Pricing in public
By Fr. John Felix Raj.
Public enterprises cover the
institutions under public ownership and operation of public purposes. They have
been defined as “that enterprises which meet the challenges posed by a dynamic
and growing economy and which are willing and capable of shaping their
attitudes, policies and operations to fulfill both the expressed and the latent
needs of the community”.
In the widest sense, public
enterprises include those undertakings which are;
Wholly owned and managed by
Wholly owned by government
but managed by private persons under overall supervision of the government;
Where majority of the
ownership and control is in the hands of the government. In a more specific
sense, they would cover industrial and commercial undertakings of the
government, which are in the form of statutory corporations or companies
registered under the Indian Companies Act.
Private enterprises may fix
prices at a level which would cover total cost and provide adequate return on
capital employed, but public enterprises are not free to do so. There has been a
fair deal of controversy in India with regard to price policies in public sector
enterprises. One school supports the principle of "No-profit, no-loss" pricing
on the ground that public enterprises should provide goods and services at a
price just covering cost of production. On the other hand, another school is in
favour of "profit-making” policy and argues that prices should be so fixed as to
cover not only cost but also leaving a reasonable surplus.
Determination of a rational and
proper pricing policy for public enterprises is of utmost importance not only to
the enterprises themselves but also to the government as an investor, to
customers and consumers and to the entire community. From the point of view of
the government, the pricing policy attains great significance as the government
is interested in pursuing the socio-economic objectives of these enterprises
through the mechanism of pricing.
The main objectives for which
public enterprises have been started in India are:
Maximising the rate of
economic and achieving the “Take-off” stage within a defined period;
Maximising the growth of
national income and of consumption level consistently with the first
Maximising the reduction in
inequalities of income and wealth and promoting equality of opportunity and
Preventing the concentration
of economic power in the private hands.
At the Ooty seminar held in
1962, Dr. V.K.R.V. Rao most vigorously put forward the view point that public
enterprises should play their role in the generation of surplus. Following his
stand, the government laid down the following guidelines regarding the pricing
policies of public undertakings:
For enterprises which produce
goods and services in competition with other domestic producers, the normal
market forces of demand and supply will operate and their products will be
governed by the prevailing market prices.
For enterprises which operate
under monopolistic or semi-monopolistic conditions, the landed cost of
comparable imported goods would be the normal ceiling within which it would be
open to the enterprises to have price negotiations and fix prices at suitable
levels. If the landed cost is found or believed to be artificially low or in
other exceptional circumstances it is considered necessary to have higher
prices, then the matter should be referred to the administrative ministry for
In reality, the nature and the
extent of socio-economic objectives in relation to public enterprises may not be
capable of being defined precisely and may differ in amount and character from
one industry to another, and so, the pricing policies may not be uniform in all
public enterprises. Competitive undertakings attempt to maintain a fair
competition in the market, and monopolist and semi-monopolistic undertakings are
guided by the degree of monopoly they enjoy, and taking into account the
character of the consumers of their products and the undertakings’ which
purchase their outputs as inputs, they operate on the basis of “Break-even” or
“Marginal profit” analysis.
In different sets of
circumstances in the past, a variety of pricing approaches have been evolved by
the government and employed in different enterprises. Enterprises like drugs and
pharmaceuticals, Cement Corporation, and Indian Oil Corporation are under the
system of price control, while Hindustan Aeronautics Ltd., Indian Telephone
Industries, BHEL, Hindustan Cable Ltd, and HEC fix their prices normally by
mutual consultation and negotiation with the government. Hindustan Machine Tools
Ltd., State Trading Corporations (tea, jute, etc) Air India and Shipping
corporation sell their products and services in the international markets. Thus
the prices of their products depend upon the international market situations.
Enterprises operating in the open market are HMT and modern bakeries. Their
pricing policy is entirely dictated by the market mechanism. Even though there
are various pricing approaches, as a matter of fact, there are only three
pricing situations, namely, price control, cost plus criterion and competitive
Duel pricing is a new concept
evolved by the government in 1973. It was first adopted in the steel industry.
According to this policy, 35 percent of steel produced in the public sector was
to be sold to the priority sector at a reduced price and the remaining 65
percent to other users at a higher price. Duel pricing came to a stop on April
1, 1982, when the informal control on the prices of steel was withdrawn. Now the
steel industry is free to sell its products at prices the market could bear.
This recent step of the government has brought about realism in the pricing of
iron and steel items.
An analysis of public
enterprises’ pricing policies will show us that most of the public undertakings
suffer from excessive cost of production due to large idle capacity, heavy
inventories and over-heads, deficiencies in project planning constructional
delays, defective productive management, inadequate marketing management,
investment decisions, application of the rules of “public accountability”
eroding even “operational autonomy” low productivity of labour and capital etc.
These are manifestations of managerial inefficiency at various levels. The cost
effectiveness has been found missing and the price increases have been used as a
cover to secure increase in profitability in many public enterprises.
The management of many public
enterprises are still not free to formulate their pricing policies and to fix
the prices of their products. They have to obey the government directives in
this respect. The power to give effect to an appropriate pricing structure is
derived from the governmental prerogative of giving directives to the public
enterprise managements. Often this is exercised informally without recourse to a
Determination of proper pricing
policies is of utmost importance as it affects the public enterprises
themselves, the government, the customers and consumers and the entire
community. Therefore, there must be a rational policy with a macro motivation
for the optimum allocation and utilisation of resources. Profit, being the
reward for efficiency, must be an integral part of the pricing policy of public
enterprises and they should earn sufficient profit to be ploughed back in the
expansion of industry and to provide funds to the government.
The proper and rational policy
must be co-ordinated with other policies regarding products, customers, sales
promotion, sales appeals, etc. and carefully formulated after considering all
the determinants of price and by giving due weightage to each determinant.
Pricing is a fulcrum for all activities in a manufacturing unit. Hence it should
be such as to increase production and sales and to secure an adequate return on
Capital employed. The technique of pricing is a job that requires great
flexibility and adaptation to market situations. Success of any business
enterprise largely depends on its performance in the market. Appropriate pricing
policy and strategy are the only tools for achieving success in the market.