Public Sector Enterprises (PSEs) occupy an important place in the national economies of most countries of the world irrespective of their political orientation. The term, 'public enterprise' is an extensive and amorphous one. Ordinarily, the term stands for a concern owned and managed by the state or any other public authority. Public Sector Enterprises fundamentally and substantially differentiate themselves from private enterprises because of the object for which they work. The objectives of public sector enterprises of any country should broadly confirm to the objectives of the state policy which it wants to accomplish through the medium of public sector. The basic objective of the public sector enterprises is to contributing either wholly or in part to the production of the basic goods and services which constitute national and human capital formation of the production of both capital and consumer goods and services.

Public Sector Enterprises in India

Prior to independence, the Britishers who started a few Public Sector Enterprises (PSEs) here and there in order to primarily to facilitate the governance of the country. Thus, a postal system, was introduced in 1766, the first telegraph line was opened in 1851, an ordnance factory was set up in 1834 and railway line were constructed from 1845 onwards carrying a Government guarantee as to the payment of minimum rate of interest on the capital invested. The issue of public sector versus private sector assumed greater significance immediately after the attainment of independence when the country was faced with the gigantic problem of accelerating the pace of economic development and selecting a political and economic philosophy suited to the needs and aspirations. Within a year of the attainment of independence, the Government of India announced the first Industrial Policy Resolution on April 6, 1948 spelling out the role of public sector in the industrial development of the country.

Public Sector and Economic Development

The growth of public sector is inter-linked with the growth and the development of economy operating in a particular country and in a system. The possible area through which the public sector can" bridge the widening gap in the face of economic development of rural regions as compared to urban counterparts are:

1. Development of human resources.

2. Dissemination of knowledge and technology.

3. Improvement in economic infrastructure.

4. Initiation of economic activity.

5. Social and environmental improvement.

The crucial role that the state has to play is about the capital formation which is an indispensable ingredient of economic development. In this context state's role should be to push up public savings and induce savings made at private level. Again, the state can search out for such projects which have got feasibility in technique and are sound from economic view point. Thus, public authorities play a major and significant role in uplifting the economic standards of the people in general.

Disinvestment

Disinvestment is a process whereby the Government withdraws a portion or the total of its equity in Public Sector Enterprises (PSEs). Disenchantment with public sector started in 1970's. It was observed in many countries that the performance of Public Sector Enterprises (PSEs) was far below the expectations. India, for almost four decades was pursuing a path of development in which public sector was expected to be the engine of growth. But by mid-eighties their short comings and weaknesses started manifesting in the form of low capacity utilization, low efficiency, lack of motivation, over-mining, huge time and cost overrun, inability to innovate and take quick decision, large scale political and bureaucratic interference in decision making, etc.

Disinvestment Policy

The present disinvestment policy has been articulated in the recent President’s addresses to Joint Sessions of Parliament and the Finance Minister’s recent Parliament Budget Speeches. The policy states that citizens have every right to own part of the shares of Public Sector Undertakings since Public Sector Undertakings are the wealth of the Nation and this wealth should rest in the hands of the people and while pursuing disinvestment, and Government has to retain majority shareholding, i.e. at least 51% and management control of the Public Sector Undertakings. The Government, while announcing its policy has stated that the main objective of disinvestment is to put national resources and assets to optimal use and in particular to unleash the productive potential inherent in our public sector enterprises.

Rationale for Disinvestment

With the rapid increase in the revenue deficit in the central budget year after year on account of current revenue expenditure on items such as interest payments, wages and salaries of Government employees and subsidies, the Government was hardly left with any surplus for capital expenditure on social and physical infrastructure. Huge amount of public resources are blocked in several non-strategic PSEs giving meager return. Government is forced to commit further resources for sustenance of many non viable PSEs in the absence of an exit route. The main features of Government's present policy towards public sector are:

1. Restructure and revive potential viable PSEs and close down PSEs which cannot be revived.

2. Bring down Government equity in all non-strategic PSEs to 26% or lower, if necessary and fully protect the interests of workers.

The Disinvestment Process and Modalities of Disinvestment

The disinvestment process is related to the procedure adopted by the Government. This procedure involves the valuation of shares and modalities to be adopted for sale of such shares. There are three broad methods which are used for valuation of shares.

1. Net Asset Value Method: This will indicate the net assets of the enterprise as shown in the books of accounts. It shows the historical value of the assets.

2. Profit Earning Capacity Value Method: The profit earning capacity is generally based on the profits actually earned or anticipated. It is an accounting profit. It is excess of earnings over expenditure. It does not really indicate the intrinsic value of the enterprise.

3. The Discounted Cash Flow Method: This technique is popularly used to evaluate viability of an investment proposal. In this method the future incremental cash flows are forecasted and discounted into present value by applying cost of capital rate. This method indicates the intrinsic value of the enterprise. Out of these three methods the discounted cash flow method is of greatest relevance though it is most difficult.

There are three broadly acceptable and transparent modalities for disinvestment. These are given below:

1. Offering shares of public sector enterprises at a fixed price through a general prospectus.

2. Sale of equity through auction of shares amongst pre-determined clientele, whose number can be large.

3. Offer for sale determining the fixed price for sale of a public enterprise, inviting open bidders and accepting highest bidders’ quotation for sale.

Table-1 Investment and Number of Units of Public Sector Enterprises in Five Year Plans

Source: Economic Survey Various Issues.

From the table 1 it has been observed that the total investment at the commencement of the first five year is Rs. 29 crore and the numbers of enterprises are 5 only. At the commencement of the fifth Five Year Plan the total investment in the public sector is Rs. 6237 crore and the number of the units are 122. But at the end of the fifth Five Year Plan the total investment is Rs. 15534 crore and the number of the units are 169. It shows that there is an increasing trend in the investment between the commencement and the end of the fifth five year, which is 149.06 percent more than the investment at the commencement of the fifth Five Year Plan.

But the investment made in the public sector enterprises at the end of Eleventh Five Year Plan ( 31.03.2012) is Rs. 7,29,228 crore which is 73.30 percent more than the investment at the end of Tenth Five Year Plan (31.03.2007). It is concluded from the above discussion that there is an increasing trend in the investment made during the different Five Year Plans due to the increasing contribution of Indian public sector in the economic development but the number of the units have been showing an increasing trend up to the commencement of the Eighth Five Year Plan then there is a decreasing trend at the end of Eighth and Ninth Five Year Plan. The decline in the number of units of public sector may be due to the adoption of liberalization policy in the country.

Table-2 Government Share after Disinvestment in the Public Sector Enterprises of India

*The balance equity is held by state Governments/other collaborators.

From the above table 2, it has been observed that there are sixteen sectors in which Government has made disinvestment up to 2001. Majority of units came under petroleum sector followed by mineral and metals sector and medium and light engineering sector. The public sector enterprises in which government has made highest disinvestment are Gas Authority of India Ltd., Hindustan Petroleum Corporation Ltd., Hindustan Organic Chemicals Ltd., Indian Petrochemicals Corporation Ltd. and Mahanagar Telephone Nigam Ltd.

Table 3
The Budget and Disinvestment Proceeds

(Rs. in Crore)

Source: Economic Survey Various Issues.

Note: *Fiscal deficit from 1999-2000 onward is based on changed system of account of made in the budget for 1999-2000. Accounting to this, loans to states against state's share in the small saving collections are to be made from the especially created 'National Small Savings Fund' under the Public Account.

Utilization of Disinvestment Proceeds

Regarding utilization of disinvestment proceeds, there has been apprehension about its proper use. Either it should be used for the repayment for Government debt, which was initially taken to finance this PEs, or this money should be used for restructuring loss making PEs. The fact lies in that the disinvestment proceeds have been mainly used for meeting budgetary deficit. The Disinvestment Commission had recommended, in its first report that, entire proceeds should go into the disinvestment fund. It will not be used to meet budgetary deficits or revenue gaps. About three years back Government announced that it would set up disinvestment fund and the disinvestment proceeds will flow to this fund. There have been only promises on the part of Minister concerned that the investment proceeds will be properly used for meeting expenditure in social sectors, restructuring using PE’s and retiring public debts. However, it has also been reiterated from time to time that disinvestment proceed will be used for providing additional budgetary support for the plan, primarily in the social and infrastructure sectors. With the result, it remains unknown as to where this money has been used. So the Government has not provided any clear-cut statement on this issue.

National Investment Fund

In 27 January 2005, the Government had decided to constitute a 'National Investment Fund' (NIF) into which the realization from sale of minority shareholding of the Government in profitable CPSEs would be channelized. The Fund would be maintained outside the Consolidated Fund of India. The income from the Fund would be used for the investment in social sector projects which promote education, health care and employment and capital investment in selected profitable and revivable Public Sector Enterprises that yield adequate returns in order to enlarge their capital base to finance expansion/ diversification. The issues regarding disinvestment which are still being debated and which will remain relevant in the coming years are:

• Which areas should not be divested?

• Whether defence production and services should be disinvested and to what extent it is desirable in view of national security.

• To what extent the method of disinvestment can be made open and transparent.

• Out of the various methods of disinvestment which path will lead to fulfillment of declared objectives?

• Should the foreign private investors be allowed to acquire controlling interest in PSEs.

Conclusion

Public sector reforms in India are the need of the hour. The new policy envisages the role of PSEs mainly in strategic areas, high-tech and infrastructural sectors. It was a good decision in the early phase of the new India after independence that the country should have a mixed economy where public and private sectors play their specified goals in the development of the national economy. India has tremendous natural resources, great resource of manpower both in quality and number, and these advantages together with grit, determination and integrity should be able to make India into a great society. Disinvestment can lead to increase in efficiency through better utilization of resources but reckless privatization may not provide the ultimate solution for longer period of time. It is also to ensure that disinvestment does not result in private monopolies and its proceeds are used to meet expenditure on social and infrastructure sectors. Some of the main suggestions based on these findings are as under:

• PSEs should be given professional management and full autonomy in the matter of pricing, investment and employment and chronically sick PSEs should be closed down and their assets should be transferred to the asset management companies to get a right price for the assets.

• There should be more provision for the research and development programmes of the public sector units in order to compete in this global competition and also to improve their efficiency in financial control, cost control and quality control.

• The judge president, deputy judges president and other judges of each high court.

The proceeds from disinvestment should be utilized partly for restructuring PSEs which can become viable and another part is to be used for investment in the social sectors like education, health, water supply and the like.

The author is Assistant Professor, Department of Commerce, School of Management Studies & Commerce,Uttarakhand Open University, Haldwani,Nainital 263139, Uttarakhand, (India)

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