Why are Public Enterprises set up? | Origin | Objectives

Why are Public Enterprises set up?

Public enterprises occupy an important position in the Indian economy. They were set up by the government to speed up the process of economic development as well as to achieve certain social objectives. They have played a major role in fostering industrial and economic development of the nation by providing the necessary infrastructure and providing essential services.

In sectors of national importance (e.g. defense, atomic and nuclear power), areas in which private capital was shy to enter (e.g. power projects, telecommunications, and essential services (e.g. water supply, transport etc.), public enterprises were set up and have contributed significantly to national interests. They operate in a wide range of industries including steel, minerals, metals, coal, petroleum, heavy engineering, fertilizers, chemicals, pharmaceuticals, transport, electricity etc.

Public Sector Enterprises are currently contributing 25% to GDP, which is very encouraging when compared to their contribution of less than 10% in 1960-61. Their profitability was around 21% and return on capital employed 18% in the year 2003-04.

Origin of Public Enterprises

The government of India declared its intention to follow the socialistic pattern of governance in its industrial policy in i956. According to The Industrial Policy Resolution, 1956, public enterprises were promoted to:

  1. accelerate the rate of economic growth.
  2. speed up industrialization, especially the development of heavy industries.
  3. expand the public sector and build a large co-operative sector.
  4. improve infrastructural facilities.
  5. ensure balanced regional development.
  6. increase employment opportunities.
  7. raise the standard of living.
  8. ensure equitable distribution of wealth in the society.

Objectives of Public Enterprises

1. To provide the necessary infrastructure like railways, roads, power, telecom, irrigation etc.

2. To fill the gaps left by the private sector. The private sector in the early days was not interested in projects which required high investment and involved long gestation periods (e.g. infrastructure projects and core sector such as iron and steel etc). Therefore the government set up these enterprises to promote all round economic development.

3. To protect consumer interests. In certain areas where consumer interests were affected because of the fraudulent practices of the private sector, the government nationalized the industry and ran it as a public enterprise e.g. LIC and GIC in the insurance sector.

4. To avoid monopolies and the resultant evils of monopolies such as hoarding, black marketing, restriction of output, creation of artificial scarcity and charging of high prices.

5. To promote public welfare. The idea is to ensure that the common public gets access to essential products and services at an affordable price.

6. To reduce income inequalities and ensure equitable distribution of resources.

7. To utilize natural resources in an optimum manner.

8. To develop backward areas and ensure balanced regional development.

9. To create large scale employment opportunities and reduce the unemployment problem to some extent.

10. To promote labor welfare. Employees in these organizations are provided good pay, perks, decent work environment, job security and retirement benefits.

11. To produce products which were hitherto imported. Such import substitution measures conserve valuable foreign exchange for the government.

12. To ensure self reliance of the country. The thrust would be on producing products in which the country lacks the required technology or skills.

13. To undertake projects which are socially important but which may yield less in terms of money.

14. To avoid concentration of economic power in a few hands. Such concentration of economic power would have a negative impact on the society.

15. To gain control over the commanding heights of the economy.

16. To help in the development of small scale and ancillary industries.

17. To utilize local resources and create value for the society.

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