IJCAES SPECIAL ISSUE ON

BASIC, APPLIED & SOCIAL SCIENCES, VOLUME II, OCTOBER 2012

[ISSN: 2231-4946]

General Study on Public Sector Undertakings:

Growth of PSUs and How Effectively
Financially Managed are our PSUs
P. K. Gupta
Unigreen Global Private limited, New Delhi
Research Scholar, CMJ University, Shillong, Meghalaya
pk_delhimetro@hotmail.com
Abstract Post independence the advent of Public Sector Undertakings was encouraged as the tool for
giving momentum to the growth of Indian Economy. The Government took several policies decisions to
set up Government controlled, Government financed undertakings to bridge the gap between rich and
poor, optimum usage of natural resources, regional inequalities, and absenteeism of private sector in
those business activities which either were totally socially oriented or were driven by very less profit
margins. In the process, government forayed into all business activities thus coming in direct competition
with the private sector in almost all sectors. When the performance of all such PSUs were adjudged
against the performance of their counterpart in private sector, then it was revealed that either many of
these PSUs were not performing as efficientely as those in private sector or were already in deep red
financially. Analysis of poor performance of these PSUs led to the conclusion that all these PSUs need to
be effectively financially managed to come closer or to surpass the performance private sector
companies. This was also essential to ensure that deployment of public funds should be done in such a
judicious manner that instead of becoming a constant burden on Government exchequer these PSUs
should contribute to the nations growth on self sustained basis
This paper covers brief history with reasons why the concept of commercial organizations as PSUs
emerged, various type of PSUs and what are the ingredients of their financial management.
Keywords Public sector Undertakings ( PSUs), Industry, Economic Development , Financial
Management , Central Public Sector Enterprises (CPSE) , Privatisation

I.
ADVENT OF PUBLIC SECTOR AND ITS GROWTH SINCE INDEPENDENCE
Post Independence, India was grappling with grave socio-economic problems, such as inequalities in income
and low levels of employment, regional imbalances in economic development and lack of trained manpower, weak
industrial base, inadequate investments and infrastructure facilities, etc. Hence, the roadmap for Public Sector was
developed as an instrument for self-reliant economic growth. The country adopted the planned economic
development policies, which envisaged the development of PSUs.
Initially, the public sector was confined to core and strategic industries. The second phase witnessed
nationalization of industries, takeover of sick units from the private sector, and entry of the public sector into new
fields like manufacturing consumer goods, consultancy, contracting and transportation etc.
The Industrial Policy Resolution 1948 outlined the importance of the economy and its continuous growth in
production and equitable distribution. In this process, the policy envisaged active engagement of the State in
development of industries. The Industrial Policy Resolution 1956 classified industries into three categories with
respect to the role played by the State The first category (Schedule A) included industries whose future development would be the exclusive
responsibility of the State
The second (Schedule B) category included Enterprises whose initiatives of development would principally
be driven by the State but private participation would also be allowed to supplement the efforts of the State
And, the third category included the remaining industries, which were left to the private sector.
In 1969, growth of Public sector undertakings saw a new era with the nationalization of 14 major
banks.The Industrial Licensing Policy 1970 placed certain restrictions on undertakings belonging to large industrial
houses, defined on the basis of assets exceeding Rs 350 mn. In 1973, the definition of large industrial houses was
adopted in conformity with that of the Monopolies and Restrictive Trade Practices Act (MRTP) 1969 and
companies whose assets exceeded Rs 200 mn.
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The priorty shown towards establishment and growth of Public Sector undertakings saw reversal in 1991. The
Statement on Industrial Policy in July 1991 was also significant. It brought in fundamental changes in the MRTP
Act as well. The statement revised the priority of the public sector.
Public Sector Undertakings (PSUs) can be classified as Public Sector Enterprises (PSEs), Central Public
Sector Enterprises (CPSEs) and Public Sector Banks (PSBs).
The Central Public Sector Enterprises (CPSEs) are also classified into 'strategic' and 'non-strategic'. Areas of
strategic CPSEs are:
Arms & Ammunition and the allied items of defence equipments, defence air-crafts and warships
Atomic Energy (except in the areas related to the operation of nuclear power and applications of radiation
and radio-isotopes to agriculture, medicine and non-strategic industries)
Railways transport.
All other CPSEs are considered as non-strategic.
II.
FINANCIAL MANAGEMENT IN PSUS
Public sector undertakings are often blamed for bad Financial Management for various reasons. The most
important of the reasons is the lack of accountability. Since, the functioning in the Public Sector Undertakings is not
only influenced by profit motive as is the case for any or most of the private sector companies, rather various other
factors such as social objective, equitable distribution of resources and wealth and addressing the needs of priority
sectors and areas are few of the factors which influence the working of Public Sector Undertakings in India.
III.
SPECIAL FEATURES OF FINANCIAL MANAGEMENT IN A PUBLIC SECTOR UNDERTAKING (PSUS)
A. Role of financial advisor
The financial advisor occupies an important position in public sector undertakings. His concurrence is required
on all proposals which have financial implications.
B. Capital budgeting decisions
The power upto certain limits, in respect of individual capital expenditure items has been delegated to the board
of public sector undertakings. For making investments beyond the limit the proposal goes to Public Investment
Board which appraises and recommends projects to the Central Government.
C.

Capital structure decisions

Such decisions involve the identification of different sources of finance. Normally PSUs are financed on the
basis of half of their capital being in the shape of equity and the rest in the shape of loans. The funds are also
provided to PSUs directly by the government. The following factors are taken into consideration at the time of
designing capital structure (i) gestation period (ii) level of business risk (iii) capital intensity of project and (iv)
freedom of pricing.
D. Working capital management
The inventory constitutes a major portion of the working capital of public sector undertakings and hence proper
inventory management should be given top priority by public sector undertakings.
E. Audit
Public sector undertakings in addition to regular audit conducted by professional accountants, are subject to
efficiency-cum-propriety audit by the Comptroller and Auditor General of India whose reports are presented to
Parliament every year.
F. Annual report
The annual reports of public sector units though similar to those of private sector units, tend to provide more
information.
G. Pricing policy
The bureau of public sector undertaking has laid down certain guidelines for pricing by PSUs with the objective
to serve the overall interest of the community at large.
IV.
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STATUS OF PUBLIC SECTOR UNDERTAKING

General Study on Public Sector Undertakings: Growth of PSUs and How Effectively Financially Managed are our
PSUs

PSUs are organized mainly as departmental enterprise or statutory corporation or companies.

Short Comings in the Management of Public Sector Undertakings
With the passage of time, the functioning of Government is becoming more and more transparent. With the
commencement of Right to Information Act, every citizen has access to most of the Government information.
Functioning in Public sector undertakings are also now under public scrutiny every moment. With the opening of
most of the sectors to private companies, except for very few strategic sector such as defence and nuclear sectors,
performance of public sector companies are compared with the very best private companies in that sector. This
comparison has led to the conclusion that Public Sector Undertakings are often bad managed Companies. There are
various reasons for such poor management but to a name a few are over capitalization, delayed implementation of
the project, lack of responsibility of the managers, too much dependence on subsidy or grant from the government,
over staffing, poor inventory management etc. While, most of the PSUs are generally deficient on one or the other
parameter but in Project execution by any PSU, Delhi Metro Rail Corporation Limited has set an example where
two serious factors i.e. cost overruns and delayed execution of the project were largely tamed showing extra
ordinary brilliance in the project execution and its management.
If we restrict our discussion to the financial management then one single largest factor is bad inventory
management. The public Sector undertakings are often blamed for over inventory resulting in blocking of capital
and space or less often for under inventory upsetting production schedule. Both are signs of inefficient inventory
management and consequently for the bad financial management. There is generally no provision for working
capital margin at the time of estimating cost of project. Consequently there is no provision of long-term funds for
working capital and the enterprise has to obtain financing from short-term sources. Most of the public sector units
are capital intensive hence ratio of current assets to fixed assets is generally low. Most of the public sector
undertakings lack application of working capital management techniques especially relating to receivables like
discount rate, credit period and credit standards. The reason being that they sell bulk of their output to Government
Departments.
V.
ROLE OF A FINANCIAL ADVISER IN A PUBLIC SECTOR UNDERTAKING
The financial adviser occupies an important position in all public sector undertakings. He functions as the
principal advisor to the chief executive of the enterprise on all financial matters. The committee on public sector
undertakings has specified the following functions and responsibilities for a financial adviser:
a. Determination of financial needs of the firm and the ways these needs are to be met.
b. Formulation of a programme to provide most effective cost-volume profit relationship.
c. Analysis of financial results of all operations and recommendations concerning future operations.
d. Examination of feasibility studies and detailed project reports from the point of view of overall
economic viability of the project.
e. Conduct of special studies with a view to reduce costs and improve efficiency and profitability.
An important role of the financial adviser with respect to the management of public sector enterprises is the
relevance of strategic financial planning technique in dealing with conflicting objectives. It is an effective mode to
optimize the flow of funds required by the overall corporate strategy and to make adequate provisions to meet
contingencies. This requires:
a. The development of adequate financial information system.
b. The existence of clear strategic financial objectives.
c. The co-ordination of plan with the Governments economic, social, fiscal and monetary policies.
VI.
CONCLUSION
In fact, the public sector is set for a major change. It is poised for a major face lift. The public sector will
become selective in the coverage of activities and its investment will be focused on strategic high-tech and essential
infrastructure. The Government has also clarified that the public sector has to mend for itself and stop relying on
Governments budgetary support.
Privatisation has come as the greatest tool in the hands of the Government for bringing efficiency in the Public
Sector Undertakings. It is the process of reforming PSEs and aims at reducing involvement of the state or the public
sector in the nation's economic activities by dividing the industries between public sector and private sector in
favour of the latter. The policy of Greenfield Privatisation has made considerable progress since the introduction of
the new economic policy (NEP) in 1991. The process of re-divide has been mainly through:
De-licensing
Reduction in budget allocation
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P. K. Gupta

External aid/grant
Anomaly in duty structure
Decision-making systems.
Earlier, Financial Management was limited to accounting of various financial transactions in the Public Sector
Undertakings. Of late, Public Sector Undertakings have understood that efficiency in Financial management is of
utmost importance, if the PSUs are to survive in the competitive environment. The competition is also from within
i.e. scarce resources of the Government and from the outside world i.e. competition with private sector.
A lot has been done; still lot needs to be done to bring efficiency in the functioning of Public Sector
Undertakings.
REFERENCES
[1]
[2]
[3]
[4]

CPSE (Author), From Build up to Break through, leading companies of India Inc. , Department of Public Enterprises, Ministry of Heavy
Industies and Public Enterprises, Govt. of India, First Edition 2009, ISBN 9788175415348, pp 18-47.
Garg A.K, 2010-11 Annual report of Delhi Metro Rail Corporation Ltd., DMRC, Sep. 2011
Rastogi Atti n and Sharma V.K., Public sector Journal vol. iii, July 2012 issue, pp. 78-81.
Central Public Sector Enterprises, Quarterly News Letter Issue I Vol. I March-June 2011.

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