Size Economics

In the context ofsize, the trends in this country have been quite interesting. While all the
banes of large scale have accrued to private sector, the benefits of large scale have not
generally arisen. This is partly because of of the fact that the size-ccononucs, particularly of
production, are invariably linked up with the individual plants. the size of which has been
generally small. On the other hand, the banes of large scale have resulted from the scattered
nature of production units. even in those cases where the size of the establishment in the
sense of controlling unit has been large. Diversification and integration have been generally
of the conglomerate type1. It is in this situation perhapes that one may look askance at the
proposition of there being monopoly power accumulating side by side with small size units.
The overall picture is that most Indiun private sector enterprises are small scale ones, in the
corporate sector as well as outside. 2

The states themselves have not been able to do anything substantial in this respect the centre
has never taken the problem quite seriously. Not only arc private limited companies an
overwhelming majority in number but even public limited companies have small capital in
general. In particular industries, however, there has been official direction in favour of
formation of public limited companies, such as manufacture of cement. In addition. banking
and insurance companies are required to be public limited by law. Inter-State activity of
private enterprises has resulted in extending areas of central control while it has hardly
looked to the interest of proper development of areas in which such activities have been
organised or located. 3

Lack of local motivation has not only made state governments but also the people of the area
relatively uninterested, if not totally indifferent. These observations arc true in cases where
the head office is in one state and the plant activity falls in another. the markets are in states
other than that in which production takes place; and the employees come from other states, In
addition, [he directions and doses of investment under private initiative have been matters in
which the slates have been asked to help with funds and facilities but their regulatory powers
have been generally limited. The incentives and attractions offered by slates for larger
activities in desired lines have not been accorded the kind of response that the states had in
1
Hanson, A.H, Public Enterprises and Economic Development, LONDON: ROUTLEDGE AHD KEGAN
PAUL LTD, Vol.X , 385(1954)
2
Id
3
PRAKASH, JAGADISH, PUBLIC ENTERPRISES IN INDIA - A STUDY IN CONTROLS,155-169,(5 th ed.,
1980)

[1]
view. In a rather desperate way many states therefore had to start enterprises in those lines in
which activities were desired to be organised on a larger scale4

Most states did this by establishing enterprises which were public sector limited companies,
so that there could be more and more public participation. This participation has been noticed
in many different industries. Incidentally, while most public sector enterprises organised as
joint stock companies are private limited companies, of those that are public limited a larger
number are under control ofstates than that under the centre. The state government companies
have not been bound by areas indicated in Industrial Policy Resolution, 1956.

This is, an important question. The prices and return on the capital employed have remained
issues under sharp public focus. The prices charged by private enterpreneurs have looked
more to the question of their own immediate profit than any other question. The states have
not so far had much of a say in this matter. The availability of goods in the areas where goods
are produced has been subject to the level of prices ruling in them. As such. when the area
has been poor and not in a position to absorb all the goods offered. the benefit in the form of
supply of goods has not accrued to the area in question. 5

The profit motive being there, the enterpreneurs have not cared to cater for local
Jonsumption, as much as would be desirable in the interest of local development. Outside
employment. coupled with higher prices has, however. brought serious repercussions on local
markets both directly and indirectly. The pressure on consumption being pushed up, the cost
of living in the area has also gone up, so that. paradoxically, industrialisation of this type has
adversely affected the existing levels of living, leave aside improvement. In the
circumstances, the states desirous of having something done in this respect have found their
going very difficult. Any step taken by states to counter this anomalous situation would
invoke all kinds of criticism including the pet slogan of parochialism and magnified by a
section of the press and the public.

Exports

Similarly, adequate motivations have not been created for states to boost up exports,
maximise foreign exchange earnings and strengthen themselves financialIy, because all these
arc matters of central control. Lack of adequate motivation in these vital matters has resulted

4
Siedman, Harold, Public Enterprise Autonomy- Need for a New Theory, INTERNATIONA1’REVIEW OF
ADMINISTRATIVE SCIENCES, XLIX (I), 65-72,1983
5
Id

[2]
in two types of consequences. First, exercise of control over these large and widely scattered
areas has resulted in uncalIed for expansion in the central secretariat and its suburbs, as welI
as in the control agencies created for the purpose. Secondly, the control actually exercised has
not been of the kind necessary. 6

The states have played the role of spectators in this process and have faced criticisms for not
doing much in these directions. Many of these states have now started export corporations for
getting those very benefits which accrue to private enterpreneurs on exporting under various
export promotion schemes. This is a recent development in this country. Apart from addition
to the total export effort put in, this kind of direct participation has augmented the states'
discretion to spend foreign exchange in the same way as it does in the case of private
exporters. The control of such effort even when the states are participating directly rests with
the centre. I\. better alternative could perhaps have been to allocate foreign exchange to states
on the basis of total foreign exchange earnings of the states. 7

Devolution in this respect would seem to be desirable to allow each state to have an effective
economic plan without the centre having to play the role of arbiter as it has been doing.
Demarcation of power to control the activities of private enterprises bewteen the centre and
the states can hardly be real without extending the power of states over the joint stock
companies. The Administrative Reforms COli/mission has suggested decentralisation of
power among the Regional Directorates with regard to functions of inspection and
investigation, It is necessary to consider in this respect whether the central authority should
be reorganised as a federative body with effective powers transferred to states to exercise
control over the corporate sector within each state. 8

This would require creation of adequate administrative machinery in each state and the
Regional Directorates can in such cases be organised as coordinating agencies. The overall
control may rest with the centre but with the administrative control developing on the states,
the unequal distribution of corporate bodies over the states and different areas within each
state resulting in indiscriminate concentration of corporate activity in particular areas could
be better taken care of. Decentralisation of control should also apply to the banks and other
corporate bodies to take care of different rather centrifugal tendencies. such as deposits
6
PRAKASH, JAGADISH, PUBLIC ENTERPRISES IN INDIA - A STUDY IN CONTROLS,155-169,(5 th ed.,
1980)
7
Hanson, A.H, Public Enterprises and Economic Development, LONDON: ROUTLEDGE AHD KEGAN
PAUL LTD, Vol.X , 385(1954)
8
Supra Note 1

[3]
generated in one area being unduly channelised in other areas. without reference to their
genuine needs.

CONCEPT OP CONTROL

Control involves certain activities undertaken for compelling events to conform to

prearranged plans. Robert Owen, a Scottish textile manufacturer, was the first to
highlight the importance of determining whether actual performance conformed to
plans. He devised a system that enabled all workers to see how well they were doing at
their jobs . In the early 1800s, control problems were associated with the Industrial
Revolution and consequently caused Owen 's techniques gain: widespread attention.9

The primary aim of any control mechanism is to ensure that the results of operation
conform as closely as possible to the established goals. Its secondary aim is to provide
timely information that may prompt revision of goals, Henri Fayol noted that control
involves overseeing whether every- thing occurs in conformity with the plan adopted,
the instructions issued, and the principles established . According to Trewatha, the
control process includes all activities that try to match performance with established
objective .

Koontz, O'Donnell and Goetz have also defined the term control in the similar manner.
Control can also be defined as guiding and regulating the activities of business or any
of its parts by means of management judgment, decisions and actions for the purpose of
attaining agreed objective .While this being the concept of control in the management
literature, we have another dimension of control when it is applied to public
enterprises. Control, as discussed in the management literature, is mostly internal to the
organization. But in case of public enterprises, control is both internal and external in
nature. As the money of the tax payer is invested in these enterprises, it becomes
imminent to think of a control mechanism which can remain external but, still oversee
the functioning of the enterprise. As a matter of fact, 'public control' is implicit in the
very concept of 'public enterprise'. Elaborating on the concept of public enterprise,
Ramanadham considers the following three aspects as the core of a public enterprise10

 Public ownership;
 Public purpose, and
9
DRUCKER, PETER, THE PRACTICE OF MANAGEMENT, 117, (2nd ed., 1955)
10
Id

[4]
  Public control
Generally, controls in the context of public enter- prises are classified into four broad
categories, viz., ministerial, parliamentary, audit and judicial However, Ramanadham
categorized the various kinds of controls into

(i) automatic control by the Act;

(ii) direct control by the Government; and
(iii) indirect public control

For the purpose of the present study, we intend to define the concept of control to
include the following dimensions:11
 Legislative;
 Administrative, and
 Audit.
NEED FOR CONTROL

It is anybody's guess that public enterprises came into being with tqx payers' money.
This makes it imperative for the Governments to use this money with utmost care and
efficiency. As a matter of fact, efficient resource utilization entails not only appropriate
planning but also plugging of loopholes in the functioning of public enterprises. For
this very purpose, public and Parliament have frequently demanded a strict control over
the use of funds by those to whom they don't belong, and whose fortunes may not be
affected by their misuse or less effective use.12

Ramanadham, the early champion of the cause o[ public enterprise in India, notes that
the device of control rests on three considerations, viz.,

(a) the Government controls intrinsically applicable to an industrial activity ought to be

applied fully to the public enterprises engaged in that activity;

(b) the control on the private enterprises de- signed to protect the interest of the
workers or the consumers ought not to be relaxed in the case of public sector
enterprises; and

11
Siedman, Harold, Public Enterprise Autonomy- Need for a New Theory, INTERNATIONA1’REVIEW OF
ADMINISTRATIVE SCIENCES, XLIX (I), 65-72,1983
12
DAS, NABAGOPAL, THE PUBLIC SECTOR IN INDIA, 166-189,(11th ed., 1966)

[5]
(c) propitious conditions must be created for the realization of the special ends
expected of the public enterprise 13

The control of public enterprises, to be effective and bear the designed results, must
fulfill certain objectives. The Rangoon Seminar advocated the following purposes of
control on PEs:

(i) operations and policies of public enterprises are consistent with and in
furtherance of basic objectives established by the Government;
(ii) policies, directives are implemented;
(iii) public enterprises and non-business programmes operating within the same
major purpose are effectively coordinated;
(iv) operations are conducted with maximum efficiency and economy; and
(v) sufficient information is provided to enable appropriate authorities and the
public to appraise the effectiveness of operations
Primarily, control over public enterprises is essential to promote efficiency. This need
is intensified by the fact that the public sector lacks the internal organizational forces
making for efficiency, characteristic of private organization. Hanson rightly remarked
as many of the State enterprises are monopolies and all enjoy a privileged status,
special arrangements must be made to ensure that they maximize their performance.
The control agencies have to promote conditions conducive to efficiency. The familiar
plea for public control is on the ground that the managers have no personal interest of
direct financial gain. The control system should enhance efficiency of the enterprises
instead of imposing restrictions.14

The object of attaining targeted results assumes greater importance in public enterprises
than in the case of private enterprises. Apart from the specialized targets of individual
enterprises, there may be certain overall criteria of the public interest which all of them
are expected to satisfy. Private enterprises do not have to fulfill the national interest but
the public enterprises cannot ignore general ends and national interest and they are
required to serve deeper social objectives of general and national character. It is

13
PRAKASH, JAGADISH, PUBLIC ENTERPRISES IN INDIA - A STUDY IN CONTROLS,155-169,(5 th ed.,
1980)
14
RAMANADHAM V. V, THE NATURE OF PUBLIC ENTERPRISE, LONDON CROOM HELM, 5-16.(3 rd
ed.,1984)

[6]
necessary that even these are to be specified with reference to each enterprise or each
major category of enterprises.15

Like this, there are a host of objectives of control over public enterprises. It is the
function of control to provide checks against the undue exercise of powers of
managers. It is also highly desirable that the control agency should have sufficient
power to minimize and regulate concentration of economic power.16

Ensuring financial accountability is another important objective of control over public

enterprises. As huge sums of money of the people are invested in public enterprises,
control over them is inevitable to ensure financial propriety. In the words of Hanson,
the management of these concerns should be made responsible to some higher public
control authority so that misuse and waste of funds may be

avoided and minimized ll. In democratic countries, control over public enterprises is
essential to ensure ministerial accountability to Parliament. There must be adequate
guarantee that for the influence exercised by the Minister either formally or informally
over a public enterprise, he is made suitably responsible to Parliament. Ensuring co-
ordination is also one of the important objectives of control.17

From the above statement of objectives of control of public enterprises, it may be

inferred that control is not synonymous pith restriction over the activities of the
managers. In the words of Ramanadham, two of its essential implications are not so
widely realised in India, as they ought to be, viz., the eventual purpose of control is to
offer the public enterprises real conditions of efficiency, and the managers of public
enterprises deserve to be controlled, if the results of the public sector should be ideal on
grounds of economic performance and constitutional propriety .It is clear from the
above discussion, that control is inevitable.

To make control more logical and meaningful, certain essential features are identified
which are expected to go with the control mechanism. Firstly, the control should be
positive. The positive approach emphasizes that efforts should be made to create
suitable conditions which may help in smooth working of an enterprise and

15
ROBSON, W.A, PROBLEMS OF NATIONALIZED INDUSTRY, 105-109.(4th ed., 1952)
16
Id
17
PRAKASH, SURYA, PARLIAMENTARY CONTROL OVER PUBLIC ENTERPRISES IN INDIA, 56-89,
(2nd ed.,1985)

[7]
enhancement of its efficiency. It should lay stress on removing obstacles which might
be inhibiting attainment of the desired level of efficiency.18

Secondly, control should be strategic and permissive. It should be limited, setting

broader objectives and evaluating performance. The Government by getting involved in
the details of day-to-day management becomes a party to the daily decisions of public
enterprise and loses its right to hold the public enterprise management solely
responsible for its performance. Dispersed control is tantamount to undue interference.
Thirdly, the control system should be reinforced through strong corporate cultures,
infusing selected performance oriented values. The system of control should be of the
right type but not the one which misdirects attention to unimportant things and neglect
important ones. To control everything is to control nothing. 19

And to attempt to control the irrelevant always misdirects If the control is incorrectly
exercised, too much or, too little of it, or, if it is handled by wrong people, it a wrong
direction, fails to produce the desired effects. Fourthly, a good control system should
focus on the output to be produced by the organization and specify the inputs required
to produce these outputs efficiently. Individual processes through which inputs are
converted into outputs should not be controlled. This results in many . Control by
results should be emphasized.

Fifthly, control should be effective. Ineffective control is worse than no control,

because, while it inhibits operational initiative by an external apparatus, it fails in its
objectives of regulating matters in those areas where regulation is essential. Lack of
effective control in public enterprises leads to a situation where there is either no
control or control by bodies without political responsibility. Truly speaking, effective
control has no alternative.20

Finally, control should be qualitative. Ravi Ramamurti brings out the fact that public
enterprises have failed to achieve the promised benefits because the Government con-

18
Id
19
DRUCKER, PETER, THE PRACTICE OF MANAGEMENT, 117, (2nd ed., 1955)
20
PRAKASH, SURYA, PARLIAMENTARY CONTROL OVER PUBLIC ENTERPRISES IN INDIA, 56-89,
(2nd ed.,1985)

[8]
trolls have invariably been high in quantity but low in quality The important point in
all this is that if the Government finds a way to raise the quality of control, they can
raise both managerial autonomy and managerial accountability.21

21
Id

[9]