Lesson 14: Role of Public and Private Sectors

After studying this lesson you will understand the following 14.1 Meaning of Public sector Importance of Public Sector Role of Public Sector in Economic Development Role or Private Sector in Economic Development Introduction

14.2 Role of Public Sector in India 14.2.1 Share of Public Sector in Employment 14.2.2. Volume of Sales of the Public Sector 14.2.3 Share in Saving and Capital Formation 14.2.4. Share of Public Sector in Capital Stock 14.2.5. Strong Industrial Base in India 14.2.6. Dominance of Public Sector in Critical Areas 14.2.7. Export Promotion 14.2.8 Import Substitution and Foreign Exchange Saving

14.2.9. Contribution to Central Exchequer 14.3 Role of Private Sector in Indian Economic Development 14.3.1 Private Sector and General Economic Development 14.3.2. Private Sector and Agriculture 14.3.3. Private sector in Trading 14.3.4. Private Sector in the Indian Economy 14.3.5. Private sector and small-scale and Cottage Industries 14.4 Summary 14.5 Check your Progress

14.6 Key Concepts 14.7 Self-Assessment Questions 14.8 Answers to check your progress 14.9 Suggested Readings

14.1 Introduction:
Prior to independence, there was virtually no Public Sector in the Indian economy. In the Post-Independence period, the expansion of public sector was undertaken as an integral part of Industrial Policy 1956. As a result of deliberate policy of encouraging public sector in the Industrial policy resolutions, heavy investment was made in the public sector, so as to facilitate the process of industrialization in the country, by establishing heavy and basic industries and create infrastructure of power, electricity and transport. Public sector undertakings are functioning at Central level and State level. Organizationally, there are four types of public sector enterprises: a) Departmentally managed b) Managed by independent boards c) Run as public corporations d) Organized as Corporations

14.2 Role of the Public Sector in India:

As mentioned earlier, after the attainment of independence and the advent of planning, there has been a progressive expansion in the scope of the public sector. The passage of industrial policy resolution of 1956 and adoption of the socialist pattern of society as out national goal further led to a deliberate enlargement of the role of the public sector.

To understand the role of the public sector, we must have an idea about its size in the context of the Indian economy. For a comprehensive view of the entire public sector, we should cover besides autonomous corporations, the departmental enterprises. While doing so, not only the enterprises owned and run by the Central be covered, but the enterprises run by the State Governments and local bodies should also be included. It would not be appropriate to use any single measure to estimate the size of the public sector because there are numerous measures such as employment, investment, value of output, national income generated, savings, capital formation and capital stock. Let us try to understand the role of public sector by considering each measurement.

14.2.1 Share of Public Sector in Employment:

There are two important categories of public sector employment: a) Government administration and defense and other government services like health, education, research and various activities to promote economic development. b) Enterprises owned by the Centre, State and Local Government. During 1971 and 1995, as a proportion of the total labor force, public sector contribution to employment comes about 6.6 percent. But it may be noted that 90 per cent of the labor force is employed in the unorganized sector and only 10 per cent is in the organized sector. Within the organized Sectors employment (10%) public sector employs 71 per cent of the workers employed in Indian economy. The share of the public sector in total employment in the organized sector reveals that in transport and communications, electricity, gas and water and construction, the share of the public sector is in the range of 95-98 per cent, a situation of total dominance. These are the traditional areas which have been the exclusive preserve of

the public sector since the days of the British rule. However, in manufacturing, the share of the public sector was about 27 per cent of the total since its entry in this area is of recent origin. With the nationalization of Coal mines and takeover of 20 major commercial banks, there has been a significant improvement in the position of the public sector. In overall sense, the public sector is a big employer in so far as the organized sector of the Indian economy is concerned.

14.2.2. Volume of Sales of the Public Sector:

During the last three decades, the share of the public sector in net domestic product (NDP) has shown a steady improvement and accounts for about one fifth of national output. Owing to rapid expansion of public sector enterprises, public sector share in NDP has increased significantly.

14.2.3 Share in Saving and Capital formation of the economy:

Gross domestic capital formation has increased between first five year plan and seventh five year plan. However, the share of the public sector improved from 3.5 per cent during the first five year plan to 10.7 per cent during the seventh plan. In other words, the share of the public sector which accounted for one-third of capital formation to about one-half during the seventh plan. However, the share of Savings of public sector has not been undergone a similar change.

14.2.4 Share of Public Sector in Capital Stock:

The term capital stock refers to the total stock of plant and machinery, equipment and tools and other capital goods available oat a point of time for further production. However, the term investment for gross capital formation refers to annual flow of

installation, of goods partly to meet the needs of depreciation of the capital stock and partly to meet the needs of depreciation of the capital stock and partly to increase the size of the total capital stock on a net basis. But the amount of capital employed per unit of output in the public sector is far greater than in the private sector. This is largely due to the differences in the nature of investment in the public sector. The important features are: a) a good part of the public sector investment goes into economic infrastructure which is essential for economic development but does not contribute to output in due normal sense of the term. b) Public sector has played a significant role in developing the key sectors of the economy and these sectors by their very nature are areas of high capital intensity. c) The projects in the public sector have longer gestation periods. Partly this is due to the technological nature of investment in heavy and basic industrial and partly it is due to the inefficiencies in public agencies in the installation of these projects. d) There is lower utilization of capacities in the public sector and this is also responsible to an extent to lower output capital ratios. e) Areas of higher output-capital ratios fall largely or wholly in the private sector. This includes consumer goods industries, small-scale and cottage enterprises and agriculture.

14.2.5 Strong Industrial Base:

The rapid industrialization was mainly due to the public sector. The state also took the responsibility for the development of key industries and the rest of industries were

left to the private sector. Therefore, public sector succeeded in laying a strong industrial base though there are still many weaknesses and gaps in the industrial structure of the country.

14.2.6 Dominance of public sector in critical areas:

Public sector has entered into a wide spectrum of industries and products. Its operations extend from basic and capital goods. Most of these industries have a strategic importance in the Indian economy since they have high linkages. In highly critical area the share of public sector is 100 per cent. In quite a large number of products, it ranges between 50 -95 per cent.

14.2.7 Export Promotion:

In India some public enterprises have done much to promote exports. Considerable success has been achieved in pushing up the exports of Indian handicrafts, light engineering goods and many other new items of exports. The foreign exchange earnings of the public sector enterprises have been rising over a period of time. There is no denying the fact that the export performance of the public sector enterprises has been quite creditable.

14.2.8 Import Substitution and Foreign exchange saving:

Some public sector enterprises were started specifically to produce goods which were formerly imported and thus to save foreign exchange. Some of public enterprises which attempt directly to increase self-reliance of the country and reduce our dependence on imports. Complete self sufficiency may not be possible at present, but a determined effort should be made to achieve this goal in the shortest possible time.

14.2.9 Contribution to Central Exchequer:

The public sector enterprises contribute to the Central Exchequer through the payment of I) Dividends, ii) Corporate taxes, iii) Excise Duty, IV) custom duty etc., in this way, they help in mobilization of resources for the planned development of the country. From every angle, public sector units have become extremely significant in India now. Their importance, especially in the critical sectors, has been growing. The justification for public enterprises in India was based on the fact that the rate of economic development planned by the government was much faster than can be achieved by the private sector alone. In other words, the public sector was essential to realize the target of the high rate of development deliberately fixed by the government.

14.3 Role of Private Sector in Economic Development:

Private sector refers to all types of individual or corporate enterprises, domestic and foreign, in any field of productive activity. Private sector enterprises are characterized by ownership and management in private hands, personal initiative and profit motive. Industrial Policy Resolutions have clearly demarcated the scope and role of the private and public sectors. In a broad way, the public sector is entrusted with the responsibility of developing heavy and basic industries, social and economic infrastructure while the private sector is broadly given the right to develop consumer goods industries.

14.3.1 Private Sector- General Economic Development:

Even before independence, the private sector was responsible for the setting up and expansion of industries. Protection given by the government during 1930s and the

Second World War stimulated industrial development. But the greatest stimulant was given to industrialization by the national government after independence. The private sector was given sufficient scope to produce intermediate goods and machines also, and as a consequence a whole range of industries producing chemicals, paints, plastics, machine-tools, ferrous and meets, rubber etc., have come up. India has become self sufficient in many consumer goods. The private sector has become as capable as to help other third world countries in their economic development.

14.3.2 Private Sector and Agriculture:

The dominant sector in India is agriculture which consists of agriculture proper and other allied activities such as dairying, animal husbandry, poultry etc., and this sector which is completely managed by private enterprise contributes nearly 32 per cent of the domestic GNP and provides employment to nearly 67 per cent of the working population.

14.3.3 Private Sector in Trading:

Trading, both wholesale and retail, has always been in the private sector because the trading services can be best rendered by private businessmen. The Government is least suited to render these services. However, under conditions of scarcity, the private businessmen have the tendency to resort to hoarding and exploitation of the consumers. Therefore, the Government of India decided to take over the wholesale trade in wheat, but the scheme fell through.

14.3.4 Private Sector in the Indian Economy:

The share of private sector is dominant in agriculture, forestry, fishing, small-scale industry, retail trade, construction, and transport other than railways. The latest census put the percentage of population working in the government sector at 7 per cent and those working in the private sector at 93 per cent. This is the position even

four decades of economic planning, and consistent effort to give a boost to the economy through creating a vibrant public sector. The dominance of the private sector is so overwhelming and as such, the Indian economy cannot really be called a mixed economy; much less a socialist country.

14.3.5 Private Sector and Small-Scale and Cottage Industries:

Small and Cottage Industries in India are in the private sector and they have an important role to play in industrial development. They are particularly suited for the utilization of local employment opportunities, as they are labor-intensive. Besides ensure a more equitable distribution of income and wealth and help in the effective mobilization human and physical capital. This is all possible via private sector which works under profit motive.

14.4 Summary:
Indian economy is passing through a process of crucial change, for the last few decades, we have been pursuing a path in which the public sector was expected to be the engine of growth. However, towards the middle of the seventies, disenchantment with the public sector had started, but the voices of protest were feeble and were sporadic and unarticulated. The failure of public sector to fulfill the role assigned to it resulted in the protest becoming louder and more articulate. Moreover, it is inconceivable that privatization in this country will be accepted by the society as an end in itself, since there is no consensus in favor of market solutions and property rights, nor are these considered as prime movers for much needed social and economic change. These real issues centre on the alleviation poverty and upgrading of technology in highly differentiated society of continental dimensions. This that privatization will have to be viewed essentially as the best possible means of achieving pre-determined ends, and ensuring that it does not distort the parameters of such ends.

14.5 Key Concepts

Public sector : Public sector units are not only the enterprises owned and run by the Central, but the enterprises run by the State Governments and local bodies also be included. Its main objective is welfare of the public. Private sector: Private Sector units are run by Private people and its main objective is to attain maximum profit. Human Capital: It is nothing but the human resources available in an economy. Physical capital can be mobilized but human capital should be strengthened by providing training. Privatization: Privatization means the selling up of public sector units or handing over the management to the private people or disinvestment in the public sector units. Labour Intensive: There will be two methods of techniques, one is Labor intensive method which means the usage of more quantum of labor in production activities of the economy Protectionist Policies: To Protect the local Industrialists from the competition of foreign investors, Indian government adopted protectionist policies till 1990. Output Capital Ratios: It refers to how much capital invested for unit of output production.

14.6

Check your Progress

State whether the following statements are True or False:

1. Prior to 1947 virtually there was no public sector. 2. State Level Public Enterprises related information compiled by Institute of Public Enterprises. 3. Company form of organization is not a public enterprise. 4. During the 6th plan about one-half of capital formation is from public sector. 5. Dividends are one of the forms of public sector contribution to Central Exchequer. 6. Large industrial houses will be more in public sector.

14.7 Self-Assessment Questions Short answer type questions: 1. What is Public Sector? Explain its share in employment.
2. Explain different forms of Public Sector Enterprises. 3. Explain the share of public sector in capital stock. 4. Distinguish between Public and Private Sector.

Long answer type questions: 1. Evaluate the role of Public Sector in India.
2. Discuss the growth of the Private Sector vis--vis the Public Sector. 3. Examine the role of Private Sector in the development of Small Scale Industries.

14.8 Answers to check your progress

1. True 4. True

2. True 5.True

3. False 6. False

14.9 Suggested Readings

1. Kuschal.S 2. Sivaiah & Das 3. Bhagwati.J.N & Desei.P 4. Shankar.U Industrial Economics. Industrial Economics. India: Planning for Industrialization. Industrial policy of India: The nature and growth of the public sector, Uppal.J.S(ed) Indias Economic Problems. 5. Dholakia.B.H. The changing efficiency of Public Enterprises in India. 6. Pramit Chaudhury 7. Cheruniliam 8. Ruddar Dutt and KPM sundaram Indian Economy The Indian Economy. Industrial Economics