Chapter Notes

Introduction

Have you ever noticed the different kinds of shops and offices around you? In your local market, you might see small shops owned by one person (sole proprietors) or big stores run by a company. You also see services like law firms or clinics run by partners. These are all examples of privately owned organisations.

At the same time, you've definitely used services run by the government.

Our country, India, has both privately owned and government-owned businesses operating side-by-side. This type of economic system is called a mixed economy. Within this system, we can classify businesses into two main sectors: the private sector and the public sector.

Furthermore, some massive companies operate in many countries at once. These are known as global enterprises. So, in India, you will find all three types of organizations—public, private, and global—playing a role in our economy.

Private Sector and Public Sector

The Indian economy is broadly divided into two sectors based on ownership.

Private Sector

The private sector consists of businesses owned by individuals or a group of individuals. The main forms of private sector organizations include:

• Sole Proprietorship
• Partnership
• Joint Hindu Family Business
• Cooperative Society
• Company

Public Sector

The public sector is made up of various organizations owned and managed by the government. This ownership can be partial or complete, held by either the central or a state government. These government-run enterprises are a way for the government to participate in the economic activities of the country.

Historically, the government has used Industrial Policy Resolutions to define which areas were open to the private and public sectors. The policies of 1948 and 1956 gave a lot of importance to the public sector to speed up industrial growth.

However, the 1991 industrial policy was a major turning point. This policy introduced concepts like disinvestment (selling public sector shares) and gave more freedom to the private sector. It also invited foreign investment, which allowed multinational corporations (MNCs), or global enterprises, to enter the Indian market.

Forms of Organising Public Sector Enterprises

For the government to participate in business, it needs an organizational structure. Public enterprises are owned by the public (through the government) and are accountable to the public through Parliament. They are funded by public money.

There are three main forms of organization for public sector enterprises:

1. Departmental Undertaking
2. Statutory Corporation
3. Government Company

Departmental Undertakings

This is the oldest and most traditional form of public enterprise. A departmental undertaking is established as a department of a government ministry and is considered an extension of the ministry itself. It doesn't have a separate legal identity from the government.

Features:

• Funding: Gets its funds directly from the Government Treasury through the annual budget. All its earnings also go directly to the treasury.
• Audit and Accounting: Subject to the same accounting and audit rules that apply to all government activities.
• Employees: The employees are considered government servants. Their recruitment and service conditions are the same as other government employees, and they are often headed by IAS officers.
• Control: It is under the direct control of the concerned ministry.
• Accountability: It is directly accountable to the ministry that oversees it.

Merits (Advantages):

• Allows Parliament to have effective control over its operations.
• Ensures a high degree of public accountability.
• Revenue earned becomes a source of income for the government.
• This form is most suitable for sectors related to national security because it is under direct government control.

Limitations (Disadvantages):

• Lack of Flexibility: Suffers from a lack of flexibility, which is crucial for running a business smoothly.
• Delayed Decisions: Heads of departments cannot take independent decisions without ministry approval, leading to delays.
• Inability to Seize Opportunities: Bureaucratic caution prevents them from taking risky but potentially profitable business ventures.
• Red Tapism: Day-to-day operations are slowed down by the need to follow a rigid chain of command for every action.
• Political Interference: There is a lot of interference from the ministry.
• Insensitive to Consumers: Often fails to provide adequate services and is not responsive to consumer needs.

Statutory Corporations

A Statutory Corporation is a public enterprise created by a Special Act of the Parliament. This Act defines its powers, functions, rules, and its relationship with the government.

Features:

• Formation: Set up under a specific Act of Parliament, which defines its objectives and powers.
• Ownership: Wholly owned by the state. The government is financially responsible for it, covering its losses and having the right to its profits.
• Corporate Existence: It is a separate legal body.
• Financial Independence: It is usually independently financed, raising funds through government borrowing or from its own revenues. It is not subject to the government's central budget.
• Accounting and Audit: Not subject to the same strict accounting and audit rules as government departments.
• Employees: Its employees are not government or civil servants. Their service conditions are governed by the provisions of the Act that created the corporation.

Merits (Advantages):

• Operational Flexibility: Enjoys independence and flexibility in its functioning, free from excessive government control.
• Financial Autonomy: Since its funds don't come from the central budget, the government generally doesn't interfere in its financial matters.
• Autonomous Policies: It can frame its own policies and procedures within the scope of its Act.
• Instrument for Development: Combines government power with private enterprise initiative, making it a valuable tool for economic growth.

Limitations (Disadvantages):

• Limited Flexibility in Reality: In practice, its actions are still subject to many rules and regulations.
• Political Interference: Government and political interference often occurs in major decisions, especially those involving large funds.
• Corruption: Rampant corruption can exist, particularly in dealings with the public.
• Delayed Decisions: The government often appoints advisors to the board, which can curb the corporation's freedom and delay decisions if disagreements arise.

Government Company

A Government Company is a company established under the Companies Act, 2013 (or any previous company law). It is created for business purposes and is meant to compete with private sector companies.

Features:

• Formation: Created under the Companies Act, 2013.
• Separate Legal Entity: It can sue and be sued, enter into contracts, and acquire property in its own name.
• Management: Its management is regulated by the provisions of the Companies Act, just like any other public limited company.
• Employees: Employees are appointed according to the rules laid out in the company’s Memorandum and Articles of Association, not by government rules.
• Accounting and Audit: It is exempt from government's strict accounting and audit rules. An auditor is appointed by the Central Government, and its annual report must be presented in Parliament or the State Legislature.
• Funding: Obtains funds from government shareholdings, private shareholders, and can also raise funds from the capital market.

Merits (Advantages):

• Easy Formation: Can be established simply by fulfilling the requirements of the Companies Act, without needing a separate Act in Parliament.
• Separate Legal Identity: It exists as an entity separate from the government.
• Managerial Autonomy: Enjoys freedom in its management decisions and can act based on business prudence.
• Market Control: By providing goods and services at reasonable prices, it can help curb unhealthy business practices in the market.

Limitations (Disadvantages):

• Limited Relevance of Companies Act: In companies where the government is the only shareholder, the provisions of the Companies Act lose much of their relevance.
• Evades Accountability: It is not directly answerable to Parliament, which evades the constitutional responsibility that a government-financed company should have.
• Purpose Defeated: When the government is the sole shareholder, it controls the management and administration, defeating the purpose of creating an autonomous company.

Changing Role of Public Sector

After India's independence, the public sector was expected to play a crucial role in the economy. The private sector was not willing or able to make the huge, long-term investments needed for infrastructure and heavy industries. The government stepped in to fill this gap.

The role of the public sector before 1991 was focused on:

• Development of Infrastructure: Building essential facilities like transportation (rail, road, sea, air), communication, and energy was the government's responsibility. This laid the foundation for industrialization.
• Regional Balance: To prevent industrial development from being concentrated in a few cities, the government deliberately set up public sector industries in backward regions. This helped create jobs and promote balanced development across the country. [!example] Four major steel plants were established in backward areas to accelerate economic growth there.
• Economies of Scale: The public sector set up large-scale industries like electric power plants and petroleum industries, which required huge capital and could only be efficient when operated on a massive scale.
• Check on Concentration of Economic Power: By setting up large industries, the public sector prevented wealth from getting concentrated in the hands of a few private industrial houses, which could lead to monopolies and income inequality.
• Import Substitution: During the second and third Five Year Plans, public sector companies were established in heavy engineering to produce goods that were previously imported. This helped India become more self-reliant.

Government Policy Towards the Public Sector Since 1991

The new industrial policy of 1991 marked a major shift. The role of the public sector was redefined to be more competitive and accountable.

The main elements of the new government policy were:

1. Reduction in Industries Reserved for Public Sector: The number of industries exclusively reserved for the public sector was drastically reduced from seventeen in 1956 to just three by 2001: atomic energy, arms, and rail transport. This opened up almost all other sectors to private competition.
2. Disinvestment of Shares: Disinvestment involves the sale of a public sector enterprise's equity shares to the private sector and the public. The goals were to raise funds for social priorities (like health and education), reduce public debt, improve managerial performance, and encourage wider public ownership.
3. Policy for Sick Units: Public sector units that were continuously making losses were referred to the Board of Industrial and Financial Reconstruction (BIFR). The BIFR would decide whether to restructure the unit or close it down. A National Renewal Fund was set up to retrain or compensate workers who lost their jobs.
4. Memorandum of Understanding (MoU): To improve performance, the government introduced the MoU system. An MoU is an agreement between a public sector unit and its administrative ministry. It grants the unit greater operational autonomy but holds it accountable for achieving specific, pre-agreed targets.

Global Enterprises

In recent decades, Multi-National Corporations (MNCs), also known as Global Enterprises, have become a common feature of the Indian economy. These are huge industrial organizations that extend their operations across several countries.

Features

Global enterprises have distinct features that set them apart:

• Huge Capital Resources: They possess enormous financial resources and can raise funds from various international sources, including banks, financial institutions, and the public. Their financial strength helps them survive in any circumstance.
• Foreign Collaboration: They often enter into agreements with local companies for technology transfer, production, or use of their brand names. This can help local industries but may also lead to the growth of monopolies.
• Advanced Technology: They possess superior production technology, which helps them conform to international quality standards. This can lead to the industrial progress of the host country.
• Product Innovation: They invest heavily in sophisticated research and development (R&D) to create new products and improve existing ones.
• Marketing Strategies: They use aggressive and effective marketing, advertising, and sales promotion techniques. Their well-known brand names make selling products easier.
• Expansion of Market Territory: Their operations extend beyond the borders of their home country, allowing them to become international brands with a dominant market position.
• Centralised Control: They have their headquarters in their home country, which exercises control over all branches and subsidiaries. However, this control is usually limited to broad policy, with day-to-day operations managed locally.

Joint Ventures

Meaning

A joint venture is created when two or more businesses agree to join together for a common purpose and mutual benefit. The businesses pool their resources and expertise to achieve a specific goal, sharing the risks and rewards. The partners can be private, government-owned, or foreign companies.

The reasons for forming a joint venture often include:

• Business expansion
• Development of new products
• Moving into new markets, especially in another country

In India, joint ventures are a popular way of doing business, and they are treated like any other domestic company under the law.

Types of Joint Ventures

There are two main types of joint ventures:

1. Contractual Joint Venture: In this type, a new, jointly-owned company is not created. The parties simply make an agreement to work together. They don't share ownership but do share some control over the venture. [!example] A franchisee relationship is a typical example of a contractual joint venture.
2. Equity-based Joint Venture: In this type, a separate business entity (like a company or partnership) is formed, which is jointly owned by two or more parties. The key factor here is shared ownership, management, capital investment, and profits/losses.

Benefits

Joint ventures offer several significant benefits to the participating businesses:

• Increased Resources and Capacity: By pooling financial and human resources, the joint venture can grow more quickly and face market challenges more effectively.
• Access to New Markets and Distribution Networks: A foreign company entering a joint venture in India gains access to the vast Indian market and can use the established distribution channels of its local partner.
• Access to Technology: One partner can gain access to the advanced technology of the other, saving time and money on developing it themselves. This leads to better quality products and lower costs.
• Innovation: Foreign partners can bring new ideas and technology, leading to the development of innovative products.
• Low Cost of Production: International companies that form joint ventures in India benefit from lower costs of raw materials and labor, allowing them to produce quality goods for their global needs at a competitive price.
• Established Brand Name: A new entrant can benefit from the goodwill and established brand name of its partner, saving the time and money required to build a brand from scratch.

Public Private Partnership (PPP)

A Public Private Partnership (PPP) is a relationship between a public sector entity (like a government ministry or department) and a private sector entity to deliver a project or service.

In a PPP model, tasks, risks, and obligations are shared between the public and private partners.

• The public partner (government) often provides capital or assets and ensures that social obligations and public interests are met.
• The private partner brings its expertise in operations, management, and innovation to run the business efficiently.

PPPs are commonly used for infrastructure projects. [!example] The Kundli Manesar Expressway is a PPP project where the government provided the land, and a private company built the expressway surface.

Features of the PPP Model

• Contract: The government contracts a private party to design and build a public facility.
• Ownership: The facility is typically financed and owned by the public sector.
• Risk Transfer: A key goal is to transfer the design and construction risk to the private party.

Strengths:

• Transfers design and construction risk to the private sector.
• Can potentially accelerate project completion.

Weaknesses:

• Conflicts may arise over issues like environmental considerations.
• It may not attract private finance easily.