Public sector enterprises in India : a descriptive survey

DOMESTIC FINANCE STUDIES NO.25 PUBLIC SECTOR ENTERPRISES IN INDIA: A DESCRIPTIVE SURVEY By Suman K. Bery Public and Private Finance Division Development Economics Department Development Policy Staff October 1976 This draft was originally prepared in October 1972. It has been included in the "D.ncstic Finance Studies" series in order to make it available to other interested persons in the Bank. It has not, however, been either updated or substantially revised since 1972. TABLE OF CONTETS PAGE NO. 1. SIZE AND STRUCTURE OF THE PUBLIC ENTERPRISE SECTOR 2. THE PERFORMANCE RECORD OF THE PUBLIC SECTOR ETERPRISES 22 3. CCCLUSION 35 ANNEX NO. 1, NON-DEARTYMTAL, NON-FINANCIAL UNDERTAKINGS OF THE CENTRAL GOVERNET AS OF MARCH 31, 1971. i - iv 2 REFERCES. v Notes: The Indian Financial Tear runs from the April 1 to March 31. $1 - Rs. 7.28 $13.74 - Rs. 100 1 crore = 10,000,000 Rs.1 crore $1,373,626 ARC = Adninistrative Reforms Cormnission. BFE = Bureau of Public Enterprises. HLS = Hindustan Steel Ltd. ICICI = Industrial Gredit & Investment Bank of India. B =Industrial Development Bank of India. IFCI = Industrial Finance Corporation o£ India. LIC = Life Insurance Corporation of India. PSE = Public Sector Enterprises. RBI = Reserve Bank of India. SFC = State Finance CorDoration. UTI - Unit Trust of India. LIST OF TABLES TABLE NO. PAGE NO. 1 Surmary Table on the Central Government's Non- Financial, NonDepartmental Undertakings giving Total Investment (as of March 31, 1971) and Net Trading Profit/Loss for 1970-71. 6 2 Gross Fixed Capital Formation in the Public Sector. 8 3 Share of Government Sector Output in Net Domestic Product at Lurrent Prices. 9 4 Public Sector in the idia Economy: Selected Indicators. 11 5 Interest Rates Charged Central Government Undertakings. 21 6. Contribution to the Public Exchequer by the Non- Financial, Non-Departmental Central Government Under- takings. 27 7 Trends in Gross Sales/Income of Non-Financial Non- Departmental Ehterprises of the Central Government. 30 8 . -The Ten Largest Loss-Making Non-Departmental Non- Financial Undertakings of the Central Government in 1970-71. 32 9 Financial Ratios for Public and Private Sector Manufacturing Industry. 33 1 SIZE AND STRUCTURE OF THE PUBLIC ENTERPRISE SECTOR The aim of this paper is-to provide a concise description of the organization and working of Public Sector Enterprises in India, to give some idea of their importance in the Economy, and to look at some sumnary indicators of their performance, including their role in resource mobilization. While enterprises under the administrative control of the State Governments and departmental undertakings at the State andCentral level will be briefly con- sidered, the major focus will be on the non-departmental, non-financial undertakings of the Central Government. Since the First Five Year Plany,and particularly since the Industrial Policy Resolution of 1956, the Indian Government has laid sub- stantial stress on the role the 'public sector' is to play in'the industrial development of the Indian economy. In executing this policy the Government has created a bewildering maze of organizational types. Finding one's way through this maze is important for an undertstanding of the institutional structure of the public sector; it is important also in understanding the precise scope of statistics issued by a variety of bodies each covering only certain parts of the public sector. Indian public sector enterprises can be classified by their legal form, the functim they perform, or the level at which they are incorporated: Centre, State and,Municipal. The legal form of the myriad financial institu- tions,including the Life Insurance Corporation,Unit Trust of India, the Industrial Development Bank of India, the nationalized banks, the State Bank of India and its subsidiaries etc., is somewhat atypical and is dealt with separately. Other industrial and commercial undertakings in the public sector belong to one of the following categories: departmental undertakings, -2- government companies and public corporations. The salient characteristics of each are as 'ollows: (i) Departmental Undertakings are financed directly by the Treasury and are subject to the accounting and auditing controls applicable to government activites. Their perman- ent staff consists of civil servants whose conditions of recruitment and service are the same as for other civil servants. At the Central level these undertakings include the Railways, the Posts and Telegraphs department and the Ordnance Factories of the Ministry of Defense. At the State level the most common departmental undertakings are the electricity generation schemes, the irrigation schemes the the various handicrafts marketing boards. (ii) Government Companies are the form in which the bulk of the public sector undertakings have been established, both at the State and the Central level. These are joint- stock companies established by the relevant government, State or Central, under the supervision of an 'administra- tive Ministry', with the majority if not the totality of the equity held by the Government, and with the G6vernment usually the major source of loan capital as well. Government companies are created by an Executive decision of the Ministry concerned within the framework of Parliamentary law but-without the need for specific Parliamentary approval of the Articles of Agreement. These Articles may, therefore, be revised unilater- ally by the Ministry; they also,typically,provide the Ministry with certain powers of approval and appointment as detailed below. Such companies are in general exempt from the acount- ing and audit procedures of the Government and their employees, aside from ' .-e on deputation, are not civil servants. At both the Cen 1 and State levels the functional range of Government co:.panies includes manufacturing, trading , promotional and financial concerns. A recent innovation within the Government company form is the holding company to be established in the steel sector. We shall discuss this below. (iii) Public CorDorations are bodies created under a specific act of Parliament (a Central Enabling Act in the case of State Corporations), which defines the purpose of the corporation, its powers and privileges and its precise relationships with the Government and with Parliament. These institutions are not subject to governmental audit procedures and, again apart from those on deputation, their employees are not government servants. Except for appropriations to provide capital or to cover losses such corporations are usually non-departmentally financed, either by borrowing from the Government or the public, or from the sale of goods and services. The major public corporations established at the Central level include the country's national and inter- national airlines and the Food.Corporation of India. At the State level it is usual for the State Electricity Boards, State Transport Corporations and State Finance Corporations to be chartered as public corporations under Central Enabling Acts. The choice of legal form for the various enterprises appears to be made ad hoc. In the early fifties the public corporation structure was in vogue; since then Government companies have become more favored, presurably because of the independence of Parliament this permits the Government and the comparative ease of their creation. One byproduct of this has been a proliferation of companies to perform allied roles in the same sector, rather than the entrusting of mew functions to established institutions. The working of the Central Government enterprises is a matter for Parlia- mentary scrutiny and the specialised committee which deals with these issues is the Select Committee on Public Undertakings in the Lok Sabha. It is extremely difficult to get consolidated accounts for the entire public enterprise sector. Information for State and Local Enterprises can be gleaned either by looking at the annual reports of the enterprises or by looking at State budgets. In the case of Central Undertakings, depart- mental undertakings are covered within the Central Budget and information on the principal ones is provided in the Explanatory Memorandum to the annual budget. In the case of the non-departmental undertakings of the Central Government the best source is the Bureau of Public Eaterprises'"Annual Report on the Working of Industrial and Commercial Undertakings of the Central Govern- ment" (hereafter BPE "Annual Report") which'however excludes banking and financial institutions. This Report categorises the Central Governments' non- departmental, non-financial institutions under the following heads: (i) Undertakings under Construction. (ii) Running Concerns - Hindustan. Steel Ltd. (HSL) (iii) Zunning Concerns - industrial and Manufacturing (other than HSL). (iv) Running Concerns - Trading. (v) Running Concerns - Commercial and Miscellaneous. (vi) Promotiona2 and Development-Undertakings. (vii) Life Insurance Corporation of India. A list of the enterprises included in each of these categories as on Iarch 31, 1971 together with the name of the administrative ministry, the year of incorporation, the total long-term capital invested and the profit and loss picture is attached as Annex 1. Table 1 provides the same information in summary form. Information on the nationalized banks and the various term lending institutions, is available either from their annual reports or from analyses performed periodically by the Reserve Bank of India (RBI) in its monthly Bulletin. The Bulletin also analyses, frcm time to time, the finan of the non-departmental Central Government Enterprises, but the usefulness c1 this information is restricted by the fact that only government companies are considered and the fact that the sample being considered is not made explicit. Detailed information therefore is most readily available from the BPE nAnnual Report". Our discussion of tperformance, below will be restricted to the "Running Concerns" covered by the 1970-1971 Report, including Hindustan Steel Ltd., and Promotional and Development Undertakings but excluding the Life Insurance Corporation (since the LIC does not appear in the consolidated accounts). One non-governmental publication which makes an extremely valuable attempt at collating data drawn from various sources is "Commerce" magazine's Yearbook of the Public Sector. To convey same idea of the relative sizes and importance of these categories the following figures may be of interest. According to the Explanatory Memorandum to the 1971/72 Central Budget, capital invested upto the end of 1969/70 in the nineteen 'major' departmental undertakings of Central Government was Rs. 3725 crores of which the Railways alone accounted for 1/. Rs. 3195 crores (7, p.126). The total investment in the non-departmental undertakings of the Central Government (including undertakings under 1/ See Annex 2, References, page v. 二 7 construction and promotional and developmental undertakings but excluding financial institutions) was Rs. 4681,,crores of which Hindustan Steel Ltd. accounted-for Rs. 1036 crores (Table 1).. L-,Lf ormation on investment in enterprises chartered at the State level is difficult to come by; a Bara-, Mission in :1969 estimated that "there are about 250 public sector industrial and mining enterprises., of which sixty, accounting for about 90 percent of total investment, are owned by the Central Government, and the rest by the States.'? (14, P-43). Owing to the paucity of data,, State enterprises are scarcely discussed at all in this paper but it would clearly be of interest to have more information on their financial and savings performance as well as on the rate of investment in them. Having given some rough idea of the relative sizes o the components I of the public sector, it is of interest to ask of the relative importance ot' the public sector in the econor,7. The Bank Mission referred to above estimated that in 1969 the contribution of centrally-owned public sector industr.7 to all value added was about 9 - 0 percent, as compared to 3. 6 percent in 1960/61 . (14, p.28). The same report concluded that "fully two-thirds of manufacturing investment du: ing the 1960s appear to have been in the private sector,, although the impression usually gained from the Plans is that it is the public sector that has dominated"(14, p.32)1. These figures refer only to public sector industry; -estimates for the share of the entire public sector in total Gross Fixed Capital Formation are presented in Table 2 which unfortunately also only extends to the mid -sixties. The Share of Government Sector Output in Net Domestic Product at Current Prices is given in Table 3. From these indications it is clear that while the GovernmentIs direct role in thee=oxy has indeed been increasing, the process has been more graidual and the overall position of the Government less camianding than is sometimes believed. This -------------- ............. .......... Table 2: GROSS FIXED CAPITAL FORMATION IN THE PUBLIC SECTOR (Ro. crores) Public Sector Total Percent Share in rivlte gross total gross fixed Adminis- Depart- Non-de- Total sector fixed capital formation YEAR trative mental part- Col.6 capital depart- enter- mental minus formation ments, prises under-L. Col.4 Public private takings sector sector 1 2 3 4 5 .6 7 8 1950-51 N.A. N.A. 7 N.A. N.A. '856 - - 1951-52 N.A. N.A. 12 N.A. N.A. 879 - - 1952-53 78 181 43 302 523 825 36.6 63.4 1953-54 96 207 31 - 334 512 846 39.5 60.5 195-55 119 252 33 04 558 962 42.0 58.0 1955-56 175 323 37 535. 676 1,211 44.2 55.8 Average for 1952-53 to 1955-56 117 241 36 394 567 861 41.0 59.0 1956-57 181 381 53 615 912 1,527 40.3 59.7 1957-58 182 396 256 834 692 1,526 54.7 45.3 1958-59 190 390 179 759 764 1,523 49.8 50.2 1959-60 223 363 391 977 711 1,688 57.9 42.1 1960-61 278 438. 337 1,053 968 2,021 52.1 47.9 Average for 1956-57 to 1960-61 211 394 213 8648 809 1,657 51.2 48.8 1961-62 300 453 350 1,103 1,108 2,211 49.9 50.1 1962-63 345 554 409 1,308 1,266 2,574 50.8 49.2 1963-64 390 652 518 1,560 1,509 3,069 50.8 49.2 1964-65 437 730 650 1,817 1,585 3,402 53.4 L6.6 1965-66 475 782 822 2,079 1,946 4,025 51.7 48.3 Average for 1961-62 to 1965-60 389 634 550 1,573 1,483 3,056 51.5 48.5 Source: Commerce Yearbook of the Public Sector, 1971, p.18 Derived from: R.N. Lal, "Capital Formation in Indiat 1950-51 to 1965-66," submitted at the Seventh Indian Conference on Research in National Income, Hydorabad, January, 1970. Table 3: SHARE OF GOVERNMENT SECTOR OUTPUT IN NET . DOMESTIC IRODUCT AT CURRENT PRICES. Total Net domestic peoduct generated in * Net IEAR domestic Government enterprises Government Government product administra- sector Departmental Non- Total tion as a whole enterprises departmental Cols. Cola. enterprises (2 4 3) (4 + 5) 1 2 3 5 5 6 1960-61 13,366 522 162 684 735 1,419 (100.0) (3.9) (1.2) (5.1) (5.5) (10.6) THIRD PLAN 1961-62 14,148 582 188 770 825 1,595 - (100.0) (4.1) (1.3) (5.4) (5.9) (11.3) 1962-63 14,981 637 270 907 923 1,830 (100.0) (4.2) (1.8) (6.0) (6.2) (12.2) 1963-64 17,208 731 332 -1,063 1,063 2,126 (100.0) (4.3) (1.9) . (6.2) (6.2) (12.4) 1964-65 20,209 780 384 1.164 1,208 2,372 (110.0) (3.8) (1.9) (5.7) (6.0) (11.7) 1965-66 20.786 890 483 1,373 1,367 2,74o (100.0) (4.3) (2.3) (6.6) (6.6) (13.2) ANNUAL PLANS I,66-67 1/ 24,136 959 560 1,519 1,546 3,065 (1O.0) (4.0) (2.3) (6.3) (6.4) (12.7) 1967-68 y 28,633 1,010 665 1,675 1,780 3,445 (100.0) (3.6) (2.3) (5.9) (6.2) (12.1) 1968-69 1/ 28,936 114 811 1,951 1,994 3,9115 (1c0.o) (3.9)* (2.8) (6.7) (6.9) (13.6) 1 Provisional (i) figures within brackets indicate percentages to not domestic product shown in Col.1 (ii) The revisod series data are available only from 1960-61 onwards. Source: Commerce Ye.rbook of.Public Sector, 1971, p.291. Derived from: "Centrl Statistical Organization, Estimates of National Product (Revised Sories)i 1960- 61 to 1969-70; Mky 1971, Tables 7 and 7.1 pp.12-13. _ 10- should not be allowed however to gainsay the preeminence of the public sector in certain strategic sectors, as indicated by Table 4. To the extent that the focus of public sector investment has been to seize control of the commanding heights of the economy, this has been partially achieved. We turn now to a more-detailed scrutiny of the non-financial non- departmental undertakings of the Central Government, including an account of their administrative and capital structure, their rate of growth and, in the next section,some assessment of their performance, financial and otherwise. Unless otherwise stated the coverage of these remarks is intended to include all rmning concerns, including promotional and developmental undertakings but to exclude the Life Insurance Corporation and other financial institutions. As noted above non-departmental undertakings occur in two legal forms: the public cc.poration established by a specific Act of Parliament, and the Government company established by an ordinance of the Government of India within a framework prescribed by the 1952 Companies Act. Of the 87 concerns included in our coverage only 7 are constituted as public corpora- tions, namely the Food Corporation of India, Cotton Corporation of India, Central Warehousing Corporation, the National Research Development Corpor- ation, the Oil and Natural Gas Commission, Air India and Indian Airlines. The other firms are all established as Government companies. The Bureau of Public Ehterprises classifies a company as a "Government Company" if the Central Government ownes the majority share in the firm's equity. The Bureau has an additional classification for "Undertakings with Central Government Investment without Direct Reponsibility for Managementti. There were twelve such undertakings in March 1971. Table 4: PUBLIC SECTOR IN THE INDIAN ECCNOMY: SELECTED INDICATORS. Public Public sector Sectors Unit Period sector Total as per cent of total 1. Agriculture etc.: Value added .. .. .. .. .. Rs. cr. (B) Neg. 15,614 Neg. 2. Mining and quarrying: Raising of coal and lignite .. .. .. .. mt (A) 21.54 74.59 28.9 3. Gross value of output in manufacturing: Registered sector .. .. ., .. .. Rs. cr. (C) 1,929 15,887 12.1 (i) Fertilisers (capacity) Nitrogenous .. .. .. .. .. '000 tonnes (J) 696 1,346 51.7 Phosphatic .. .. .. .. .. '000 tonnes (J) 91 437 20.8 Production: (il) Refined petroleum products .. .. .. mt . (D) 11.0 18.5 59.5 (ill) Indigenous crude oil .. .. .. .. m t (D) 6.8 6.8 100.0 (iv) Steel ingots .. .. .. .. .. mt (A) 3.69 6.11 60.4 (v) Saleable pig iron .. .. .. .. mt (A) 0.97 1.27 76.4 (vi) Finished steel .. .. .. .. .. mt (A) 2.26 4.73 47.8 (vii) Heavy industrial machinery .. .. .. Rs. cr. (B) 20.49 20.49 100.0 (viii) Machine tools .. .. .. .. .. Rs. cr. (B) 13.00 24.34 53.0 (Wx) Heavy electrical equipment .. .. .. Rs. cr. (B) 70.64 70.64 100.0 (x) Defence .. .. .. .. .. .. Rs. cr. (A) 121.60 121.60 100.0 4. Gross value of output in manufacturing: Small-scale manufacturing .. .. .. .. Rs. cr. (B) Nil 1,694 Nil 5. Construction. Cement despatches .. .. .. .. .. '000 tonnes (D) 4,434(a) 13,822 32.1 6. Electricity, gas and water supply: Power (installed capacity) .. .. .. .. Million kw. (1) 15.2(b) 16.7(b) 91.0 7. Transport and communications: () Railways .. .. .. .. .. Route km. (T) 59,684 60,138 99.2 (ii) Passenger buses .. .. .. .. Number (E) 31,714 85,490 37.1 (iii) Air transport .. .. .. .. .. km. flown ('000) (D) 715,789 720,444 99.4 (iv) Shipping . .. .. G.R.T. (lakh) (H) . 8.6 24.4 35.3 8. Banking: (i) Aggregate deposits .. .. .. .. Rs. cr. (G) 5,101 6,080 83.9 (ii) Branches .. .. .. .. .. Number (F) 9,887 11,892 83.1 9. Insurance: () Life (new business) .. .. .. .. Rs. cr. (A) 1,303 1.303 100.0 (ii) General (gross premium) .. .. .. Rs. cr. (B) .32.57(c) 130.44 25.0 NOTES : m t = million tonnes : Rs. cr. = Rs. crores ; Neg. = Negligibie ; (a) = Relates to rate contract despatchcs: (b) = Excludes power generation capacity in the industrial units mostly for sclf-consumption ; (c)=Thc management of all the companies cngaged in general inst.trance business was taken o6er by the Government with Cfect from Nlay 13. 1971. (A) = For 1970-71; (1) = For 1969-70; (C) = For 1968-69; (D) = For 1970; (E) = End of March. 1969 (F)-As on June 30, 1971; (G) =As on May 7, 1971 ; (H) = As on April 1, 1971 ; (1)=As on March 31, 1971. (J)=As on January 1, 1971. Source: "Commerce" YeTrbook of the Public Sector, 1971. - 12 - The exact provisions of the Articles of Association clearly differ from company to company. However the study team on Public Sector Undertakings of the Administrative Reforms Commission (ARC), which in 1967 investigated the workings of much the same enterprises with which we are concerned; analysed the relevant Acts and Articles of Association and reported that "generally powers have been reserved to the Government in the following matters: (i) Appointment of the Chairman and Members of the Governing Board. (ii) Appointments, or approval of appointments to posts carrying salaries above a certain level and to the post of Financial Adviser/Financial Controller. (iii) Capital Expend. 'ure above a certain amount. (iv) Sanction for upward variations in estimates of over 10 percent in cases where the DPR (Detailed Project Report) with detailed estimates has already been approved by the Governme.t. (v) Matters connected with borrowings, investments in securities, distribution of profits etc. (vi) Appointment of the auditors; except in statutory corporations in which the Comptroller and Auditor-General has been designated as the auditor. (vii) The power to issue such directions or instructions as may be considered necessary to ensure.that the conduct of business of the undertaking is in conformity with the policies laid down by the Government, and (viii) in a few nases, rules relating to the terms and conditions of service of employees of the public under- taking s. -13 The Study Team further noted that "there is no significant difference in this respect between the Statutory Corporations and the Government Companies," (1 p.10) In response to recommendations made by the Administrative Reforms Co=mission, there have been formal moves made since its report to allow greater autonomy to the enterprises themselves. Some of these were enunciated in a document entitled "Public Sector Eaterprises, A Memorandumn issued by the Ministry of Finance in 1969. The most important change was with respect to (ii) above, the power to make top level appointments. Whereas prior to the change the administrative Ministry had to approve all appointments above a given salary level, this was altered so that only Chairmen and Members of the Boards of Directors and the General Managers of constituent units were' henceforth to be appointed by the Government; leaving all appointments below the Board level including the post of Financial Adviser at the discretion of the management of the public enterprises without any reference to Government (.p.6). The composition of the Boards of Directors of these firms, and the status of the chief executive differs from firm to firm; in some, the Chairman of the Board is also the Managing Director; in others the Chairman is a part-time officer with operations-the responsibility of a full-time Managing Director. The IMemorandun endorsed a move to full-time Functional Directors as executive heads of departments in each firm (paragraph 13). Furthermore the "Memorandum" also announced the Government's decision that as a rule no officer of a Ministry should be made Chairman of a Public Undertaking, nor should the Secretary of any Ministry be included in its Board of Management (paragraph 13). These moves were in response to the ARC's recommendations, the view being that the high propor- tion of board memberships held by Government officials (on a part-time basis) led to the Board acquiring the character of a Government Committee rather than that of an autonomous board of management. One further consideration 'was that the existence of a large proportion of ex-officio appointments led to a very high turnover of board members and hence a lack of continuity in company policy (1,p.110).These policy changes were announced in 1969: precisely what effect they have actually hFd in appointments and functional relationships is uncertain. The fourth Plan concurred with the ARC in its definition of problem areas in the administration of public enterprises: "The problems involved are thoserelating to the development of an appropriate relationship between the enterprises on the one hand and Government and Parliament on the other, which would leave adequate initiative and operational autonomy to the manage- ment. Government should be primarily concerned with reserving for itself only such powers as are required to determine questions of policy and to ensure that the programmes of the public enterprises conform to the accepted plans and that the enterprises are run on commercial lines". (12, p.313). The diagnosis of the major problems therefore exists; translating this into effective policy is a process which is still very much underway. Another vexed issue has concerned the practise of deputing officers from the administrative services for spells of service as managers in the public enterprises. As with the Board, this has led to frequent changes in senior positions, lack of co,mitment to the organization and low morale amongst career employees of the enterprise. The Government has recognized the undesirability of this practise and is seazed of the need to develop a cadre of professional managers within each enterprise and within the enterprises as a group. It has tried to achieve this by forcing deputationists to choose permanently between their civil service cadre and the enterprise for which they worked. While most opted for reversion to their cadre a number have in fact continued working in the enterprises,changing the situation very little. Quite apart from the formal powers which the Government arrogates to itself, there is a large area of informal control as well. To an extent this is connected with the problem of civil servants on deputation referred to above since, as the ARC noted, "Trained and habituated as civil servants are to implementing ministerial directions, it is difficult for them to take ministerial advice less seriously than Government orders. Further, being junior in service to the senior officials of the Iinistry, it is not possible for them to disregard official advice howsoever informally given." (1, p.120). Thns although Governmental policy control is suppos.e&to be exercised through the issue of formal directives, in practise these are seldom if ever used, policy control being exercised instead in ways which dilute accountability and deter professional management. The effect of this Governmental intervention as seen by o.e of the professional managers in the enterprises is indicated by the following extracts from a speech given in 1971 by Dr. S.M. Patil, Chairman and Managing Director of Hindustan Machine Tools Ltd., one of the more successful public sector enterprises. He complains that, "there is still ...... an excessive degree of Government control over the management of the public sector enter- prises, in spite of the fact that in the meantime there has been a groing sense of participation among the managers of the public sector enterprises who over a decade have also acquired business acumen and managerial capabil- ities and yet have not been rewarded with greater autonomy they deserve. For instance ... although public sector enterprises are now notionally free to fix their own salary scales, in practice they are still controlled by the Government because Government continues to fix the salaries of the chief -16- executives of the public sector undertakings ... .Government control goes to the length of making every new post carrying a salary of Rs. 2,500 per month and above...." (1 , p.h63). Mr. Patil ends his lament with a rhetorical question. "Is it therefore surprising", he asks, "that finding their every action potentially questioned in turn by their Board of Directors, their Ministry, the Bureau of Public Enterprises, the Comptroller and Auditor-General, the Parliament, the Enforcement, the Special Police Establishment and the VLgilance Comdissioner, many chief executives of the public sector enterprises and their senior officers prefer to play safe and make the avoidance of any error,,however minor it may be, their principal objective rather than to manage their enterprises with, confidence,decisiveness, boldness and despatch?" (15,p.465). It is clear from these remarks, as from other references to these issues elsewhere that the problem of combining autonomy with accountability is far from having been ,satisfactorily resolved in India. Very recently the Government has taken-a fresh initiative to try and deal with these problems in the establishment of a [holding company' for the steel sector. This 'holding company' will differ from Hindustan Steel Ltd. in that it will include not only all the steel plants in the public sector but also related activities such as iron ore mining, coking coal mining and development and so on. The new company will be established as a joint stock company and not as a statutory corporation, and will in turn hold the equity capital owned by the Central Government in all the corporations. to be brought -thin its ambit. The Chairman of the company will himself enjoy the -status of Secretary to the Government (the seniormost Civil Service title). This move appears designed to separate policy making from operational control. The details of the institution of the new company are being worked out by the -17- Chairman of the new company (who has already been named and who previously worked in the private sector), rather than by the Steel Ninistry. According to one source, "the Steel Ministry and the Department of Steel, as we have known them, will cease to be once the holding company is formed and its Chairman is invested with the status and powers of a Secretary to the Government" (5, p.1401). If successful, the holding company idea will be extended to other industries. This move could, therefore, lead to a radical redefinition of the relationships between the Government and the enterprises, though much will depend on the manner in which the Articles of Agreement are fra::ed, how much power the Government voluntarily cedes and how working practise evolves. This move would also meet another criticism of the ARC which rightly cozi.mmented that "there is no single autonomous authority in each industry charged with the development and functioning of the industry. In that sense it may be said that we have no nationalized industry we only have individual under- takings functioning in an area of industry reserved for the public sector" (1, p.6). The holding company hopefully, will emerge as the agency for promoting coherent sectoral development under policy direction from the Government. We turn now to a brief discussion of the capital structure of the public sector enterprises. The Government's broad policy has been to achieve parity between equity and debt for the non-departmental enterprises. As will be seen from Table 1, this has been achieved taking the sector in aggregate with equity amounting to 49 percent and long-term debt to 51 percent of the total investment. Almost 90 percent of all long-term capital has come from the Central Government (Rs. 1157 crores). The remaining 10 percent has been - 18 - put up by State Governments, Private Parties (Indian) and Private Parties (foreign). Of these three, the last category is the most important accounting for Rs. 433.9 crores, or 9.2 percent of total investment. The bulk of this foreign investment is in the form of deferred credits and loans, rather than equity (9, p-5). The transfers of resources from the Central Government to the enterprises are provided for in the annual budget. The working capital and short-term finance requirements of these enterprises are met by borro-wing from the State Bank of India and, of late, the nationalized commercial banks as well. The aggregate outstanding in the way of overdrafts under these cash credit arrangements on March 31, 1971 was Rs. 311 crores. (9. p.3). The financial and organizational structure of the various financial institutions is rather different. The apex institution in this realm is the Reserve Bank of India (RBI) which however channels the bulk of its term-lending assistance through its wholly owned subsidiary, the Industrial Development Bank of India (IDBI). At th, end of May, 1972 the total paid up capital of the IDBI was Rs. 40 crores; its total borrowings were Rs. 251 crores, Rs. 78 crores of which came from the RBI and the remainder from the Government (16, p.1292). These funds are utilized for a variety of purposes: to extend term finance to the private sector, directly through extension of credit and purchase of equity; to underwrite security issues; to refinance the State Finance Corporations (SFCs) and to subscribe to sharef, and bonds of other financial institutions. Of all the domestic finance companies the IDBI has the widest on its own initiative. mandate and can go so far as to establish new enterprises / The IDBI is also expected to play a 'co-ordinating' role with respect to the other DFCs and the State Finance Corporations. The other important DFCs at the national level are the Industrial Finance Corporation of India (IFCI) which is the oldest of the DFCs and the Industrial Credit and Investment Corporation of India (ICICI). There has also recently been established the Industrial -19 Reconstruction Corporation of India (IRCI) with a-specific mandate to deal with the problems of sick industries in the eastern regions of India. All these institutions are chartered as public corporations and while both the Reserve Bank and the Department of Banking of the Ministry of Finance take an interest in their operations, there appears to be reasonable autonomy in day-to-day operations. The Boards of these agencies include members from the Reserve Bank, private industry and some academic economists. The various term lending institutions are linked closely with each other Financially, ICICI draws 10 percent of its loans from IDBIand in turn has investments in the IRCI and in the UTI (Unit Trust of India). The division of responsibilities between these institutions is not clear-cut but it appears that the IFCI concentrates on loans to the larger established houses the IDBI has more of a freelance, innovative function, and ICICI essentially acts as a conduit for foreign funds to private domestic enterprises. The capital structure of the 18 State Financial Corporations is more complex still, since they draw their funds from the Reserve Bank directly as well as through the IDBI, from subscriptions by the State Governments and through the issue of bonds and debentures. To give an idea of the relative sizes of these institutions, the IDBI is the largest, with assets (as of May 1972) of Rs. 374 crores; IFC1 was the next with total assets of Rs. 225 crores; and ICICI had total assets of Rs. 167 crores, 93 crores of which were in the form of foreign currency loans. The 18 State Finance Corporations, taken as a group had total assets amounting to Rs.196 crores at the end of May, 1972. (16, p.1290-1293). The State Bank of India and the nationalized banks follow yet a different pattern: the State Bank's operations are independent of the Reserve Bank although the Reserve Bank is the major shareholder.. - 20 - A smal.l private holding still exists in the State Bank. The nationalized banks (nationalized in July 1969) have 'custodians' appointed by the Finance Ministry's Department of Banking. Since nationalization they have operated with 'temporary' Boards of Directors. At the time of this writing, some moves were being made to appoint permanent Directors. Returning to the commercial and industrial concerns, it may be of interest to present a more complete profile of these enterprises taken as a group. In 1970-71 the working capital of these enterprises amounted to Rs. 1,395 crores as compared with current liabilities of Rs. 1,120 crores. The ratio of working capital to current liabilities was therefore 1.24; the ratio of working capital to total assets is 0.24 (9, p,17). These figures would be of greater interest if a time-series could be presented of them, unfortunately the BPE's presentation of its data has altered so as to make a consistent time-series difficult to derive., On fresh loans the current interest rate policy of the Government (as represented in the BPE annual report) is to charge rates which-are "by and large comparable with the interest rates paid by first class companies in the private sector for the borrowings.... .The loans-,granted to financial institutions which undertake relending operations are lower than that charged to industrial and commercial enterprises ... The total period of the loans, inclusive of moratorium, is restricted to 15 years. The repayment of principal ordinarily commences one year after the proj ect commences produc- tion". (9, p.5). The current rates of interest charged are given in Table 5. Impressionistically, they appear to be below commercial rates. They 21 - also appear to be"somewhat higher than the rates charged tonon-financial concerns so far in that the ratio of interest payments to total debt in 1970-71 was 5 percent. This could reflect either soft terms initially or the effect of interest waivers in the year under consideration. Table 5: INTEREST RATES CHARGED CENTRAL GOVERNMNT UNDERTAKINGS. Industrial and 2/ Commerical Financial Eaterprises institutions Upto From Upto From May 31,71 June 1,71 May 31,71 June 1,71 Upto 1 year ;6 6 4 Exceeding 1 year but not exceeding 4 years 6 6n Wn 5 Exceeding 4 years but not exceeding 9 years 7 5 5½ Exceeding 9 years but not exceeding 15 years 7 7½ 5½ 6 Exceeding 15 years but not exceeding 30 years - - 5 3/4 &4 1/ Period of loan is restricted to 15 years. Source: Bureau of Public Ehterprises "Annual Report" for 1970-71, p.5. In the next section we will be looking at the profitability of these enterprises; before we dojit should be mentioned.that the division of the net profit into retained profits and di,vidends appears to be settled in an extremely ad hoc fashion between the enterprise and the administrative ministry. The ARC recommended that the disposition of profits be more systematically determined (1, p.359). This does not yet appear to have ocurred. - 22 - 2. THE PEFORMACE RECORD OF THE PUBLIC SECTOR ENTERPRISES In this section we will be looking at some sumary performance measures of the Central Government's non-departmental undertakings. It should be noted that as late as 1959 the profitability of these enterprises was given little consideration. To start with, indeed, there was a bias against their earning profits; instead it was argued that they ought to function on a "no profit no loss basis" (3, p.91). In the view of one writer the change in attitude occurred at the meeting of the All India Congress Comittee's Seminar on Planning in 1959. At tht meeting Dr. V. K. R. V. Rao argued the adoption of a "price and profit policy for public enterprises which would make the State increasingly reliant on its own resources, as distinguished from taxing the personal income of its citizens" (3, p.91). This view apparently gained acceptance because of the difficulty the Government was then experi- encing in financing its Five Year Plan through the normal methods of taxation, savings and borrowing. A surplus earned by the State's enterprises it was felt could make a contribution to this end. Prior to this goal being established, the emphasis had been rather different. In the First Five Year Plan the role assigned the public sector was to "develop those industries in which private enterprise is unable or unwilling to put up the resources required-ahd run the risks involved" (10, p.44). These were industries regarded as essential to development in the modern World such as iron and steel, heavy chemicals and electrical equip- ment, in addition to the traditional public utilities such as power and trans- portation. The argument at this stage was therefore essentially one of intervention in the expectation of market failure. These goals were elaborated and expmanded in the Central Government's Industrial Policy Resolution of 1956 where explicitly ideological consider- -23- ations assumed greater importance. The Resolution declared that, "The adoption of the Socialist pattern of society as the national objective, as well as the need for planned and rapid development, require that all indus- tries of basic and strategic importance, or in the nature of public utility services, should be in the public sector" (6, para 6). Another objective was to "reduce disparities in income and wealth .... to prevent private monopolies and the concentration of economic power in different fields in the hands of small numbers of individuals".(6, para 5). An overall assess- ment of the success of these enterprises must take into account all the tasks they were assigned rather than focus narrowly on financial aspects alone. Since the Third Plan much more attention has been given to the Public Sector Enterorises (PSEs) financial and economic obligations of the /* and disappoinwment has ensued when these obligations have not been met. The Administrative Reforms Co=missicn was extremely critical, however, of the manner in which these obligations were formulated. It called upon the Central Government to make a clear statement laying down "the principles that should guide the creation of various reserves, the extent to which enterprises should undertake the responsibilities for self-financing, the anticipated returns on the capital employed, and the basis for working out rational wage structures and pricing policies" (1,p.357). It also noted that, in arriving at targets for surplus generation during the Third Plan the enterprises themselves had not been consulted (1, p.355). The Commission cited other factors in extenuation of the poor financial performance of these enterprises. . It noted that a substantial portion of the capital invested in the Central Government's enterprises-was in heavy indus, trial plants with long gestation periods and that many of the larger concerns were still in the process oC expansion. The Commission also remarked that "the prices of commodities like steel, oil, coal and fertilisers which account for over three-fourths of the total turnover of the industrial enterprises of the Central Government are regulated or fixed by the Government. Since most of these goods are what can be described as essential commodities, the Government is keen to give full protection to the interests of consumers. The result is that the prices fixed are often on the low side and do not make sufficient allowance for the increased capital costs of setting-up new plants in these sectors" (1, pp.360-362). The importance of this consideration in any comparison of the public and private sectors is difficult to judge since a good many prices are controlled for the private sector as well. It is fair to remark that, in the monoplist or quasi-monopolist situation enjoyed by most of the PSEs high profits would not be an index of efficiency. Also, to the extent that the prices of key industrial goods are deliberately. kept down, one would expect to see corresponding benefits elsewhere in the economy. One feature which is different is the importance of,expenditure on townships for employees of the enterprises. This expenditure was regarded as part of the capital cost of the projects and the enterprises have had to pay interest on loans incurred to finance these townships: to that extent .1 their net profit has clearly been affected. Recently a decision has been taken to finance township costs wholly by way of equity but this does not apply to the period under consideration by us. (4, p.867). The location of public enterprises is also an important instrument of regional policy in India, sometimes to the detriment of the particular enterprise's viability. In considering the profitability of these firms a variety'of financial considerations have to be kept in mind. While rough parity is maintained between debt and equity in the public sector, in private industry the ratio of debt to equity is about 3 to 1 (14, p.43).* Secondly, waivers of interest payments have been granted on some loans and subsidies granted / In 1970/71 the expenditure on townships maintenance and social overheads (excluding,interest)wasRs. 27 crores. -25 - to meet the operating losses of certain enterprises. Thirdly, even in the absence of formal interest-waivers the interest burden on a PSE can be lowered by the Government at the stroke of a pen by converting loan finance into equity. In the case of an undertaking making a loss this has the effect of making the loans effectively interest-free. Fourthly, as noted abovethe rate of interest charged on loans to its undertakings by the Government appears to be lower than the market rate for equivalent loans (see also 14, p.43). For the above reasons therefore, a superficial comparison of aggregate profit measures for all of the Central Governent's undertakings against aggregate for all of the private sector has to be treated with extreme caution. To have faith in such a comparison it would be necessary to go down to the level of the individual industry or plant to compare the cost of capital, output mix, price control and adjust for all of these as appropriate. These reservations ought to be kept firmly in mind in evaluating the measures of performance presented below. We will first look at the targets assigned to public enterprises in the Third and Fourth Plan and later at more detailed financial indicators for the last few years. The Third Plan targets were formulated in terms of 'surpluses', defined as lithe balance of resources available with public enter- * prises after providing for their working expenses, normal replacements, interest and dividend. In other words it does not merely represent net profits; it also includes net accretions to depreciation reserve aunds and other funds of these enterprises, the assumption being that these funds will be utilised for financing the Expansion Programmes of these enterprises"(11, p,97). In the Third Five Year Plan the Central Government's enterprises were assigned the goal of generating a surplus of Rs. 150 crores. Which enterprises were - 26 - included within the scope of these targets was nowhere clearly specified; from the text it appears that in addition to Governent companies and cor- porations all departmental undertakings, other than the railways, were also to be included within the target. The Fourth Plan document showed the actual levels attained on the same definitions and'coverages. Against Rs.300 crores to be generated by the central undertakings, Rs.269 crores were in fact generated a shortfall of 10.3 percent. Of the Rs.150 crores surplus that State T.dertakings were to raise, Rs.104 crores were in fact raised, a short- fall of 30.6 percent. Taking State and Central enterprises together, the shortfall was 17.1 percent (12, p.73). Judgement on whether this performance was good, bad or indifferent clearly depends on how ambitious the targets are considered to have been. No explanation was given in the Plan of how these targets were determined. In terms of what was asked of them over the Third Plan period the enterprises appear to have responded quite well. The ARC (which had a higher estimate of the surplus generated by the Central Government's undertakings)expressed con- cern that the provision for depreciation constituted the bulk of these surpluses (on its estimates of a surplus of Rs.287 crores, Rs.218 crores was accounted for by the depreciation provision - about 75 percent) (1, p.353). The targets established in the Fourth Plan were much more ambitious but were again presented as aggregate targets rather than being specified for the individual enterprise.No rationale was,given for the targetsactually 1/ From the Fourth Plan document it is not clear whether the s=ca-definiticn of surplus is being used,as was in the Third Plan. The term used in the Plan document is 'ccntributicna'which may include interest, tax and divi_ dend payments as wel2. The contribution to the Ecchequer from all these sources over the past few years is given in Table 6. - 27 - arrived at. The breakdown by kind of enterprise was more detailed than in the Third Plan and separate targets were determined for the railways, posts and telegraphs, various centrally administered water resources schemes and power generation schemes, and 'others, (12, p.76). The 'others' category appears to include all non-departmental undertakings of the Central Govern- ment and enterprises under the State Governments; whether it includes the profits of the various financial institutions, banks etc. is not certain. Table 6: CCNTRIBUTICU TO THE PUBLIC EXCHEQUER BY THE NOI-FIANCIAL, NON-DEPARTMENTAL CENTRAL GOVENMENT UNDERTAKINGS. (as. crores) 1965/ 1966/ 1967/ 19.68/ 1969/ 1970/ 1966 1967 1968 1969. 1970 1971 Income tax 8.3 14.1 18.5 18.6 17.6 23.3 Excise duty 104.8 160.3 200.9 265.6 347.4 394.4 Interest n.a. n.a. 80.7 91.1 103.9 126.3 Dividend 2.8 7.4 10.3 11.7 12.7 15.1 Total 115.9 181.8 31o.4 387.0 481.6 559.1 Source: 'Commerce' Yearbook of the Public Sector, 1971, p.321 and BPE 'Annual Report' 1970-71, pp 18,23,27. The target set for 'other' Central Government undertakings for tre Fourth Plan period was Rs.785 crores while that for the State Government's enter- prises was Rs.495 crores making a total of Rs.1,280 crores over the Plan period (12, p.76). The Revised Estimates presented in the Fourth Plan Mid- Term Appraisal prepared at the end of 1971 called for an aggregate contribu- tions of Rs.834 crores (a downward revision of 35 percent) reflecting the poor performance exhibited thus far in the Plan (13, p.17). This target - 28 - should be viewed in the light of the contributions to date: in 1969-70 the 'contribution' of these undertakings (State and Central) was Rs.169 crores, the 1970-71 estimate is Rs.144 crores and the 1971-72 estimate Rs.145 crores. Disaggregating these totals into Central and State contributions, the original estimated contribution of Central Government non-departmental undertakings of Rs.785 crores has been revised to Rs.500 crores in the light of performance thus far. in 1969-70 the actual contributions of these undertakings amounted to Rs.75 crores; for 1970-71 they were estimated at Rs.70 crores; and for 1971-72 they were estimated at Rs.92 crores (13, p.22). The mid-term appraisal commented that "the contribution in these years was far below the original expectation, due mainly to a set-back in production, particularly in the case of steel and fertilizer industries, rise in working expenses due to higher wage and material costs, larger inventories and labour troublesi (13, p.20). The contribution of State enterprises to Fourth Plan resources has also now been revised downward by 33 percent to Rs.334 crores as compared with the original Fourth Plan estimates of Rs.495 crores. The reason cited for these shortfalls are much the same: "In the case of States also, the contribution of non-departmental undertakings, mainly State Electricity Boards and Road Transport Corporation, has'been running below the level or- iginally envisaged primarily because of shortfall in sales of power and in increases in emoluments of employees and other working expenses" (13, p.20). It should be emphasized that these are revised targets and the actual per- formance over the Fourth Plan period taken as a whole may prove even these somewhat optimistic. - 29 - To review our findings thus far, if we use the yardstick of plan expectations, the actual performance of Central Government undertakings over the period of the Third Plan was just 10 percent short of the target assigned while that of the State enterprises was 30 percent short of the target assigned them. Overall the shortfall was 17 percent. In the Fourth Plan period the 4 comparison is between the original estimates and the revised estimates, (which are based on performance in the first half of the Plan period). In the case of the non-departmental undertakings of the Central Government, it was deemed necessary to revise downwards the original estimates by 36 percent, in the case of the Statets enterprises this downward adjustment was by 33 percent. To give an indication of the relative importance of public enterprise contri- butions, these amounted to 8 percent of total Plan resources in the original estimates of the Fourth Plan. With the revisions in the reappraisal this dropped to 5 percent of the total resources for the Plan (12, p.76, 13, 23). It may, however, reasonably be argued that trends in sales are a more significant indicator of the importance of these enterprises to the economy. The trends in Gross Sales/Income over the past decade are given in Table 7. It will be seen that the growth rate of sales over the period has been about 9 percent per annum. (Over the same period the growth rate of investment in these enterprises was about 5 percent per annum). It appears that the rate of growth in sales is now moderating though this could be a cyclical phenomenon. - The situation with regard to net trading profits and losses is given in Annex 1. Certain features seem worthy of note. Firstly, the largest losses tend to be in the Industrial and Manufacturing category, which is also where the bulk of the investment has been. Secondly, in this sector, the enterprises connected with Petroleum and Oil (which tend to be in quasi- monop:Oistic markets) appear to do the best. Thirdly the trading and- comnercial - 30 - Table 7: TRMDS IN GROSS SALES/I9COME OF NON-FINANCIAL NON-DEPARTISMTAL ENTERPRISES OF THE CENTRAL GOVERNMNT. Sales/Income Increase over the previous year Year Rs. crores Rs. crores Percent 1960-61 213 79 59.1 1961-62 287 74 34.7 1962-63 4C01 117 4o.7 1963-64 517 113 28.0 1964-65 672 155 30.1 1965-66 1,olo 338 50.3 1966-67 1,407 397 39.2 1967-68 1,850 443 31.5 1968-69 2, 144 594 32.1 1969-70 2,997 $53 22.6 1970-71 3,321 32 10.8 Average annual rate of increase 34.5 percent Growth rate 1960-61 to 1970-71 8.95 percent. Source: Commercel Yearbook of the Public Sector 1971, p.27 and for 1970-71, BPE Annual Repcrt 1970-71, p.27. concerns (which in terms of numbers are quito substantial, although not in terms of investment) tend at least to show a small profit. Fourthly the al- most umifornly poor profitability of enterprises under the Ministry of Steel and Mines is remarkable: of the total losses of Rs.64.44 crores incurred by all concerns in category (iii) (industrial and manufacturing running concerns other than HSL) almost three-quarters (Rs.47-04 crores) are attri- buable to enterprises under the Ministry of Steel. -31 More generally, it is sometimes suggested-that the low overall profitability of the public sector is due chiefly to the poor performance of a handful of firms, obscuring the more satisfactory performance of the great majority of enterprises. The ten firms with the largest deficits in 1970-71 are given in Table 8, together with the size of the deficit and total invest- ment as of March 31, 1971. These ten firms accounted for 43 percent of all investment in Running Concerns (including Bindustan Steel but excluding promo- tional and developmental undertakings) but for 87 percent of all deficits incurred. The remaining Running concerns showed a total net trading profit of Rs.64.09 crores on a total investment of R:.2,040.31 crores - a return of 3.1 percent. The generalization that seems valid therefore is that a sub- stantial portion of the deficit is incurred by a few, very large firms, while the remainder manage to show a profit, albeit a small one. 'With profitability this low, it is clear that these enterprises have had to draw massively on resources other than their own to finance in- vestment. According to the Bureau of Public Ehterprises tAnnual Report' for 1970-71, 28 enterprises had, as of March 31, 1971, utilized internal resources for creation of capital assets. For these firms this amounted to 14 percent of Gross Block (including capital works in progress). As a proportion of the Gross Block for all running and promotional undertakings, internal resources constituted 11.8 percent of Gross Block (9,pp 163-164). Thternal sources accounted for 32 percent of all funds used by running concerns in 1969-70 (2, p. 304). Retained profits are important sources of internal resources in comparatively few cases, and the depreciation fund is the chief form of gross corporate saving. For all undertakings taken in aggregate the depreciation provision accounts for over 100 perceit of internal resources and apparently is used to fund part of the net trading deficit (2, p.306). - 32 - Table 8: THE TEN LARGEST LOSS-MAKING NON-DEPARTMTAL NON- F1NANCIAL NNDERTAKINGS OF THE CENTRAL GOVERNMEIT IN 1970-71. Total Net Trading Administrative Investment loss F.Y. Name of Firms Ministry as of 3.31.71 70-71. (Rs. crores) (Rs. Crores) 1. Heavy Engineering Corp. Ltd. Steel and Mines 269.22 18.33 2. Neyveli Lignite Corp. Ltd. Steel and Mines 173.26 ii .06 3. India Drugs & Pharmaceut- Petroleum & Chemicals 81.51 7.87 icals Ltd. 4. Mining & Allied Machinery Steel and Mines 60.45 6.45 Corp Ltd. 5. Heavy Electricals (India) Industrial Development 125.49 5.82 Ltd. 6. Hindustan Steel Ltd. Steel and hines 1,036.22 4.72 7. Indian Airlines Civil Aviation 73.05 4.69 8. Hindustan Photofilns Mfg. Industrial Development 16.66 2.89 Co. Ltd. 9. National Mineral Develop- Steel and Mines 59.93 2.62 ment Corp. Ltd. 10. Fertilizers & Chemicals Petroleum & Chemicals 73.89 2.12 (Travancore) Ltd. TOTAL 1,969.68 66.57 Source: Annex 1. - 33 - Table 9: FINANCIAL RATIOS FOR PUBLIC AND PRIVATE SECTOR MANUFACTURING INDUSTRY. 1. Public Sector 1962/3 1964/5 1966/7 1967/8 Gross Profit / Sales 5.2 6.5 4.8 4.0 2/ Gross Profit/Capital Employed 1.7 2.3 1.9 1.5 3/ 4/ Net Profit Net Worth" -1.7 1.1 -0.1 -0.5 2. Private Sector 1960/1 1964/5 to and 1967/8 1968 1963/4 1965/6 Gross Profit/Sales 10.2 0.7 7.6 7.9 Gross Profit/Capital Employed 10.6 10.2 7.8 8.2 Net Profit/Net Worth 9.8 9.0 7.3 7.6 1/ 'Gross Profit' is after depreciation but before tax, interest and managing agents' remunerations. 2/ 'Capital Employed' is net fixed assets plus inventories and other niscel- laneous assets. 3/ 'Net Profit' is after 'depreciation and after tax, interest and managing agents' remunerations. 4/ 'Net Worth' is paid up capital plus reserves and surplus. Source: "India - A Review of Trends in Manufacturing Industry" IBRD Report SA-9(a) dated April 1, 1970 pp. 40-42. These various measures of performance would be of greater interest if they could be put in context, against some standard of comparison. We have already referred to some of the considerations which make gross comparisons be- tween the public and private sectors inappropriate; comparisons at the level of the firm and industry would be much more desirable. In order to give an extremely rough idea of how the two sectors compare, it might be worthwhile to present the findings of the earlier %brld Bank Study, referred to above (14, pp.41-43). That study made estimates of the ratio of Gross Profits to Sales, Gross Profit to Capital Employed and Net Profit to Net Worth for selected years in the 1960s, for both private and public sector manufacturing industry. These estimates are reproduced in Table 9. It is clear that financial returns have been much poorer in the public secto,, than in the private, by a degree which is not altogether explained by all the special factors cited above (some of which - e.g. lower interest rates - would in any case tend to overstate public sector profitability). Furthermore, it appears that since the mid-sixties public sector profitability has been declining. 3. CGCLUSION This paper has not sought to advance a thesis, but has been don- cerned more to provide basic information on the structure and working of the public enterprise sector in India. The first half of the paper therefore dealt exclusively with organizational and institutional matters, focussing primarily on the Central Government's non-financial non-departmental under- takings. In the second section we tried to come to terms with the 'performance' of these enterprises. Our efforts uere restricted by the fact that there is considerable ambiguity in official pronouncements on exactly what the object- ives should be for this sector. Our judgement was.that, insofar as one aim of the Government was to capture the itcommanding heights of the economy", this has been accomplished reasonably successfully in the industrial sector. In the agricultural sector there has been comparatively little governmental inter- vention. As far as financial objectives are concerned, the only explicit targets set by the Government have been for 'surpluses' for the undertakings -in aggregate., In the Third Plan these targets were almost met; in the Fourth Plan to date, the performance has been much poorer. Since no defense was publicly nade of the targets established, it is not possible to determine whether the targets werie*ambitious or not. It is clear however that the public enterprises continue to make massive demands on resources external to them- selves for their investments. Finally, a crude comrison between the private and public sectors in manufacturing industry confined that, relatively, the public sector was much less profitable than the private sector. It is in making the transition from statements on profitability to statements on economic welfare that the real-problem arises. As itemized above, these enterprises have - 36 - been charged with a number of other vaguely specified 'social' objectives, which tend to make their profitability an understatement of their social value. On the other hand they are given explicit and implicit subsidies, and often operate in quasi-monopolistic situations. This would tend to overstate profits as a measure of welfare. The net result is indeterminate. What is needed is a detailed appraisal of at least a sample of the firms, making ex- plicit the costs and benefits of their extra-economic obligations and the effects on their profits of governmental policy measures such as price control, low interest rates etc. Only by comparing the results of this exercise with social returns elsewhere in the economy can we hope to get some idea of the true value of these enterprises to the Indian economy. Otherwise we are con- demed to continue with inconclusive estimates and guesses. Annex 1: NON-DEPARTMENTAL, NON-FINANCIAL UNDERTAKINGS OF THE CENTRAL GOVERNMENT AS OF MARCH 31, 1971. Year of Incorpor- Investment (Ra. crores) Net Trading Profit ation, or Government Administrative (+) or Loss (-) assumption of control Ministry Loans Equity Total for F.Y. 70- 1 (as. Croresj (i) UNDERTAKINGS UNDER CONSTRUCTION 1. Bokaro Steel Plant 1964 Steel and Mines 91.96 410.00 501.96 - 2. Bharat Aluminium Co. Ltd. 1966 Steel and Mines - 16.12 16.12 - 3. M'aras Fertilizers Ltd. 1966 Petroleum and Chemicals 35.80 13.65 h9.45 - h. Hindustan Copper Ltd. 1967 Steel and Mines 12.35 27.20 39.56 - 5. Indian Petro-chemical Corp. Ltd. 19b9 Petroleum and Chemicals - 11.85 11.85 - 6. Bharat Pumps & Compressors Ltd. 1970 Industrial Development - 0.99 0.89 - 7. Hindustan Paper Corp. Ltd. 1970 Industrial Development - 0.07 0.07 - 8. Bharat Dynamics Ltd. 1970 Defense - 0.75 0.75 - TOTAL UNDERTAKIGS UNDER CONSTRUCTION 1110.11 480.53 620.65 - (11) RUT1llM COJCEIl3: IITNDUSTAN STEEL LTD. 9. Hindustan Steel Ltd. 1954 Steel and Mines 479.22 557.03 1,036.22 -4.72 (iii) RUNNING* C0iCdIiN:: U11311TRIAL AND MIAiUFACTURIN3 (other than IISL) En-ineerin,p awd Shibuilding 10. 1IndusttLn Teleprinters Ltd. 1960 Communications 1.47 0.82 2.29 +0.56 11. Bharat Flectronicu Ltd. 1954 Defense 6.79 5.21 12.03 +2.56 12. Instrumentation Ltd. 1964 Industrial Development 3.98 3.90 7.87 +1.49 13. Iwlidn Telepone In-lustries Ltd. 1950 Communications 4.55 4.95 9.50 +1.83 1h. Garden Reach Workshops Ltd. 1960 Defense 14.92 3.0o 7.92 +0.81 15. Bhiarat Earth Movers Ltd. 1964 Defense 9.30 11.90 21.20 +2.89 16. Mizwon Dock Ltd. 1960 Defense 6.93 3.30 10.28 +0.67 17. Got Shipyard Ltd. 1967 Defense I14 .6o 1.04 +0.11 18. Hindustan Aeronautics Ltd. 1964 Defense 158.69 50.41 209.10 +4.67 19. Hindustan Housing Factory 1953 Works, Housing and 0.27 0.119 0.76 +0.014 Urban Development 20. IlIndurtan 'hipyard Ltd. 1952 Shipping and Transport 5.20 6.89 12.10 +0.31 21. Tungabhadra Steel Products Ltd. 1960 Steel -1.01 1.01 +0.01 22. Bharat Heavy Electricals Ltd. 196 Industrial Development 111.82 65.03 176.82 +0.65 23. Electronics Corp. of India Ltd. 1967 Dept. of Atomic Energy 0.75 3.50 1.25 +0.o4 24. Pra.Ra To3ls Ltd. 1959 Defense 3.19 3.00 6.69 -0.30 25. Hindustan Cables Ltd. 1952 Industrial Develdpmt 0.69 6.39 7.07 -0.01 26. Hir.dusten Machine Tools Ltd. 1953 Industrial Development 17.88 12.03 29.88 +0.03 27. HIe-vy Electricals (IndIa) Ltd. 1956 Industrial Development 75 1,8 50.00 125.49 -5.82 28. VTLiona1 Instruments Ltd. 1957, Industrial Development 1.92 3.26 8.18 -1.35 29. leavy Er,ineerirg Corp. Ltd. 1956 Steel and Mines 169.22 103.03 269.22 -18.33 30. Mining & Allied Machinery Corp. Ltd. 1965 Steel and Mines 110.45 20.03 60.-15 -6.145 31. Trivent 3I.ructurals Ltd. 1965 Zteel and Mines 1.12 3.03 7.12 -0.71 3. hlrat Heavy Plates & Vernels Ltd. 19X6 Steel and Mines 9.23 7.00 16.23 -0.112 33. M-chine Toal Corp. of rwila LL4. 1967 Industrial Development .9 1.03 11.9 -0.35 Tol.~1 E'Ii, I III'L- 1'. n Will "i Iphul I111 64,1.8- 361).63 1,011.115 416.614 Year of Incorpor- Investment (Rs. crores) Net Trading Profit?j ation, o- Government Administrative (+) or Loss (-) assumption of control Ministry Loans Equity Total 11 for F.Y. 70-71. (Pa. crores) (111) Tlunni,ng Concerns: Inountrial ana Vanufacturing (otner tnan ISL) Continued. Chem.ic-.ls 314. Hiniustan Insecticides Ltd. 1954 Petroleum and Chemicals - 1.2b 1.26 +0.1b 35. Hin,lustan Latex Ltd. 1966 Health & Family Planning 0.62 0.70 1.32 +0.02 36. 41inlustan Antibiotics Ltd. 1954 Petroleum and Chemicals - 2.17 2.47 +0.114 37. Hiniustan Organic Chemicals 1960 Petroleum and Chemicals 7.25 7.414 14.69 +0.0 38. Fertilizer Corp. of India Ltd. 1961 Petroleum and Chemicals 113.90 115.55 229.45 +1.67 39. Fertilizers & Chemicals Travancore Ltd. 1963 Petroleum and Chemicals 51.25 22.61 73.89 -2.12 40. National Newsprint & Paper Mills Ltd. 1947 Industrial Development 7.02 4.95 11.96 -0.17 41. Hin.ustan Salts Ltd. 1953 Industrial Development - 1.79 1.79 -0.014 42. lindustan Photo Films MFg.Co.Ltd. 1960 Industrial Development 10.811 5.82 16.66 -2.89 43. Indian Drugs & Pharmaceuticals Ltd. 1961 Petroleum and Chemicals 55.56 25.95 81.51 -7.87 44. Sw.bbar Salts Ltd. 1964 Industrial Development .15 1.03 1.15 -o.o Total Chemicals 246.59 189.57 436.16 +2.09 -13.13 Mining and Minerals 145. In:11an Rare Eartns Ltd. 1950 Dept. or Atomic Energy 1.55 1.75 3.3a +0.34 -6. Uranium Corp of India Ltd. 1967 Dept. of Atomic Energy 2.5" 7.45 10.03 +o.47 147. National Coal Development Corp. Ltd. 1956 Steel and Mines 72.85 122.01 194.86 -0.96 48. Neyvell Lignite Corp. Ltd. 1956 Steel and Mines 93.26 8.Oo 173.2b -11.06 . p. National ineral Development Corp. 1958 Steel and Mines 14.1;5 45.28 59.93 -2.62 50. Pyrites, Phosphates & Chemicals Ltd. 1960 Steel and Mines 3.31 5.75 9.06 -o.16 51. 11industan Zinc Ltd. 1966 Steel and Mines 8.22 7.85 16.06 -1.18 Total Mining and Minerals 196.42 270.09 466.51 +0.81 -15.93 Petroleum and Oil 52. [ubrizol India Ltd. 1966 Petroleum and Chemicals 0.42 0.60 1.02 +0.32 53. Cochin Refineries Ltd. 1963 Petroleum and Chemicals 12.96 7.00 19.96 +2.49 54. Madras Refineries 1965 Petroleum and Chemicals 24.50 12.88 37.37 +4.04 55. Indian Oil Corp. Ltd. 1959 Petroleum and Chemicals 50.57 71.17 121.74 +20.32 56. Indo-Burmah Petroleum Co. Ltd. 1970 Petroleum and Chemicals - 1.50 1.50 +0.26 57. Indian Oil International 1970 Petroleum and Chemicals - 0.01 0.01 +0.0 58. Oil and Natural Gas Commission 195b Petroleum and Chemicals 91.114 127.10 218.23 +9.41 Total Petroleum and Oil 179.59 220.26 399.85 +36.84 Miscellaneous 59. Maolern Bakeries of Indle Ltd. 1965 Agriculture 2.55 1.03 3.55 +0.09 60. Cement Corp. of India Ltd. 19f)6 Industrial Development 4.83 5.70 10.53 -0.58 61. Tannery & Fo3twear Corp. of India 1969 Industrial Development .92 .23 1.16 -0.34 Total Miacellaneoua 8.30 6.93 15.23 40.02 -0.92 TOTL, IUlNuIN3 CO1CEF11: TUDUSTRIAL AND 1,272.72 1,056.48 2,3?9.20 MA:11ECTUtilft(OriWit TH1AU 111.1) Year or Incorpor- Investment (Re. crores) Net Trading, Profit2/ ation, or, Government Administrative (+) or loss (-)(Rs assumption of control Ministry loans Equity Totaly for F.Y. 70-71 crore3) (tv) wUNNIn3 CONCERNS: TRADING 62. State Trading Corp.or Inala 1956 Foreign Trade 22.61 7.00 29.61 +0.50 63. Pinerals and Trading Corp. of India 1963 Foreign Trade 0.62 3.00 3.62 +2.03 64. Carhew Corp. of India 1970 Foreign Trade - 0.50 0.50 +0.25 65. Poad Corp. of India 1965 Agriculture 214.00 65.47 279.M7 +0.19 66. Cotton Corp. of India 1970 Foreign Trade - 0.50 0,50 Account not due TCrAAL R.IilN1G CONCEMtlS: TRADING 237.23 76.47 313.70 +2.97 (v) RU1IIG CONCERNS: COI-VERCIAL & MISCELLANEOUS Aviation and Shipping 67. -=,ipping Corp. of India Ltd. 1961 Shipping & Transport 85.87 23.45 109.32 +8.74 66. Air India 1953 Tourism & Civil Aviation 57.38 15.90 73.29 +3.87 69. I.oal Lines Ltd. 1960 Shipping & Transport 6.29 1.01 7.30 +0.10 70. Irlian Airlines 1953 Tourism & Civil Aviation 52.16 20.89 73.05 -4.69 Total Aviation and Shipping 201.70 61.25 262.95 +12-71 201.70-1.69 Miscellaneous 71. b.ational Industrial Development Corp. 1954 -Industrial Development 6.51 0.10 6.61 +0.16 72. Engineers India Ltd. 1965 Petroleum and Chemicals - 0.25 0.25 +0.36 73. Iindustan Steel Works Const.. Corp. 1964 Steel and Mines - 0.23 0.23 +0.28 74. Cer:tral Warehousing Corp. Ltd. 1957 Agriculture 9.75 10.77 20.52 +0.66 75. Vational Textiles Corp. Ltd. 1968 Foreign Trade 4.26 1.40 5.66 +0.09 76. India Tourism Development Corp. 1965 Tourism & Civil Aviation 2.19 5.97 8.16 +0.26 77. Rational Projects Const.. Corp. Ltd. 1957 Irrigation and Power 3.40 2.55 5.95 -1.26 78. Valional Building Const. Corp. Ltd. 1960 Works and Hbusing 1.03 2.00 3.03 -0.17 79. Central Road Transport Corp. Ltd. 1964 Shipping and Transport 0.88 .. 1.06 1.914 -0.23 80. Film Finance Corp. Ltd. 1960 Information & Broadcasting 0.59 0.50 1.09 +0.00 81. Exrert Credit & Guarantee Corp. Ltd. 1957 Foreign Trade - 1.00 1.00 +0.48 82. En:Ineering Projects (India) Ltd. 1970 Steel and Mines - 0.05 0.05 -0.03 83. Central Fisheries Corp. Ltd. 1965 Acriculture 0.11 o.6o 0.71 -0.1? 84. Central Inland Water Transport Corp. 1967 Shipping and Transport - 7.02 2.08 9.10 -1.18 85. State Farms Corp. Ltd. 1969 Agriculture 0.19 3.12 3.32 -0.00 86. Water & Power Development Consult- ancy Services Ltd. 1969 Irrigation and Power - 0.20 0.20 -0.02 87. India Consortium for Power Projects 1969 Industrial Development - 0.10 0.10 -0.05 Total Kiscellaneous 35.93 31.98 67.92 -3A0 TOTAL RUNNING CONCERNS: COIERCIAL AND +15.00 rISCELLANEOUS 237.63 93.23 330.87 -7.75 Year of Incorpor- Investment (Ra. crores) Net Trading Profit2 ation, or Government Administrative (+) or loss (-) assumption of control Ministry loans Equity Total2/ for F.Y. 70-71 (Re. crores) (vi) PROMOTIONAL & DEVEDPENTAL UNDERTAKINGS 83. National Research Develop- aent Corp. Ltd. 1953 Education 0.34 0.44 0.78 +0.01 89. Indian otion Pictures Export Corp. Ltd. 1963 Foreign Trade 0.20 0.25 0.45 +0.03 90. National Seed Corp. Ltd. 19103 Agriculture 1.65 2.30 3.95 +0.12 91. H-ndicrarts & Ilandlooms Export Corp. .1958 Foreign Trade 0.51 1.00 1.51 +0.04 92. Rural Electrification Corp. Ltd. 1969 Irrigation and Pbwer - 11.00 11.00 +0.26 93. Vational Small Industries Corp. Ltd. 1955 Industrial Development 18.83 3.50 22.33 -0.47 914. Pehabilitation Industries Corp. Ltd. 1959 Labor and Employment 3.68 3.18 6.86 -0.62 95. Housing & Urban Development Corp. 1970 Works and Housing - 2.00 2.00 -0.00 9V. Indian Dairy Corp. 1970 Agriculture 0.40 1.00 1.40 -0.28 TOTAL PRO1tTIONAL & DEVELOPMENTAL U:D1-raINGS 25.61 24.67 50.28 .1.39 -1.37 (vii) LIFE IIISURANCE CORPORATION OF INDIA 1956 Finance - 5.oO 5.00 - 1/ Totals may not be exact because of rounding error. 2/ Net Trading Profit (+)/Loss (7) are before non-trading profit/loss and prior period expenditure/receipts. Saurce: Bureau of Public Enterprises "Annual Report" 1970-71, from Tables on pp. 21, 22 and from Annexure 1. U Annex 2: REFRECES 1. Administrative Reforms Commission: Report of the Study Team on Public Sector Undertakings, July 1967.. 2. 'Commerce' Yearbook of the Public Sector 1971, editor Vadilal Dagli, Bombay, 1971. 3. Das, Nabagopal: 'The Public Sector in India'. Asia Publishing House 3rd Edition, 1966. 4. Economic and Political Weekly, Bombay, April 29, 1972, p. 867: 'Debt Relief for Public Sector'. 5. Economic and Political Weekly, Bombay, July 22, 1972, p.1401: 'Super- structure for Steel'. 6. Government of India: Industrial Policy Resolution, April 30, 1956. 7. Government of India, Ministry of Finance: 'Explanatory Memorandum on the Budget of the Central Government for 1971-72, part 1'. 8. Government of India, Ministry of Finance: 'Public Sector Enterprises: A Memorandumt', February 1969. 9. Government of India, Ministry of Finance, Bureau of Public Enterprises: 'Annual Report on the Ubrking of Inudstrial and Comercial Undertakings of the Central Government 1970-71', New De&lhi. 10. Government of.India, Planning Commission: The First Pive Year Plan, 1951-56. 11. Government of India, Flanning Commission: The Third Five Year Plan, 1961-66. 12. Government of India, Planning Comission: The Fourth Five Year Plan, 1969-74.*- 13. Government of India, Planning Commission: The Fourth Plan Mid-Term Appraisal, December 1971.' 14. I.B.R.D., South Asia Department, Report No. SA-9a: 'India - A Review of Trends in Manufacturing Industry', April 1, 1970. 15. Patil, S.M.: 'The Government's Role in Managing Public Sector' in 'Lok Udyog', Volume 5, No. 5, August, 1971. 16. Reserve Bank of India: 'R.B.I. Bulietin,' June, 1972.