At the time of independence, Indian economy was highly underdeveloped. Agriculture was the mainstay of the Indian population and there was little industrial presence. Policymakers of free India decided industrialisation as the key strategy for the rapid growth and development of the country. They favoured industrialisation through creation of huge Public Sector to ensure growth with equity and social justice. The Industrial Policy Resolution of 1948 and subsequent one of 1956 accorded the Public Sector Enterprises a predominant role in the economic development of India. As a result, for the next two decades investments in Public Sector Enterprises saw rapid expansion and spread in diverse sectors of the Indian economy. However, by the mid eighties, it became clear that these investments had failed to generate adequate surplus for other public purposes due to lack of efficiency. In 1991, in the mid of a serious macroeconomic crisis, economic reform measures were initiated. New Industrial Policy 1991 initiated the process of Deregulation, Liberalisation and Globalisation of the Indian economy granting much larger role for the private sector – both domestic and global, based on free play of market forces. To meet the needs of the emerging economic realities, a number of measures were also taken to reform the working and performance of the Public Sector Enterprises. Disinvestment and Memorandum of Understanding were key measures among them. These reform measures led to positive impact on the performance of the Public Sector Enterprises; however, for the past many years performance of Public Sector Units has shown signs of weaknesses. Given the size and contribution of the public sector, their performance is the key to success of the Indian economy. This paper attempts to trace the weakening performance of the PSEs in recent years despite rise in Sales and Net Profit.

KEYWORDS: Economic Reforms, Public Sector Enterprises, Disinvestment, Memorandum of Understanding.