Comparative Analysis of the Private Sector and Public Sector in India

8/19/2019 Comparative Analysis of the Private Sector and Public Sector in India

1/15

Xavier Institute of Management

hubaneswar

EEB REPORT

On

Comparative analysis of the Private sector and public sector in India

Course Instructor: Prof. S. P. Das

Submitted By:- Bibhu Prasad Mishra

UM15323

BM - Section F


2/15

Comparative analysis of the Private sector and public sector in India

Introduction:

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 ofindustries 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 sector 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.

Development of mixed economy:

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 bothconsumer 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.


3/15

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 hypothec 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.

The analysis is based on a comparison of efficiency patterns for sixteen time-periods between

1973 –1974 and 1988 –1989, which is the last year for which data have been released by the

Central Statistical Organization of the Government of India, for four sectors of Indian industry

in respect of which data have been reported by ownership type. These are: the central

government-owned sector; the state government-owned sector; the mixed sector; and the

private sector.

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 intothree schedules, i.e., state owned sector, progressively state-owned sector and private sector.


4/15

As per this policy, 1956, the State would facilitate and encourage the private sector industries

by ensuring infrastructural facilities like power, transport and other services and provided

non-discriminatory treatment to both public and private owned units.

Pre Economic reform Structure of Private and public ownership:

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 analysing 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 ancillaryindustries 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.

Post Economic reform Structure of Private and public ownership:

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 liberalisationmeasures in order to integrate Indian economy with the world economy, liberated the


5/15

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.

Comparison of Private and state enterprises in terms of profitability:


6/15

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.


7/15

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;


8/15

(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.

Performance of SOEs

The performance of SOEs could be studied in terms of financial and non-financial parameters.

Table 1 depicts the share of SOEs to the domestic output in key sectors of the economy. It is

seen that the SOEs form the backbone of important production items such as coal, petroleum

products, and nuclear power generation and telecommunication services through wired lines.

Table 2 provides the macro view of financial performance of SOEs in India during 2006-07 and

2012-13. The table shows that 277 SOEs had a paid up capital of Rs 1,85,282 crore in 2013.

The total investment during this period stood at Rs 8,50,599 crore. The total turnover of these

enterprises during this period was Rs 19,45,777 crore. The overall net profit earned by the

SOEs was Rs 1,15,300 crore. The sales to capital employed ratio for SOEs was 128.83 per cent

in 2012-13. The net profit to capital employed ratio during this period was 7.63 per cent. The

net profit to turnover ratio stood at 5.93 percent. The dividend payout ratio was 43.11 per

cent. The interest to gross profit ratio was 19.86 per cent.


9/15

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 lightareas, 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.


10/15

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.


11/15

Comparison:

Share In Gross Domestic Savings (As a %age of GDP)

Years Household Sector Private Sector Public Sector

Gross Domestic

Savings

1 2 3 4 5

New Series (Base: 1999-2000)

1950 5.7 0.9 2.0 8.6

1955 9.0 1.2 2.1 12.3

1960 6.5 1.6 3.1 11.2

1965 8.6 1.4 3.6 13.7

1970 9.5 1.5 3.3 14.2

1975 10.9 1.3 4.7 16.9


12/15

1980 12.9 1.6 4.0 18.5

1985 13.1 1.9 3.9 19.0

1990 18.4 2.7 1.8 22.8

1995 16.9 5.0 2.6 24.4

2000 21.6 3.9 -1.8 23.7

2005 24.2 7.5 2.6 34.3

2007 23.8 7.8 3.2 34.8

Share In Gross Domestic Capital Formation

Year Public Corporate Sector Private Corporate Sector Gross Capital Formation

1 2 3 4

(BASE : 1999-2000)

1950 2.6 6.1 8.7

1955 5.4 6.3 11.7

1960 6.7 5.8 12.5

1965 8.1 6.9 14.9

1970 5.8 7.9 13.8

1975 7.4 8.6 16.1

1980 8.9 9.5 18.4

1985 10.7 9.7 20.4

1990 9.6 13.4 23.0

1995 8.3 16.2 24.4

2000 6.5 16.3 22.7

2005 7.0 24.0 31.0

2007 7.4 25.0 32.5


13/15

Employment Provider

Years Public Sector Private Sector

end march end march

1981 154.8 74.0

1991 190.6 76.8

1995 194.7 80.6

2000 193.1 86.5

2002 187.7 84.3

2003 185.8 84.2

2004 181.9 82.5

2005 180.1 84.5

2006 181.9 87.7

Comparison of both the sectors across various industries:

S. No Industry Public Sector Private Sector Total

1 Agriculture, Forestry & Fishing 4,549 2,70,309 2,74,858

(1.7) (98.3) (100.0)

2 Mining & Quarrying 16,785 3,863 20,645

(81.3) (18.7) (100.0)

3 Manufacturing 21,106 1,27,015 1,48,121

(14.2) (85.8) (100.0)


14/15

4 Electricity, Gas & Water 18,487 -3,878 14,609

(126.5) (-26.5) (100.0)

5 Construction 9,607 46,089 55,696

(17.2) (82.8) (100.0)

6 Trade, Hotel & Restaurants 5,267 1,58,797 1,64,064

(3.2) (96.8) (100.0)

7 Transport, Storage &

Communications

36,044 30,066 66,110

(54.5) (45.5) (100.0)

8 Finance, Insurance, Real Estate &

Business Services

47,074 84,453 1,31,527

(35.8) (64.2) (100.0)

9 Community, Social & Personal

Services

95,509 48,203 1,43,712

(66.5) (33.5) (100.0)

Total 2,54,428 7,64,917 10,19,345

(25.0) (75.0) (100.0)

Conclusion:

The debate about the costs and benefits of private or public sector is infinite. It hinges on the

economic and political merits of the role of government in society as well as the economics

of ownership, and has found supporters on both sides of the policy divide. Interestingly,

privatization programmes were started in the 1980s purely "on faith" and not because the

policy makers had found conclusive evidence for the superiority of the private sector.


15/15

Though the sponsors of private ownership are in ascendance now, the state

ownership was considered the most successful economic policy only a few decades ago.

However, the studies do show that only those mismanaged public enterprises could generate

favorable budgetary impact, which were sold at competitive prices to buyers who could

improve their performance and fully realize their market potential.

The public sector in spite of its defects is a driving force for private sector in India because it’s

the public sector that takes initiatives to develop infrastructure. There have been declines in

performance of public sector companies but we should never forget that they provide the

foundations to the private sector.

The acceleration in growth in the past five years or so is largely driven by the private sector.

We are not only reaching the South-East Asian levels of saving (32.4 per cent) and investment

(33.8 per cent) rates but the private sector has played a major role in generating these savings

and investment.

Though privatization alone may not be the sole reason for improved efficiency, there is no

denying the fact that competition and regulation would have remained elusive and of

academic value in developing countries’ economies without the emergence of a potent and

assertive private sector. The fact is that the private sector is superior in terms of efficiency

and cost effectiveness only where the regulators have ensured a competitive market. Higher

the degree of competition, greater the resilience and efficiency level of the private sector.

However, we must not forget that due to the inherent tradeoff between equity and efficiency,

the private sector, compared with the public sector, would opt for efficiency that can be

translated into profit - its primary motive for survival.

Date post:	07-Jul-2018
Category:	Documents
Upload:	hitesh-asnani
View:	215 times
Download:	0 times

Comparative Analysis of the Private Sector and Public Sector in India

Documents