The changing role of the public sector

Before 1991, the public sector was expected to lead the economy. Its roles were:

• Developing infrastructure: roads, power, steel, which private firms could not afford to build.
• Regional balance: setting up industries in backward areas, not only in big cities.
• Economies of scale: big industries that need huge investment.
• A check on concentration of economic power, so that wealth did not pile up with a few private houses.
• Import substitution: making at home goods that India would otherwise have to buy from abroad.

Many public enterprises then began making losses and needed government money year after year. So the 1991 industrial policy set new aims:

• Revive the units that could be made healthy, and close those that could not.
• Bring the government's share in non-strategic units down to 26 per cent or lower.
• Protect the workers' interests.

Four big changes followed:

• Fewer reserved industries: 17 industries were reserved for the public sector in 1956; this fell to 8 in 1991, and to just 3 in 2001: atomic energy, arms, and rail transport.
• Disinvestment: the government sold part of its equity shares in public enterprises to the private sector and the public.
• Sick units were sent to the Board for Industrial and Financial Reconstruction (BIFR), which decided whether to revive or close them. A National Renewal Fund was set up to retrain or compensate workers who lost their jobs.
• Memorandum of Understanding (MoU): an agreement that gives a public unit more freedom in running itself, in return for meeting agreed targets. It is held accountable for the results.

So public enterprises now have to compete with private firms instead of being protected.