SHORTCUTS IN JUDGING OTHERS AND ITS APPLICATIONS

INTRODUCTION

In perceiving the stimuli in our environment, people are likely to make so many errors and ended up with poor results. Some of those errors are stereotyping, halo effects, selective perception, distortions, attributions, projections etc. Each of these errors is dysfunctional for good decision making and management. Since subjective emotions, judgmental attitudes, and distortion of facts are common in perceiving any situation, we have tried to identify ways in which we can minimize perceptual biases. The need for managers to accurately perceive the environment and how manages can sharpen their perceptual skill are vital in enhancing perceptual skills.

SHORTCUTS IN JUDGING OTHERS

People tend to follow a number of shortcut methods when observing others and making judgment of others activities. These techniques are to some extent valuable and allow us to make accurate perceptions rapidly and provide valid data for making predictions. However, they are not foolproof. However, people often rely on them and follow them blindly. They can get us into trouble, particularly if you happen to hold higher level position and required to make effective decision making. An understanding of this shortcut can be helpful in recognizing when they can result in significant distortions.

Frequently used shortcuts in judging others:

While observing others in our day-to-day life, people tend to commit errors due to faulty perceptual process and make a wrong decision. This has to be avoided. There are five types of errors or short-cut methods which are frequently used by the individuals. They are:

1. Selective Perception
2. Projection
3. Stereotyping
4. Halo Effect
5. Contrast Effect

i) Selective Perception

It is a tendency to observe people selectively and accordingly interpret based on their interest, background, experience and attitudes. For example, a production manager is always likely to identify the need to strengthen the production system; the marketing manager will focus only on the marketing research and sales promotions activities. In general, we tend to notice things which are similar to us. For instance, we are more likely to notice the type of cars which are similar to ours. The simplest way of avoiding hasty or wrong decision being made due to selective perception is to seek other people’s perceptions of “reality” in the same situation in order to make a better assessment of the situation.

ii) Projection

It is a tendency to assign one’s own personal attributes to others. For instance, a manager who is corrupt will tend to project that all others are also corrupt like him. Similarly, a manager who loves challenging work might project that all others like challenging work. Many times, this is not true, and the manager who tries to enrich all the jobs as challenging might be leading to wrong motivational technique for other employees. When managers engage in projection, they compromise their ability to respond to individual differences. They tend to see people as more homogeneous than they really are. Thus, managers should guard themselves against perceptual biases through projection.

iii) Stereotyping:

It is a tendency to judge people based on the perception of the group to which he belongs.

We tend to attribute favorable or unfavorable characteristics to the individual based on upon widely held generalization about the group. For instance, we perceive that Japanese in general are hard working, quality conscious and industrious, and based on that we generalize that all Japanese are like that, but in reality it may not be so. There are some Japanese who may not possess the above mentioned characteristics. Similarly we assume that women in general are soft, kind, caring, affectionate, considerate, gentle, but there are some women who may not possess these characteristics. Similarly, we may assume older people are traditional, conservative, and cranky, but not every elderly person fits into this mould and hence we are likely to make errors of judgment. Sex-role stereotypes and age-stereotypes adversely affect recruitment, pay, job placement, and promotion decisions. As a result of which, organizations frequently lose good employees.

iv) Halo Effect:

It is tendency to draw a general overall impression about an individual based on single striking characteristics. For instance, if a person speaks English fluently, we tend to assume that that person is very knowledgeable, intelligent, smart, clever etc. hard working, smart etc. Similarly, if a man is abrasive, he may also be perceived as bad, awful, unkind, aggressive, harmful, deceitful and wicked. Halo effect, whether it is positive or negative, will distort our perception and block us from actually perceiving the trait that is being judged. This phenomenon frequently occurs when students appraise their university lecturer.

v) Contrast Effect:

It is tendency to evaluate a person’s characteristics by just comparing with other people who happened to acquire higher or lower position on the same characteristics. For instance, while comparing the presentation of students, a good presentation made by one student just before you will probably make you feel that you won’t be as good as you probably are. This contrast effect can distort our perception. In general, a person will be evaluated in isolation. But our reaction to one person is often influenced by other people or events in which we have recently encountered. In interview situation, a job applicant is likely to receive a more favorable evaluation if preceded by mediocre applicants and a less favorable evaluation if preceded by strong applicants.

Methods to overcome such biases in perception

The pitfalls listed above can be minimized by enhancing perceptual skills by consciously putting effort in the following activities:

1. Knowing and perceiving oneself accurately
2. Being empathic
3. Having positive attitudes
4. Enhancing one’s self-concept
5. Making a conscious effort to avoid the possible common biases in perception
6. Open communication
7. Avoiding Attributions.

i) Knowing and Perceiving Oneself Accurately:

One of the ways in judging others and situations more accurately are by knowing, perceiving and understanding ourselves accurately. The best way of achieving this objective is to obtain information on how others perceive us from as many sources as possible – supervisors, peers, subordinates and other colleagues. By consciously putting effort in getting feedback from others as much as possible about yourself regarding all the activities will help widen your open self. Similarly, by exposing yourself to others regarding your opinions, suggestions, beliefs, values, attitudes life styles etc, others may be able to understand you better and come forward to share their views more frequently. There are two critical things relevant to widening ones open self – i) soliciting feedback from others and ii) exposing or disclosing yourself to others.

ii) Being Empathic

Empathy means being able to see a situation as it is experienced by others. If a person is able to view the problems of his employees from the employees’ point of view instead of looking things from his own perspective, he may be able to understand the real problems experienced by them very clearly. The truly effective manager will be able to rise above his or her own personal impressions and comprehend problems from others perspectives. This can occur only when the manager can be sensitive to the needs of others and perceive situations from their point of view as well before making final decisions.

iii) Having Positive Attitude

There is a high level of relationships among attitudes, perceptions, beliefs and values. Unless managers can take positive attitudes to whatever situations they find themselves in and see things from a positive angle, their perceptions are likely to be distorted. By being aware of personal biases, and making a concerted effort to be as unbiased as possible, manages can consciously try to get rid of any negative feelings they may have of others. This will help them to pout things in their proper perspectives and thus enhance their perceptual skills.

iv) Enhancing one’s Self-Concept

Positive evaluation of oneself by accomplishing a commendable performance or remarkable things will boost good self image. When people handle roles where they can exhibit and enhance their competence and be successful, they will develop a basic sense of self-esteem and have a positive self regard. When our self-concept is enhanced and we have acquired a positive self-regard, we are apt to respect others more and perceive them more accurately.

v) Avoiding Common Biases in Perception

By checking and cross checking the events and spending adequate time and resources to monitor the various things around, one can consciously raise the overall level of awareness and this will help considerably minimize our perceptual biases. Self correction and self renewal process must be continuous within oneself as we interact with situation on a daily basis and based on that one must change and adapt to the current situations

vi) Open Communication

Even though mangers may watch out for their own perceptual errors, it is a fact that employees at the workplace act in accordance with their own perceptions. Effective mangers not only have to remember that employees tend to misperceive situations but they should also be able to effectively communicate to employees the happenings in the work setting such that any misperceptions are dispelled.

vii) Avoiding Attributions

Inappropriate attributions are frequently made by all of us when we try to make sense of what is happening in our environment. Due to this, our judgment will be wrong and will end up with poor results. By observing keenly certain behavioral principles as laid down in attributions model, people can sharpen their judgment to check whether the causes of particular behavioral act is due to personality or situational factors. Based on this, one can enhance their perceptual skills.

Perception: Specific Applications in Organizations

In general, people tend to judge one another for many purposes, such as appraising performance, motivational level, attitudes, skills, knowledge etc. These types of judgments will have some important consequences for the organization.

Stress:

Judging people based on the comparison process will make people tensed. It will have either positive consequences or negative consequences. If a person is matured enough, he or she will take up this issue positively and will try to put more effort to meet the expectation or perception of their manager. Some times, the consequences will be very negative leading to absenteeism, illness, low job satisfaction, poor morale etc. A great deal of stress can be due to the perception, judgments and expectations that workers and managers have about the workplace. Managers must ensure that the judgment must lead to positive consequences.

Employment Interview:

Due to perceptual errors in the interview process, the screening of job applicants from not so potential to potential will not be very effective. There is poor inter-rater agreement on the performance of job applicants which will perhaps due to interviewer’s subjective feelings, bias, prejudice and cause all the perceptual errors. In some cases, discrimination in recruitment interviews occur due to the forming of opinions of interviews based on racial, gender or age stereotypes. Taking due consideration on the elimination of these errors will significantly help in making effective decision.

Performance Expectation:

Manager’s expectation will have a significant impact on the performance of an employee. If a manager expects a very good performance from his subordinate and conveyes such expectations in all possible ways to him, that employee will adjust behavior in such a way by putting more effort in his work and fulfill the expectation of his manager. Similarly, if a manager expects a very poor or substandard performance, that concerned employee will tend to behave in such a way to as to meet those low expectations. Thus, the expectations become reality. The terms self-fulfilling prophecy has evolved to characterize the fact that people’s expectations determine their behavior. Managers must ensure that only positive expectations must be conveyed to their employees to make them put on more effort to become outstanding employees.

Performance Evaluation:

During the performance appraisal, the managers are subjected to have influenced by various perceptual errors particularly, halo effect, stereotyping, contrast effect etc. In general, managers use subjective measures in evaluating employees performance as good or bad based on their overall perception Due to this, their assessment is found to be faulty leading to severe implications in job outcomes. In order to avoid such errors, managers need to be trained in evaluation techniques.

Employee Effort:

Assessment of an individual’s effort is purely subjective judgment susceptible to perceptual distortions and bias. If manager is free from such perceptual errors and his judgment is just and fair, the employees will put more effort and help the organization to meet its objectives.

Employee Loyalty:

Managers tend to perceive employees differently. If employees are looking for employment outside the organization, the employees may be labeled as disloyal. If an employee questions top management decision, he is branded as disloyal, If an employee reports unethical practices of management to authorities outside the organization, he is branded as disloyal. The assessment of an employee’s loyalty or commitment is highly subjective judgmental. Due care must be taken to ensure proper judgment free from such perceptual errors.

PERSON PERCEPTION: MAKING JUDGMENT ABOUT OTHERS

Attribution Theory:

While observing people’s behavior such as getting an overseas assignment or promotion to top management position or failed miserably in university examination or fired from the employer etc, we attempt to determine whether it was internally caused or external caused. If those factors such as knowledge, skill, effort, talent, hard work, positive attitude are responsible for the occurrence of behavior, it is labeled as internally caused. Internally caused behaviors are those that are believed to be under the personal control of the individual. If those factors such as situational factors such as location advantage, non availability of material, contacts with influential others, etc are responsible for the occurrence of behavior, it is labeled as externally caused. Externally caused behavior is seen as resulting from outside causes; that is, the person is seen as forced into the behavior by the situation.

If an employee is late for work, one can attribute his late coming due to laziness or lack of interest in the job of over sleeping. This would be internal interpretation. If an employee late coming is due to traffic jam or road accident or his wife sickness, then he is making external attribution. There are three factors which are used to determine whether the behavior is caused by internal factors or due to external factors. They are: Distinctiveness, Consensus and Consistency.

Distinctiveness:

It refers to whether an individual displays different behaviors in different situations. If a person is coming late not only to office but also to picnic party or to birth day party or to attending meeting etc. If his late coming behavior is not unique, it will probably be judged as internal. (Low Distinctiveness) If his late coming behavior is unusual, that is, only to office work, his late coming behavior is due to external attribution. (High Distinctiveness)

Consensus:

It refers to whether all the people who are facing with a similar situation respond in the same way or not. If all the people are responding the same way, then there is high consensus. If consensus is high, then his late coming behavior is due to external factors. If only this worker is late and all others are punctual, then there is low consensus. If consensus is low, then his late coming is due to internal factor

Consistency:

It refers whether a person responds the same all the time, that is, whether his late coming is common in all the days or once in a blue moon. If his late coming is reported in all the days, then there is high consistency. If there is high consistency, his late coming behavior is due to internal factor. If his late coming is reported only one time, then there is low consistency. If there is low consistency, then his late coming is due to external factors. The more consistent the behavior, the more the observer is inclined to attribute it to internal factors.

Errors in Attribution:

While attributing the causes for the behavior of individuals, people tend to commit two types of errors.

Fundamental Attribution Error:

There is tendency to underestimate the influence of external factors and overestimate the influence of internal factors when making judgment about the behavior of others particularly with reference to the victims of accidents or failures. This is called the fundamental attribution errors. For example, a sales manager is likely to attribute the poor performance of his sales agents to laziness rather than to the new product line introduced by the competitor or current recession prevailing in the society etc.

Self-Serving Bias:

There is also a tendency for individuals to attribute their own success to internal factors such as ability or effort, while putting the blame for failure on external factors such as luck or fate. This is called the self-serving bias. While assessing the performance of subordinates, the managers are likely to provide feedback in a distorted manner depending on whether it is positive or negative.

FACTORS INFLUENCING PERCEPTION

Several factors influence how we process the perceptual inputs and transform them into outputs. There are three broad categories: 

1. Characteristics of Perceiver, 
2. Characteristics of Target, and 
3. Characteristics of Situation.

1. Characteristics of Perceiver:

A person’s needs and motives, self-concept, past experience, emotional state, and personality aspects strongly influence the perceptual process.

• Needs and Motives: Unsatisfied needs or motives stimulate individuals and may exert a strong influence on their perception. For examples, two groups of subjects – One group who is deprived of food for about 24 hours and the other group which had food enough were shown the blurred pictures and asked to explain the contents. The first group perceived the blurred image as food far more frequently than the other group. People needs and motives thus play a big part in the perceptual process.
• Self Concept: It refers how a person perceives himself/herself which in turn influence his or her perception of the world around them. If a person perceives himself as incompetent, then he perceives the world as threatening. On the other hand, if he feels himself as confident and capable, he will perceive everything around as friendly.
• Attitudes: The preferences and likingness affects ones perception. A lecturer, who likes bigger class, feels comfortable in a lecture session which has more than hundred students. Another lecturer, who likes small class with a lot of questions, may not be so comfortable in such big classes.
• Interests: Individual’s focus of attention is also influenced by the interests of people. A plastic surgeon will more likely to notice an imperfect nose than a plumber. Because of our individual interests differ considerably, what one person notices in a situation, can differ from what other person perceives.
• Past experiences: Individuals past experiences also influence in molding ones perception. For example if one has had problem responding to examination questions in the past, he or she will tend to perceive even simple, straightforward examination question as tricky. Likewise, if a person was betrayed by a couple of friends, he or she would never venture to cultivate new friendship in future.
• Psychological or Emotional State: If an individual is depressed, he or she is likely to perceive the same situation differently from the other person who is at the extreme level of excitement or happiness. If a person has been scared of seeing a snake in the garden, she is likely to perceive a rope under the bed as a snake. Thus, the emotional and psychological states of an individual also influence the perceptual process and the different types of interpretation of the situation.
• Expectation: Expectations can also distort the perceptual process. If a person expects police officers to be more authoritative and dictatorial, he or she may perceive them as if they are rough and tough regardless of the Police Officers actual traits.
• New Experience: If a person experiences something new, that is more likely to grab attention than the objects or events that has been experienced before. For example, a person is more likely to notice the operations along an assembly line if this is first time that person has seen an assembly line. In 1970’s women police officers are highly visible because traditionally Police Officers positions were predominantly held by males.
• Personality Characteristics: There is a strong relationship between personality factors and perception. For example, secure people tend to perceive others as warm supportive than those, who are more cold and indifferent. Similarly, self-accepting persons perceive others as lining and accepting them. Those who are not self-accepting tend to distrust others. Insecure, thoughtless or non self-accepting persons are less likely to perceive themselves and those around them accurately. In all probabilities, they are likely to distort, misinterpret or in other ways defensively perceive the situation

2. Characteristics of Target:

The ways things are organized around us are greatly influencing the perceptual process.

Some of the typical characteristics include bright color, noise; novel objects, bigger unusual size, moving objects, status, appearance, contrast, intensity, repetition etc. catch people attention. For example, an unusual noise raised by a person, a strong beam of light suddenly flashed, a very handsome, attractive person among a group of clumsy people, a red light against the black background, an unusually obese person amidst a group of slim people etc.

• Organization of Target: People tend to organize the various parts of elements in the environment as a meaningful whole. Such organizing activity is a cognitive process and those are based on Gestalt Principles. The following are the four Gestalt Principles – Figure and Ground, Proximity, Similarity, Closure, Continuation.
• Figure and Ground: What a person observes is dependent on how a central figure is being separated from its background. This implies that the perceived object or person or event stands out distinct from its background and occupies the cognitive space of the individual. In a dance programme, the spectators’ tend to perceive the dance performance against the back ground music, backdrop setup etc. The perceiver thus tends to organize only the information which stands out in the environment which seems to be significant to the individual.
• Proximity: People tend to perceive things, which are nearer to each other, as together as group rather than separately. If four or five members are standing together, we tend to assume that they are belonging to same group rather than as separately. As a result of physical proximity, we often put together objects or events or people as one group even though they are unrelated. Employees in a particular section are seen as group.
• Similarity: Persons, objects or events that are similar to each other also tend to be grouped together. This organizing mechanism helps us to deal with information in an efficiently way rather than getting bogged down and confused with too many details. For examples, if we happen to see a group of foreign nationals at an International seminar, Indians are grouped as one group, British as another, Americans as yet another based on the similarity of nationalities.
• Closure: In many situation, the information what we intend to get may be in bits and pieces and not fully complete in all respects. However, we tend to fill up the gaps in the missing parts and making it as meaningful whole. Such mental process of filling up the missing element is called as closure. For example, while giving promotions to the staff members, the managers will try to get full information to make an effective decision, in absence of getting complete information, managers try to make meaningful assumptions and based on that suitable decision will be made.

3. Characteristics of the Situation:

The context at which the incident is occurring can influence the perceptual process. The physical, social, organizational settings, time etc can influence how we interpret the stimuli. For example, late coming of subordinate at birthday party may be ignored but treated him as an important guests by the manager, but at same time, the same person’s late coming to an important official meeting will be viewed as seriously and manager may issue a memo seeking his explanation. Thus, the location of an event, the social context in which takes place, timing and the roles played by the actors play a significant part in how we interpret the situation.

PERCEPTION: PERSON PERCEPTION.

INTRODUCTION

Perception can be defined as a process by which individuals organize and interpret their sensory impressions in order to give meaning to their environment. Perception is not just what one sees with eyes. It is a much more complex process by which an individual selectively absorbs or assimilates the stimuli in the environment, cognitively organizes the perceived information in a specific fashion and then interprets the information to make an assessment about what people select, organize, and interpret or attach meaning to events happening in the environment. Since perception is subjective process, different people may perceive the same environment differently based on what particular aspects of the situation they choose. For example, some employees may perceive the work place as great if it has favorable working conditions, good pay. Others may perceive it as great if it has challenging assignments and opportunity to grow. Managers should sharpen their perceptual skills so that they are as close to perceiving people, events, and objects as they truly are. When “misperception” occurs due to perceptual errors and distortion, managers are bound to make poor or improper decision.

PERCEPTION

Perception is process through which short-run changes are made in behavior in response to inputs from work environment. The process itself consists of two major actions – i) attention to incoming stimuli and ii) translation of such stimuli into a message that leads to a meaningful behavioral response. Perception is form of behavior and, therefore, influenced by at least the following factors: i) characteristics of the object or source of incoming stimuli (such as a supervisor issuing work request); ii) the situation or conditions under which the stimuli occur (such as timing of a message) and iii) characteristics of the perceiving person. The last category is extremely important in determining the way incoming stimuli will be interpreted and subsequent response. An individual’s motives, previous learning and personality will influence perception. Managers must take such consideration into account in predicting the way their actions and order will be perceived by others.

Five Stages in Perceptual Process:

Stage I: Observation Phase – It depicts the environmental stimuli being observed by the fives senses of the perceived

Stage II: Selection of the Stimuli: This is governed both by factors external to the perceived, such as the characteristics of the stimulus, and internal to the individual, such as the personality disposition and motivations of the perceiver.

Stage III: Organizing Stage – In this stage, the perceiver is influenced by figure and ground, grouping, and several perceptual errors such as stereotyping halo effects, projection and perceptual defense.

Stage IV: Interpretation Stage: This stage is governed by the perceiver’s assumptions of people and events and attributions about causes of behavior and feelings.

Stage V: Behavior Response: In this stage the response of the perceiver takes on both covert and overt characteristics. Covert response will be reflected in the attitudes, motives, and feelings of the perceiver and overt responses will be reflected in the actions of the individual.

PROBLEMS OF PUBLIC ENTRPRISES

Public enterprises suffer from a great deal of problems. These problems faced by the state enterprises are:

v       Choice of the form of organization:

The success of an organization largely depends on the choice of an organization. Before selecting the form of organization, its nature, capital requirement, requirement of managers and the state policy should be considered.

v       Autonomy:

In theory, it has been believed that state enterprises have attained managerial autonomy. But in practice, the estimates committee has suggested that these organizations are subject to government interference and control. Maximum government interference has affected efficiency of the organization.

v       Internal administration:

Lack of adequate trained personnel put a lot of difficulties on the administration of public enterprises. The managing directors are senior personnel of the government who do not have adequate technical knowledge on the management of public enterprises.

v       Price policy:

The pricing policy of the state enterprises is another problem of these organizations. A sound pricing policy should him at earning some profit so that the enterprises will be economically viable units. The pricing policy should be such that it will cover the cost and meet the financial requirement for development plans.

v       Poor project planning:

Investment decisions in many public enterprises not based upon proper evaluation of demand and supply, cost benefit analysis and technical feasibility.

v       Over-capitalization:

Due to inefficient financial planning, lack of effective financial control and easy availability of money from the government, several public enterprises suffer from over-capitalization. The Administrative Reforms Commission found that Hindustan Aeronautics, Heavy Engineering Corporation and Indian Drugs and Pharmaceuticals Ltd. Were over-capitalized.

v       Excessive overheads:

Public enterprises incur heavy expenditure on social on overheads like townships, schools, hospitals, etc. In many cases such establishment expenditure amounted to 10 percent of the total project cost. Recurring expenditure is required for the maintenance of such overhead and welfare facilities. Hindustan Steel alone incurred an outlay of Rs. 78.2 crore on townships. Such amenities may be desirable but the expenditure on them should not be unreasonably high.

v       Overstaffing:

Manpower planning is not effective due to which several public enterprises like Bhilai Steel have excess manpower. Recruitment is not based on sound labour projections. On the other hand, posts of Chief Executives remain unfilled for years despite the availability of required personnel. As many as 26 public sector units were top less on January 1, 1987.

v       Under-utilization of capacity:

One serious problem of the public sector has been low utilization of installed capacity. In the absence of definite targets of production, effective production planning and control, proper assessment of future needs, adequate supply of power and industrial peace, many industrial peace, many undertakings have failed to make full use of their fixed assets. The average capacity utilization in more than 5 percent of the public enterprises has been less than 75 percent. There is considerable idle capacity. In some cases productivity is low on account of poor materials management or ineffective inventory control.

v       Lack of a proper price policy:

There is no clear-cut price for public enterprises and the Government has not laid down guidelines for the rate of return to be earned by different undertakings. Public enterprises are expected to achieve various socioeconomic objectives and in the absence of a clear directive, pricing decision are not always based on rational analysis. In addition to dogmatic price policy, there is lack of cost-consciousness, quality consciousness, and effective control on waste and efficiency.

v       Inefficient Management:

The management of public enterprises in our country leaves much to be desired. Managerial efficiency and effectiveness have been low due to inept management, uninspiring leadership, too much centralization, frequent transfers and lack of personal stake. Civil servants who are deputed to manage the enterprises often lack proper training use bureaucratic practices. Political interference in day-to-day affairs, rigid bureaucratic control and ineffective delegation of authority hamper initiative, flexibility and quick decisions. Motivations and morale of both executives and workers are low due to the lack of appropriate incentives.

v       Unsatisfactory industrial Relations:

In several public enterprises relations between management and labour are far from cordial. There has been serious and frequent labour trouble in Durgapur steel. Plant, Bharat Heavy Electrical, Bhopal, and in Bangalore-based undertakings.

v       Lack of coordination:

Various public enterprises are dependent on one another as the output of one enterprise is the input of another. For instance, the efficient functioning of power and steel plants depends on the production and transportation of coal which turn is dependent upon supplies of heavy equipment machinery.

HOW TO IMPROVE THE EFFICIENCY OF PUBLIC ENTERPRISES?

1.       The managerial autonomy of public enterprises should be preserved through greater delegation of power and by reducing the number of civil servants and bureaucrats on their boards of directors.

2.       A management culture different from the bureaucratic culture should be developed to promote initiative and decision-making. Greater representation should be given to non-official part-time directors. Now the Government of India has decided to appoint technocrats in place of civil servants on the boards of public enterprises.

3.       Chief executives should be provided tenure of 5 years and superannuary posts should be created for understudies of chief executives.

4.       Special training programmes should be undertaken for developing a professional cadre of managers in the various functional areas of management. Participative management style should be promoted. Standing conference on public enterprises (SCOPE) can help in its task.

5.       An efficient personnel management system is to be developed to improve recruitment, selection, appraisal, promotion, job satisfaction, compensation and industrial relations in public enterprises. Production incentives should be introduced.

6.       The process of project appraisal an investment decisions should be streamlined. Detailed feasibility studies should be made.

7.       A drive should be launched to improve capacity utilization and to build up cost consciousness among public sector concerns.

8.       Continuous monitoring of cash flows, tight control over inventory, and improvement in productivity is necessary for prudent use of working capital clear-cut objectives should be laid down to facilitate evaluation of performance.

9.       An efficient management information system and early warning devices are to be developed to avoid delays taking and implementing decision.

10.   An Effective machinery for periodic review and appraisal of performance of public enterprises should be created so that their problems are identified and remedial measures undertaken as early as possible.

On the recommendations of the Standing Committee on public sector undertakings, the Government has prepared a draft White paper to spell out its strategy and objectives of the public sector. The planning Commission has constituted a high level Working Group under the chairman ship of Mr. Krishnamurthy to:

v       Suggest an appropriate pricing policy for the public sector.

v       Review the achievements and shortcomings of public enterprises in fulfillment of the national development goals.

v       Suggest measures for improving management and work culture in the public sector.

v       Identify the areas where the public sector should be required to assume the role of the leader and trend-setter for achieving excellence

v       Suggest measures for improving the autonomy of public enterprises while maintaining their overall accountability.

NEW POLICY OF GOVERNMENT

 In India, a number of joint sector enterprises have been established, e.g., Gujarat State fertilizers Company, Indian Telephone industries Ltd., Hindustan Machine tools, cochin refineries, Indian Rate Earths Ltd., Praga Tools corporation, etc.

The central Government has laid down following guidelines for the ownership and management o f joint sector enterprises:

1.       Each proposal for setting up of a joint sector project will be judged ad decided on its own merits.

2.       The joint sector projects are welcome in industries from which the private sector has been excluded. But the undertakings covered by the MRTP Act would not be permitted to use the joint sector as a device for entry into industries from which they are otherwise excluded.

3.       If a big business house or a foreign majority company wants to participate in a joint sector project, prior permission of the Central Government is essential.

4.       Ina joint sector enterprise involving no foreign collaboration, the distribution of equity ownership would be: Government 26 percent, private enterprises 25 prevent and investing public and financial institutions 49 per cent.

5.       Where foreign collaboration or participation is involved, ownership pattern is: Government 25% foreign investor 20% and the investing public including financial institutions 35%.

6.       No single party can hold more than 25% share without prior approval of the Central Government.

7.       Strategic or basic policy decisions are made by then board of directors on which all the partners are represented. Tactical or operational decisions are made by the chief Executive and his team of executives. The Government will ensure for itself an effective voice in the management and operation of joint sector concerns.

8.       Chief Executives in charge of production, marketing, finance and personnel should have the status of whole time directors. The chairman of the Board is exported to integrate the divergent goals of all major partners so that the management may evolve policies required to achieve the overall objectives of the enterprise.

9.       The boards of directors may consist of (a) majority of Government nominees, (b) majority of non-government directors, or (c) directors in proportion to the equity ownership of various partners in the joint sector enterprise.

PRICING POLICY IN PUBLIC ENTERPRISES

The investment policy of the Government aims at channelizing public investment in basic and infrastructural sector and for continuing with the provisions of essential commodities. The pricing policies in the Central Public Sector Enterprises (CPSEs) are therefore, interlinked with the investment policies. Another dimension of the pricing policy is to create a balance between the social objectives of these enterprises and their commercial viability and also the overall economic policies of the Government.

It has been accepted principle that prices of products produced and service rendered by public enterprises should be so determined that at a satisfactory level of capacity utilization these enterprises not only cover their costs of production, but also generate a reasonable amount of surplus.

This will assist in capital formation and enable redeployment of the capital for further strengthening of economic and social infrastructure. In this sense, product making in public enterprises is not quite inconsistent with the public purpose. It is the Government’s expectation that with the excusive investment in the public sector enterprises, these enterprises do not at any stage erodes the resource base, but strengthens it. It is therefore, recognized that subject to the total overall impact of certain product prices on the economy, the producers in the public sector should generally have proper control in determining the prices of their commodities. These policies are applicable to public sector as well as private sector and are discussed below:

        i.            AGRICULTURE

An agricultural product comprises both food grains and industrial raw materials. The stress is on adoption of a pricing policy which will provide a minimum fair return to the producers, reduce fluctuations in prices and achieve an equitable distribution of essential consumer goods. An efficient public distribution system is an essential ingredient to ensure that this pricing strategy Works equitably. Under this policy, Govt. of India fixes Minimum

Support prices (MSP) in respect of major food grains and industrial raw materials on the recommendation of the commission on Agricultural Costs Prices (CACP). At the same time, Government ensures supply of major grains to weaker sections of society at reasonable rates through public distribution system.

Food Corporation of India (FCI) implement procurement and public distribution policy for food grains while Jute Corporation of India and cotton corporation India implement MSP policy for jute and cotton respectively.

      ii.            COAL

The pricing of coal has been completely deregulated after colliery control order, 1945. Under the colliery control order, 2000, the central government has no power to fix the prices of coal and the coal companies themselves are competent to fix grade-wise prices for coal produced by them based on marketing economics.

    iii.            FERTILIZERS

At present, only urea, which is the main nitrogenous fertilizer constituting about 60% of the total fertilizer consumption in the country, is under statutory price and partial distribution control. Urea is sold/made available to the farmers at statutory notified sale price. All other varieties of fertilizers were removed from price and distribution control between August ‘92 and June ’94. However, Government of India still indicates the MPP in respect of major phosphates and complex fertilizers, namely Di-Ammonium phosphate(DAP), Muriate of Potash(MOP) and Complex Fertilizers. The MR for Single supper phosphates (SSP) are indicated by the respective State Government. The statutorily notified sale price and indicative MRP is generally kept less than the cost of production of the respective manufacturing unit. The difference between the cost of production and the selling price/MRP is paid as subsidy/concession to manufacturers. As the consumer prices of both indigenous and imported fertilizers are fixed uniformly, financial support is also given on imported urea and decontrolled phosphates and potassic fertilizers.

     iv.            STEEL

Prices of steel products have been fully decontrolled and the Central Public Sector Enterprises (CPSEs) are free to determine prices of their products/service based on free interplay to market forces. However, the Government, through its policy initiatives attempts to ensure adequate availability of steel in the domestic market and a stable price regime.

       v.            PETROLEUM PRODUCTS

Effective from 1/4/02, pricing of petroleum products except for PDS  kerosene and domestic LPG , has become market determined. As per the decision taken at the time of announcement of APM dismantling, post APM Government subsidies on PDS kerosene and Domestic LPG were to be on flat rages basis to be provided from the fiscal budget and after providing for this subsidy , the retail prices were to vary as per changes in the international prices.

     vi.            POWER

The power tariff for the sale of power by the generation company to the distribution company and to other persons is determined/regulated as per the terms and conditions notified by the Government of India vide its notification dated 30^th March 1992 and subsequent amendments made therein from time to time.

As per the Electricity Act, 2003, the Regulatory commission shall be guided by Electricity Tariff policy to be notified by the Central Government in near future.

   vii.            PHARMACEUTICALS

For fixations of prices of pharmaceutical products in Central Public Sector Enterprises (CPSEs), the Drugs Price Control Order (DPCO), 1995 is followed. As per DPCO, the pharmaceutical products are categorized as scheduled and Non-scheduled formulations. The prices of scheduled products are fixed by the National pharmaceutical pricing Authority (NPPA) under the provisions of DPCO. The Maximum Retail Prices (MRP) of scheduled formulations are fixed and revised as per announcement/notification by the Government of India. In case of Non-scheduled formulations the prices are fixed by the CPSEs on cost plus basis.

PURCHASE PREFERENCE POLICY

The policy of purchase preference for products and services of Central Public Sector Enterprises (CPSEs) by Government Departments/Organizations and other CPSEs was introduced in 1992 by replacing the earlier policy of both price and purchase preference operating since 1971. The underlying objective of this policy is to enable CPSEs to adjust to the new environment of competitiveness and market mechanism in the wake of liberalization/globalization and to assist these enterprises in improving their profitability by better utilization of their installed capacities.

The purchase preference policy (PPP) was initially made applicable for a period of three years. However, over the period of time it has been reviewed and extended from time to time with or without certain modifications. The policy was last reviewed by the Government in June,2005 and extended vide O.M. dated 18.07.2005 it with certain modifications for a period of three years beyond 31.3.2005 with clear stipulation that the policy will be terminated with effect from 31.3.2008.

PUBLIC SECTOR IN INDIA

PUBLIC SECTOR IN INDIA

At the time of independence, India was backward and under developed – basically an agrarian economy with weak industrial base, high rate of unemployment, low level of savings and investment and near absence of infrastructural facilities. Indian economy needed a big push. This push could not come from the private sector because of the lack of funds and their inability to take risk with large long-gestation investments. As such, government intervention through public sector was necessary for self –reliant economic growth, to diversify the economy and to overcome economic and social backwardness.

OBJECTIVES OF PUBLIC SECTOR

The public sector aims at achieving the following objectives:

·         To promote rapid economic development through creation and expansion of infrastructure.

·         To generate financial resources for development.

·         To promote redistribution of income and wealth.

·         To create employment opportunities.

·         To promote balanced regional growth.

·         To encourage the development of small-scale and ancillary industries, and

·         To promote exports on the one side and import substitution, on the other.

ROLE OF PUBLIC SECTOR

The public sector has been playing a vital role in the economic development of the country. Public sector is considered a powerful engine of economic development and an important instrument of self-reliance. The main contributions of public enterprises to the country’s economy may be described as follows:

1.       Filling the Gaps in Capital Goods: At the time of independence, there exited serious gaps in the industrial structure of the country, particularly in the field of heavy industries such as steel, heavy machine tools, exploration and refining  on oil, heavy Electrical and equipment, chemicals and fertilizers, defense equipment, etc.  Public  sector has helped to fill up these gaps. The basic infrastructure required for rapid industrialization has been built up, through the production of strategic capital goods. If this way the public sector has considerably widened the industrial base of the country.

2.       Employment: Public sector has created millions of jobs to tackle the unemployment problem in the country. Public sector accounts for about two-thirds of the total employment in the organized industrial sector in India. Bu taking over manual sick units the public sector has protected the employment of millions. Public sector has also contributed a lot towards the improvement of working and living conditions of workers by serving as a model employer.

3.       Balanced Regional Development: Public sector undertakings have located their plants in backward and untraded parts of the country. These areas linked basic industrial and civic facilities like electricity, water supply, township and manpower public enterprise have developed these facilities thereby bringing about complete transformation in the socio-economic life of the people in these regions. Steel plants of Bhilai, Rourkela and Durgapur; fertilizer factory at sindri, are few examples of the development of backward regions by the public sector.

4.       Contribution to public exchequer: Apart from generation of internal resources and payment of dividend, public enterprises have been making substantial contribution to the Government exchequer through payment of corporate taxes, excise duty, custom duty tax in this way they help in mobilizing funds for financing the needs for the planned development of the country. In recent years, the total contribution form the public enterprises has increased considerably, between the periods 2002-03 to 2004-05 the contribution increased by Rs.81, 438 crores on the average.

5.       Export promotion and Foreign Exchange Earnings: Some public enterprises have done such to promote India’s export. The State Trading Corporation(STC), the Minerals and Metals Trading Corporation(MMTC), Hindustan Steel Ltd., the Bharat Electronics Ltd., the Hindustan Machine Tools, etc., have done very well in export promotion. The foreign exchange earnings of the public sector enterprises have been rising from Rs.35 crores in 1965-66 to Rs 42, 264 crores in 2004-05.

6.       Import substitution: Some public sector enterprises were started specifically to products goods which were formerly imported and thus to save foreign exchange. The Hindustan Antibiotics Ltd., the Indian Drugs and pharmaceuticals Ltd.(IDPL), the Oil and Natural Gas Corporation(ONGC), the Indian Oil Corporation Ltd., the Bharat Electronics Ltd., etc., have saved foreign exchange by way of import substitution.

7.       Research and development:  As most, of the public enterprises are engaged in high technology and heavy industries, they have undertaken research and development programmes in a big way. Public sector has laid strong and wide base for self-reliance in the field of technical know-how, maintenance and repair of sophisticated industrial plants, machinery and equipment in the country. Through the development of technological skill, public enterprises have reduced dependence on foreign know how. With the help of the technological capability, public sector undertakings have successfully computed in the international market.

In addition to the above, the public sector has played an important role in the achievement  of constitutional goals like reducing concentration of economic power in private hands, increasing public control over the national economy, creating socialistic pattern of society, etc. with all its linkages the public sector has made solid contributions to national self-reliance.

LIMITATIONS OF PUBLIC SECTOR

Despite their impressive role, public enterprises in India suffer from several problems and shortcomings. Some of these are described below:

1.       Poor project planning: Investment decisions in many public enterprises are not based upon proper evaluation of demand and supply, cost benefit analysis and technical feasibility. Lack of a precise criterion and flaws in planning have caused undue delays and inflated costs in the commissioning of projects. Many projects in the public sector have not been finished according to the times schedule.

2.       Over- capitalization: Due to inefficient financial planning, lack of effecting financial control and easy availability of money from the government, several public enterprises suffer from over- capitalization. The administrative Reforms Commission found that Hindustan Aeronautics, Heavy Engineering Corporation and Indian Drugs and pharmaceuticals Ltd were over-capitalized. Such over - capitalization resulted in high capital-output ratio and wastage of scare capital resources.

3.       Excessive Overheads: Public enterprises incur heavy expenditure or social overheads like townships, schools, hospitals, etc. in many cases such establishment expenditure amounted to 10 percent of the total project cost Recurring expenditure is required for the maintenance of such overheads and welfare facilities. Hindustan Steel alone incurred an outlay of Rs. 78.2 crore on town ships. Such amenities may be desirable but the expenditure on them should not be unreasonably high.

4.       Overstaffing: Manpower planning is not effective due to which several public enterprises like Bhilai steel have excess manpower. Recruitment is not based on sound labour projections. On the other hand, post of Chief Executives remain unfilled for years on spite the availability of required personnel.

5.       Under-utilization of Capacity: One serious problem of the public sector has been low utilization of installed capacity. In the absence of definite targets of production, effectuate production planning and control and proper assessment of future needs many undertakings have failed to make full use of their fixed assets. There is considerable idle capacity. In some cases productivity is low on account of poor material is management or ineffective inventory control.

6.       Lack of a proper price policy: There is no clear-cut price policy for public enterprises and the Government has not laid down guidelines for the rate of return to be earned by different undertakings. Public enterprises are expected to achieve various socio-economic objectives and in the absence of a clear directive, pricing decisions are not always based on rational analysis. In addition to dogmatic price policy, there is lack of cost-consciousness, quality consciousness, and effective control on waste and efficiently.

7.       Inefficient Management: The management of public  enterprises in our country leaves much to be desired. Managerial efficiency and effectiveness have been low due to  inefficient management, uninspiring leadership, too much centralization, frequent transfers and lack of personal stake. Civil servants who are deputed to manage the enterprises often lack proper training and use bureaucratic practices. Political interferences in day-to-day affairs, rigid bureaucratic control and ineffective delegation of authority hamper initiative, flexibility and quick decisions. Motivations and morale of both executives and workers are low due to the lack of appropriate incentives.

CAUSES FOR THE EXPANSION OF PUBLIC ENTERPRISE

At the time of independence, India was backward and underdeveloped –basically an agrarian economy with weak industrial base, high rate of unemployment,  how level of savings and investment and near absence of infrastructural facilities. India economy needed a big push. This push could not come from the private sector because of the lack of funds and their inability to take risk with large long- gestation investments. As such, government intervention through public sector was necessary for self-reliant economic growth, to diversify the economy and to overcome economic and social backwardness.

Let us discuss the rationale or causes for the expansion of public sector enterprises in India.

1.       Rate of Economic Development and public Enterprises:  The justification for public enterprises in India was based on the fact that the targeted rate of economic growth planned by the government was much higher than could be achieved by the private sector alone. In other words, the public sector was essential to realize the target of high growth rate deliberately fixed by the government.

2.       Pattern of Resources Allocation and Public Enterprises: Another reason for the expansion of the public sector lies in the pattern or resources allocation deeded upon under the plans. In the second plan the emphasis was shifted to industries and mining, mainly basic capital goods industries to be developed under the aegis of the public sector. Thus more resources for industrialization were funneled through the public sector.

3.       Removal of Regional Disparities through public enterprises: Another important reason for the expansion of the public sector was the need for balanced development in different parts of the country and to see that there were no serious regional disparities. Public enterprises were set up in those regions which were underdeveloped and where local resources were not adequate. Good examples are the setting up of the three steel plants of Bhillai, Rourkela and Durgapur and the Neyveli project in Madras which meant to help industrialize the regions surrounding the project.

4.       Sources of funds for economic development: Initially, state was an important sources or fund for development. The surplus of government enterprises could be re-invested in the some industries or used for the establishment and expansion of other industries. Profits of public sector industries can be directly used for capital formation which is necessary for the rapid development of the country.

5.       Socialistic pattern of society: The socialistic pattern of society envisaged in the constitution calls for expansion of public sector. For one thing, production will have to be centrally planned as regards the type of goods to be produced, the volume of output and the timing of their production. Besides, one of the objectives of the directive principles of the Indian Constitution is to bring about reduction of the inequalities of income and wealth and to establish an egalitarian society. The Five years plans have taken his up as a major objective of planning. The public enterprises were used as major instruments for the reduction of inequalities of income and to bring about a more equitable distribution of income in several ways.

6.       Limitations and Abuses of the Private sector: The behavior and attitude of the private sector itself was an important factor responsible for the expansion of the public sector in the country. In many cases the private sector could not take initiatives because of the lack of funds and their inability to take risk with large long-gestation investments. In a number of cases the government was forced to take over a private sector industry or industrial units either in the interest of workers or to prevent excessive exploitation of consumers. Very often the private sector did not function as it should and did not carry out its social responsibilities. Accordingly, the government was forced to take over or nationalize the private sector units.

To sum up the expansion of the public sector was aimed at the fulfillment of our national goals, viz., the removal of poverty, the attainment of self-reliance, reduction in inequalities of income, expansion of employment opportunities, removal of regional imbalances, acceleration of the pace of agricultural and industrial development, to reduce concentration of ownership and prevent growth of monopolistic tendencies by acting as effective countervailing power to the private sector, to make the country self reliant in modern technology and create profession, technological and managerial cadres so as to ultimately rid the country from dependence on foreign aid.

CAPITAL FORMATION

Capital formation is a concept used I macroeconomics, national accounts a financial economics. Occasionally it is also used in corporate accounts. It can be defined in three ways:

·         It is a specific statistical concept used in national account statistics econometrics and macroeconomics. In that sense, it refers to a measure of the net additions to the (physical) capital stock of a country (or an economic sector) in an accounting interval, or, a measure of the amount by which the total physical capital stock increased during an accounting period. To arrive at this measure, standard valuation principles are used.

·         It is used also in economic theory, as a modern general term or capital accumulation, referring to the total “stock of capital” that has been formed , or to the growth of this total capital stock

·         In a much broader or vaguer sense , the term “ capital formation” has in more recent times been used in financial economics to refer to savings drives, setting up financial institutions, fiscal measures, public borrowings, development of capital markers, privatization of financial institutions, development of secondary markets. In this  usage, it refers to any method in utilizing or mobilizing capital resources for investment purposes. Thus, capital could be “formed” in the sense of “ being brought together for investment purposes in many different ways. This broadened meaning is not related to the statement measurement concept or to the classical understand of the concept in economic theory”.

EMPLOYMENT

Employment is a contract between two parties, one being the employer and the other being employee. An employee may be defined as:

“A person in the service of another under any contract of hire, express or implied, oral or written, where the employer has the power or right to control and direct the employee in the material details of how the work is to be performed.”

INFRASTRUCTURE

Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function. It can be generally defined as the set of interconnected structural elements that provide framework supporting an entire structure of development.

The term typically refers to the technical structures that support a society, such as roads, water supply, sewers, electrical grids, telecommunications, and so forth, and can be defined as “the physical components of interrelated systems providing commodities and services essential to enable, sustain, or enhance societal living conditions.”

Viewed functionally, infrastructure facilitates the production of goods and services, and also the distribution of finished to markets, as well as basic social services such as schools and hospitals; for example, roads enable the transport of raw materials to a factory in military parlance, the term refers to the buildings and permanent installations necessary for the support, redeployment, and operation of military forces.