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Explain the concept of public sector and private sector.

The Government of India has chosen for a mixed economy whereby both government and private establishments are allowed to operate. The economy, hence, may be categorized into two sectors namely., public sector and private sector. The private sector comprises of business owned by an individual or a group of individuals. The different types of organisations are sole or single ownership, joint venture, joint Hindu family, cooperative and company. On the other hand the public sector comprises of various organisations that are owned and managed by the government.


State the various types of organisations in the private sector.

The types of business organisation in the private sector are namely, single ownership, joint ventures, Hindu joint family, cooperative and company.


What are the different kinds of organisations that come under the public sector?

The types of organisation which a public sector house may take are as follows:

(i) Departmental enterprise

(ii) Statutory body

(iii) Government organisation


Why is the government company form of organisation preferred to other types in the public sector?

These companies are recognized under the Indian Companies Act, 1956. These are Government companies like all other companies in the private sector are registered and governed by the laws of the Indian companies Act. According to the Indian Companies Act 1956, a government company is the one wherein not less than 51 percent of the remunerated capital is done by the central government, or by any state Governments or partly by central Government and partly by one or more state Governments. So the government company form is preferred to other types due to its advantages and facilities.


How does the government maintain a regional balance in the country?

The government is accountable for removing regional disparities and developing all regions and states in a balanced way. Most of the industrial development was restricted to a few areas like the port towns before independence. After 1951, the government proposed in its Five Year Plans, that special attention would be given to those regions that were lagging behind and public sector industries were intentionally set up. Four major steel plants were set up in the backward areas to enhance economic development, provide employment to the labour force and develop ancillary industries. This was attained to a certain extent but there is room for a lot more. On of the main objectives of the planned development is the development of backward regions in order to ensure regional balance in the country.


Describe the Industrial Policy 1991, towards the public sector.

Four major reforms were introduced by the government of India in the public sector in its new industrial policy in 1991. The main components of the Government policy are as follows:

Restructure and bring back potentially viable PSUs

Shut down PSUs, which cannot be invigorated.

Bring down governments equity in all non-strategic PSUs to 26 per cent or lesser, if required; and

Fully defend the interest of workers.

(a) Reduce the number of industries retained for the public sector from 17 to 8 (and then to 3):

17 industries were reserved for the public sector in the 1956 resolution on Industrial policy. In 1991, only 8 industries were retained for the public sector, they were limited to railways, atomic energy, arms and communication, mining. In 2001, only three industries were reserved solely for the public sector. These are atomic energy, arms and rail transport. This meant that the private sector could gain access in all areas (except the three) and the public sector would have to compete with them. The public sector has played an important role in the progress of the economy. However, the private sector is also quite competent in contributing significantly to the process of building the nation. Hence, both the private sector and the public sector need to be seen as mutually complementary elements of the national sector. Private sector units also have to assume greater public responsibilities. At the same time, the public sector needs to focus on attaining more in a highly competitive industry.


(b)Disinvestment of shares of a select set of public sector undertakings: Disinvestment is the sale of the equity shares to the private sector and the public. The AIM is also quite capable of contributing substantially to the nation building process. Therefore, both the public sector and the private sector need to be viewed as mutually complementary parts of the national sector. Private sector units also have to assume greater public responsibilities. Simultaneously, the public sector needs to focus on achieving more in a highly competitive market.


Disinvestment of shares of a select set of public sector enterprises: Disinvestment involves the sale of the equity shares to the private sector and the public. The aim was to raise resources and encourage wider involvement of the general public and workers in the ownership of these undertakings. The government had taken a decision to pull out from the industrial sector and reduce its equity in all enterprises. It was expected that this would result in improved administrable performance and guaranteeing economic regulation. But there remains far more to be done in this regard. The main aims of making public enterprises private are:

Liberating a huge amount of public resources locked up in non strategic Public Sector Enterprises (PSEs), so that they may be used on other social priority areas such as primary education, basic health, and family welfare.

Reducing the large amount of public debt and interest burden

Transferring the commercial risk to the private sector so that the finances are put in able projects;

Releasing these undertakings from government control and introduction of corporate authority; and

In many areas where the public sector had a monopoly, for eg, in the telecom sector the consumers have benefited by more choices, quantity and quality of products and services.

(c) Policy as regards sick units to be the same as that for the private sector: All public sector units were referred to the Board of Industrial and Financial Reconstruction to decide if a sick unit was to be restructured or shut down. The Board has reconsidered renewal and rehabilitation schemes for some cases and closing down for a number of units. There is a lot of protest amongst workers of the units which are to be closed down. A National Renewal Fund was started by the government to retrain or reemploy retrenched labour and to give

Compensation to public sector employees looking for voluntary retirement. There are many undertakings that are sick and inefficient of renewal as they have accrued heavy losses. With public funds under extreme pressure, both state and central government are not capable of sustaining them much longer. The only choice present for the government in such instances is to shut down these enterprises after giving them a safety net for the employees and workers. Resources under the National Renewal Fund have been insufficient in meeting the cost of Voluntary Separation Scheme or Voluntary Retirement Scheme.


Memorandum of Understanding: Progression in performance via a MoU (Memorandum of Understanding) scheme by which administrators are to be given

greater freedom but held responsible for particular results. Under this system, clear targets and operational freedom for achieving those targets were given to the public sector units . The MoU was between the specific public sector unit and

its administrative ministries defining their relationship and freedom.


What was the role of the public sector before 1991?

It was expected, at the time of Independence that the public sector undertakings would play a major role in attaining certain objectives of the economy either by direct involvement in business or by acting as a channel. The public sector would

construct the backbone for other sectors of the economy and invest in main areas. The private sector had long gestation periods and was unwilling to invest in projects which required heavy investments. The government then took the burden to develop the skeletal/framework facilities and provide for goods and services necessary for the economy. The Indian economy is in a stage of changeover. The Five Year Plans in the beginning stages of development gave a lot of significance to the public sector. In late 90’s period, the new economic policies laid emphasis on privatisation, liberalisation, and globalisation. The role of public sector was redefined. It was not supposed to play a passive role but to actively involve and compete in the market with other private sector firms in the same field. They were also held responsible for losses and profits on investment. If a public sector was incurring losses repeatedly, it was referred to the Board for Industrial and Financial Reconstruction (BIFR) for complete renovation or close down. Different committees were set up to learn the functioning of inefficient public sector units with reports on how to bring up their administrative efficiency and profitability. The role of public sector is certainly not what was predicted in the early 60’s or 70’s.


Growth of infrastructure:

The development of backbone/framework is a prerequisite for industrialisation in any country. Before independence, the fundamental infrastructure was not developed and hence, industrialisation advanced at a very slow pace. The process of industrialisation cannot be maintained without enough transportation and communication facilities, energy and fuel, and basic and heavy industries. The private sector did not show any initiative to invest in heavy industries or develop it in any manner. They did not have trained personnel or Funds to straight away establish heavy industries which was the necessity of the economy. Only the government could muster huge capital, harmonize industrial construction and train technicians and labour force. Rail, road, sea and air transport was the accountability of the government, and their development has contributed to the pace of industrialisation and ensured future economic growth. The public sector enterprises were to function in certain spheres. Investments were to be made to:

(a) Give infrastructure to the core sector, which needs a massive capital investment, complicated and improved technology, large and effective organisation structures like steel plants, civil aviation, power generation plants, railways, coal petroleum, state trading, etc

(b) Give a lead in investment to the core sector where private sector undertakings are not operating in the desired direction, like pharmaceuticals, fertilizers, petro-chemicals, newsprint, medium and heavy engineering

(c) Give direction to future investments like textiles, project management, consultancies, hotels, automobiles, etc.


Regional balance: The government is accountable for removing regional disparities and developing all regions and states in a balanced way. Most of the industrial development was restricted to a few areas like the port towns before independence. After 1951, the government proposed in its Five Year Plans, that special attention would be given to those regions that were lagging behind and public sector industries were intentionally set up. Four major steel plants were set up in the backward areas to enhance economic development, provide employment to the labour force and develop ancillary industries. This was attained to a certain extent but there is room for a lot more. On of the main objectives of the planned development is the development of backward regions in order to ensure regional balance in the country. Hence, the government had to locate new establishments in backward areas and simultaneously prevent the budding growth of private sector units in already advanced areas.


Economies of scale: Where large scale industries are required to be set up with huge capital outlay, the public sector had to step in to take advantage of economies of scale. Some good examples of the public sector setting up large scale units are electric power plants, natural gas, petroleum and telephone industries. These units required a bigger base to operate financially which was only possible with government resources and mass scale production.


Check over concentration of economic power: The public sector serves as a check over the private sector. In the private sector, the willingness of the industrial houses to invest in heavy industries is lesser as people fear the wealth gets concentrated in a few hands and monopolistic practices are encouraged. This gives rise to difference in income, which is detrimental to society. The public sector is able to set large industries which require heavy investment and thus the income and profits that accumulate are shared by a large of number of employees and workers. This precludes concentration of wealth and financial power in the private sector.

Import substitution: India was aiming to be self-reliant in many spheres during the second and third Five Year Plan period. Some of the problems then were obtaining foreign exchange and also importing heavy machinery that were required for a strong industrial base. During that time, public sector enterprises involved in heavy engineering which would help in import substitution were established. At the same time, many public sector enterprises like STC and MMTC have played a vital role in the expansion of exports of the country.


Why are global enterprises considered superior to other business organisations?

At some time, you must have come across products manufactured by Multi National Corporations (MNCs). Over the last 10 years, MNCs have played a vital role in the Indian economy. They have become a general feature of most developing countries in the world. MNCs are gigantic corporations from what we see around us, which function in a number of countries. They are featured by their large size, huge number of products, superior technology, marketing approach and operational set up universally. Global enterprises are hence huge industrial bodies that broaded their industrial and marketing operations through a network of their branches in many different countries. Their branches are also known as Majority Owned Foreign Affiliates (MOFA). These undertakings function in many areas manufacturing many products with their business procedure extending over a many countries. They do not look at maximising their profits from one or two products instead expand their branches all over. They have an effect on the global economy too. This is apparent from the fact that the sales of top 200 corporations were equal to 28.3 percent of the world’s GDP in 1998. This proves that the top 200 MNCs control over a quarter of the world economy. Hence, MNCs are in a state to exercise immense control on the world economy because of their capital resources, latest technology and goodwill. As a result of this, they are capable of selling any product in various countries. Some of these corporations may be slightly unfair in nature and look into more on selling consumer goods and luxury items which are not always attractive for developing countries.



The corporations have discrete features which distinguish them from other private sector companies, public sector companies and public sector enterprises. They are as follows:

Huge capital resources: The characteristics of these enterprises are that they possess massive financial resources and the capability to raise funds from different sources. They tap funds from different sources. They can issue equity shares, debentures or bonds to the public. They too are in a position to borrow from financial institutions and international banks. They enjoy reliability in the capital market. Hence, investors and banks of the host country are prepared to invest in them. Due to their financial strength they are able to survive under all situations.

Foreign collaboration: Global enterprises habitually enter into agreements with Indian companies with respect to the sale of technology, production of goods, use of brand names for the final products, etc. These MNCs can work together with companies in the public and private sector. There are generally several restrictive clauses in the agreement involving transfer of technology, pricing, dividend payments, tight control by foreign technicians, etc. Large industrial houses willing to diversify and extend have gained by working together with MNCs in terms of patents, resources, foreign exchange etc. But simultaneously these foreign collaborations have paved way to the growth of monopolies and vesting of power in few hands.


Advanced technology: With the advancement in technology, these enterprises have technological superiorities in their methods of production. They are able to be conventional to the international standards and quality specifications. As a result, industrial growth of the country in which such corporations function as they are able to optimally exploit local resources and raw materials.


Product innovation: These enterprises possess highly sophisticated research and development units engaged in the task of developing new products and advanced designs of existing products. Qualitative research needs huge investments that are affordable only for global enterprises.


Marketing strategies: Global companies implement marketing strategies that are more effective than other companies in order to increase the output within a short period. They have a very reliable and up-to-date market information system. The advertising and sales promotion techniques of global companies are generally very effective as they have already carved out a place for them in the global market more so, their brands are well-known and selling their products is quite easy

(vi) Expansion of market territory: Their functions and activities are stretched beyond the physical boundaries of their own countries. The international image also mounts up and the market territory grows enabling them to become international brands. They function through a network of subsidiaries, branches and affiliates in host countries. Because of the giant size they occupy a foremost position in the market.

(vii) Centralised control: Their headquaters is in their home country and exercise control over all the branches and their subsidiaries. Nevertheless, this control is limited to the extensive policy framework of the parent company. There is no interference in day-to-day functions.


What are the benefits of entering into joint ventures?

Business firms are of various types namely, private or government owned or global enterprises. At present, if any business firm can join hands with another business firm for mutual benefit. These two firms may be private, government-owned or a foreign company. Joint ventures can be adopted at any scale. It is not dependant on the size or strength of the firms. It can even collaborate for short term projects. A joint venture becomes flexible based on the party’s requirements. This requires to be clearly declared in a joint venture agreement to avoid conflicts further. A joint venture can also be the outcome of an agreement between two business firms in different countries. In such case, there are certain requirements provided by the governments of the two countries that will have to be followed strictly. Hence, joint ventures may involve many things, depending upon the context in which it is conducted. But in a wider sense, a joint venture is can be described as the pooling of resources and proficiency by two or more business firms, to achieve a particular objective. The risks and rewards of the business are also shared. The reasons for joint venture often include business development and growth, developing new products or moving into new markets, especially in another country. The advantage in this kind of a joint venture is that two or more (parent) companies mutually agree to share capital, technology, human resources, risks and rewards. India promotes joint venture companies and identifies it as the best way of doing business and is not bound by any separate law.

Benefits: A Business can attain unforeseen gains through joint ventures with a partner which can prove to be extremely beneficial for both parties. The major benefits achieved by joint ventures are as follows:

(i) Increased resources and capacity: Joining hands with another or teaming up adds to existing resources and capacity enabling the joint venture company to grow and expand more quickly and efficiently. The new business pools in financial and human resources and is able to face market challenges and take advantage of new opportunities.

(ii) Access to new markets and distribution networks: When a business firm joins hands on joint venture with a partner from another country, it unveils a vast growing market. For instance, foreign companies gain access to the vast Indian market when they form joint venture companies in India. The products that have reached a saturation point in their host country can be easily sold in new markets and they can also make use of the established distribution channels in different local markets, or, establishing their own retail outlets may prove to be very expensive.

(iii) Access to technology: Technology is considered as a major factor for most business enterprises to enter into joint ventures. Advancement in production techniques lead to superior quality products thereby saving a lot of time, energy and investment as they do not have to develop their own technology. In addition, technology also adds to efficiency and effectiveness leading to reduction in costs.

(iv) Innovation: There is a remarkable increase in the markets and becoming more demanding in terms of new and innovative products. Joint ventures enhance business to come up with new and creative products catering to the demands of the same market. Especially, foreign partners may come up with innovative products because of new ideas and technology.

(v) Low cost of production: With the investment by international corporations India, they benefit immensely because of the lower cost of production. They are also able to obtain quality products for their global needs. India is becoming an important global source and tremendously competitive in many products. There are umpteen number of reasons for this viz., low cost of raw materials and labour, technically qualified labour force; management professionals, remarkably excellent manpower in different cadres viz., lawyers, chartered accountants, engineers, scientists. The international partner gets the products of required quality and specifications at a comparatively lower cost than what is prevailing in the home country.

(vi) Established brand name: When two business firms enter into a joint venture, one of the parties gain benefit from the other’s benevolence which has already been customary in the market. If the joint venture is in India and with an Indian company, the Indian company need not spend time or money in developing a brand name for the product or a distribution scheme. There is a ready market awaiting the product to be launched. A lot of investment is saved in the proce

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