Industrial Growth and Structure – Public, Private and Joint Sectors
Division of the Economy between Public Sector and Private Sector:
The present economic structure of Indian economy is known as mixed economy, where there is a coexistence of both the public sector and the private sector. All the different types of industries are divided between these two sectors. From the very beginning, most of the industries of the country were within the purview of private sector.
But after independence and especially after the introduction of economic planning followed by the introduction of Industrial Policy Resolutions, 1948 and 1956 the importance of the public sector was realised. Accordingly, some definite category of industries was gradually reserved for the public sector for their expansion and development.
In this way, the sizes and activities of the public sector gained its momentum with the growing volume of planned expenditure for the development of public sector under different Five Year Plans of the country. Thus in a mixed economy like India, some industries are owned and managed by the State through its public sector and the remaining others are owned and managed by the private sector of the country.
In India, only those industries are reserved for the public sectors which are essential for speedy development of the economy and where private sector is reluctant to invest either due to low rate of return or heavy risk involved in it.
In India, the area of activities of the public sector were very much restricted to a limited range like power, irrigation, roads, railways, port, communications and some departmental undertakings at the time of independence. But after independence, the area of activities of the public sector was expanded at a rapid pace. Two industrial policy resolutions adopted in 1948 and 1956 respectively have divided the industries of the country into different categories.
Accordingly, some industries were entirely reserved for the public sector; some industrial fields were left completely for the private sector. Such division of areas between the public and private sector reveals that while the heavy, basic and strategic industries were reserved for the public sector, the entire group of consumer goods industries, producing both consumer durables and non-durables was kept open for the private sector.
The entire agricultural sector, being the largest sector of the country has been left for the private sector. Again the infra-structural fields like railway, air transport, port, power, communications, banks, insurance, financial corporation’s etc. are reserved for the public sector.
The logic behind reserving the heavy and basic industries like iron and steel, heavy electrical plant, heavy engineering etc. for the public sector and the quick-yielding consumer goods industries for the private sector is quite simple.
R.K. Hazari made an attempt to analyse the logic behind such strategy of the Government, where he argued that the industrial programme of the government adopted after 1955 were finalised as per the following two hypotheses:
(a) Private investment activity in relatively simple goods would generally be promoted by shutting out imports as well as through utilisation of excess capacity at home, with a consequent boost to profits; and
(b) Public investment, being indifferent to profits, would be made in those basic and strategic- areas which had long gestation periods, poor or zero rate of profits, a large exchange requirement, complex technology and equally complex problems of co-ordination.
Here the first hypother is argued that private investment was in the form of ‘induced investment’ and could be promoted by adopting a policy of protection against various imported substitutes. The argument in favour of the second hypothesis was that the flow of investments in low profit yielding and heavy investment requiring industries were in the form of ‘autonomous investment’ and, therefore, could be undertaken by the state.
Relative Role of Public Sector and Private Sector in the Indian Economy:
Relative Role of Public and Private Sector as reflected in the Industrial Policy of India:
In a country like India, both the public sectors as well as the private sector are playing their relative role quite effectively. The Industrial Policy Resolutions of 1948 and 1956 have made special provision for the reservation of sphere for both the public as well as the private sector considering their relative role in the economy of the country.
The Industrial Policy, 1948 has divided Indian industries into four broad categories, involving both the public as well as the private sector and thereby laid the foundation of mixed economy. Thereafter, Industrial Policy Resolutions, 1956, classified the Indian industries into three schedules, i.e., state owned sector, progressively state-owned sector and private sector.
As per this policy, 1956, the State would facilitate and encourage the private sector industries by ensuring infra- structural facilities like power, transport and other services and provided non-discriminatory treatment to both public and private owned units.
Moreover, the philosophy and programme of action for the promotion of public sector was incorporated in the Industrial Policy Resolutions of 1948 and 1956. The Industrial Policy Resolutions of 1956 aptly observed, “The adoption of the socialistic pattern of society as the national objective, as well as the need for planned development requires that all industries of basic and strategic importance or in the nature of public utility services, should be in the public sector. Other industries which are essential and require investment on a scale which only the state in present circumstances, could provide, have also to be in the public sector. The state has, therefore, to assume direct responsibility for the future development of industries over a wider area.” Thus, the Industrial Policy Resolutions of 1948 and 1956 have clearly mentioned the relative role of both public and private sector in a country like India.
While analyzing the role of public sector in Indian economy, Mrs. Indira Gandhi the then Prime Minister of India, rightly observed, “We advocate a public sector for those reasons to gain control of the commanding heights of the economy to promote critical development in terms of social gain or strategic value rather than primarily on consideration of profit and to provide commercial surpluses with which to finance further economic development.”
The Industrial Policy Statement, 1977, has also mentioned about the role of public sector and thereby it prescribed the expansion of the role of public sector especially in respect of strategic goods of basic nature. The public sector was also encouraged to develop ancillary industries and to transfer its expertise in technology and management to small scale and cottage industry sector.
Considering the growing problem of sickness of public sector enterprises, the Industrial Policy of 1980 reaffirmed its faith on the public sector in-spite of having erosion of faith in it in recent years. Therefore, the policy introduced a time bound programme in order to revive the efficiency of public sector undertakings through its effective operational system of management.
Again the industrial Policy of 1980 also made an attempt to integrate industrial development in the private sector by promoting the concept of economic federalism with setting up of a few nucleus plants in each district, identified as industrially backward district, to generate as many ancillaries and small and cottage units as possible.
The new Industrial Policy, 1991 radically liberalized the industrial policy itself and deregulates both the public and private sector industries substantially, in line with the liberalisation move introduced during the 1980s. Realising the relative role of both public and private sector industries of the economy, the new industrial policy, 1991 un-shackled both the two industrial sectors from the cobwebs of unnecessary bureaucratic controls and introduced liberalisation measures in order to integrate Indian economy with the world economy, liberated the indigenous private sector enterprises from the restrictions of MRTP Act so as to attain sustained growth in productivity and employment and also to achieve international competitiveness.
Moreover, the new policy also made provision for reducing the load of public sector enterprises most in their expansion programmes. The policy for the public sector has helped them to restructure their potentially viable units. Moreover, the priority areas for the growth of future public sector enterprises are also rescheduled to include essential infrastructure, exploration and exploitation of minerals and oil, technology development and products with strategic consideration.
Thus, we have seen that various industrial policies, formulated by the Government since 1948 have given due consideration to the relative role of both public and private sector in Indian economy. Therefore, these policies have made sincere attempts for the sustained development of both the public as well as private sector simultaneously.
Relative Role of Public Sector in India:
Public sector occupied a no worthy place for achieving systematic and planned development in a developing country like India. In a country like India suffering from multi-dimensional problems, private sector is not in a position to make necessary effort for the development of its various sectors simultaneously.
Thus, in order to provide the necessary support to the development strategy of the country, the public sector offers the necessary minimum push for bringing the economy to a path of self sustained growth. Thus it is now well recognized that public sector plays a positive role in the industrial development of the country by laying down a sound foundation of industrial structure in the initial stage of its development.
The following are some of the important relative roles of the public sector in the economic development of a country like India:
(a) Promoting economic development at a rapid pace by filling gaps in the industrial structure;
(b) Promoting adequate infrastructural facilities for the growth of the economy;
(c) Undertaking economic activity in those strategically significant development areas, where private sector may distort the spirit of national objective;
(d) Checking monopolies and concentration of power in the hands of few;
(e) Promoting balanced regional development and diversifying natural resources and other infrastructural facilities in those less developed areas of the country;
(f) Reducing the disparities in the distribution of income and wealth by bridging the gap between the rich and the poor;
(g) Creating and enhancing sufficient employment opportunities in different sectors by making heavy investments;
(h) Attaining self-reliance in different technologies as per requirement;
(i) Eliminating dependence on foreign aid and foreign technology;
(j) Exercising social control and regulation through various public finance institutions;
(k) Controlling the sensitive sectors such as distribution system, allocating the scarce imported goods rationally etc.; and
(l) Reducing the pressure of balance of payments by promoting export and reducing imports.
Relative Role of Private Sector in India:
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 relative 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 liberalization of Indian economy in recent years, the private sector is being assigned with much greater responsibility in various spheres of economic activities.
Role of Joint Sector Industries in Developing the Economy of India
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 nationalization.
The joint sector experiment has been viewed with misgivings by many industrialists. It has been assailed as “nationalization by the backdoor”.
But others have welcomed it on the ground that it is preferable to wholesale nationalization 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.
Conclusions:
In any economic system, no single form of organisation can exist. The national economy runs on the conditions that all major forms of organisations not only coexist but also are dependent on each other. Because of the need of the time, immediately after independence, public sector was accorded more than its traditional role in the Indian economy. Over the years both public sector and private sector have contributed in the development process of the Indian economy. However, after liberalisation, public sector is gradually being marginalised in favor of private sector. Private sector now has the required resources, will, and the capability to contribute even in the traditional domains of public sector. Now, in an open and globally integrated economy where survival depends on the efficient use of the scare resources, it is being realised that private sector involvement is a better alternative than public sector involvement. Hence, worldwide, there is a greater and faster move towards privatisation than ever before.
Privatization in generic terms refers to the process of transfer of ownership, can be of both permanent or long term lease in nature, of a once upon a time state-owned or public owned property to individuals or groups that intend to utilize it for private benefits and run the entity with the aim of profit maximization.
ADVANTAGES OF PRIVATIZATION
Privatization indeed is beneficial for the growth and sustainability of the state-owned enterprises.
• State owned enterprises usually are outdone by the private enterprises competitively. When compared the latter show better results in terms of revenues and efficiency and productivity. Hence, privatization can provide the necessary impetus to the underperforming PSUs .
• Privatization brings about radical structural changes providing momentum in the competitive sectors .
• Privatization leads to adoption of the global best practices along with management and motivation of the best human talent to foster sustainable competitive advantage and improvised management of resources.
• Privatization has a positive impact on the financial health of the sector which was previously state dominated by way of reducing the deficits and debts .
• The net transfer to the State owned Enterprises is lowered through privatization .
• Helps in escalating the performance benchmarks of the industry in general .
• Can initially have an undesirable impact on the employees but gradually in the long term, shall prove beneficial for the growth and prosperity of the employees .
• Privatized enterprises provide better and prompt services to the customers and help in improving the overall infrastructure of the country.
DISADVANTAGES OF PRIVATIZATION
Privatization in spite of the numerous benefits it provides to the state owned enterprises, there is the other side to it as well. Here are the prominent disadvantages of privatization:
• Private sector focuses more on profit maximization and less on social objectives unlike public sector that initiates socially viable adjustments in case of emergencies and criticalities .
• There is lack of transparency in private sector and stakeholders do not get the complete information about the functionality of the enterprise .
• Privatization has provided the unnecessary support to the corruption and illegitimate ways of accomplishments of licenses and business deals
ADVANTAGES AND DISADVANTAGES OF PRIVATISATION IN INDIA
• Privatization loses the mission with which the enterprise was established and profit maximization agenda encourages malpractices like production of lower quality products, elevating the hidden indirect costs, price escalation etc..
• Privatization results in high employee turnover and a lot of investment is required to train the lesser-qualified staff and even making the existing manpower of PSU abreast with the latest business practices .
• There can be a conflict of interest amongst stakeholders and the management of the buyer private company and initial resistance to change can hamper the performance of the enterprise .
• Privatization escalates price inflation in general as privatized enterprises do not enjoy government subsidies after the deal and the burden of this inflation effects common man
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