At the time of independence Indian economy was pre-dominantly agrarian in nature. There was little industrial presence in the country. The policymakers of independent India favoured creation of public sector as a tool for economic development through industrialisation. After the announcement of Industrial Policy Resolution 1956, the public sector saw massive growth in terms of investment and diversification. However, by the early eighties there was clear realisation among the policymakers that

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... ublic sector as whole was unable to generate adequate surplus due to inefficiency which had set in due to numerous factors. Learning from the experiments of other countries, Arjun Sengupta Committee was formed in mid-eighties to suggest measures to improve the working of the public sector enterprises. Based on its suggestions, Memorandum of Understanding (MOU) system, that afforded more autonomy to the Public Sector Enterprises, was introduced in the late eighties. The MOU system that was introduced with just four PSEs in 1988 gradually expanded its scope to cover almost entire universe of the public sector in the next two and a half decades. The MOU system has also undergone many changes over this period. This paper is an attempt to trace the evolution of the MOU system in India and expansion of its scope over a period of two and a half decades. The paper also traces the trajectory of macro-level performance of the PSEs and attempts to assess whether the movement in the performance of Public Sector Enterprises (PSEs) as a whole has generally moved together with the expansion of the MOU system or whether there is a need for deeper analysis to explain the deviations, if any.