Model Answer
0 min readIntroduction
Following independence, India adopted a socialist-leaning economic model, with the public sector playing a central role in driving industrialization and achieving socio-economic objectives. Public Sector Enterprises (PSEs) were envisioned as the engine of growth, responsible for building core infrastructure, promoting self-reliance, and ensuring equitable distribution of wealth. However, by the late 1980s, the performance of these enterprises came under intense scrutiny. This answer will critically analyse the performance of PSEs during the pre-reform period, examining their achievements, failures, and the underlying factors contributing to their trajectory.
Early Phase (1951-1965): Laying the Foundation
The initial phase saw the establishment of PSEs in strategic sectors like steel (Hindustan Steel Limited, 1954), power (Damodar Valley Corporation, 1948), and transport (Indian Airlines, 1953). The focus was on building basic industries and infrastructure, often in areas where private investment was lacking. These enterprises largely succeeded in establishing a foundation for industrial development and achieving import substitution. However, efficiency wasn’t a primary concern, and many operated with significant state support.
Growth and Expansion (1966-1980): Proliferation and Challenges
This period witnessed a significant expansion in the number of PSEs, driven by the Indira Gandhi government’s nationalization policies (1969 & 1980). Banks, insurance companies, and coal mines were nationalized, aiming to redistribute wealth and control key sectors. While nationalization expanded access to credit and essential services, it also led to several problems:
- Over-Diversification: Many PSEs ventured into unrelated areas, diluting their focus and expertise.
- Lack of Competition: Monopolistic structures reduced incentives for innovation and efficiency.
- Political Interference: Appointments were often based on political considerations rather than merit, leading to mismanagement.
- Bureaucratic Control: Excessive bureaucratic control stifled initiative and delayed decision-making.
The Period Leading to Reforms (1980-1991): Mounting Losses and Inefficiency
The 1980s saw a deterioration in the performance of PSEs. Many incurred substantial losses, requiring continuous budgetary support from the government. Several factors contributed to this decline:
- Technological Obsolescence: Lack of investment in research and development led to technological backwardness.
- Overstaffing: PSEs were often used as a source of employment, leading to bloated workforces and low productivity.
- Weak Financial Discipline: Lack of accountability and financial discipline resulted in wasteful expenditure.
- Price Controls: Government price controls often suppressed profitability.
Financial Performance of PSEs (1980-1991)
The financial performance of PSEs during this period was dismal. According to the Economic Survey (1991-92), the cumulative losses of PSEs amounted to over ₹9,000 crore. The Return on Investment (ROI) for PSEs consistently lagged behind that of the private sector. Furthermore, a significant portion of the government’s revenue was diverted to bail out loss-making PSEs, crowding out investment in other crucial areas like education and healthcare.
| Indicator | 1980-81 | 1990-91 |
|---|---|---|
| Number of PSEs | 244 | 307 |
| Total Losses (₹ crore) | ₹350 | ₹9,000+ |
| Return on Investment (%) | 4.3% | -1.7% |
Sectoral Performance
Performance varied across sectors. PSEs in capital-intensive industries like steel and fertilizers faced significant challenges due to global competition and rising input costs. PSEs in the service sector, like telecommunications (BSNL), enjoyed a degree of monopoly power but suffered from inefficiency and poor customer service. However, some PSEs, like Oil and Natural Gas Corporation (ONGC), continued to perform well due to favorable market conditions and efficient management.
Successes of PSEs
Despite the widespread criticism, PSEs did achieve some notable successes:
- Development of Core Industries: They played a crucial role in establishing basic industries like steel, power, and petroleum.
- Regional Development: PSEs were often located in backward regions, promoting industrialization and employment generation.
- Social Objectives: They provided employment opportunities and subsidized essential goods and services.
- Self-Reliance: Contributed to reducing dependence on imports in key sectors.
Conclusion
In conclusion, the performance of PSEs during the pre-reform period was a mixed bag. While they played a vital role in laying the foundation for industrial development and achieving social objectives, they were plagued by inefficiency, over-diversification, political interference, and a lack of accountability. The mounting losses and financial burden on the government ultimately necessitated the economic reforms of 1991, which aimed to improve the efficiency and competitiveness of the Indian economy, including a restructuring of the public sector. The pre-reform period serves as a crucial lesson in the importance of sound economic principles, efficient management, and a conducive regulatory environment for sustainable growth.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.