Impact of business on Public Sector, Private Sector and Joint Sector

Impact of business on Public Sector

In India, a public sector company is that company in which the Union Government or State Government or any Territorial Government owns a share of 51 % or more. Currently there are just three sectors left reserved only for the government i.e. Railways, Atomic energy and explosive material. Private sectors/players are not allowed to operate in these sectors.

Before the independence of India, there were only a few public sector companies in the country this includes, Indian Railways, the Port Trusts, the Posts and Telegraphs, All India Radio and the Ordinance Factory are some of the major examples of the country’s public sector enterprises. However, post Indian independence, some policies for the development of the socio-economic status of the country were planned out by the then visionary leaders, where the public sector were used as a tool for the self-reliant growth of the nation’s economy.

This was the reason that the second five year plan of India was solely based on the development of the different industries. Till 1990s major sectors of the economy were reserved only for the government, this caused the great loss of our precious natural resources and the whole country trapped into the great economic problem. From the very first five year plan till 1980s our country grows with the average rate of 3.5% per year (which is called Hindu rate of growth by Prof. Rajkrishna).

But later on the in 1991, july our new economic policy was launched under the leadership of Mr. Manmohan Singh and P.V. Narsimha Rao.

The main objectives of this new economic policy were:

• To maintain a sustained growth in productivity
• To enhance gainful employment
• To achieve optimum utilization of human resources
• To transform India into a major partner and player in the global arena.
• To take out Indian economy from the vicious circle of poverty.
• Open the Indian economy to interact openly with the rest of the world.

The main result of this new policy was that reserved sectors were opened for the private players. Public sectors were not able to operate at its optimum pace.

Objectives: 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 accelerate export promotion and import substitution

Role of public sectors in the development of the country is explained below:

• Public Sector and Capital Formation: The role of public sector in collecting saving and investing them during the planning ear has been very important. During the first and second five year plan it was 54% of the total investment, which declined to 24.6 % in the 2010-11.
• Employment Generation: Public sector has created millions of jobs to tackle the unemployment problem in the country. The number of persons employed in the as on march 2011 was 150 lakh. Public sector has also contributed a lot towards the improvement of working and living conditions of workers by serving as a model employer.
• Balanced Regional Development: Public sector undertakings have located their plants in backward parts of the county. These areas lacked basic industrial and civic facilities like electricity, water supply, township and manpower. Public enterprises 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.
• 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 etc. gross internal resource generation in 1990- 2000 was 36000 cr which rose to 1, 11,000 cr in 2008-09, while net profit was 92,077 cr in 2010-11.
• Export Promotion and Foreign Exchange Earnings: Some public enterprises have done much 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.
• Import Substitution: Some public sector enterprises were started specifically to produce 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 Commission (ONGC), the Indian Oil Corporation Ltd., the Bharat Electronics Ltd., etc., have saved foreign exchange by way of import substitution.
• Promotion of 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 operation of sophisticated industrial plants, machinery and equipment in the country. Expenditure on research and development reduces the cost of production.

Impact of business on Private Sector

India, being a mixed economy, has assigned a great importance on the private sector of the country for attaining rapid economic development. The Government has fixed a specific role to the private sector in the field of industries, trade and services sector.

The most dominant sector of India, i.e., agriculture and other allied activities like dairying, animal husbandry, poultry etc. is totally under the control of the private sector. Thus private sector is playing an important role in managing the entire agricultural sector and thereby providing the entire food supply to the millions.

Moreover, the major portion of the industrial sector engaged in the non-strategic and light areas, producing various consumer goods both durables and non-durables, electronics and electrical goods, automobiles, textiles, chemicals, food products, light engineering goods etc., is also under the control of the private sector.

Private sector is playing a positive role in the development and expansion of aforesaid group of industries. Besides, the development of small scale and cottage industries is also the responsibility of the private sector.

Finally, the private sector is also having its role in the development of tertiary sector of the country. The private sector is managing the entire services sector providing various types of services to the people in general. The entire wholesale and retail trade in the country is also being managed by the private sector in a most rational manner.

Moreover, the major portion of the transportation, especially in the road transport is also managed by the private sector. With the growing liberalisation of Indian economy in recent years, the private sector is being assigned with much greater responsibility in various spheres of economic activities.

Characterstics

High Potentiality:

Most of the small scale and cottage scale industries are using labour intersine technologies, they create huge employment opportunities. These industries are owned by private sector. About 80% of the total working forces are employed in either organized or unorganized private sector units. Private sector contributes about three-forth of the country’s national income. Moreover, this sector also plays a vital role to increase gross domestic saving (CDS) and gross domestic capital formation'(GDCF) within the economy.

According to 1956 resolution, “industries producing intermediate goods and machines can be set up in the private sector.” A good number of ultra modern industries are constructed under the control of private sector. This includes several consumers’ good industries like sugar industry, edible oil industry, textile industry, paper industry, spice industry and fast food or semi-finished food industries.

Even in the sphere of capital goods, iron and steel heavy engineering, chemical, motors etc. private sector plays a dominant role for their development. In the post liberalisation phase (after introduction of New Industrial Policy, 1991), the working of few private industries became huge.

Contribution to Agriculture:

India is an agro based economy. The share of agriculture and its allied activities like fishing, poultry, cattle rearing, animal husbandry, dairy farming etc. to the national income is nearly 22%. On the other hand, about 60% of the total working population is engaged in this area. Hence, this large agriculture sector is controlled by the private sector.

Helpful for Development:

According to Schumpeter peter private sector plays a dominant role in economic development. It enhances the process of industrialisation. All the private entrepreneurs are worked for profit motive. They actually played a leading role for the introduction of new commodities, new techniques of production, new plants equipment’s and machineries. Private entrepreneur has innovative ideas and always modifies the total method of production. After the introduction of new industrial policy in 1991, private sector leads a vital role in country’s industrial development.

Employment Generation:

Private sector plays a dominant role for generating employment opportunities inside the country. A huge number of large scale, small scale, cottage scale units are under the control of private sector. It proves that small scale and cottage scale industries contribute four times more employment in compare to large scale industries. According to 2001-02 statistics, as far as employment is concerned, the share of private sector was 51.2% against 44.3% of the public sector.

Most Important Sector:

In-spite of huge progress of the public sector during the plan period, the importance of private sector is tremendous in the India economy. On the basis of the latest data available for the country’s industrial development, the number of private sector companies in 2001- 02 was 1, 10, 634 in compare to the total number companies of 1,28,549. In other way 86.1% of the total companies were under the control of private sector in compare to only 11.67o companies under public sector.

Impact of business on Joint Sector

The joint sector represents a new ideology of economic management geared to sub serve a new economic system.

The term is applied to an under­taking only when both its ownership and control are effectively shared between public sector agen­cies on the one hand and a private group on the other.

Joint sector was emerged as an alternative to both the public and private sector in the mixed economy of India to help the Government by providing the ‘nuclei’ for a healthy growth of certain important industries making the best possible use of available technical and managerial experience in the existing enterprise.

The radical shift in Government policy has brought the concept of the joint sector into sharp focus. It is nothing but a form of partnership between the public sector and the private sector.

Although the Joint Sector concept was conceived by the authors of the 1956 Industrial Policy Resolution, it was really the brainchild of the Industrial Licensing Policy Enquiry Committee, popularly known as the Dutta Committee.

Besides the public and the private sector, there was need for a new sector a joint sector for the harmonious industrial development of the economy. The joint sector is envisaged as something in between the public and the private sector and in which the state could actively participate in management, control and decision-making.

It is claimed that the joint sector scheme has the advantages of both the public and the private sectors and at the same time avoids the evils of both sectors and thus fulfils the basic socio-economic objectives of the country.

Moreover, it offers an avenue of growth when all other gates to growth seem to have been closed.

The concept of a joint sector is basically an extension of the idea of mixed economy in which the public and private sector units are separate and function independently but are nevertheless part of a national plan.

It is a compromise between total nationalisation and complete private autonomy. In the joint sector, the relationship between the representatives of the private and public sectors is much closer as they have to work together within the same unit.

The joint sector was recommended for units where a large proportion of the cost of a new project was to be met by public financial institutions either directly or through their support.

There are three different concepts of joint sector: First, financial institutions can exercise the right to convert debt into equity and appoint directors on company boards.

Secondly, Government may appoint directors on company boards through the exercise of powers granted by the Monopolies and Restrictive Trade Practices Act to check malpractices.

This need not involve share participation and must not be confused with the joint sector. The third form is the real joint sector where the Government directly, or through its agencies, is a co- shareholder in an enterprise. The Government in this case plays a promotional and entrepreneurial role and is an active majority partner.

In a memorandum submitted to the Government, JRD Tata suggested a slightly different definition of the joint sector. “A joint sector enterprise is intended to be a form of partnership between the private sector and the Government in which the State participation of capital will not be less than 26 per cent, the day-to-day management will normally be in the hands of the private sector partner, and control and supervision will be exercised by a board of directors on which government is adequately represented”.

The Dutta Committee advocated conversion of some of the private sector units into joint sector enterprises as an important means of curbing the concentration of economic power in certain private groups.

A number of new industrial projects had been established in the private sector with the help of funds provided by public financial institutions but the latter had not asked for a voice in the management.

It was strange that huge private industrial empires should be built up with funds provided by public institutions without knowing how the money was actually spent. The Dutta Committee asked the Government to enunciate a new industrial policy whereby this anomaly could be rectified.

There was a change in the industrial policy without there being a change in the 1956 Policy Resolution. The Government announced the new industrial policy in February 1970. The joint sector concept as suggested by the Dutta Committee was accepted in principle.

It was laid down that while sanctioning loans or subscribing to debentures, public financial institutions should in future have the option to convert them into equity within a specified period of time. Specific guidelines had been laid down.

In case the aggregate loans granted were below Rs. 25 lakh, the financial institutions are not to insert any convertibility clause in the agreement. If the loans granted were between Rs. 25 lakh and Rs. 50 lakh, it is optional for the financial institutions to insert a convertibility clause in the agreement. Once convertibility was agreed to, the undertaking is required to appoint representatives of the lending institutions as directors on company board.

It is not difficult to understand the logic behind the joint sector. As has been emphasised by the then Prime Minister, the old concepts of exclusive private ownership and private profit do not fit in with today’s social values and priorities.

An open society requires an open corporate structure; the joint sector provides this openness without taking away the advantages of private enterprise and initiative. The joint sector is a departure from exclusive private ownership but it should be welcomed in preference to outright nationalisation.

The joint sector experiment has been viewed with misgivings by many industrialists. It has been assailed as “nationalisation by the backdoor”.

But others have welcomed it on the ground that it is preferable to wholesale nationalisation of existing private undertakings. There is one serious objection to the joint sector.

The concept is based on mutual trust and confidence, yet the idea originated because the private sector could not be trusted enough to grow on its own. Thus, conceived in mistrust, the marriage might be a disastrous failure.

The joint sector was evolved to check the concentration of economic power of private groups. But some think it is not necessary to check the concentration of economic power as the existing Monopolies and Restrictive Trade Practices Act was adequate for the purpose.

Features of Joint Sector:

Joint sector enterprises may be brought into being by any of the following ways:

(i) The Central Govt. and private entrepre­neurs may jointly set up new enterprises. Sometimes the Central Govt. and one or more State Govts, together may set up enterprises in partnership with the pri­vate sector.

(ii) The State Govt. or their industrial devel­opment corporations may set up new companies jointly with private partners, involving equity participation by both the partners.

(iii) Public financial institutions may, through equity participation or conver­sion of loans or debentures into equity, transform enterprises promoted by pri­vate entrepreneurs into joint sector com­panies.

(iv) The existing private enterprises may be transformed into joint sector enterprises by the govt. or govt. companies acquir­ing a part of the equity or converting debt into equity or by contributing to an increase in the share capital.

(v) The existing public sector companies may be transformed into joint sector en­terprises through the sale of some eq­uity shares to private entrepreneurs or the general public.

Advantages

Growth with Welfare:

Growth with wel­fare can be achieved more readily through the agency of joint sector; for expansion and diversifi­cation in this sector will not generate concentra­tion of economic power. The joint sector run and managed on business lines, with specific emphasis on welfare of the surrounding community can be the most useful formula.

In fine, it may be stated that the joint sector, if managed properly, can be a viable alternative to both state capitalism with its risk of bureaucratisation on the one hand and private capi­talism with its acute inequality in the distribution of wealth and income.

Curbing the Concentration of Economic Power:

Govt. participation in the ownership and management of enterprises jointly with private entrepreneurs could be an effective means for con­trolling monopoly, concentration of economic power and business malpractices.

The Dutt Com­mittee even regarded the joint sector as possibly more effective than licensing in achieving this ob­jective.

Social Control over Industry:

Govt. par­ticipation in equity and management is expected to give a social orientation to the enterprise. The joint sector would ensure that the management of industry is conducted according to the overall poli­cies laid down by the Govt. and that public interest and not merely private profit would guide the op­erations of the enterprises.

Alternative to Public and Private Sectors:

The joint sector has the potential to grow as an al­ternative to both the public and private sectors in the mixed economy of India. The main advantage of the joint sector is that it combines the favourable points in the public as well as the private sector and seeks to eliminate the negative points in both.

Broad-Basing of Entrepreneurship:

Another advantage of the joint sector is that it helps Broad base entrepreneurship by encouraging new and small entrepreneurs. The joint sector enables potential entrepreneurs, with small financial resources and less experience to participate in large enterprises as the public sector shares investment and the risk.

Promotion of Mixed Economy:

It is also expected that the joint sector will promote the mixed economy and help achieve development ob­jectives. The basic justification of the idea of mixed economy is to harness all the productive forces of society, state as well as private, to the task of eco­nomic development with a view to accelerating the process.

By allowing the private sector to play its part in the process, the state is able to develop entrepreneurship outside the govt. and enlist it to sup­plement its entrepreneurial role. Similarly, a mixed economy allows the state to take advantage of vol­untary savings in society for purpose of investment to supplement the resources it is able to mobilise for this purpose.

Acceleration of Economic Growth:

The joint sector, by mobilising and augmenting the pro­ductive resources, can accelerate the pace of eco­nomic growth. It enables private entrepreneurs and the state agencies to promote or invest in a greater number of projects than would otherwise be possi­ble.

The resources of the private sector in savings, investments and entrepreneurship can be harnessed in the joint sector with active state help to supple­ment the efforts made by them in the public sector without the private profit motive being allowed to vitiate the effort.