In this essay we will discuss about the Private Sector of India. After reading this essay you will learn about: 1. Introduction to Private Sector in India 2. Role of Private Sector in India 3. Limitations 4. Problems 5. Prospects.
Contents:
- Essay on the Introduction to Private Sector in India
- Essay on the Role of Private Sector in India
- Essay on the Limitations of Private Sector in India
- Essay on the Problems of Private Sector in India
- Essay on the Prospects of Private Sector
1. Essay on the Introduction to Private Sector in India:
In India, the distinction between the private sector and the public sector gained its importance, particularly after the introduction of Industrial Policy Resolutions 1948 and 1956, paving the way for the adoption of mixed economy in India.
These industrial policy resolutions firstly reserved certain industrial areas for the public sector; secondly allowed certain existing industries in the private sector to continue along with the public sector, whose future development would be restricted to the public sector alone and finally, reserved certain other areas exclusively for the private sector.
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Broadly, the public sector in India is assigned with the responsibility of developing and managing heavy and basic industries, economic and social economic infrastructure but the private sector has been assigned with the task of developing consumer goods industries.
While the railways, civil aviation, power generation and distribution, banks, insurance and other financial institutions are reserved in the public sector, but the private sector has been allotted with the entire agriculture and allied activities, plantation, mining, internal trade both wholesale and retail, foreign trade, road freight traffic etc.
At present, the organised areas of the private sector is mostly controlled by the corporate industrial sector and the unorganised agricultural and cottage industrial sector are controlled by the household sector and private individuals.
In the initial stage of economic development, investment in the public sector was quite necessary to accelerate the pace of economic development as well as for the development of basic and heavy industries and the infrastructural areas so as to provide necessary support to private sector.
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As the private sector investment is very much interested in quick-yielding projects and high profitability areas, thus, the investment in those projects having long-gestation periods and low-profit yielding are mostly reserved for the public sector.
The growing sickness of the public sector and the policy of economic liberalisation introduced in India particularly after post-1991 period, i.e., after the introduction of New Industrial Policy, 1991, the policy towards the public and the private sector has been reversed.
The new policy has made provision for reducing the load of public sector enterprises showing either low rate of return or incurring losses over the years. The new policy has now reduced the list of industries under the public sector to 8 against the 17 industries reserved earlier as per 1956 policy.
The industries which are now removed from the list of reserved industries for the public sector and made open for the participation of private sector enterprises include iron and steel, electricity, air transport, ship building, heavy machinery industries, telecommunication and telecommunication cables and instruments.
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Thus, with the growing economic liberalisation of the Indian economy, more and more areas are now being made open for the participation of private sector enterprises. Accordingly, the industrial activities in the private sector gained its momentum through the participation of both domestic and foreign private companies.
Thus, in recent times, private sector has been assigned with increasing role and responsibilities in a developing country like India.
2. Essay on the Role of Private Sector in India:
While in various Western capitalist countries and in Japan, private sector played a responsible role for their economic development but in socialist countries, public sector played a dominant role for their industrial development. But India, being a mixed economy, adopted a middle course where it has judicially mixed both the public sector and private sector for their respective role in development activities of the country.
From the very beginning, the Government has earmarked some specific areas in the field of industry, agriculture, infrastructure and trade for the private sector. Accordingly, the Industrial Policy Resolutions of 1948, 1956 and 1991 have allotted a specific role to the private sector for conducting the development activities of the country.
The private sector has been playing a dynamic role in introducing new products, new varieties, new processes, new designs etc. and thereby updated the entire production system.
Thus, it is quite fruitful to study the role of private sector under the following heads:
(i) Private Sector and Industrial Development:
During the pre-independence period, the private sector has played a responsible role in Indian economy where it set up and expanded cotton and jute textiles, sugar, paper, edible oil, tea etc. After independence, the national government gave sufficient stress on industrialization.
The private sector also made a serious attempt to invest on industries producing wide range of intermediate products which include machine tools, chemicals, paints, plastic, ferrous and non-ferrous metals, automobiles, electronics and electrical goods etc.
In this way, the private sector has developed the consumer goods industry, producing both durables and non-durables and became self-sufficient in the production of different types of consumer goods.
(ii) Private Sector and Agriculture:
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In India agriculture and other allied activities like animal husbandry, dairying, poultry etc. are playing a dominant role as it contributes nearly 30 per cent of GDP and it provided employment to nearly 67 per cent of the total working population of the country. Such a big sector is completely owned and managed by the private sector. Thus, private sector is quite dominant in respect of agriculture and other allied activities.
In India, agriculture is not conducted on commercial basis rather it is managed by the households as much of these activities are in the hands of small and marginal farmers. In India, the new agricultural strategy adopted by the Government has been implemented by the private sector under the active support of the Government.
(iii) Private Sector and Trading:
Both the wholesale and retail trade in India is in the hands of private sector. In a big country like India, having a huge size of population, the entire trading activities are managed by the private sector in a best possible manner. But in case of scarcity of any essential commodities, the private businessmen have their natural tendency in resorting to hoarding and black marketing of such commodities leading to exploitation of the consumers. In order to control such illegal activities, the Government has introduced various control and regulatory measures in the form of controls on price, movement of goods and on storage etc.
Moreover, the Government has been procuring foodgrains through its premier organisation Food Corporation of India (FCI) and has introduced a huge network of the public distribution system (PDS) to participate in the trading of essential commodities for the interest of the consumer.
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Moreover, in respect of international trade, the private sector is playing an important role in its promotion through active government support. The State Trading Corporation (STC) and Minerals and Metals Trading Corporation (MMTC) of the Government are playing a dominant role in this regard. However, in a country like India, the private sector is dominating over the entire trading sector of the country.
(iv) Private Sector and Infrastructure:
Private sector is also providing an active support to the infrastructural sector of the country. Although, the major areas of the infrastructural sector lies in the hands of public sector but still the private sector is participating in those areas which remain open for it.
Private sector has been playing dominant role in respect of road transport, water transport etc. from the very beginning. But after the introduction of New Industrial Policy, 1991, the Government has opened some areas like power generation, air transport etc. for the participation of the private sector.
Accordingly, in the post-1991 period, the private sector has been actively participating in those new areas like power generation, air transport, building highways and bridges on Build, Operate and Transfer (BOT) basis etc.
(v) Private Sector and Services Sector:
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The services sector of the country is almost totally under the control of the private sector. The entire community and personal services, which contributed nearly 11.1 per cent of GDP in 1994-95, is entirely managed by the private sector. The entire professional services, repairing services, domestic services, entertainment services etc. are solely rendered by the private sector throughout the country.
(vi) Private Sector in the Indian Economy:
Private sector is playing an important role in Indian economy. The importance of this sector in the economy of the country can be visualised from the fact that it contributes to the major portion of national income and employment.
As per the latest available statistics for the year 1984-85, the private sector contributed about 75.5 per cent of the net domestic product and the remaining 24.5 per cent as contributed by the public sector. The role of private sector is quite dominant in agriculture and allied activities, small scale industry, retail trade etc.
Again, as per 1981 census, the percentage of population working in the government sector, including public enterprises and government administration was only 7 per cent and the remaining 93 per cent of the working population are engaged in the private sector.
Thus, even after making a huge volume of investments in the public sector and completing more than 45 years of planning, Indian economy is still broadly based on the private sector.
(vii) Private Sector and Small Scale and Cottage Industry:
In India, small scale and cottage industries are playing an important role in the industrial development of the country. The entire small scale and cottage industry is owned and managed by the private sector. As these industries are mostly labour-intensive in nature, thus they can utilise the local employment opportunities suitably.
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The importance of these industries can be visualised from the fact that in 1994-95 the small scale and cottage industries, numbering 25.71 lakh units, have generated employment to the extent of 146.5 lakh, produced output worth Rs 2,93,990 crore and contributed nearly 34 per cent of the total exports of the country.
Considering the importance and the various problems faced by these industries, the Government has taken various steps for the promotion and development of these industries. These measures include both credit and non-credit measures. In India, there is vast potentiality for the expansion of the small sector.
The Government has also announced a small-scale Industrial Policy, 1991 for the promotion and development of the sector. The most important peculiarity of this sector is that the small scale and cottage units of the country, producing variety of products would continue to remain within the control and management of the private sector.
Considering the importance of the private sector, the Government has been undertaking various supporting measures for promotion and development of this sector. But as this sector is mostly guided by the profit motive and have little consideration about the national and social goals, thus the Government has enacted various legislative measures for the control and regulations Of the private sector during the last four decades.
But too much control and regulations imposed on the private sector has resulted in a lot of hurdles on the path of their development leading to a slow rate of growth of the economy. Realising this problem, the Government has introduced the policy of economic liberalisation for the uninterrupted growth of the private sector through the announcement of new and liberal industrial policy in 1991 and also introduced some other industrial policy reforms in the subsequent years.
3. Essay on the Limitations of Private Sector in India:
Private sector has been playing a dominant role in India’s economic development and has proved its capacity and superiority during the last 45 years. In spite of achieving a huge milestone in the path of economic development, the private sector has manifested some weaknesses of its own. The factors which are mostly going against this sector are its economic strength, profit motive and personal initiative.
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As the private sector is mostly guided by the profit maximisation motive for the owners and have little consideration for the national objectives and priorities, thus it may adopt certain undesirable steps which may go against the interest of the consumers as well as the nation itself. Undesirable steps adopted by large scale units may sometimes thwarted the process of growth of the medium and small scale industrial units.
Moreover, leading industrial and business houses of the country have got their tendency to become monopolistic which has led to concentration of wealth and economic power in the hands of few. Besides, private sector units, both large, medium and small are subjected to frequent industrial disputes and chronic industrial sickness.
The following are some of the important weaknesses and limitations of the private sector:
(i) Too Much Emphasis on Low-Priority Industries:
The first important limitation of the private sector in India is that during the last four decades it has invested most of its capital on the development and expansion of consumer goods industries, having low priority elitist bias, like Television and other electronics, man-made fibres, refrigerators, automobiles, perfumes and cosmetics, air conditioners etc.
Such an industrial trend diverted the scarce economic resources of the country into some undesirable channels leading to undesirable waste, rise in elitist consumption pattern and international demonstration effect. In this way, long term requirements of the economy are being ignored deliberately and the required development of the essential sectors has been hampered.
But the entire blame of this undesirable trend cannot be solely shifted to the private sector alone. Government by reserving most of the priority areas for the public sector has restricted the operation of the private sector and also helped the private sector indirectly to increase the production of non-essential goods.
(ii) Emergence of Monopoly Power and Economic Concentration:
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Since introduction of development process along with economic planning in the country in 1951, some existing industrial and business houses got the advantage to avail all those facilities provided by the Government and gain its control over certain industries and gradually became monopolistic in character.
By adopting unfair and restrictive trade practices, they restricted the entry of their rivals and simultaneously eliminated their rivals smoothly. These houses have gained the control over huge volume of wealth and economic power.
In this way, 20 big industrial houses with Tatas and Birlas at the top have emerged as the top economic leaders of the country, which are controlling the economic lever of the country as per their own interest.
As per the study made by the Mahalanobis Committee and the Monopolies Inquiry Commission, it is found that planning process of the country has increased the monopoly and economic concentration instead of reducing such trend.
(iii) Concentration of Black Money:
Growing economic concentration along with growing tendency on the part of the individual to avoid taxes has led to a huge concentration of black money in the hands of private sector. Such accumulation of black money and Government’s failure to arrest such tendency has resulted in a huge drainage of real resources into undesirable channels, leading to considerable wastage, economic scam, political tampering etc.
(iv) Industrial Disputes:
The private sector in India has been suffering from poor industrial relations. Since independence, the country has been experiencing a good number of large scale strikes and lockouts leading to a valuable loss of man-days as well as production.
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Industrial disputes in the private sector of the country is mostly resulted from the issues like wages and allowances, bonus, working hours, leave privileges, victimisation of workers, retrenchment, recognition of unions etc. Moreover, the incidence of industrial disputes is much higher in the private sector as compared to that of public sector of the country.
(v) Industrial Sickness:
Another important limitation of the private sector in India is the problem of growing industrial sickness in different lines of industrial and business activity. In India, industrial sickness was very much common to engineering industry, cotton and jute textiles industry.
But in recent times, the problem of sickness is gradually increasing in all different types of industry irrespective of their scale of production. The factors which me mostly responsible for such growing industrial sickness in the country include inefficient and corrupt management, lack of proper marketing strategy, poor labour relations and faulty government policy.
The fundamental limitation of the private sector is that it has always been assigned with a secondary role to play in the field of economic development of the country by the Government. Naturally it could not find any chance to show its worth in basic, heavy and capital goods industries and also in infrastructural sector.
With the gradual opening of the economy through economic liberalisation, the private sector has now been assigned with a greater role to play in that priority sector during the post-1991 period, which was earlier reserved solely for the public sector.
4. Essay on the Problems of Private Sector in India:
In a mixed economy like India, the private sector has been assigned with a significant role to play in the field of economic development of the country. Although the Government has taken various supporting measures to develop this sector but the various control and regulatory measures introduced by the Government has restricted the private sector to diversify its productive activities and also hampered its growth process.
The following are some of the problems with which the private sector of the country usually suffers:
(i) Regulatory Procedure and Related Delays:
Too many regulatory measures imposed by the Government on the private sector has resulted in lengthy procedure and delays in getting final clearance of a new industrial project. On the Government level, decision making system is so poor that it normally takes 7 to 8 years for large investment project to complete its gestation period.
Delegation of decision making in the Government bureaucracy is so poor that even the simple decisions are rolled back to the top level leading avoidable procedural delays, huge cost escalation, increasing interest burden and higher burden Oil Consumers.
(ii) Unnecessary Control:
From the beginning, the private sector of the country is subjected to unnecessary Government control. Price controls imposed by the Government on certain goods have resulted in disincentive to increase production.
Rather competition among the rival producers can enlarge the production base and thereby can reduce the prices automatically. But in India, under the conditions of shortage, price controls, dual pricing etc. has resulted in black marketing and hoarding of such commodities.
Moreover, the system of licensing of capacity as a capacity restraint has also resulted in undesirable effects on the investors instead of preventing monopolistic tendencies. It is only since 1980, that unnecessary controls on the utilisation of excess capacity and on the creation of new capacities have been either abolished or liberalised.
(iii) Inadequate Diversification:
The private sector has been suffering from inadequate diversification as the Government did not allow them to participate in those basic, heavy and infrastructural sectors which were earlier reserved for the public sector. It is only in post-1991 period, some of these areas are now opened for the private sector participation.
(iv) Reservation for the Small Sector:
From the initial stage of development, the Government is providing necessary support to the small industrial sector in the form of reservation of certain products exclusively for the small sector so as to save it from unfair competition of large units and also by providing excise exemption or lower excise duties on the goods produced by the small sector.
But for the proper development of the small sector, modernization of their production techniques, proper product-mix, updating of designs must be given adequate priority.
(v) Lack of Finance and Credit:
Although the large scale industrial corporate units of the private sector are mobilising their fund from banks, development financial institutions and from the market through sale of their equities or debentures but the small scale units are facing acute problem in raising fund for their expansion.
(vi) Low Ratio of Profit:
Another important problem of the private sector enterprises is the declining trend in its net profit ratio. Accordingly, the net profit to turnover ratio of these total Indian private sector enterprises declined from 6.1 per cent in 1994-95 to 3.2 per cent in 1996-97 and then to 2.3 per cent in 1997- 98.
Moreover, the net profit to net worth (NP/NW). reflecting on return on investment, of the total private sector enterprises also declined considerably from 15.2 per cent in 1994-95 to 6.5 per cent in 1996-97 and then to 4.7 per cent in 1997-98 as compared to that of 5.4 per cent of the Central Public Sector Enterprises (CPSEs).
5. Essay on the Prospects of Private Sector:
Since independence, the private sector was assigned with a secondary role to participate in the industrial activity of the country by the Government. It was only since the Sixth Plan, the Government started to assign much responsibility to the private sector by allocating about 47 per cent of the total planned investment in the private sector.
Side by side, the private sector has also improved its condition, showing sufficient buoyancy and registering higher rate of growth by raising higher volume of funds from the capital market and also by setting up many joint ventures in some other countries. In spite of that, the private sector of India was about 20 years behind the schedule as compared to that of other developing countries.
In order to overcome such gap, a series of measures has been taken by the Government so as to improve the conditions of the private sector. These measures include permitting automatic expansion of capacity to a good number of industries, providing special incentive to export oriented units, exemption from MRTP restrictions on industrial units producing export goods, granting licenses easily to industrial units located in “zero industry” districts, fastening the licensing procedures, liberalisation of import and pricing policies etc. All these measures which were introduced during the Sixth Plan were further liberalised and strengthened during the Seventh Plan.
Moreover, the Government has announced the New Industrial Policy, 199I, which has liberalised the private sector considerably. The main changes brought by this new policy include abolishing the system of industrial licensing for all industrial undertaking except for a short list of 18 industries, reducing the list of industries under public sector to 8 as against the 17 industries reserved earlier, inviting private sector participation in PSUs earning higher profit, abolishing the system of pre-entry scrutiny of investment decisions of the MRTP companies, removing the asset limit of the MRTP companies, providing automatic permission for foreign technology agreement, removal of mandatory convertibility clause etc.
Thus, the new policy has assigned a greater role on the private sector by removing restrictions and controls and introduced a liberalised regime for the private sector of the country.
Thus, the prospects of the private sector in the future development programme of the country are quite bright under the new liberalised regime. Private sector has now been allowed to participate in those basic, difficult and strategic areas to compete with the public sector of the country.
Thus, this is quite a challenging situation before the private sector of the country. It is expected that the private sector will be able to accept this challenge and prove its worth within the definite time frame.