[PDF Notes] What are the Causes for Decline of Public Sector Enterprises in India?

At the global level, compelling combination of circumstances leading to restructuring of economics included successful global economic performance of Japan and Asian Tigers in 80s and 90s, based on a global approach to production and competition; and development of technologies, which changed the very concept of productivity and even geography led a serious thinking among policy makers in India about the viability of the Public Sector in Independent India.

Under these unprecedented circumstances, the public sector and the policies governing them could hardly afford to remain immune from mainstream developments, as they have invariably been a critical and an integral part of most economics.

The insular, ‘no change1 status quoits and State interventionist public sector policies of 60s, 70s and 80s could no longer be sustained in any meaningful way, except on the premise of efficiency and competitiveness.

Since 1980s privatisation has become a buzzword in the global industrialisation. Taking a cue from UK and USA, other countries the world over has attempted privatisation in different forms and extent.

In India too, actions, to privatise public sectors were initiated by the Indira Gandhi government and later on accentuated by the Rajiv Gandhi government. A great impetus has taken place since 1991 with the government’s enunciation of New Economic Policy on the floor of the Parliament.


Privatisation means transfer of management control of a government enterprise to the private company either with sale of a portion of total equity or by lease.

Disinvestment means divesting a portion of government equity in a government enterprise to retail investors, mutual funds, employees of the unit etc to raise funds. It does not involve transfer of management.

Strategic Sale and privatisation are the same.

The policy of the Government on disinvestments has evolved over a period of ten years. It started with selling of minority shares in 1991-92 and continues today with emphasis on strategic sale.

The implementation of the present policy has shown tremendous benefits of privatisation to the taxpayers, the economy, the stock market and the employees.

Before the year 2000, the government had primarily sold minority shares in public sector companies. The price realised through the sale of shares, even in blue chip companies like IOC, BPCL, HPCL, GAIL & VSNL was low. On the other hand, the prices realised through strategic disinvestments have been high.

Fears expressed by employees of Public Sectors on disinvestments are unfounded. Of a total workforce of about 350 million in the country, the public sector employees are about 2 million.

During the last ten years, without any privatisation or strategic disinvestments, this work force has reduced from 2.3 million to 1.7 million, on account of economic pressures.

Privatized companies have not retrenched a single employee. Some of the companies are now in the process of restructuring and adopting VRS. These companies are giving VRS to the employees, which are normally higher than the Government VRS.

The new industrial policy announced in 1991 envisaged disinvestments of part of the government shareholdings in the case of selected public sector enterprises to provide financial discipline and improve the performance of the public enterprises.

In pursuit of this, beginning from 1991-92 disinvestment of government equity has been completed in about 50 central PSUs. In the process an amount of about Rs. 20,000 crore has been realised.

Strategic b Sale

Sale of a portion or whole of Government equity along with transfer of management control is called Strategic Sale. The equity sold is generally less than 25 per cent if the recent experience starting from Modern Foods to VSNL, IBP and IPCL are the indications.

At the same time, each one has seen management control transferred to the party that bid for and bought the government equity. The advantages with strategic sale are that

(1) It gets investment

(2) Proceeds are not wasted by the government

(3) The strategic partner with management control will invest further for diversification and technological improvement

(4) Market perception will improve as it is no longer a government company

(5) And shareholder value will increase

(6) With the improvement of the functioning of the company, workers’ protection will also be guaranteed.

Leave a Reply

Your email address will not be published. Required fields are marked *