UPSC Prelims 2014 CSAT Paper II · Q57 of 65 Comprehension easy

Passage

Passage – 2 Net profits are only 2·2% of their total assets for central public sector undertakings, lower than for the private corporate sector. While the public sector or the State-led entrepreneurship played an important role in triggering India's industrialization, our evolving development needs, comparatively less-than-satisfactory performance of the public sector enterprises, the maturing of our private sector, a much larger social base now available for expanding entrepreneurship and the growing institutional capabilities to enforce competition policies would suggest that the time has come to review the role of public sector. What should the portfolio composition of the government be ? It should not remain static all times. The airline industry works well as a purely private affair. At the opposite end, rural roads, whose sparse traffic makes tolling unviable, have to be on the balance-sheet of the State. If the government did not own rural roads, they would not exist. Similarly, public health capital in our towns and cities will need to come from the public sector. Equally, preservation and improvement of forest cover will have to be a new priority for the public sector assets. Take the example of steel. With near-zero tariffs, India is a globally competitive market for the metal. Indian firms export steel into the global market, which demonstrates there is no gap in technology. Indian companies are buying up global steel companies, which shows there is no gap in capital availability. Under these conditions, private ownership works best. Private ownership is clearly desirable in regulated industries, ranging from finance to infrastructure, where a government agency performs the function of regulation and multiple competing firms are located in the private sector. Here, the simple and clean solution — government as the umpire and the private sector as the players is what works best. In many of these industries, we have a legacy of government ownership, where productivity tends to be lower, fear of bankruptcy is absent, and the risk of asking for money from the tax payer is ever present. There is also the conflict of interest between government as an owner and as the regulator. The formulation and implementation of competition policy will be more vigorous and fair if government companies are out of action.

The portfolio composition of the government refers to

  1. (a) Public sector assets quality.
  2. (b) Investment in liquid assets.
  3. (c) Mix of government investment in different industrial sectors. ✓ UPSC's answer
  4. (d) Buying Return on Investment yielding capital assets.

Why the answer is (c)

• The passage explicitly asks, 'What should the portfolio composition of the government be?' and immediately follows with examples of specific industries like airlines, rural roads, public health, and steel.

• It argues that some sectors (like rural roads) must remain on the State's balance sheet, while others (like steel and airlines) work best under private ownership.

• The text discusses the strategic decision of which industrial sectors the government should own versus which should be privatized to optimize performance and competition.

• Therefore, 'portfolio composition' in this context refers to the strategic mix of government investments across various industrial sectors, not just the quality of assets or financial liquidity.

• This aligns with option (c), which defines it as the mix of government investment in different industrial sectors.

Why the other options are wrong

(a) Public sector assets quality.
The passage focuses on the strategic decision of which sectors to own or divest, not on the intrinsic quality or efficiency of the existing public sector assets.
(b) Investment in liquid assets.
The text discusses industrial sectors like steel, airlines, and roads, not financial instruments or liquid assets such as cash or bonds.
(d) Buying Return on Investment yielding capital assets.
The passage is about the structural role of the state in the economy (ownership vs. regulation), not about the financial metric of buying assets based on their return on investment.

Asked in the CSAT Paper II of the UPSC Civil Services Preliminary Examination 2014, held on 24 August 2014. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.

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