restructuring, performance improvement, and disinvestment.

Objectives of Public Sector Undertakings

The establishment of PSUs in India served multiple socio-economic objectives, including:

• Accelerating industrial growth and reducing dependence on foreign capital and technology.
• Creating employment opportunities and promoting regional development.
• Developing infrastructure and strategic industries essential for national security and self-sufficiency.
• Ensuring equitable distribution of wealth and control over commanding heights of the economy.
• Promoting import substitution and export diversification.
• Generating resources for the government through dividends, taxes, and profits.

Classification of PSUs

Public Sector Undertakings in India can be classified in several ways:

1. Based on Ownership

• Central Public Sector Enterprises (CPSEs): Owned and managed by the Union Government through various ministries or departments.
• State Public Sector Enterprises (SPSEs): Owned by respective State Governments.

2. Based on Sector of Operation

• Strategic Sectors: Defence, atomic energy, railways, and space, where public ownership is considered essential.
• Non-Strategic Sectors: Industries such as manufacturing, trading, and services, where private participation is encouraged.

3. Based on Financial Performance and Importance

The Department of Public Enterprises classifies CPSEs into categories according to their size, turnover, and profitability:

• Maharatna: The largest and most autonomous enterprises with significant global presence and operational flexibility (e.g., ONGC, Indian Oil Corporation, NTPC, Steel Authority of India).
• Navratna: Mid-sized PSUs with financial and operational autonomy in investment decisions (e.g., Bharat Electronics, Hindustan Aeronautics, Power Grid Corporation).
• Miniratna (Category I and II): Smaller profitable PSUs granted limited autonomy (e.g., Airports Authority of India, Rashtriya Ispat Nigam Limited).

Organisational and Legal Structure

Most PSUs are established under the Companies Act, 2013 (earlier Companies Act, 1956) as government companies, while a few operate under special statutes, such as the Life Insurance Corporation of India (LIC) Act or Food Corporation of India Act.
They are governed by a Board of Directors, which includes representatives from government ministries, professionals, and functional executives. The Administrative Ministry concerned supervises policy direction and performance monitoring, while the Department of Public Enterprises (DPE) under the Ministry of Finance lays down overall policy guidelines, performance targets, and evaluation mechanisms.

Performance Evaluation

The performance of PSUs is assessed through the Memorandum of Understanding (MoU) system, introduced in 1987, which sets annual performance targets agreed upon between the enterprise and the government. Key parameters include financial profitability, productivity, efficiency, innovation, and corporate social responsibility (CSR) initiatives.
The Public Enterprises Survey, published annually by the DPE, provides comprehensive information on the financial and operational performance of all Central PSUs.

Role and Contribution

Public Sector Undertakings have made substantial contributions to India’s economy:

• They have been instrumental in creating a strong industrial base, particularly in sectors such as steel, energy, and heavy engineering.
• PSUs have played a vital role in infrastructure development, including power generation, transportation, and telecommunications.
• They contribute significantly to government revenue through dividends, taxes, and disinvestment proceeds.
• Many PSUs undertake corporate social responsibility (CSR) activities in education, health, and environmental sustainability.
• They serve as model employers, providing stable employment and skill development opportunities.

Disinvestment and Reforms

Since the 1990s, economic reforms have led to a major shift in the policy towards PSUs, focusing on improving efficiency and reducing the fiscal burden.
Key reform measures include:

• Disinvestment: The sale of government equity in PSUs to raise resources and promote wider ownership. This has been pursued through partial disinvestment, strategic sales, and public offerings.
• Privatisation: Transfer of ownership and management control in select enterprises where private sector efficiency is expected to yield better results.
• Performance improvement and restructuring: Modernisation, technology upgradation, and adoption of corporate governance norms.
• Revival or closure of loss-making units: The government has implemented restructuring packages or closure schemes for unviable PSUs.
• Adoption of global benchmarks: Emphasis on competitiveness, profitability, and professional management practices.

Challenges Faced by PSUs

Despite their achievements, Public Sector Undertakings continue to face several challenges:

1. Operational Inefficiencies: Overstaffing, outdated technology, and bureaucratic delays hinder productivity.
2. Financial Constraints: Many PSUs depend heavily on budgetary support and are burdened with mounting losses.
3. Political and Administrative Interference: Decision-making autonomy is often limited by excessive government control.
4. Global Competition: Liberalisation has exposed PSUs to intense competition from private and foreign players.
5. Governance Issues: Weak accountability, lack of professional management, and corruption affect performance.
6. Underutilisation of Assets: Poor asset management and lack of diversification reduce returns on investment.

Policy Directions and Future Outlook

The Government of India has outlined a clear strategy for the future of public enterprises, focusing on rationalisation and improved efficiency:

• New Public Sector Enterprise Policy (2021): Limits government presence to strategic sectors such as defence, atomic energy, and transport, while encouraging privatisation or closure of PSUs in non-strategic areas.
• Corporate Governance Reforms: Strengthening of independent boards, transparent recruitment of executives, and adoption of performance-linked incentives.
• Strategic Disinvestment: Sale of stakes in high-value enterprises such as Air India, BPCL, and Shipping Corporation of India to strategic investors.
• Monetisation of Non-Core Assets: Unlocking value through leasing and divestment of surplus assets.
• Enhanced Accountability: Linking managerial performance to measurable outcomes under the MoU system.