After reading this article you will learn about Public Sector in India:- 1. Introduction to Public Sector 2. Objectives of Public Sector 3. Growth 4. Financial Management.
Introduction to Public Sector:
It is known to us that public sector means and includes all those activities and/or functions including the services which are performed, controlled or regulated or owned by the State Government, i.e., the public sector comprises of State enterprises.
In the past, its area was limited. But, at present, the Government under the control of planning and welfare State, took a number of schemes with the result that the field of public sector had to be widened.
In other words, India has much extended the sphere of public sector and consequently extend the sector according to the needs of the industrial policy of the country. As a result, State participation in the field of economic activities is ever increasing.
Reasons for Increasing State Participation:
The reasons for increasing State participation are noted below:
(a) Low Savings and Investment:
The savings and investment pattern of the country is very low. Private sector is totally proved to be failure i.e., neither they mobilised the resources nor applied properly the foreign investment opportunities for the development of the country.
On the other hand, the position is better in the case of public sector since the State squeezes the additional savings and invests the same for the development of the country as a whole.
(b) Establishment of Large Scale or Heavy Industries:
Since the resources of the private sector undertaking is limited, heavy or large scale industries cannot be operated for lack of funds/resources e.g., Iron and Steel industry that needs a larger amount of funds which is not possible to supply by the private sector. The same is quite possible under the public sector as because the state can accommodate the necessary funds.
(c) Concentration of Economic Power:
Concentration of economic power restores in the hands of a few under private sector. If the public sector industries develop the same can check the growing disparities and maintains a balance.
(d) Profit Motive Criterion:
It is needless to say that private sector undertakings do not find any interest on the less-profitable undertakings since its object is to earn maximum profit even if it may be considered as necessary for the social benefit and for the development of the country as a whole or which attains self-sustained economic growth.
That is why, under the circumstances, public sector undertakings should come forward in order to develop the neglected sectors since it has a service motive.
(e) Uneven Distribution of Resources:
In order to make a balanced development of trade and commerce, the Government should not leave the entire field of trade and commerce under private sector which practically invites uneven distribution of resources within the country which also affect the promotion of export trade with foreign countries.
We know that the primary objective of the public sector undertaking is to do the greatest good to the greatest number and to supply social services for the benefit of the largest section of the people. At the same time, it becomes necessary to strengthen the position of the state as a whole.
The same is accepted by the new industrial policy of the Government of India which states that, “the nation has now set itself to establish a social order where justice and equality of opportunity shall be secured to all the people” etc.
Objectives of Public Sector:
The general objectives of public sector are:
(a) To provide required investment and promotion of industrial activity by way of indirect public investment either by supplying financial assistance to private sector or to supply infrastructural and basic activities;
(b) To supply socio-economic developmental opportunities which should not be transferred to private sector undertakings;
(c) To nationalize those companies which are foreign dominated,
(d) To supply activities relating to import-substituting and export-promoting which are essential for the development of the country;
(e) To develop savings by mobilizing resources with the help of proper public sector prices more quick than others;
(f) To introduce certain activities to take the benefit of foreign aid and co-operation in the public sector;
(g) To make a balanced regional development by establishing regional promotional undertakings in less developed regions, e.g., D V. C (Damodar Vally Corporation);
(h) To protect the interest of small farmers by transferring all private licences to the corporations of agricultural reforms;
(i) To control the concentration of economic power and wealth as well;
(j) To make a social control on long term capital by supplying the necessary financial assistance through public financial institutions which are quite justified;
(k) To supply necessary finance for various development programmes which are essential for the development of the country;
(l) To make opportunities for employment and to form a rational society which is absolutely desired;
(m) To re-distribute incomes either by raising wage levels and checking higher salary level or by supply outputs at a concessional rate to the poor etc.
(n) To generate surplus resources for future growth and development; and
(o) To use human resources and material resources in a better way.
Growth of Public Sector in India:
The public sector undertaking is growing at a rapid rate after independence. At present in our country, there are 750 State public sector enterprises and 225 central public sector enterprises approximately employing nearly about 1,00,000 managers.
During 7th Five year plan, on an average 50,000 crore of rupees were invested at the beginning in public sector enterprises which brought a remarkable contribution in the field of economic development Needless to mention here that these public sector enterprises covered all economy sector.
However, as per Standing Conference of Public enterprise, public sector enterprises are divided into the following nine categories, viz.:
(i) Public sector enterprises must supply essential infrastructure for economic development which are known as primary public utilities which include the following: Airlines, Shipping, Railways, Power Generation, Telecommunication etc.;
(ii) Public sector enterprises also to have control of the “commanding heights of the economy” e.g. Defence, Banks, Coalmines, Oil, Steel etc.
(iii) They are to play an entrepreneurial role which is, in other words, called capital intensive industries: e.g., Iron ore, Petro-Chemicals, Fertilizer, Mining, Ship- Building. Heavy Engineering etc.
(iv) Public sector enterprises under Government monopoly which includes: Telecommunication equipment. Defence production. Railways, Rolling Stock etc.
(v) Public sector enterprises which are exclusively meant for High Technology industries, e.g.: Atomic energy.
(vi) Consumer oriented public sector undertakings, viz.:
Drug. Paper, Hotels etc.
(vii) Public Sector enterprise which is set up in order to take over the sick private units, e.g.: Textile, Engineering etc.
(viii)Public sector enterprises which are set up as Trade Corporation, e.g.: FCI, CCI, STC etc
(ix) Public sector enterprises which serves as a consultancy and engineering service etc. e.g. MECON.
It becomes crystal clear from the above nine categories of public sector enterprises that public sector enterprises vary from industry to industry relating to its investment pattern, the nature of operation, the number of workers, its market both in national and international, locational factors, availability of raw materials, power, transportation, financial facilities, national and international collaboration, the nature of product, i.e. whether wealth it is monopolistic or competitive one.
Financial Management of Public Sector:
It is interesting to note that the principles, techniques and application of financial management which are discussed in this volume earlier are equally applicable to all sectors whether private or public. Only certain specific features will be highlighted in the present study which arises primarily from State/Government and control and ownership.
Public sector enterprises do not possess a basic framework where efficient financial management may be introduced in most of the cases. The Report of the Comptroller and Auditor General of India (Union Government, Commercial) stated that a large number of public sector undertakings have no procedure for compilation and maintenance of accounts and as such, internal audit system is very poor.
Even some firms neither maintain any systematic cost record nor follow inventory control methods for the purpose of proper evaluation Credit collection system is faulty in many cases and large capital is blocked in receivables and inventories. As a result, working capital is not properly utilized.
Weak Areas of Financial Management:
The followings are the weak areas of financial management which need careful attention:
(i) Cash Management;
(iii) Internal Audit; and
(i) Cash Management:
It may be recalled that adequate cash balance should always be maintained by a firm. But it does not necessarily mean that the firm should hold excessive cash balance since it is a non-earning asset. Excessive cash balance will not only impair firms’ profitability but also gives a lower asset turnover ratio. Therefore, optimum cash balance should be maintained.
It is needless to mention here that cash management involves the three following factors: viz.
(a) Ascertained of minimum cash balance;
(b) Proper arrangement to be made for collection and payment of cash in such a way so that minimum balance can be maintained; and
(c) Surplus cash, if any, may be invested in temporally investments.
It is known to us that public sector undertakings have a painful experience relating to release of funds from the Government for the purpose. When the funds are required for capital project and the same should be financed by the Government, it is better to prepare a time-table for the release of funds from Government and when they are needed particularly for the benefit of the enterprise.
At the same time, a similar schedule of funds released by the Government should also be maintained by the public sector undertakings when it experiences a deficit and is not able to earn sufficient income in order to meet its revenue expenditures. With the help and co-operation from the Ministry of Finance and parent ministries, it becomes necessary for the undertaking to chalk out a detailed programme for such schedule.
From the discussion made so far, it becomes clear that public sector undertakings should prepare a cash flow chart and invest the surplus funds, if any, and the funds taken from the Government, in the most economical and efficient manner. In order to maximise the return on investment, a firm must go for efficient management of its resources. Same principle is also applicable in the case of public sector undertakings.
Traditional budgetary control system is being followed by the public sector undertakings like private sectors. It is interesting to note that the technique of classifying expenditure in the budgets does not have any relation with its actual performance although the same becomes necessary for performance budgeting and future estimates.
Practically they do not produce any valuable information to the management except an instrument for controlling expenditure for acquiring funds.
Some notable public sector undertakings present their budget simply by showing the distribution of expenditure in terms of actual performances which primarily satisfies the basic needs of performance budgeting although they do not produce the detailed or comprehensive pictures.
Comprehensive budget/ performance budgeting is very useful in public sector undertakings, particularly of those who are very big in size. Because, if the budgets are not prepared according to the individual needs of performances it would be very difficult to control the financial activities i.e., performance budgeting is essential.
The performance budget is one where plan and control of performances of individual sectors, areas and functions of management are established. The basic issue involved in the fixation of performances budget is that of developing work programmes and performance expectations by assigned responsibility, necessary for the attainment of the goals and objectives of the enterprise.
The steps involved in the establishment of a successful system of performance budgeting are:
(a) Establishment of well-defined centre of responsibility;
(b) Establishment for each responsibility centre;
(c) Forecast the amount of expenditure under the various classification heads; and
(d) Evaluation of performance
Needless to mention in this respect that a budget is prepared in order to fulfill the following objectives:
(a) To attain the desired ends, the desired policies are to be formulated;
(b) To create definite ideas relating to short-term and long-term aims and objectives;
(c) To prepare integration and co-ordination among the various departments and activities;
(d) To motivate the related departments and persons for attaining the desired ends and goals; and
(e) To act as a guide for management decisions.
Thus like private sector undertakings, public sector undertakings should always prepare the budgets which must cover the following:
(a) Sales Budgets;
(b) Purchase Budget;
(c) Product Budget;
(d) Production Cost Budget (i.e., Material Budget, Labour Budget, Factory Overhead Budget);
(e) Administrative Overhead Budget;
(f) Selling and Distribution Overhead Budget;
(g) Plant Utilization Budget;
(h) Capital Expenditure Budget;
(i) Cash Budget, etc.
It may be mentioned here that if one wants to take the advantages from the comprehensive budgeting requires a high efficient levels of management, co-ordination and cooperation as well.
But it is a matter of regret that practically no public sector undertaking maintains such knowledge, efficiency and proper environment to implement such budgeting system. Of course, the Government and a few public sector undertakings are trying to implement such budgeting system as a tool of planning and control since they have realised its benefit.
(iii) Internal Audit:
In the present day business world, very often a process of continuous checking of accounting entries is taken into consideration and is conducted daily by separate internal staff in order to measure the appraisal of performance in the context of established policies, procedures and norms.
This procedure is known as internal audit which is carried out in greater details than external audit. Even if internal audit is in operation, final audit is conducted by an external auditor.
In other words, internal audit is similar to internal control and checking to some extent excepting that the former is entrusted to internal stuff whereas the latter is concerned with systems or methods of efficient workings.
Thus, internal audit in many cases includes internal control and checking. Practically, internal audit is a tool of management for ensuring efficient working, compliance with plans, policies, procedures, rules etc. which are very significant in the present day business world.
From the above discussion it may be stated that internal audit is the .independent appraisal of activity within an organisation for the review of accounting, financial and other business practice as a protective and constructive arm of management.
It is a type of control which functions by measuring and evaluating the effectiveness of other types of control, i.e., it implies an audit of the accounts by the employees of the undertakings.
So, the function of an internal auditor is like an external auditor. It is a kind of continuous audit but conducted by the staff of the organisation. Although it is desired that internal auditor should have a link with the top management for better effectiveness and results, but in most of the public sector undertakings, internal auditor is related with finance director or financial adviser/manager.
However, from time to time, the Government and the parliamentary committee have understood the usefulness and importance of internal auditing system which should be applied in all public sector undertakings.
On the basis of such audit, a comprehensive audit manual should be prepared. But public sector undertakings are not coming forward in this regard. It may be mentioned here that the report of the comptroller and Auditor General of India in this regard is very much disappointing relating to such audit in almost all public sector undertakings, e.g. BHEL, Maruti Udyog, Heavy Engineering Corporation etc.
Usual costing techniques and procedures are not adopted in the public sector undertaking like a big private sector undertaking due to the following:
(a) Public sector undertakings have no role on such items of cost which are fixed by public policies, i.e., even if it produces a higher cost, they do not find any interest on such activities.
(b) Since most of the public sector undertakings either have monopoly power or have captive buyers or others like Railways, Defence etc. supply direct physical product, they do not bother about cost.
(c) It is also known to all that the managers or administrative staffs of a public sector undertaking have no financial stake for its proper functions, operations and control and as such they are not interested in cost.
(d) The project report of the public sector undertakings does not present proper weight on the cost per unit and as such, the undertakings are not basically bound to interpret and analyze and to compare the project estimate with the actual.
The public sector undertakings should use properly their human and other resources for reducing the costs. In order to improve indicators of performances certain procedures should carefully be followed by them which ultimately will help to control costs for financial stability.
It is, however, needless to mention here that, most of the public sector undertakings do not possess any proper system for ascertaining cost or for introducing costing methods and techniques which has been corroborated by the Audit Report (Commercial) 1991 presenting the following examples:
i. Hindustan Cables— It does not ascertain the standard cost of the primary product;
ii. Gardan Reach Shipbuilders — It does not maintain proper records for ascertaining the loss in production for the primary product etc.
Conclusion to Public Sector:
From the foregoing discussion it becomes clear that the methods/techniques of financial management as well as control require careful attention for its development in public sector undertakings. The insufficient and improper uses invite the overall deficiency on the part of the management.
If the various financial developed techniques, viz, budgetary control, costing, internal audit etc. are not introduced, it will be impossible for such public sector undertakings to stay in this competitive world.