Let us make an in-depth study of the guidelines and reforms of new public sector.

Guidelines that have Redefined the Role of Public Sector:

The following guidelines have redefined the role of the public sector since July 1991:

1. The public sector should make invest­ments only in areas where investment is of an in­frastructure nature which is necessary for facilitat­ing growth as a whole.

2. Secondly, the public sector may also with­draw from areas where no public purpose is likely to be served by its presence. It is, however, stated that the public sector “should come in where the investment is essentially for preservation and aug­mentation of the resources of the country, like land, forests, water, ecology, science and technol­ogy or for running infrastructural activities. The public sector will have responsibility for meeting social needs or for regulating long-term interests of the society like population control, health, edu­cation, etc.”


3. Thirdly, in large-parts of the public sector operations where commodities are produced and distributed—unless it is necessary for protecting the poorest in the society—the principle of market economy should be accepted as the main operating principle. It means charging as per cost and costing with full efficiency in operations.

Public Sector Reforms in India:

In the last 6 years, there have been four posi­tive developments with respect to the reform of India’s public sector enterprises. According to Dr. Bimal Jalan, the Governor of the RBI, the most significant for the future is the partial disinvest­ment of equity of selected enterprises. In most cases, however, the extent of disinvestment is very small (less than even 20% of equity). But it is no doubt an important first step in the commercialisation of enterprises and in making them subject to public scrutiny and accountability.

Secondly, public sec­tor enterprises including commercial banks are now encouraged to raise fresh equity directly from the public rather than depend on government sub­sidy. If this measure is properly taken the future expansion of enterprises would depend on their ability to attract capital from the public. This, of course, will depend to some extent on their finan­cial performance.

Thirdly, public sector monopo­lies called ‘natural monopolies’ are now forced to face competition from new private enterprises in most sectors. According to Dr. Jalan, “A competi­tive environment is a necessary, though not, suffi­cient condition for efficient use of resources by enterprises”.


Fourthly, steps are being taken to make the institutional relationship between the government and commercial enterprises more con­tractual and less ad hoc. It may be noted that the Central Government has signed a memorandum of undertaking with more than 100 commercial en­terprises in the past few years. No doubt a formal and contractual relationship is more conducive to better performance than an informal and ad hoc system of supervision and control.

However, these measures are not sufficient to impart the needed dynamism to the economy and to remove fiscal deficit. India’s internal debt has reached a staggering figure and is becoming unmanageable day by day. Moreover, it is no longer possible and economically feasible to provide any revenue or capital support to public enterprises.

In truth, in the next few years, fiscal discipline as also welfare objectives for the poor require that the burden of interest payments on internal debt is drastically reduced. This is likely, if part of the public sector assets are sold to the public and re­ceipts are used to retire public debt. A more posi­tive policy is now required for partial disinvest­ment in profit-making enterprises and outright sale of losing concerns.

The combination of partial sale of equity in profit-making enterprises and outright sale of los­ing and sick enterprises can generate substantial resources. Moreover, shares of well-performing enterprises including banks can be sold at a sub­stantial premium over book value. The sale of los­ing concerns, in addition to recovering the costs of some past investments, will also relieve the budget from the burden of financial losses of such enterprises.