It should be remembered that public sector undertakings should not be guided by profit and loss considerations.
Thus, their pricing policy should be guided on the basis of the following socio-economic considerations:
(i) Public sector undertakings should operate its activities at the lowest possible cost along with maximum increased efficiency.
(ii) The prices of their product/output/serving are to be fixed in such a manner which will help the consumers of all levels to buy and have it.
(iii) They must raise adequate resources for re-investment purposes.
(iv) While determining the price policy various considerations relating to costs and benefits to the various sections of the community are to be considered carefully in our socialistic pattern of society.
(v) Lastly, while determining price policy certain other factors should also be taken into consideration; viz.: Competition from private sectors, requirements of foreign trade etc. Thus, it is not an easy task to fix up the pricing policy of a public sector undertaking.
Moreover, ascertainment of pricing policy is really very difficult which may be applicable to all public sector undertakings, since the nature, size, types of one enterprise is quite different than the others, e.g., some enterprises are industrial or trading, some others are basic or which supply the essential services (like railways, electricity, telecommunications etc.).
So one price or the principle cannot effectively be used for all types of public sector undertakings. In addition to above, there are certain others factors which affect the pricing policy of a public sector undertaking, viz., competitive environments, both domestic and international.
We know that prices depend upon cost element except fiscal monopolies Cost element should be the lowest as far as possible. Higher cost may be advocated where there is monopoly or near monopoly condition enjoyed by the undertakings. But it is needless to mention that the significant characteristics of our public sector undertakings are the low productivity and surplus labour.
Moreover, additional cost arises for the following:
(i) Holding excessive inventory level;
(ii) Excess benefits and amenities provided to the staff;
(iii) Capacity under-utilization;
(iv) Systematic maintenance is not properly maintained;
(v) Overall managerial efficiency is very poor.
However, prices fixed by the public sector undertakings usually do not include a higher cost element due to the improper utilisation of resources. It is known to all that proper allocation and appropriation of resources depends upon an ideal price policy which again accelerates balanced economic growth.
Practically, the condition of the market provided the price level under condition of perfect competition, although it becomes absolutely necessary to prescribe some norms for those undertakings which are working under conditions of monopoly with their respective degrees. But either no prescribe norms/guidance is provided or provided a very little relating to the price policy in any undertakings.
Advocating Marginal Cost Technique for Pricing:
The prices of a product should be fixed in such a way so that the same will reveal its real cost, otherwise either it will increase the demand of the related scarce resources or there will be under-utilisation of capacity of resources, i.e., both are harmful.
Marginal cost is the cost of producing one extra unit/ Application of marginal cost principles is possible where the resources are distributed to an undertaking whose product becomes more valuable than the other and distribution of resources is properly made and effectively used.
Short-run Marginal Cost:
The capital assets of an undertaking is fixed while defining marginal cost is in the short- run marginal cost is one which depends on certain fixed quantity of capital.
Long-run Marginal Cost:
On the other hand, long-term marginal cost is the product of changing quantity of capital, i.e., the undertaking may change its capital assets in the long run if it so desires. It is interesting to note that the prices of public sector undertaking are associated with long- term marginal cost.
However, application of marginal cost principles will bring deficit in those undertakings where the cost is decreasing. Such deficits may be off-set by the surplus taken from others which will adversely affect them.
Another problem will arise in the case of increasing cost, that is, if prices are increased with production, the same may produce a greater surplus for which the workers will make a demand for higher wages and bonuses.
Thus, application of marginal costing should be introduced after careful analysis and assumptions and conditions. It is interesting to note that in some cases, prices may be fixed below the marginal cost level for social benefit and national interest, (e.g., prices of fertilizers are fixed at a low rate in order to increase the agricultural production).
Sometimes, the Government fixes the price which is above the marginal cost level for self- financing. (e.g., the prices fixed by the Government for water rates of the canal system in Punjab were higher than the cost of irrigation and interest on capital as revealed by Taxation Enquiry Commission).
Pricing Policy under Break-Even Principles:
Another significant method of fixing price policy of a public sector undertaking is the introduction of Break-Even Principles, i.e., no profits no loss point.
It is suggested in favour of the application that since the public sector undertakings are meant for public/nation’s good, the primary duty is to supply the goods and services at cost (including cost of capital employed) and they should not make any profit/surplus. Thus, prices should be fixed in such a manner so as to recover the cost of such product only.
However, the Taxation Enquiry Committee mentioned that ‘no profit no loss’ (i.e., Break-Even Principles) may be applied in advanced countries in public sector undertakings. They also suggested that this principle could be applied only in the initial stage of some undertakings and the same could not be recommended for neither as a permanent one nor for a long-term objective of Indian public sector undertakings.
Policy of Losses:
Some public sector undertakings, particularly in the basic and key areas, are expected to suffer losses due to the social, developmental and political factors e.g. opening of various branches of commercial banks in rural areas which produce a recurring losses to the banks.
Profit as the basis of Price Policy:
Profits of public sector undertakings proves then efficiency (although they have their monopoly power) and also serves as an important role relating to self-financing, e.g., the Indian Railways, the RBI, HMT and many others plough, back of their major portion of profits for expansion, diversification and development as well.
It is interesting enough to note that some public sector undertakings, e.g. Hindustan Antibiotics reduced the price structure due to large scale production and as such, lowers the costs.
In some areas, nationalization of some industries and services by the Government has been following by rising prices, e.g., coal and transportation sector, i.e., Indian Railways, State Roadways, Indian Airlines etc. Thus, the transport corporation has increased the rate of fare and freight due to a rise in cost and to supply the benefits to the consumers as well.
Import Parity Price:
Some public sector under-takings, have adhered to the policy of import-parity prices, e.g., the Hindustan Shipyards Ltd. decided to sell the ship to the Visakhapatnam Shipyard at a price which will approximately be equal to the cost of buildings of such a ship in the United Kingdom.
Reason in Favour of Low Pricing Policy:
It has already been mentioned earlier that the public sector undertakings, particularly these under basic and key areas, should maintain a low price policy so that the indirect benefit will be enjoyed by the public, society and the country as a whole, which is considered very important in economic legislation. The above agreement is neither always acceptable nor the same is practically applicable.
The second argument in favour of low pricing policy is that if higher prices are imposed particularly in basic and key areas, there will have an inflationary impact on the economy directly although it is not so happened in real world situation. Because, it is not possible to prove.
It is known to us that if the prices, power, freight etc. are reduced, no doubt, the same will help to increase the amount of profit in the private sector as it is a part of their cost of inputs as they fix their prices of the output in accordance with the demand and supply condition of the market.
The same is not possible in the case of public sector undertakings as they cannot fix up the prices of their output according to the market conditions even if they have to suffer losses.
Guidelines on Pricing Policy:
The Government of India has issued three guidelines on primary policy for the public sector undertakings: viz.,
(a) These must be economically viable units. As such, an attempt must be made to improve their operational efficiency and make them viable in such a way by which they can earn a reasonable amount of profit for them.
(b) The public sector undertakings which supply goods and services in a competitive way with the private sectors must operate on the basis of market condition and their pricing policies must be controlled by the prevailing market forces.
(c) The public sector undertakings which run under monopolistic or semi-monopolistic condition must fix up their prices on the basis of landed cost of comparable imported goods available in the market.
(d) Some public sector undertakings will sell their services in a subsidized price e.g., the Food Corporation of India and the State Electricity Board. Because, the prices of food-grains which is charged by the Food Corporation does not even cover the cost (i.e., including procurement, storage, distribution charges etc.)
(e) There are some undertakings which followed the method of cost plus prices. In other words, there are provided a certain percentage of profit (usually 17 ½ %) on their cost. Some public sector undertakings e.g., Hindustan Aeronautics, however follow this principle. But after liberalization, this principle practically is not taken into consideration in public sector undertakings.
(f) Some public sector undertakings adopted retention price on the basis of cost of production to make a reconciliation between the interest of producer and consumers e.g., fertilizers In other words, this system introduces uniform sale price to the consumers.
The so called retention price is ascertained on the basis of cost of production more successful units which is actually based on certain norms of consumption relating to material, labor and overhead.