Poor Performance of Public Sector Enterprises (9 Causes)!

Cause # 1. Low Capacity Utilisation:

Most public sector enterprises set up in India during the plan period could not utilise their entire capacity which was created at high cost.

In 1999-00, nearly 20% of such enterprises succeeded in utilising 55 to 75% of their capacity and another 25% operated below 50% of their capacity. There are various reasons for such low capacity utilisation such as lack of market survey regarding demand for prod­ucts, transport bottleneck (such as non-availabil­ity of wagons), go-slow practices of workers, power shortage and so on.

Cause #  2. Faulty Manpower Planning:

Most pub­lic sector enterprises have not made any manpower planning. Consequently, manpower is in excess of actual requirements in a number of cases. Moreo­ver, the arrangement for training and education to staff have led to movement of key personnel from the public to the private sector.

Cause # 3. Labour Problem:


The public sector en­terprises have also been hit by labour problems or deteriorating industrial relations. One of the causes of poor performance of such enterprises has been indiscipline among workers. We may also observe deteriorating labour-management relations in most large government enterprises where supervision is a very difficult task.

Cause # 4. Over-Capitalisation:

It is often alleged that most public sector projects have a common characteristic, viz., over-capitalisation. In other words, the input-output ratio is not optimum in most public sector projects. The Study Team on Public Sector Enterprises, appointed by the Gov­ernment in 1967, found over-capitalisation in sev­eral undertakings, viz., Heavy Engineering Cor­poration, Hindustan Aeronautics, Fertiliser Cor­poration (Trombay Projects), etc.

It has identified the following causes of over-capitalisation, viz.:

(i) Inadequate planning,


(ii) Delays and avoidable (wasteful) expenditure during construction,

(iii) Surplus machine capacity,

(iv) Tied aid result­ing in the compulsion to purchase imported equip­ment on a non-competitive basis,

(v) Expensive trunkey contracts,


(vi) Bad location of projects and

(vii) The provision of housing and other amenities on a liberal scale.

Cause # 5. Cost Overruns:

Various surveys made on the working of public sector enterprises in In­dia have highlighted the point that most of the projects took longer time to complete than was initially envisaged. Such delays raised the cost of such projects, putting extra burden on the coun­try’s scarce resources.

The delay in construction time-schedule and the consequent increase in costs are largely attributable to poor and inadequate project planning. For instance, it took about 7 years to complete the Trombay Fertiliser Project against the original estimate of 3 years. Consequently, the final cost figure stood at Rs. 40 crores (approx.) in 1965 compared to the estimate of Rs. 27 crores, made in 1959.

Cause # 6. Political Interference:

In most cases, po­litical factors, rather than commercial considera­tions, influence decisions about location of projects. Plants are located in some States without making any feasibility study about costs just to satisfy political leaders. For example, the Central Government decided to break up the MIG aircraft project into two parts, to be located in Nasik and Koraput, which belong to 2 different States, and one is 900 km. away from the other. Such an ap­proach has led to a huge wastage of the country’s scarce capital resources.

Cause # 7. Wrong Pricing Policy:

The pricing poli­cies of most public sector enterprises are not guided by the principle of profit maximisation, but are controlled and regulated by the Government. Since most public sector enterprises supply inputs like coal, power, steel, etc. to other sectors, prices are kept low even in the face of rising costs. Naturally, commercial profitability is adversely affected. Prof­itability is affected by another factor. Most public sector enterprises do not follow rational pricing policies. They are not guided by any clear-out price policy. Prices are, in most cases, fixed by departmental directives and ad hoc piecemeal or­ders.

Cause # 8. Excessive and Faulty Controls:

There is excessive control over PSUs in India. Stringent financial control is exercised over the operation of a PSU, both by the Ministry of Finance and by the Ministry-in-charge of the undertaking. The control by the Ministry of Finance is revealed by the fact that most PSUs have to submit to all the budgetary controls applicable to Central Govern­ment departments.

The audit of the Auditor-General tends to destroy all the initiative of the enterprises. Politicians also exercise control over PSUs not only regarding their working but also regarding the recruitment of people at various lev­els. Finally, one may refer to rigid Parliamentary control over the operations and capital develop­ment plans of PSUs.

Cause # 9. Inefficient Management:

Most PSUs do not recruit efficient managers. Managers are re­cruited on the basis of certain special criteria. Con­sequently, the managers of such enterprises have failed to define responsibilities and duties of their subordinates. One of the causes of poor perform­ance of public sector enterprises in India had been lack of managerial efficiency and effectiveness.


Most managers cannot take operational decisions quickly. Mostly bureaucrats are recruited as chair­persons, managing directors and managers of PSUs. Most of them are not competent enough to run industrial enterprises. This practice has adversely affected the operational efficiency of such enter­prises.

An Overall Look:

A review of the working of PSU in India reveals that most of them have incurred losses over the entire plan period. Some have, of course, made profit. But the quantum of such profit is very low. Consequently, the overall performance has not been satisfactory. Losses are mounting year after year and PSUs are treated as models of inefficiency. In 1999-01, Government undertakings, 232 enterprises earned a gross profit of Rs. 42,422 crores. Net profit after tax was Rs. 14, 555. Gross profit to turnover was 10.9% and gross profit to capital employed was 14%.