The evaluation of the performance of public sector is rather difficult. Public enterprises should be evaluated in terms of social cost-benefits rather than commercial profitability alone.
The performance of the public sector can be made on the following grounds:
1. The share of the public sector in the net domestic product has been steadily increasing. The public sector accounts for one-fourth of the total income of the economy. The compound rate of annual growth of the public sector was 6 per cent whereas that of the private sector was only 2.8 per cent.
2. If we evaluate the relative efficiency of investment in the public enterprises against the performance of private enterprises, we find that private enterprises are, on an average, 2.5 times more profitable than public enterprises.
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For every hundred rupees invested, the private enterprise yields a return of Rs. 11.40, while the same amount in the public enterprise yields only Rs. 4.70.
We must not forget that public enterprises are mostly concentrated in basic, core and heavy industries where the rate of return is very low and also in sick enterprises taken over by the Government, such as the National Textile Corporation and Coal India Limited.
The economic efficiency of a public sector industry should be considered in terms of the transformation of the industrial structure, modernisation, higher labour productivity on a countrywide scale etc.
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The fact is that a higher proportion of the value produced by the public sector industries is realised outside this sector and it is therefore very difficult to estimate the efficiency of public sector enterprises in terms of cost and profitability.
B.H. Dholakia advocates the adoption of the total factor productivity criterion to judge the efficiency of public sector enterprises.
The criterion examines the contribution made by the enterprise to the country’s net national product in terms of rent, wages and salaries, interest and profit.
Adopting this criterion Dholakia finds that over the period 1967-68 to 1975- 76, the overall economic efficiency of the public enterprises increased at a rate of 2.44 percentage points per annum whereas that of private sector enterprises could increase by only 0.59 percentage points per annum.
3. Share in Capital Formation:
Public sector has played an important role in capital formation. The share of the public sector in the total gross fixed capital formation in the country was 41 per cent during the first and second Plans and 49 per cent during the third Plan.
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It reduced to 42 per cent in the fourth Plan and 40 per cent in the fifth Plan. But it again rose to 47 per cent in the sixth Plan and 48 per cent in the seventh Plan.
It should be pointed out that investment in the private sector producing luxury goods should be evaluated lower than the similar type of investment in the public sector which is engaged in the production of basic goods and infrastructural services to the economy.
Considering this, capital formation in the public sector is very significant for a developing economy like India.
4. Public Sector Enterprises and Employment:
In India the organised sector is very small as it provides 10 per cent of the total employment in the economy and about 90 per cent is provided by the unorganised sector.
The workers employed in the public sector constituted only 7 per cent of the total labour force in the country and those employed in the organised private sector was 3 per cent. The number of persons employed in the public sector enterprises stood at 23.05 lakhs as on March 31, 1991.
The public sector is a model employer which provides the workers better wages and other facilities compared to the private sector. The public sector enterprises have also spent huge amount for the development of townships around industries.
5. Public Sector and Foreign Exchange Earnings:
Foreign exchange earnings of public enterprises have been substantial and they have also helped in saving foreign exchange through their efforts at import substitution. Capital goods and industrial machinery which were imported about three decades ago are now being manufactured in the country itself.
This has saved valuable foreign exchange. Public sector export earnings went up from Rs. 2143 crore in 1980- 81 to Rs. 6366 crore in 1989-90. In addition to actual exports by manufacturing units foreign exchange is also earned from services rendered by air corporations and shipping companies etc.
6. Financial Performance:
The value of sales of public sector enterprises is an indicator of their contribution to the flow of goods and services in the economy. The total turnover of public enterprises amounts to Rs. 1, 18,355 crore in 1990-91.
Public enterprises contribute to national exchequer in the form of interest on government loans, income tax and excise duty. In 1990-91 Central Government units generated about Rs. 11,372 crore of resources; it contributed about Rs. 1,400 crore towards tax and Rs. 4,100 crore towards interest.
As far as net profit after tax is concerned, the position was unsatisfactory up to 1980-81. However, the situation improved and public sector made impressive profits. In 1981-82 net profit after tax was Rs. 445 crore which went upto 3,789 crore in 1989- 90 but fell to Rs. 2,368 crore in 1990-91.