Revitalizing India’s Public Sector: Strategies for Improvement

India’s Public Sector Undertakings (PSUs) were built with a mission – to be the engine of a newly independent nation’s industrial growth. For decades, they delivered on that promise, building steel plants, running airlines, and providing energy to millions. But over time, many of these enterprises accumulated structural problems: overstaffing, bureaucratic decision-making, mounting losses, and an inability to compete in a liberalizing economy. The question was no longer whether change was needed, but how to bring it about without dismantling the public sector entirely. The answer came in the form of a comprehensive, multi-pronged reform strategy – one that is still evolving today.

Why reform became unavoidable 🔗

By the late 1980s, India’s PSUs had drifted far from their core mandate. Many had expanded into non-core areas like hotels and consumer goods, becoming tools for political patronage rather than economic development. The result was low capacity utilization, reduced productivity, a failure to innovate, and complex decision-making that made quick responses to market changes nearly impossible. The balance of payments crisis of 1991 forced a reckoning. The government could no longer sustain the fiscal drain of loss-making enterprises, and a new industrial policy was drawn up that same year – one that fundamentally redefined the role of public sector enterprises.

Disinvestment: refocusing the state’s role 🔗

Disinvestment is one of the most significant – and most misunderstood – reform tools. It does not simply mean “selling off” government companies. At its core, it is a strategy to refocus the government’s resources where they matter most, while reducing the fiscal burden of running non-essential enterprises.

Strategic vs. non-strategic sectors 🔗

The 2021 New Public Sector Enterprise Policy for Atmanirbhar Bharat formally divided CPSEs (Central Public Sector Enterprises) into strategic and non-strategic sectors. In strategic sectors – such as atomic energy, defence, banking, and critical infrastructure – the government retains a significant presence because national security and public welfare depend on it. In non-strategic sectors, where private enterprise already operates effectively, CPSEs are considered for privatization, merger with another PSE, or closure. This distinction ensures that disinvestment is targeted and purposeful, not a blanket sell-off.

Types of disinvestment 🔗

India has used several methods of disinvestment over the years. Minority disinvestment allows the government to retain majority control (above 51%) while selling smaller stakes to raise funds and introduce market discipline. Strategic disinvestment involves transferring management control to private players, bringing in professional management. Complete privatization transfers full ownership. According to research published in the International Journal of Creative Research Thoughts, disinvestment policies have become a key part of economic reforms to improve the accountability, efficiency, and competitiveness of PSUs – though they have also triggered important debates about transparency, social impact, and the role of the state.

Public participation through equity offers 🔗

One particularly powerful reform has been inviting ordinary citizens to become part-owners of PSUs through the capital market. When a PSU lists its shares via an Initial Public Offering (IPO) or a Follow-on Public Offer (FPO), it opens itself up to public scrutiny. A company listed on a stock exchange must comply with strict regulations set by SEBI – publishing quarterly results, maintaining transparency, and being accountable to thousands of shareholders, not just a single ministry. The LIC IPO in 2022 is a prominent recent example of this approach. Beyond accountability, equity offers also raise substantial capital that PSUs can redirect toward modernization, technology upgrades, and expansion.

DIPAM’s policy (Department of Investment and Public Asset Management) explicitly aims to promote public ownership of CPSEs by ensuring every listed CPSE meets the minimum 25% public shareholding threshold through OFS or FPO mechanisms. This widens the stakeholder base and creates a culture of performance-driven governance.

Management autonomy: the ‘Ratna’ framework 🔗

One of the most structurally significant reforms has been reducing government interference in day-to-day PSU management. For years, PSU managers had to seek ministerial approval even for routine business decisions – a system that paralyzed quick decision-making. The solution was the Memorandum of Understanding (MoU) system, first introduced in the late 1980s, followed by the graded autonomy scheme – the Ratna classification.

How the MoU system works 🔗

Research findings consistently show that PSEs which signed MoUs demonstrated decisive improvements in financial performance compared to non-MoU PSEs. MoUs are performance contracts – mutually negotiated agreements between the government and a PSU’s board that set specific financial and non-financial targets for the year. The government retains its role as the principal shareholder setting targets, while the management gets the operational freedom to achieve them. Performance is evaluated on a five-point scale, and results directly influence eligibility for performance-related pay, creating real incentives.

Maharatna, Navratna, and Miniratna 🔗

Building on this, the government introduced a tiered autonomy framework based on financial performance. As of 2025, there are 14 Maharatnas, 26 Navratnas, and 65 Miniratnas – each tier enjoying progressively greater independence.

Maharatna companies (such as ONGC, NTPC, and IOCL) represent the top tier. To qualify, a PSU must already hold Navratna status, be listed on Indian stock exchanges, and demonstrate at least ₹25,000 crore in average annual turnover, ₹15,000 crore in net worth, and ₹5,000 crore in net profit after tax over three years. In return, their boards can make investment decisions of up to 15% of net worth in a single project, form global joint ventures, and undertake mergers and acquisitions – all without seeking government approval for each move.

Navratna companies (such as HAL and BEL) enjoy the freedom to invest up to ₹1,000 crore or 15% of their net worth in a single project, raise debt from international markets, and enter strategic alliances – operating much like transnational corporations.

Miniratna companies are smaller but profitable PSUs that receive scaled autonomy to make faster decisions within defined financial limits, without waiting for clearances that would slow them down.

This framework directly addresses a long-standing criticism: that providing sufficient autonomy to managers enhances their performance capacities by empowering them to deploy organizational resources more effectively. With authority comes accountability – and with accountability comes results.

Manpower optimization: the workforce challenge 🔗

Overstaffing has been one of the most persistent problems in India’s public sector. Many PSUs employed far more people than their operations required – a legacy of social employment policies and trade union influence. Addressing this without triggering mass unrest required a measured, humane approach.

The Voluntary Retirement Scheme (VRS) 🔗

The Voluntary Retirement Scheme (VRS), governed by guidelines from the Department of Public Enterprises, has been the primary tool. Often called the “Golden Handshake,” VRS offers employees above 40 years of age with at least ten years of service an attractive early retirement package – including a lump-sum payment calculated at 45 days’ salary per year of service, provident fund benefits, and gratuity. Critically, once an employee takes VRS, their position is not refilled, directly reducing headcount.

The scheme has multiple benefits. For PSUs, it reduces operational costs and improves productivity through a leaner workforce, while avoiding the legal complications of direct retrenchment under the Industrial Disputes Act of 1947. For employees, it provides financial security and a dignified exit. The Narasimham Committee II recommended VRS specifically for public sector banks to address overmanning, and over 100,000 bank employees across various cadres took up the offer in the subsequent years.

Reskilling and modern recruitment 🔗

Manpower optimization is not only about reducing numbers – it is equally about building the right capabilities. PSUs are increasingly investing in reskilling existing employees for roles in areas like data analysis, digital operations, and renewable energy. Simultaneously, fresh recruitment is being channeled toward specialists with skills relevant to 21st-century operations, ensuring PSUs do not simply shrink but evolve.

Strategic planning and better financial control 🔗

Beyond structural reforms, improving PSU performance also requires stronger internal management systems. A major shift has been the move from reactive, short-term decision-making to long-term strategic planning. PSU leadership is now expected to define where the company should be in five or ten years, identify key growth sectors, assess competition, and build a roadmap – not merely respond to annual government directives.

On the financial side, the 1991 industrial policy reforms pushed PSUs toward market-oriented practices, including professional financial management and the adoption of accrual accounting norms. Better financial control means identifying inefficiencies in procurement, reducing cost overruns in projects, and ensuring that capital expenditure translates into productive output. The shift from cash-based to accrual accounting, in particular, provides a far more accurate picture of a PSU’s financial health – enabling better planning and reducing the risk of hidden losses accumulating unnoticed.

Focusing on high-priority areas 🔗

The overarching philosophy behind all these reforms is concentration over dispersion. For decades, PSUs spread themselves thin – running hotels, manufacturing consumer goods, and operating in sectors that had no strategic rationale for government ownership. The reformed approach insists that the government’s presence must be limited to areas where it adds irreplaceable value: critical infrastructure, energy security, defence, financial inclusion, and social welfare delivery.

This focus on high-priority areas also means that PSUs remaining in the public fold are expected to become world-class in their chosen domain. The Maharatna framework explicitly envisions these enterprises competing globally and emerging as Indian multinationals – not just surviving in the domestic market with protected advantages.

The results so far are mixed but directionally positive. Government of India documentation notes that disinvestment is now seen not only as a tool to shore up government finances, but also as a means for crowding in private investment by vacating non-strategic sectors. Larger PSUs – particularly Maharatnas – have shown they can perform at par with, and sometimes better than, comparably sized private firms. The challenge remains with mid-tier and smaller PSUs, where reform still has significant ground to cover.

What do you think? As India pushes PSUs toward global competitiveness, is there a risk that the drive for efficiency could come at the cost of the social and developmental mandates these enterprises were originally built to fulfill? And given that disinvestment targets have been missed more often than met in recent years, what structural changes would make the reform process more consistent and effective?

References

1. https://en.wikipedia.org/wiki/Disinvestment_in_India
2. https://dipam.gov.in/disinvestment-policy
3. https://ijcrt.org/papers/IJCRT2508609.pdf
4. https://www.sebi.gov.in/
5. https://www.researchgate.net/publication/241674435_Impact_of_MoU_on_financial_performance_of_public_sector_enterprises_in_India
6. https://en.wikipedia.org/wiki/Public_Sector_Undertakings_in_India
7. https://vajiramandravi.com/current-affairs/maharatna-navratna-and-miniratna/
8. https://askfilo.com/user-question-answers-smart-solutions/criteria-for-navratna-status-for-psus-it-should-have-a-3334383838363137
9. https://academic.oup.com/ppmg/article/6/1/54/7022161
10. https://dpe.gov.in/dpe-guidelines/voluntary-retirement-scheme-(vrs)
11. https://cleartax.in/glossary/voluntary-retirement-scheme
12. https://lotusarise.com/public-sector-reforms-in-india-upsc/
13. https://egrowfoundation.org/blog/disinvestment-in-public-sector-enterprises-and-its-changing-dynamics/