Why India has so many loss making PSUs?

In India, 70 Public Sector Undertakings (state-run companies) were in a loss as of 31 March 2019, with their total stress amounting to over Rs 31,000 crore collectively. Out of these, state-run carrier Air India, telecom companies Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) were the top three loss-making PSUs in fiscal 2018-19, Prakash Javadekar, Minister of Heavy Industries and Public Enterprises, said in a written reply to Rajya Sabha on Monday. According to the reply, BSNL lost Rs 14,904 crore; Air India’s losses were at Rs 8,474 crore and MTNL’s losses stood at Rs 3,390 crore.

PSUs such as Orissa Mineral Development Company Ltd., Chennai Petroleum Corporation Ltd., Hindustan Newsprint Ltd., National Textile Corpn. Ltd., State Trading Corpn. of India Ltd., also reported losses in hundreds of crores. The reasons for the failures of these PSUs were also provided. While the reasons of failures differ from The reasons for losses differ from one enterprise to another, “Common problems faced by loss-making CPSEs include obsolete plants and machinery, heavy interest burden, resource crunch, low capacity utilization, low productivity, surplus manpower, high input cost, non-remunerative prices etc,” the Ministry said. 

Why did India opt for so many Public sector units after independance?

1. Socialist Pattern of Society:

The public sector was created as a means towards socialising the instruments of production for mass welfare. The adoption of the socialist pattern of society as the national objective calls for expansion of the public sector.

Under such a society major decisions regarding production, distribution, consumption and investment must be made by agencies working not for private profit but for social gain. In other words, the public sector has to expand rapidly.

It has not only to initiate developments which the private sector is either unwilling or unable to undertake, it has to play the dominant role in shaping the entire pattern of investments in the economy, whether it makes the investments directly or whether these are made by the private sector.

The adoption of the socialist pattern of society as the national objective as well as the need for planned and rapid development requires that all industries of basic and strategic importance, or in the nature of public utility services, should be in the public sector.

Other industries which are essential and require investment on a scale which only the state in the present circumstances could provide have also to be in the public sector.

The state has, therefore, to assume direct responsibility for the further development of industries over a wider area.

The responsibility for new developments in basic and capital goods industries must be undertaken in the main by the State and the existing units have also to fall in line with the emerging pattern.

Public ownership and public control are especially required in those fields in which technological considerations tend towards a concentration of economic power and wealth.

In a growing economy which gets increasingly diversified there is scope for both the public and the private sectors to expand simultaneously, but it is inevitable, if development is to proceed at an accelerated rate and to contribute effectively to the attainment of the larger social goals that the public sector must grow not only absolutely but also relatively to the private sector.

2. Socio-economic objectives:

Reduction of inequalities of wealth and income is the most important socio-economic objective. Elimination of poverty and the establishment of an egalitarian society through a policy of redistribution constitute the objectives of planning in India.

It has to be ensured that in the course of economic development, economic power does not concentrate in the hands of a few big capitalists. Deduction of excess wealth and income is generally made by fiscal measures.

Another social objective is to help the underprivileged. Though not laid down as a specific objective, the public sector has been used to promote the development of certain backward sections of society viz., the Scheduled Castes and Scheduled Tribes.

It was directed to make reservations in appointments at lower levels in respect of deaf, blind and orthopedically handicapped. Private enterprise, with a commercial outlook, is likely to ignore such social obligations.

Nationalised banks have come out with numerous schemes to help the economically backward and vulnerable sections of the society.

This important social purpose was never served adequately before the nationalisation of banks. The differential rate of interest scheme seeks to benefit mainly the weaker sectors in the rural areas.

3. Balanced Regional Development:

One of the objectives of planning is to secure the balanced development of all parts of the country. In order that industrialisation may benefit the economy as a whole, it is important that disparities in the levels of development between different regions should be progressively reduced. The entire economy can attain higher standards of living by securing a balanced industrial development.

One of the declared objectives of industrial policy is to bring about a reduction of regional disparities in industrial development so that industrialisation may benefit all the regions of the country.

In the scheme of development of industries in the public sector, priority is given to the backward regions. Steel plants at Rourkela, Bhilai and Durgapur are cases in point.

While private entrepreneur’s decisions on industrial location are governed by profitability, the State’s decisions are governed by net social benefit. Society takes into account both output and its distribution in net social benefit while the private entrepreneurs consider only the output.

4. Need for Rapid Economic Development:

The imperative need of the hour is a rapid economic development. The private sector has neither the desire nor the resources to undertake the massive programme of industrialisation.

Hence dependence on the private sector only will make the economic development slow. Expansion of public enterprise will speed up the rate of economic growth.

5. Pattern of Resource Allocation:

The main reason for the expansion of the public sector lies in the pattern of resource allocation decided upon under the plans. In the first Plan, the major emphasis was on agriculture but in the second Plan the emphasis was shifted to basic and capital goods industries.

During the first plan period, the private sector was dominant in the field of industrial activities. But with changed emphasis it was inevitable that the public sector must grow not only absolutely but also relatively to the private sector.

6. Building up Infrastructure:

Infrastructure provides certain basic facilities for rapid economic growth. In the economic infrastructure, there are facilities like power, irrigation, transport and communication, banking, training etc. Social infrastructure includes education, health, sanitation, drinking water facilities etc.

The development of infrastructure is not possible through efforts of private individuals since its benefits go to the society as a whole and not to individuals. It is therefore mainly the responsibility of the State.

The infrastructure has accounted for 95.1 per cent of the public outlays in the first Plan and nearly 75 per cent in the subsequent plans.

Government’s efforts to address reasons for losses

The government is also doing its bit to get the CPSEs out of their stress. These measures include “business restructuring, formation of joint ventures, modernization and improved marketing strategies, corporate governance, professionalization of boards of CPSEs etc,” according to the reply. However, the government said that getting these CPSEs back on track is a continuous process.

The government has also been trying to divest its stake in the national carrier Air India and the Minister of Civil Aviation, Hardeep Singh Puri, has time and again said that it is not the government’s business to run businesses. The Indian government looks to offload 100% of its stake in the airline and is looking for a prospective bidder for the airline.

Reports of PSUs in losses have been lingering from a decade. An increasing number of PSUs, even the highly profitable ones, have run into debts and losses.

There are some general reasons and some specific blunders committed by the Indian government. PSUs are cultivating losses because:

Indian government has sucked the accumulated cash reserves in the name of special dividends, to meet its short-term fiscal deficit and disinvestment targets. This annual cash reserve was to be used to improve technologies and for capital expenditure. The government is forcing these profit-making PSUs to take excessive loans and buy all of the government’s stakes in the other loss-making PSUs. This step was taken in order to meet the disinvestment targets. The government has also asked the oil and gas PSUs to bear the fuel subsidies to counter the increasing fuel prices.

The government has no place to run businesses. Apart from defence, currency, nuclear energy and some other areas, the government should move aside. Government is getting highly involved and then take these businesses as a part of their own machinery and use them unwisely to meet their targets instead of keeping the PSUs’ profits in mind.

Many of the PSU’s products are not of saleable quality, still the workers and managers come daily to the office and leave. And they are getting paid by the government for their unproductivity, as they are in no pressure to produce and recover more than their investments, unlike private companies.

Also comes the matter of unemployment. A huge number of people are employed but are under-utilized. The salary and pension eat up most of the revenue.

The unions in the PSUs have also grown strong often the roadblocks for increasing productivity.

The Minister of State for ‘Heavy Industries and Public Enterprises’, Babul Supriyo, rightly told the Lok Sabha that “Some common problems for losses in Central Public Sector Enterprises (CPSEs) include old and obsolete plants and machinery, outdated technology, low capacity utilisation, excess manpower, weak marketing strategies, stiff competition, heavy interest burden, high input cost.”

The government should move out of the business of running businesses. The scenario will change to a very large extent if the government stops the extracting huge biased dividends to cover up their failures in other areas. And till the government is controlling the PSUs it should be fair to them in all aspects and should not side by private players. Diversification and modernization are utmost needed.