The public sector did not show better financial performance or profitability. Give
reasons.
Answers
lack of importance of profit motive
Answer:
It is usual to judge the performance of private sector units by the yardstick of net profit or loss since in their case, maximization of profit is the sole aim. This yardstick fails miserably in the case of public sector undertakings.
Such units are frequently started in those sectors where profitability is low and gestation period long. For instance, investment in infrastructure and basic industries is not likely to yield early returns and, accordingly, profits in the beginning are likely to be very low and in some instances, may even be negative.
Yet these investments serve important ends since they create the basis for expansion of industrial activities in the future. Investments made by the public sector in the steel industry, fertilizers, power projects, mining, etc., come under this category.
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Then, in some cases, public sector provides inputs to the private sector (for example, iron and steel to machine building, tools, automobile industry, etc.) It is very easy for it to earn huge profits by merely hiking the prices of its output.
However, this is likely to have an adverse impact on the industrial activity in the private sector on the one hand, and push up prices on the other. Accordingly, prices are intentionally kept low even though this cuts into the profits of the public sector seriously. Also, as noted by Hazari and Oza, private sector has invested mostly in consumer and lighter goods which have been granted far greater protection against external competition as compared to capital goods which were mostly produced by the public sector and which faced stiff competition from imports financed by aid and foreign private investment.
Another point that needs specific mention is that the public sector is not merely capital-intensive and characterised by longer gestation periods; in steel, which accounts for the bulk of investment, it is also material intensive, and that extent its value added component is smaller than in items like, say, chemicals.
Because of considerations such as these, it is often maintained that the performance of the public sector units should not be judged by what they earn in the form of profits but by the total additions they make to the flow of goods and services in the economy.
Explanation:
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