Public Sector Enterprises in India: A Decade of Transformation

Syllabus: GS3/Economy

Context

• Across the world, the decline of centralised economic planning has reshaped the role of state-owned enterprises, pushing them toward efficiency, competitiveness, and innovation.
• India’s experience mirrors global trends, and reflects unique domestic policy priorities. It needs to examine how Public-sector Enterprises (PSEs) in India have evolved over the past decade.

About Public Sector Enterprises (PSEs)

• These are government-owned corporations or state-owned enterprises having majority stake (51% or more).
  • These include sectors like energy, steel, telecommunications, transportation, and finance.
  • They are categorized into:
    • Central Public Sector Enterprises (CPSEs);
    • State Level Public Enterprises (SLPEs)
• They are primarily overseen by the Department of Public Enterprises (DPE) under the Ministry of Finance.
• Classification of CPSEs:
  • Maharatna: Large, highly profitable CPSEs with significant global presence (e.g., ONGC, NTPC).
  • Navratna: CPSEs with operational autonomy and strong financials (e.g., BEL, HAL).
  • Miniratna: Smaller CPSEs with consistent profits and operational flexibility.

Why Does PSE Reforms Matter?

• Global Context: Globally, reforms in PSEs were driven by their outsized influence on national economies and the need for better service delivery.
  • Measures such as stock market listings, technology upgrades and improved corporate governance became common. More recently, PSEs have taken the lead in low-carbon transitions.
  • According to the Organisation for Economic Co-operation and Development (OECD), public entities owned over 25% of 2,037 listed companies worldwide in 2023, accounting for nearly 12% of global market capitalisation.

Key Challenges Facing India’s PSEs

• Technology Disruption and Digital Transformation: Many PSEs struggle with legacy IT systems and outdated processes; slower adoption of emerging technologies such as AI, automation, and data analytics; and cybersecurity risks due to increased digitisation;
• Skill Gaps and Workforce Transition: Key issues include mismatch between existing skills and future technology needs; slow pace of re-skilling and up-skilling programs; and rigid human resource policies limiting lateral hiring.
• Governance and Autonomy Constraints: Although governance has improved, challenges persist:
  • Limited operational autonomy due to bureaucratic oversight;
  • Delays in decision-making, especially in procurement and investment;
  • Political and administrative interference in some cases;
• Capital Allocation and Return on Investment: Capital efficiency remains uneven while CPSEs have strong balance sheets.
  • Capital expenditure decisions are sometimes policy-driven rather than commercially optimal.
  • Return on capital employed (ROCE) in several PSEs remains below private-sector benchmarks.
  • Underperforming assets continue to tie up capital
• Research and Development (R&D) Deficit: Compared to global peers, Indian PSEs invest relatively less in R&D.
  • Limited focus on product innovation and process upgrades.
  • Dependence on imported technology in strategic sectors.
  • Weak collaboration with academia and startups.
• Market Competition and Pricing Pressures: PSEs increasingly operate in competitive markets alongside private players. Challenges include:
  • Price controls or social obligations in sectors like energy and transport;
  • Lower flexibility in pricing and contracts;
  • Rising input costs affecting margins;
• Sustainability and Climate Transition Risks: The global shift toward low-carbon growth poses both opportunities and risks.
  • High transition costs for fossil-fuel-based PSEs;
  • Uncertainty around future regulations and carbon pricing;
  • Need for large investments in renewable energy and green technologies;
• Global Exposure and Geopolitical Risks: As Indian PSEs expand overseas, new vulnerabilities emerge:
  • Exposure to geopolitical instability and sanctions;
  • Currency and commodity price volatility;
  • Regulatory and compliance risks in foreign jurisdictions
• State-Level PSE Weaknesses: While central PSEs have improved, many state PSEs lag behind.
  • Poor transparency and weak financial discipline;
  • High dependence on state government support;
  • Limited reform momentum;

India’s Policy Shift: Focus on Strategic Sectors

• New PSE Policy (2020) under Atmanirbhar Bharat: It classified Central Public Sector Enterprises (CPSEs) as strategic and non-strategic.
  • The government has largely exited non-strategic sectors, while retaining a limited presence (one to four CPSEs) in strategic areas such as defence, energy and space, encouraging private participation alongside public firms.
• Financial Turnaround of CPSEs: Over the last decade, CPSEs have moved from policy paralysis and muted growth to becoming major contributors to financial value creation and capital expenditure.
  • The number of profit-making CPSEs rose from 157 in FY15 to 227 in FY25, and loss-making CPSEs declined from 77 to 63 during the same period.
  • Net profits of profit-making CPSEs increased 2.4 times, from Rs 1.30 lakh crore in FY15 to Rs 3.09 lakh crore in FY25.
  • Total paid-up capital expanded from Rs 2.13 lakh crore in FY15 to Rs 6.87 lakh crore by March 2025.
  • Net worth surged from Rs 9.85 lakh crore to Rs 22.33 lakh crore over the decade.
• Contribution to the Exchequer and Markets: CPSEs’s contribution to the central exchequer increased from ₹2.00 lakh crore in FY15 to ₹4.94 lakh crore in FY25.
  • The combined market capitalization of 66 listed CPSEs touched ₹38.57 lakh crore in March 2025, three times its level a decade earlier.
• Investment and Savings Engine: Non-financial CPSEs have played a critical role in sustaining investment demand in core sectors.
  • Gross capital formation by these enterprises has grown at nearly 12%, making them a net saving sector that accounts for about 10% of national savings.
• Financial Sector Revival: Among financial CPSEs, public-sector banks have staged a strong comeback after the twin balance-sheet crisis.
  • Consolidation through mergers, improved governance and rapid technology adoption have transformed performance.
  • Net profits of banks rose sharply, and key indicators such as return on assets and return on equity turned decisively positive by FY25.
• Exports and Global Footprint: Reforms have boosted CPSE contributions to exports, particularly in defence, engineering and commodities.
  • Defence exports reached a record ₹23,622 crore in 2024–25. Indian oil PSUs now operate 45 overseas assets across 21 countries, with cumulative investments exceeding $40 billion.
• Green Transition: Indian Railways, though not formally a PSE, illustrates Green Transition through large-scale electrification, renewable energy integration and trials of hydrogen-powered coaches, pointing towards rapid decarbonisation.

Key Recommendations for Strengthening India’s PSEs

• Deepen Governance Reforms and Board Autonomy: Strengthen independent and professional boards with domain experts;
  • Reduce excessive administrative controls and approvals;
  • Clearly separate ownership and management functions;
• Enhance Operational and Financial Autonomy: Expand the scope of the Navratna and Maharatna frameworks;
  • Allow greater flexibility in capital expenditure, joint ventures, and asset monetisation;
  • Move from input-based controls to outcome-based performance monitoring;
• Strategic Capital Allocation and Portfolio Rationalisation: Exit or privatise non-core and chronically loss-making enterprises;
  • Focus government capital on strategic sectors such as defence, energy, and infrastructure;
  • Adopt strict return-on-capital benchmarks for new investments;
• Invest in Technology and Digital Transformation: Modernise legacy IT systems and operations;
  • Deploy AI, automation, data analytics, and cloud technologies;
  • Strengthen cybersecurity and digital risk management;
• Build a Future-Ready Workforce: Launch large-scale re-skilling and up-skilling programs;
  • Introduce flexible HR policies, including lateral hiring and performance-linked pay;
  • Encourage collaboration with startups, academia, and global firms;
• Increase R&D and Innovation Ecosystems: Set minimum R&D spending targets for strategic PSEs;
  • Establish innovation labs and centres of excellence;
  • Promote joint research with IITs, DRDO labs, and private innovators;
• Align Public Service Obligations with Financial Viability: Transparently compensate PSEs for non-commercial social obligations;
  • Replace price controls with targeted subsidies where feasible;
  • Use direct benefit transfers to reduce operational distortions;
• Accelerate the Green and Energy Transition: Develop time-bound decarbonisation roadmaps for high-emission PSEs;
  • Scale investments in renewables, hydrogen, and energy storage;
  • Use green bonds and blended finance to fund transition costs;
• Strengthen Global Expansion and Risk Management: Improve governance of overseas subsidiaries and joint ventures;
  • Enhance geopolitical, currency, and commodity risk assessment;
  • Build global compliance and contract management capabilities;
• Extend Reforms to State-Level PSEs: Introduce transparent disclosure and performance benchmarks;
  • Link state financial support to reform milestones;
  • Encourage consolidation and public–private partnerships at the state level;

Source: IE