In the early 1980s, India’s public sector enterprises (PSEs) faced significant challenges despite their pivotal role in industrial growth since independence. These enterprises, central to the government’s socialist vision and outlined in the 1956 Industrial Policy Resolution, dominated key industries like steel, coal, and heavy engineering. By 1983-84, the public sector had expanded to 209 enterprises employing over 2 million people, with a combined turnover of ₹46,777 crores. However, their financial performance lagged, with low returns on investments and declining profitability, placing a heavy burden on the national budget. This economic backdrop prompted the government, under Prime Minister Indira Gandhi, to establish a committee chaired by Arjun Sengupta, Special Secretary to the Prime Minister, to review the policy framework governing public enterprises, identify problems, and recommend solutions. Members included R. Ganapati; Bimal Jalan; Y. K. Alagh; S. V. S. Raghavan; D. V. Kapur; S. D. Srivastva; Nitin Desai; and B. Swaminathan (Member-Secretary).

The committee found that while public enterprises had contributed to industrial development, regional growth, and technological capabilities, their financial performance was unsatisfactory. Many enterprises in non-core sectors incurred significant losses and relied heavily on government subsidies. Core sector enterprises operated under price controls that affected profitability. Excessive bureaucratic interference stifled autonomy and decision-making, and complex approval processes delayed investments. Furthermore, accountability mechanisms were inadequate, leading to inefficiencies in operations and resource utilization. Loss-making units, particularly in the non-core sector, drained public resources without clear plans for restructuring or closure.

The committee proposed a comprehensive reorganization of public enterprises to enhance efficiency and accountability. It recommended forming holding companies for core sector enterprises to streamline interactions with the government while decentralizing operations to subsidiary units. For financially viable non-core enterprises, it suggested greater autonomy in raising funds and implementing projects, with reduced government oversight. It emphasized using a Memorandum of Understanding framework to set performance goals and metrics for enterprises. For loss-making units, the committee proposed targeted restructuring or closure to minimize resource wastage. In addition, it recommended linking wages and executive compensation to productivity and establishing long-term training programs to improve managerial capabilities.

The Sengupta Committee’s key recommendation to introduce a Memorandum of Understanding system between the PSEs and government was implemented in 1986, enhancing accountability and autonomy. However, its proposals for restructuring PSEs into holding companies and reducing bureaucratic controls were largely unimplemented, limiting operational efficiency and autonomy in India's public sector enterprises.