Economic Administration: from the Mixed Economy to LPG and the New Economic Policy; Industrial Policy since Independence; Public Enterprises — Concept, Growth, Forms, Management, Accountability and Autonomy; Disinvestment Policy
2. Public enterprises: concept, growth and forms
A public enterprise is an undertaking owned (wholly or majority) and controlled by the state that produces goods or services for sale — combining public ownership and public purpose with commercial operation. The rationale in India was to build basic industry where private capital was lacking, to control the "commanding heights", to reduce regional disparity, to generate surpluses for development, and to prevent concentration of economic power. From five central public enterprises with an investment of about ₹29 crore at the start of the First Plan, the sector grew to well over two hundred operating central enterprises in steel, heavy engineering, oil, power, mining, fertilisers, telecommunications, aviation and finance. Their three classical organisational forms have different degrees of autonomy.
| Form | Nature | Autonomy and control | Examples |
|---|---|---|---|
| Departmental undertaking | Organised as a government department, financed through the budget and staffed by civil servants | Least autonomy; full ministerial responsibility and budgetary, audit and accounting control | Indian Railways; the Department of Posts; ordnance factories (until their corporatisation in 2021) |
| Public (statutory) corporation | Created by a special Act of the legislature that defines its powers, functions and relations with government; a body corporate with separate legal personality and its own finances | Substantial autonomy in day-to-day operations, with government powers to issue policy directions written into the Act — Herbert Morrison's "public corporation" | Life Insurance Corporation (1956); Food Corporation of India (1965); Airports Authority of India |
| Government company | Registered under the Companies Act, with at least fifty-one per cent of paid-up capital held by government | The most flexible form — can be set up by executive decision, has a board of directors and commercial freedom; the most common form in India | Steel Authority of India; Bharat Heavy Electricals; Oil and Natural Gas Corporation |
3. Management: boards, the MoU system and the Ratna categories
Public enterprises are managed by a board of directors appointed by the administrative ministry. Two models of board have been debated: a functional board, consisting of full-time directors each heading a function (finance, production, personnel, marketing), and a policy board, consisting of part-time directors — officials of the ministry, experts and outsiders — who lay down policy and leave execution to a chief executive. Most Indian boards are mixed. Top appointments are made through the Public Enterprises Selection Board. Recurrent management problems are political interference, frequent changes of chief executive, ministry officials on boards acting as agents of control, over-staffing, pricing below cost for social reasons, and the absence of clear objectives against which performance can be judged.
The Memorandum of Understanding (MoU) system, recommended by the Arjun Sengupta Committee (1984) and introduced in the late 1980s, is an annual performance agreement between an enterprise and its administrative ministry: the enterprise commits to measurable targets, the ministry to granting autonomy and support, and performance is rated at the year's end. To give the best enterprises greater financial and operational freedom, the government created the Navratna and Miniratna categories in 1997 and the Maharatna category in 2009–10. Maharatna status allows the board to approve investments far above the Navratna limit without government approval; the categories are conferred on the basis of profitability, net worth, turnover and MoU ratings.
4. The problem of accountability and autonomy
The central administrative dilemma of public enterprise is that it must be autonomous enough to operate commercially — taking investment, pricing, purchase and personnel decisions quickly, like a business — and yet accountable because it uses public money and serves public purposes. Too much control produces a department in disguise; too little produces an unaccountable empire. The instruments of accountability are ministerial control (appointments, directions, approval of plans and budgets), parliamentary control and audit.
- Parliament: questions, debates on the reports and accounts laid before it, and above all the Committee on Public Undertakings (constituted 1964, on the recommendation of the Krishna Menon Committee), which examines their reports and whether they are run on sound business principles.
- Audit: government companies are audited by statutory auditors appointed on the advice of the Comptroller and Auditor General, who may also conduct supplementary audit; statutory corporations are audited as their Acts provide.
- Ministerial control: the "arm's length" principle holds that ministers should set policy and objectives and leave operations to the board — a principle more honoured in the breach, since informal pressure on appointments, purchases and pricing is common.
- Vigilance and other controls: the Central Vigilance Commission's jurisdiction, the Right to Information and investigative agencies — which managers say induce risk-aversion in commercial decisions.
5. Disinvestment policies
Disinvestment is the sale of government equity in public enterprises. It may be minority disinvestment (the state sells a part and keeps control), majority disinvestment, or strategic sale (transfer of management control to a private buyer along with a large block of shares); privatisation in the full sense means the state ceasing to own the enterprise. The objectives have been to raise resources for the budget, to improve efficiency through market discipline and private management, to broaden share ownership, and to withdraw the state from non-strategic sectors.
| Year | Step |
|---|---|
| 1991–92 | Minority stakes in selected central enterprises sold in bundles |
| 1993 | The Rangarajan Committee on disinvestment recommended the extent of equity to be sold, with the government holding 51 per cent (or 26 per cent in some cases) |
| 1996 | Disinvestment Commission set up (chaired by G. V. Ramakrishna) to advise on individual enterprises |
| 1999–2004 | A Department of Disinvestment (1999), later a Ministry (2001–04); strategic sales of several enterprises, including Bharat Aluminium Company and Videsh Sanchar Nigam |
| 2005 | National Investment Fund created to receive disinvestment proceeds |
| 2016 | The Department of Disinvestment renamed the Department of Investment and Public Asset Management (DIPAM) |
| 2021 | New Public Sector Enterprise Policy: in four broad strategic sectors a bare minimum public presence, and in non-strategic sectors enterprises to be privatised or closed |
| 2022 | Strategic sale of Air India to the Tata group completed in January 2022 |
The debate is administrative as much as economic: supporters argue that disinvestment relieves the budget and exposes enterprises to market accountability; critics object to selling assets to meet annual deficits ("selling the family silver"), to undervaluation, to the loss of social objectives and jobs, and to replacing public monopolies with private ones where regulation is weak.
Key takeaways
- The 1956 Resolution divided industry into Schedules A (17, exclusively state), B (12) and C; the 1991 NEP cut public-sector reservation to eight and ended most licensing.
- Public enterprises take three forms — departmental undertaking (least autonomy), statutory corporation (created by a special Act) and government company (51 per cent government capital, the commonest form).
- The MoU system (Arjun Sengupta Committee, 1984) trades autonomy for accountability for results; Navratna and Miniratna date from 1997, Maharatna from 2009–10.
- Accountability runs through ministerial control, the Committee on Public Undertakings (1964) and CAG audit; the dilemma is to control without converting the enterprise into a department.
- Disinvestment moved from minority sales (1991) through the Rangarajan Committee (1993) and Disinvestment Commission (1996) to DIPAM (2016), the 2021 strategic-sector policy and the Air India sale (2022).
Practice questions (10)
Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.
How many industries were placed in Schedule A, reserved exclusively for the state, by the Industrial Policy Resolution of 1956? Type a number.
Numerical answer — type the value.
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Answer: 17
Schedule A listed seventeen industries whose future development would be the exclusive responsibility of the state; Schedule B had twelve, and Schedule C covered the rest.Which form of public enterprise enjoys the least autonomy?
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Answer: A — Departmental undertaking
A departmental undertaking such as Indian Railways is run as a government department under full budgetary, audit and ministerial control. Corporations and companies have separate legal personality and more operational freedom.A statutory corporation differs from a government company chiefly in that it:
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Answer: B — Is created by a special Act of the legislature defining its powers
The defining feature of a statutory corporation is its creation by a special Act, as with the LIC (1956) and the FCI (1965). Registration under the Companies Act defines a government company; budget financing and lack of separate personality describe a departmental undertaking.Which of the following were features of the Statement on Industrial Policy of July 1991? Select all that apply.
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Answer: A — Reduction of industries reserved for the public sector to eight; C — Abolition of industrial licensing for all but a short list of industries
Delicensing and the cut in public-sector reservation to eight were core to 1991. Bank nationalisation came in 1969, and the three schedules belong to the 1956 Resolution.The Memorandum of Understanding system for public enterprises was recommended by:
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Answer: D — The Arjun Sengupta Committee (1984)
The Sengupta Committee on public enterprises recommended performance agreements between enterprises and ministries. Rangarajan dealt with disinvestment, Krishna Menon with parliamentary oversight (leading to the Committee on Public Undertakings), and Kelkar with PPPs.Assertion (A): The government company became the most common form of public enterprise in India. Reason (R): A government company can be set up by executive decision without a special Act and enjoys the commercial flexibility of company law. Choose the correct option.
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Answer: A — Both A and R are true, and R is the correct explanation of A
Both are true and R explains A: because the company form needs no legislation and offers operational freedom, successive governments preferred it to the statutory corporation, making it the dominant form.The Department of Disinvestment was renamed in 2016 as the:
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Answer: C — Department of Investment and Public Asset Management
DIPAM took over disinvestment in 2016. The Department of Public Enterprises is a separate department dealing with policy on CPSEs; the National Investment Fund (2005) receives proceeds; the PESB selects top managers.Which of the following are instruments through which public enterprises are held accountable in India? Select all that apply.
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Answer: A — Audit involving the Comptroller and Auditor General; B — The Committee on Public Undertakings; C — Annual MoU performance ratings
The COPU, CAG audit and MoU ratings are all accountability mechanisms. Boards are appointed by the administrative ministry, not elected by customers.Under the New Public Sector Enterprise Policy of 2021, public enterprises in non-strategic sectors are to be:
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Answer: B — Privatised, or closed where privatisation is not possible
The 2021 policy keeps a bare minimum presence in four broad strategic sectors and envisages privatisation — or closure — of enterprises elsewhere.A "policy board" of a public enterprise consists mainly of:
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Answer: A — Part-time directors who lay down policy and leave execution to a chief executive
A policy board is made up of part-time directors — ministry officials, experts and outsiders — who set policy; a functional board has full-time directors in charge of finance, production, personnel and so on.