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PUBLIC SECTOR
UNDERTAKINGS OF INDIA
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Economic Term Paper

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Submitted By:
Dharshana Pratap (09MBA016)
Shabana Surendran(09MBA049)
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 PUBLIC SECTOR UNDERTAKING OF INDIA

Public Sector Undertaking (PSU) is a term used for a government-owned corporation

(company in the public sector). The term is used to refer to companies in which the

government (either the Union Government or state or territorial governments, or both)

owned a majority (51 percent or more) of the company equity.

EVOLUTION

Prior to Independence, there were few ‘Public Sector’ Enterprises in the country. These

included the Railways, the Posts and Telegraphs, the Port Trusts, the Ordinance

Factories, All India Radio, few enterprises like the Government Salt Factories, Quinine

Factories, etc. which were departmentally managed. Independent India adopted

planned economic development policies in a democratic, federal polity. The country was

facing problems like inequalities in income and low levels of employment, regional

imbalances in economic development and lack of trained manpower. India at that time

was predominantly an agrarian economy with a weak industrial base, low level of

savings, inadequate investments and infrastructure facilities. In view of this type of

socio-economic set up, our visionary leaders drew up a roadmap for the development of

Public Sector as an instrument for self-reliant economic growth. This guiding factor led

to the passage of Industrial Policy Resolution of 1948 and followed by Industrial Policy

Resolution of 1956. The 1948 Resolution envisaged development of core sectors

through the public enterprises. Public Sector would correct the regional imbalances and

create employment. Industrial Policy Resolution of 1948 laid emphasis on the expansion

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of production, both agricultural and industrial; and in particular on the production of

capital equipment and goods satisfying the basic needs of the people, and of

commodities the export of which would increase earnings of foreign exchange.

In early years of independence, capital was scarce and the base of entrepreneurship

was also not strong enough. Hence, the 1956 Industrial Policy Resolution gave primacy

to the role of the State which was directly responsible for Industrial Development.

Consequently the planning process (5 year Plans) was initiated taking into account the

needs of the country. The new strategies for the public sector were later outlined in the

policy statements in the years 1973, 1977, 1980 and 1991. The year 1991 can be

termed as the watershed year, heralding liberalization of the Indian economy. The

public sector provided the required thrust to the economy and developed and nurtured

the human resources, the vital ingredient for success of any enterprise; public or

private.

Economic Scenario and Role of Public Sector in India – General perspective

Government of India, as part of its national agenda to promote growth, increase in

efficiency and international competitiveness, has been continuously framing policies for

industrial growth, fiscal, trade and foreign investment to achieve overall socio-economic

development of the country. As a result of exceptionally severe balance of payments

and fiscal crisis in the year 1991, the government decided to shift to a liberalized

economy with greater reliance upon market forces, a larger role for the private sector

including foreign direct investment.

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The Government realized that a strong and growth oriented nation could be built if India

grows as part of the world economy and not in isolation. Thus, liberalizing and

deregulatory steps were initiated from the year 1991 onwards, which aimed at

supporting growth and integration with the global economy. Since then, the thrust of

New Economic Policy has been on progressive reforms such as reduction in the scope

of industrial licensing, reforms in the Monopolies and Restrictive Trade Practices

(MRTP) Act, reduction of areas reserved exclusively for public sector, disinvestment of

equity of selected public sector enterprises (PSEs), enhancing limits of foreign equity

participation in domestic industrial undertakings, liberalization of trade and exchange

rate policies, rationalization and reduction of customs and excise duties and personal

and corporate income taxes, promoting FDI, investments from NRIs (Non-Resident

Indians), extension of the scope of CENVAT, implementing the VAT regime in States,

taking steps to switch over to goods & services tax system w.e.f. 01.04.2010, e-

governance and simplification of various procedures, rules and regulations etc. Since

the setting up of World Trade Organization (WTO) in the year 1995, as an apex body at

the international level, to which India is a signatory, the world trade has definitely grown

thereby giving indications that international trade reforms do play an important role in

boosting economic development of various countries. Industrial policy has seen a sea

change with most Central Government industrial controls being liquidated. The Central

Public Sector Enterprises (CPSEs) were classified into ‘strategic’ and ‘non-strategic’.

Strategic CPSEs were identified in the areas of (a) Arms & Ammunition and the allied

items of defence equipments, Defence air-crafts and warships; (b) Atomic Energy

(except in the areas related to the operation of nuclear power and applications of

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radiation and radio-isotopes to agriculture, medicine and non-strategic industries); and

(c) Railway transport. All other CPSEs were considered as non-strategic. Further,

Industrial licensing by the Central Government has been almost abolished except for a

few hazardous and environmentally sensitive industries.

The main elements of the present Government policy towards Public Sector enterprises

as contained in the National Common Minimum Programme (NCMP) are reproduced

below:

i) To devolve full managerial and commercial autonomy to successful, profit making

companies operating in a competitive environment

ii) Generally , profit-making companies will not be privatized

iii) Every effort will be made to modernize and restructure sick public sector companies

and revive sick industry

iv) Chronically loss making companies will either be sold off, or closed, after all workers

have got their legitimate dues and compensation

v) Private industry will be inducted to turn-around companies that have potential for

revival

vi) Privatization revenues will be used for designated social sector schemes

vii) Public sector companies and nationalized banks will be encouraged to enter the

capital market to raise resources and offer new investment avenues to retail investors.

The Government has made a clear commitment to empowering the CPSEs and their

managements. It was recognized that public enterprises could not compete effectively

with private entrepreneurs without freedom to function and operate commercially. Thus,

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the concept of Navratna and Mini-Ratna was introduced with greater delegated

authority, both financial and managerial. Government has realized that ‘Navratnas’,

‘Mini-ratnas’ and other CPSEs are required to grow and deliver on the promises they

have made to their stakeholders. Other reforms have also been announced, such as

professionalization of the Boards of Directors of public sector enterprises and evaluation

of performance of CPSEs through Memorandum of Understanding (MOU).

Performance Status

Over the years, operations of CPSEs have extended to a wide range of activities in the

manufacturing, engineering, steel, heavy machinery, machine tools, fertilizers, drugs,

textiles, pharmaceuticals, petro-chemicals, extraction and refining of crude oil and

services such as telecommunication, trading, tourism, warehousing, etc. and a range of

consultancy services. In 2006-07, there were 247 Central Public Sector Enterprises in

India, as compared to 236 in 1997-98.

The following observations are made regarding the performance of CPSEs during the

last 10 years:-

 The capital employed has increased from Rs. 2,49,855 Crores in 1997-98 to

Rs.6,65,124 Crores in 2006-07 recording a growth of 266%.

 Number of loss incurring CPSEs, it has come down from 100 in 1997-98 to 59 in

2006-07.

 Turnover increased to Rs.9,64,410 Crores in 2006-07, from Rs. 2,76,002 Crores

in 1997-98 recording a net worth growth of 349% increased from Rs.1,34,443

Crores to Rs.4,52,995 Crores in 2006-07 recording a growth of 337%.

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  The turnover is equal to Rs.9,64,410Crores in 2006-07, which is an increase of

349% in comparison to 1997-98 (Rs. 2,76,002Crores ). As regards Net worth, it

has increased by 337% in 2006-07 in comparison to 1997-98

(Rs.1,34,443Crores), and is presently at Rs.4,52,995Crores.

 Net profit has increased by 599% in 2006-07 in comparison to 1997-98

(Rs.13582Crores), and is currently to the tune of Rs. 81550Crores.

 The combined Dividend and Dividend Tax has increased by 772% in 2006-07 in

comparison to 1997-98 (Rs. 4063Crore), and is equal to Rs. 30910Crores.

Investment pattern

“Investment” defined as aggregate of paid-up share capital, share application money

pending allotment and long term loans in CPSEs has grown from Rs.29 crore in 5

enterprises as on 1.4.1951 to Rs.4,21,089 crore as on 31.3.2007. In addition, the

CPSEs have accumulated a large amount of Reserves and Surplus which stood at

Rs.416494 crores as on 31.3.2007.

Turnover and Sales

Cognate group wise turnover of CPSEs for financial years 2006-07 and 2005-06 shows

robust growth in the sales/ turnover of CPSEs during 2006-07. The Electricity Sector

had the highest, 19.59 per cent growth, followed by the manufacturing companies with a

16.03 per cent growth and the service companies with a growth of 9.16 percent in 2006-

07 (over 2005-06). Amongst the various cognate groups, the growth in turnover of

Consumer Goods (88.81%), Tourist Services (54%), Agro Based Industries (42%),

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Transportation Equipment (30%Heavy Engineering (29%), Contract and Construction

Services (23%), Chemicals & Pharmaceuticals (21%), Financial Services (20%), Power

Generation (20%), Steel (18%) and Petroleum (17%) have been significant. However,

the CPSEs under the cognate groups of textiles (-14.37%), Telecom services (-5.07%)

and Coal & Lignite (-1.34%) have witnessed a negative growth in turnover during 2006-

07 over 2005-06. Overall, there was a 15.18 per cent growth in the turnover of CPSEs

during 2006-07 over 2005-06.

Profit and Loss

The Group-wise analysis of aggregate profit and loss shows that except for the cognate

groups of 'Fertilizers', 'Chemicals & Pharmaceuticals', 'Medium and Light engineering',

'Agro-based Industries' , 'Textiles', 'Consumer Goods' and 'Contract and Construction

services’ all the others showed profits during the year 2006-07. Companies under the

cognate groups of 'Heavy Engineering' and 'Transport Equipment ' performed better

than the rest, with a 117 per cent growth and 111 per cent growth in profit in 2006-07

over 2005-06 respectively in terms of absolute values. High profits were reported by

companies under the cognate groups of Petroleum (Rs.33,442crore),

Telecommunications Services (Rs.14,126crore), Power Generation (12,115crore), Coal

and Lignite (Rs.8,853crore), Steel (Rs.7,612crore), Minerals & Metals (Rs.5246crore),

Financial Services (Rs.2,828), Transportation services (Rs.2,210crore) and Heavy

Engineering (Rs. 2,123crore). Overall, the grand total of net profits of all the CPSEs put

together was Rs. 8154crore during 2006-07, which indicates 17.28% growth over 2005-

06.

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Contribution of CPSEs to the Economy and Central Exchequer

The share of output of CPSEs in GDP at market price stood at 8.23 per cent in 2006-07

and 8.21 per cent in 2005-06. The CPSEs made substantial contribution to the Central

Exchequer through payment of dividends, interest on government loans and taxes &

duties. The major share of contribution to Central Exchequer by the CPSEs was by way

of payment of taxes & duties growth of 85.91% followed by dividend (11.74%) and

interest (1.33%).

Revival of Sick CPSEs

The National Common Minimum Programme (NCMP) stipulates a “strong and effective

Public Sector, whose social objectives are met by its commercial functioning.

Endeavour is to modernize and restructure sick CPSEs and revive sick industry. The

chronically loss making CPSEs may be closed down or sold off, after all the employees

are paid their legitimate dues. The problem of sickness in CPSEs is addressed by the

administrative Ministries/Departments in the Government by evolving appropriate need

based strategy concerning a particular CPSE. Some of the strategies for restructuring /

revival of CPSEs including sick units on long-term basis include:-

 Revival through the process of BIFR;

 Financial restructuring;

 Formation of joint venture by induction of partners capable of providing

technical, financial and marketing inputs; and

 Organizational restructuring and manpower rationalization through approved

Voluntary Retirement Scheme (VRS).

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In order to combat industrial sickness particularly with regard to the crucial sectors,

where public money is locked up and for timely detection of sick and potentially sick

industrial companies, Sick Industrial Companies Act (SICA) was extended to public

enterprises in 1993; enabling sick public sector enterprises to be referred to a quasi

judicial body - Board for Industrial & Financial Reconstruction (BIFR), to take

appropriate measures for revival and rehabilitation of potentially sick industrial

undertakings and for liquidation of non-viable companies.

Under the Sick Industrial Companies Act (SICA), 1985, a company is termed sick if at

the end of any financial year, it has accumulated losses equal to or exceeding its entire

net worth. Such industrial company is required to be referred to BIFR for formulation of

rehabilitation/ revival plan. Government set up a Board for Reconstruction of Public

Sector Enterprises (BRPSE) in December, 2004 to advise the Government inter-alia on

the measures to be taken to restructure/revive CPSEs, including cases where

disinvestments or closure or sale are justified. The concerned administrative Ministries

are required to refer the proposals of their CPSEs identified as 'sick' for consideration of

the BRPSE.

Human Resource Management and Personnel Policy

Effective utilization of Human Resources is one of the most important factors for the

efficient and profitable functioning of an organization. It has special significance in the

management of public sector enterprises. CPSEs employ a large workforce in different

disciplines and the successful operation of these enterprises very much depend on the

10
skills and capabilities of the workforce. Out of around 16lakhs manpower (as on

31.03.07) deployed presently in CPSEs, about 3.65lakh are in the supervisory and

managerial cadres which represent about 22.12% of total manpower. In 2005-06, the

aggregate amount paid towards salaries & wages and other benefits including Bonus

was to the tune of Rs.45,625 crores; and the cost of production was Rs.7,35,964crores.

Accordingly, the average of Payment to employees as percentage of Cost of production

is around 6.2%; out of which the lowest percentage is of Petroleum group i.e. 1.28%

and the highest percentage is of Coal and Lignite group i.e. 39.91. The number of

employees during the period has reduced from 19.59 lakhs in 1997-98 to 16.14lakhs in

2006-07, which is a reduction of 17.61%. On the other hand, the total emoluments have

increased from Rs.25,385 crores in 1997-98 to Rs.52,574 crores in 2006-07, which is

an increase of 107%. Similarly, the per capita emoluments have increased from

Rs.1,29,582 in 1997-98 to Rs.3,25,738 in 2006-07, which is an increase of 151%. The

Emoluments as percentage of Turnover has decreased from 9.19% in 1997-98 to

5.45% in 2006-07.

Categorization

The public enterprises are categorized into four Schedules namely ‘A’, ‘B’, ‘C’ and ‘D’,

based on various quantitative, qualitative and other factors. The quantitative factors are:

investment, capital employed, net sales, profit before tax, number of employees,

number of units and value added per employee. Qualitative factors are: national

importance, complexities of problems, level of technology, prospects for expansion and

diversification of activities and competition from other sectors, etc. while the other factor

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relates to the strategic importance of the corporation. The pay scales of Chief

Executives and full time Functional Directors in CPSEs are determined as per the

schedule of the concerned enterprise. As on 31.3.2007, there were 247 CPSEs. Out of

247 there are 54 Schedule ‘A’, 77 Schedule ‘B’, 48 Schedule ‘C’ and 06 are Schedule

‘D’ enterprises. The rest have not been categorized.

Navratna

Navratna was the title given originally to nine Public Sector Enterprises (PSEs),

identified by the Government of India in 1997 as its most prestigious, which allowed

them greater autonomy to compete in the global market. The number of PSEs having

Navratna status has been raised to 18, the most recent addition being Coal India

Limited.

Historical symbolism

Originally, the term Navaratna meant a talisman or ornament composed of nine

precious gems. Later, this symbology was adopted in the courts of King Vikramaditya

and the Mughal emperor Akbar, where the Navaratnas were a group of nine

extraordinary men in their respective courts.

Significance

The Navratna status is offered to PSEs, which gives a company enhanced financial and

operational autonomy and empowers it to invest up to Rs. 1000 crore or 15% of their

net worth on a single project without seeking government approval. In a year, these

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companies can spend up to 30% of their net worth not exceeding Rs. 1000 cr. They will

also have the freedom to enter joint ventures, form alliances and float subsidiaries

abroad.

Criteria

Navratna status is conferred by Department of Public Enterprises. To be qualified as a

Navratna, the company must obtain a score of 60 (out of 100). The score is based on

six parameters which include net profit to net worth, total manpower cost to total cost of

production or cost of services, PBDIT (Profit Before Depreciation, Interest and Taxes) to

capital employed, PBDIT to turnover, EPS (Earning Per Share) and inter-sectoral

performance. Additionally, a company must first be a Miniratna and have four

independent directors on its board before it can be made a Navratna.

List of Navratnas

The original list of 1997 included BHEL, BPCL, HPCL, IOC, IPCL, NTPC, ONGC, SAIL

and VSNL, of which IPCL and Videsh Sanchar Nigam Ltd (VSNL) were later privatised.

GAIL and MTNL joined the list in November 1997. In June 2007 the government

awarded the coveted status to three more PSEs: BEL, HAL and Power Finance

Corporation (PFC).

The incumbents of this group as of 1.12.2008 are:

1. Bharat Electronics Limited

2. Bharat Heavy Electricals Limited

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 3. Bharat Petroleum Corporation Limited

4. Coal India Limited

5. GAIL (India) Limited

6. Hindustan Aeronautics Limited

7. Hindustan Petroleum Corporation Limited

8. Indian Oil Corporation Limited

9. Mahanagar Telephone Nigam Limited

10. National Aluminium Company Limited

11. NMDC Limited

12. NTPC Limited

13. Oil and Natural Gas Corporation Limited

14. Power Finance Corporation Limited

15. Power Grid Corporation of India Limited

16. Rural Electrification Corporation Limited

17. Shipping Corporation of India Limited

18. SAIL

Miniratnas

In addition, the government created another category called Miniratna. Miniratnas can

also enter into joint ventures, set subsidiary companies and overseas offices but with

certain conditions. In 2002, there were 41 government enterprises that were awarded

Miniratna status.

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Category I

This designation applies to PSEs that have made profits continuously for the last three

years or earned a net profit of Rs. 30 crore or more in one of the three years. These

miniratnas granted certain autonomy like incurring capital expenditure without

government approval up to Rs. 500 crore or equal to their net worth, whichever is lower.

1. Balmer Lawrie & Co. Limited

2. Bharat Dynamics Limited

3. BEML Limited

4. Bharat Sanchar Nigam Limited

5. Bongaigaon Refineries & Petrochemicals Limited

6. Central Warehousing Corporation

7. Central Coalfields Limited

8. Chennai Petroleum Corporation Limited

9. Cochin Shipyard Limited

10. Container Corporation of India Limited

11. Dredging Corporation of India Limited

12. Engineers India Limited

13. Garden Reach Shipbuilders & Engineers Limited

14. Goa Shipyard Limited

15. Hindustan Copper Limited

16. HLL Lifecare Limited (Formerly Hindustan Latex Limited)

17. Hindustan Newsprint Limited

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18. Housing & Urban Development Corporation Limited

19. India Tourism Development Corporation Limited

20. Indian Railway Catering & Tourism Corporation Limited

21. IRCON International Limited

22. Kudremukh Iron Ore Company Limited

23. Mazagaon Docks Limited

24. Mahanadi Coalfields Limited

25. Mangalore Refinery & Petrochemicals Limited

26. MMTC Limited

27. MSTC Limited

28. National Fertilizers Limited

29. Neyveli Lignite Corporation

30. NHPC Limited

31. Northern Coalfields Limited

32. Numaligarh Refinery Limited

33. Oil India Limited

34. Rashtriya Chemicals & Fertilizers Limited

35. Rashtriya Ispat Nigam Limited

36. RITES Limited

37. Satluj Jal Vidyut Nigam Limited

38. South Eastern Coalfields Limited

39. State Trading Corporation of India Limited

40. Telecommunications Consultants (India) Limited

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 41. Airports Authority of India (AAI)

42. CSR Group

Category II

This category include those PSEs which have made profits for the last three years

continuously and should have a positive net worth. Category II miniratnas have

autonomy to incurring the capital expenditure without government approval up to Rs.

300 crore or up to 50% of their net worth whichever is lower.

1. Educational Consultants (I) Limited

2. Engineering Projects (I) Limited

3. Ferro Scrap Nigam Limited

4. HMT (International) Limited

5. HSCC (India) Limited

6. India Trade Promotion Organization

7. Indian Medicines Pharmaceuticals Corporation Limited

8. Manganese Ore India Limited

9. MECON Limited

10. National Film Development Corporation Limited

11. PEC Limited

12. Rajasthan Electronics & Instruments Limited

13. Water & Power Consultancy (India) Limited

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Maharatna

In 2009, the government established the Maharatna status, which raises a company's

investment ceiling from Rs. 1,000 crore to Rs. 5,000 crore. The Maharatna firms would

now be free to decide on investments up to 15 per cent of their net worth in a project.

Earlier, the Navaratna companies could invest up to Rs 1,000 crore without government

approvals.In order to qualify as a Maharatna, a company must have:

 Three years with an annual net profit of over Rs. 5,000 crore

 Net worth of Rs. 15,000 crore

 Turnover of Rs. 25,000 crore

The only companies currently meeting the criteria are SAIL, ONGC and NTPC.

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