Top 9 Causes of Poor Performance of Public Enterprises in India

Here we detail about the nine causes of poor performance of public enterprises in India.

1. Lack of Importance to Profit Motive:

In the working of public enterprises profitability criteria was not given proper place.

Some of the persons and economists associated with our Planning Commission who formulated policies on public sector enterprises as well as those who were entrusted with setting them up and running them played down the idea of profit making by public enterprises and unduly emphasized the social obligations of public enterprises. It is only recently that profit aspect of public enterprises has been given due recognition.

2. Inappropriate Location:

An important reason for the low profitability of public enterprises is their uneconomic location. Usually, public enterprises are set up on the basis of political considerations rather than economic criteria. There is clamor for locating these enterprises in certain regions on the part of the ruling party bosses, influential ministers and public leaders even at the threat of fasts.

3. Underutilization of Installed Capacity:

Low utilisation of capacity has been a very important reason for the low profitability of the public undertakings. Enormous installed capacities have been created with the help of foreign credits and know-how on easy terms, but fuller use of them has not been made. The phenomenon of underutilization of capacities has arisen on account of overestimating demand, administrative deficiencies, lack of proper working techniques, labour troubles or failure to install balancing equipment or making technical improvement essential for fuller utilisation of capacity.

4. Not Making Proper Technical Feasibility Studies:

The technical factors determine the scale of operations of production enterprises. Technical considerations require that there should be a thorough investigation into the processes to be used and the availability of the essential factors of production like raw materials, fuel, power, water supply, skilled and unskilled labour, credit facilities, transport, proximity of the markets, etc.

In several cases, there is no evidence that a proper study of these aspects was made before the project was launched. The scale was determined more by a bias for launching a big project rather than on the basis of economic calculation of production potential and likely demand. The Committee on Public Undertakings pointed out that tenders were invited without any project reports in the case of Trombay Fertilizer Project, Hindustan Insecticides and Indian Telephone Industries.

5. Delay in Project Completion:

Also, very little consideration is given to the time-schedule in the construction of the public sector projects. The inevitable result is that the projects are commissioned much later than scheduled. It unnecessarily raises the cost of construction. Trombay Fertilizer Project, for instance, took 6-7 years to complete against time schedule of 3 years and this heavily raised the cost of the project.

6. Absence of Professional Management:

The composition of the Boards of Directors indicates the absence of professional managers. These boards are dominated invariably by IAS officers from the civil service, a number of whom owe their position to political patronage rather than their professional managerial abilities.

The Committee on Public Undertakings remarked that the civil servants are costly on account of the burden of deputation pay and leave-salary and pension contribution. The use of civil servants such as IAS officers is not conducive to efficiency as by their attitude and training, they are used to a different way of working, which hardly fits into a business organisation.

7. Overstaffing, Defective Recruitment and Promotion Policy:

With regard to staffing, recruitment and promotion policy a deplorable situation exists in our public sector. Recruitment is haphazard; there is overstaffing, drift of personnel and a lack of regular schemes of ‘executive development’. The Committee on Public Undertakings pointed out the bureaucratic approach to the administration of these undertakings and warned against the regular practice of dumping retired and superannuated Government officials into their service.

8. Lack of Rational Pricing Policy:

The public enterprises in India have failed to evolve an appropriate pricing policy for their products. Should public enterprises follow marginal cost pricing or average cost pricing or the mark-up pricing policy? In the absence of an appropriate pricing policy, optimal utilisation of resources and profitability cannot be achieved.

Most of the public enterprises are regulated by the Government and do not aim at maximising profits. It is worth noting that most of the products produced by the public enterprises such as steel, fertilizers, oil etc. are essential inputs for other industries or sectors of the economy.

It will be anti-growth and socially improper if the public enterprises follow profit-maximising pricing principle and fix high prices of the essential products produced by them. The appropriate pricing policy for public enterprises is to follow mark-up pricing principle with reasonable profit margin.

9. Political Interference:

The political interference has been forcing the management of public enterprises to give up sound commercial principles in arriving at vital decisions pertaining to investment, location, production and pricing policies of public enterprises.

Most often political considerations guide the decision making of the public enterprises. Ministers and Members of Parliament put pressure on the government about the location of the public sector projects in their constituencies regardless of any economic criteria and feasibility studies made. This leads to considerable wastage of capital resources.

Conclusion:

The relatively low surpluses created by the public enterprises are attributed to their long gestation period, the lack, in the initial period, of expert and trained personnel, defective planning, wrong selling policies and monopolistic nature of various public enterprises which produced lethargy among the managerial staff.

It is true that there may be losses in the initial stages but the losses should not have become a permanent phenomenon. The public enterprises suffer from inefficiency and low productivity due to lack of an effective system of accountability. It is the system of accountability in the private sector which leads to an efficient utilisation of resources which ensures profitability.