ECONOMICS
Dr. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY
ECONOMICS
PROJECT
ON
GROWTH OF PRIVATE SECTOR AFTER 1991
Submitted to: Submitted by:-
Dr. Mitali Tiwari Pravesh Shrimal
Asstt. Prof. Roll No. 103
1st Year (IInd Sem)
2018-2019
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CONTENTS
ACKNOWLEDGEMENTS.........................................................................................................3
INTRODUCTION: .....................................................................................................................4
LITERATURE REVIEW ............................................................................................................5
PRIVATE SECTOR IN THE INDIAN ECONOMY ...................................................................6
GROWTH OF PRIVATE SECTOR IN INDIA: ..........................................................................8
ROLE OF PRIVATE SECTOR IN INDIA: ............................................................................... 11
(I) PRIVATE SECTOR AND INDUSTRIAL DEVELOPMENT:............................................................ 11
(II) PRIVATE SECTOR AND AGRICULTURE: ............................................................................... 11
(III) PRIVATE SECTOR AND TRADING: ...................................................................................... 12
(IV) PRIVATE SECTOR AND INFRASTRUCTURE:......................................................................... 12
(V) PRIVATE SECTOR AND SERVICES SECTOR: ......................................................................... 13
(VI) PRIVATE SECTOR IN THE INDIAN ECONOMY:..................................................................... 13
(VII) PRIVATE SECTOR AND SMALL SCALE AND COTTAGE INDUSTRY: ...................................... 13
SHORTCOMINGS AND LIMITATIONS OF PRIVATE SECTOR ......................................... 15
SUGGESTION FOR REFORMS .............................................................................................. 17
BIBLIOGRAPHY ..................................................................................................................... 18
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ACKNOWLEDGEMENTS
I owe a great many thanks to a great many people who helped and
supported me during the writing of this research paper .
Words are inadequate in offering my deep sense of gratitude to my
Professor for her precious guidance.
With her enthusiasm, her inspiration and her great efforts to explain
things clearly and simply, she helped throughout my analysis of work
with lots of encouragement, sound advice, and good innovation.
I would also like to thank the librarians of Dr. Madhu Limaye Library
who extended their assistance to me by helping me out consult the
relevant reference books.
I know that despite my best efforts some discrepancies might have
crept in which I believe my humble Professor would forgive.
Thanking you all.
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INTRODUCTION:
Despite the important role played by the public sector in India, the contribution of private sector
to overall growth was always higher than public sector because of its significantly higher share
in GDP. The importance of private sector can be assessed in terms of its share in domestic saving
and gross domestic capital formation. The gross domestic savings and gross domestic capital
formation of private sector accounts for around 25 percent and 18 percent respectively of total
GDP at market price. The plan wise statistics depicts that private sector dominates the savings
and capital formation in the economy. Under the new economic policy the private sector has
become more preponderant than public secto
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LITERATURE REVIEW
Majumdar, 1998 in his article titled ‘Assessing comparative efficiency of the state-owned
mixed and private sectors in Indian industry' with an objective of to examine
performance differences between government owned, mixed sector and private sector
enterprises in India for the period 1973–1974 to 1988–1989 and he found that enterprises
owned by the central government and state governments are less efficient than mixed or
private sector enterprises, while mixed sector enterprises are less efficient than those in
the private sector.
Bellante and Link, 1981 in their article titled ‘Are public sector workers more risk averse
than Private sector workers’ with an objective to find the differences in working
conditions in a private sector with the public sector and found that People in public sector
have more secured job and better working enviornment.
Feder, Birner and Anderson, 2011 in his article titled ‘The private sector's role in
agricultural extension systems: potential and limitations’ with an objective to find the
private sector’s role in scientific development in agriculture observed that Private sector’s
involvement in the R&D in agriculture helped in reducing difficulties of the same.
Vasanthagopal, 2008 in his article titled ‘Nature and cause of Disputes in Public and
Private sector Enterprises in Kerala’ with an objective of finding the reasons behind the
strikes and disputes in private and public sector enterprises found that the main reason
behind all these disputes is wages and allowances.
Zeffane, 1994 in his article ‘Patterns of Organizational Commitment and Perceived
Management Style: A Comparison of Public and Private Sector Employees’ with an
objective to examine the Organizational commitment and perceived management styles
observed that Comparisons between the two groups of employees revealed higher
commitment among private sector employees. These differences were consistent with
differences in perceived management styles.
Rajan, 2011 in his article ‘Role of the Government: Create fair & competitive market for
private sector’ with an objective to find the importance of competition in market found
that government should ensure environment in which fair market activities can flourish.
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PRIVATE SECTOR IN THE INDIAN ECONOMY
The Government of India opted for a mixed economy in which both public and private sectors
were allowed to operate. For example, the 1948 Industrial Policy Resolution divided industries
into four categories:
(i) three industries in which State was given a monopoly;
(ii) six industries where State was to have the exclusive right to set up new units but existing
private sector units were allowed to operate;
(iii) eighteen industries where regulation and direction was necessary; and
(iv) all other industries (not included in the above three categories) where private sector was
allowed the freedom to operate.
The 1956 Industrial Policy Resolution divided industries into three categories:
(i) seventeen industries (listed in Schedule A) whose future development was to be the exclusive
responsibility of the State;
(ii) twelve industries where the State would increasingly establish new units and increase its
participation but would not deny the private sector opportunities to set up units or expand
existing units; and
(iii) all other industries (not listed in Schedules A and B) where the private sector was given
freedom to operate. However, the private sector had to operate within the provisions of the
Industries (Development and Regulation) Act. 1951 and other relevant legislations. In this
context, the Industrial Policy Resolution 1956 stated, ―Industrial undertakings in the private
sector have necessarily to fit into the framework of the social and economic policy of the State
and will be subject to control and regulation in terms of the Industries (Development and
Regulation) Act and other relevant legislation.
The Government of India, however, recognizes that it would, in general, be desirable to allow
such undertakings to develop with as much freedom as possible, consistent with the targets and
objectives of the national plan. When there exist in the same industry both privately and publicly
owned units, it would continue to be the policy of the State to give fair and nondiscriminatory
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treatment to both of them.‖ The Resolution also emphasized the mutual dependence of public and
private sectors. While State could start any industry not included in Schedule A and Schedule B,
the private sector could be allowed to produce an item falling within schedule A. In fact, the
1956 Resolution emphasized not only the mutual co-existence of private and public sectors but
also provided for their mutual co-operation and help.
The private sector took full advantage of the loopholes and exceptions in the legislation and the
‘elbow room’ allowed by the 1956 Resolution to set up industries even in areas exclusively
reserved for the State sector. In fact, with the passage of time, more and more concessions were
granted to the private sector to expand its business activities. The working of the Industries
(Development and Regulation) Act, 1951, was also full of flaws as the licensing committee
worked in a very haphazard and ad hoc manner and there were no definite criteria adopted for
acceptance or rejection of applications. Because of widespread criticism of the working of the
Act, the government considerably liberalised the industrial licensing policy as well.
The New Industrial Policy, 1991, ushered in a new era of liberalisation as industrial licensing
was abolished, role of public sector diluted, doors to foreign investment considerably opened,
and numerous incentives and initiatives granted to the private sector to expand its business
activities. The 1991 policy was therefore welcomed with unbridled enthusiasm by the private
sector initially. It welcomed the thought of lower taxes, less red tape, less paperwork, more
‘space’ to work and less government interference. However, the 1991 policy had also opened the
doors to multinationals and increased competition from abroad as tariffs were reduced
substantially. Consequently, many domestic producers suddenly discovered their market shares
shrinking drastically as their goods failed to meet foreign competition both on grounds of qualit y
and price. The corporate world also saw significant changes with many old businessmen being
knocked out from their top positions and a number of new entrants making their mark.
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GROWTH OF PRIVATE SECTOR IN INDIA:
At the dawn of independence, almost the entire productive activities and trade were owned and
managed by the private sector. At that time, the role of public sector was insignificant, and its
activity was very much confined to irrigation, power, railways, ports, ordinance, posts and
telegraphs etc. But the activity of the public sector was gradually expanded in different new
fields by both the Centre and the States.
Accordingly, the public sector started to play a significant role in different areas; in terms of
investment, turnover, capital formation, import substitution, contribution to export etc. Even after
the huge expansion of the public sector, the private sector still continued to play a dominant role
in all spheres and thereby accounting nearly 80 per cent of the gross domestic product and about
90 per cent of the total employment. In a narrow sense, private corporate sector provides a
picture about the private sector. Thus, it is quite important to study the growth of private
corporate sector in comparison to that of public sector.
Table 4.10 reveals the growth of both the public sector and private corporate sector over the last
three and a half decades. In respect of number of companies, the rate of growth of public sector
companies was much faster than that of private sector companies. During the period from 1957
to 2000, total number of government companies had increased from 74 to 1,279, i.e., by nearly
16.9 times. Again, the non-government companies has increased their number from 29,283 to
5,41,051 during the same period and thus the same increased by only 7.5 times.
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Moreover, the paid up capital of government companies jumped up from only Rs. 73 crore in
1957 to Rs. 95,842 crore in 2000. Again, the paid-up capital of the private sector companies
increased from Rs. 1,005 crore in 1957 to Rs. 1,72,056 crore in 2000.
The share of Government companies in total paid-up capital of all companies increased
significantly from a mere 6.8 per cent in 1957 to 72.6 per cent in 2000. But the share of non-
government companies in total paid up capital of all companies declined from 93.2 per cent in
1957 to 64.2 per cent in 2000.
In the post-1991 period, the investment scenario mostly in the private sector has been buoyant
and upward moving since the introduction of economic reforms. The number of Industrial
Entrepreneurs Memorandum (IEMs) and Letters of Intent (LOIs) filed from 1991 to October
2000 totaled 44,446 with overall investment intention of Rs. 9,57,824 crore and estimated
employment potential of 7.73 million.
Again, the state-wise distribution of private sector companies shows that as on 31st March, 1986,
Maharashtra recorded the largest concentration of private sector companies, i.e., 29,633
companies with a paid up capital of Rs. 1,515 crore, followed by West Bengal (20,397
companies with paid up capital of Rs. 1,170 crore), Delhi, Tamil Nadu, Gujarat, Karnataka and
Andhra Pradesh.
Among the private sector corporate units, the largest industrial activity in terms of paid up
capitals is in processing and manufacture of metals and metal-products and then the same is
followed by chemicals, textiles, leather and leather products, foodstuffs and processing,
commerce, agriculture and allied industries, construction utilities etc.
The Reserve Bank of India Bulletin, January-February 1995-96 reveals that there has been
marked improvement in the financial performance of the private corporate sector during the first
half of 1995-96 registering a 30.3 per cent growth over the corresponding period of the previous
year. Sales of 1,350 companies in the first half of 1995-96 amounted to Rs. 1,02,510 crore
compared to Rs. 78,678 crore in the corresponding period of the previous year.
The other income of the private corporate sector went up by 15.6 per cent during this period.
Total expenditure also increased at a slightly lower rate of 28.8 per cent than total income (29.9
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per cent) amounting to Rs. 84,380 crore in the first Six months of 1995-96 compared to Rs.
65,507 crore in the corresponding period.
The higher growth rate in income than that of expenditure resulted in a high level of gross profits
of Rs. 1 7,470 crore showing a rise of 34.8 per cent as compared to that of Rs. 12,957 crore in the
corresponding period of the preceding year. The pre-tax profits of this private corporate sector
have recorded a growth of 39.6 per cent but the post-tax profits recorded a growth of 39.7 per
cent during the same period.
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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:
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
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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.
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
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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:
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 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
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by the private sector. As these industries are mostly labour-intensive in nature, thus they can
utilise the local employment opportunities suitably.
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.
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SHORTCOMINGS AND LIMITATIONS OF PRIVATE SECTOR
Private sector though has depicted a spectacular growth profile but it suffers from the limitations
discussed as follows:
1) UNHEALTHY WORKING: Barring few exceptions, private sector in India often indulge in
unfair business practices of generation of black-economy and corrupt business dealings like
evasion of tax, charging higher prices for goods, creating artificial scarcity of Goods etc. A
series of capital market scams by big corporate and cooperative banks has brought into sharp
focus the need for improvement of regulation of private sector.
2) LACK OF SOCIAL ORIENTATION: Private sector is motivated towards short-term gain and
often fails to maximize production of essential goods. Private sector has been extremely cautious
to venture into innovative products and processes.
3) SLOW PROGRESS IN R&D: The private sector has been hesitant to invest in the research and
development of technology. Huge public investments are made in the universities and research
institutes by the government. The commercial behavior guide the investment and funding of
research projects.
4) MONOPOLY AND CONCENTRATION OF POWER: The restrictive production policies and
charging of higher price have resulted in monopoly gains to the private sector. The policy of
mergers, acquisition has been used to prevent competition in the industry. The increased foreign
investment that targets the small domestic industry to enter the domestic market has further
aggravated the problems of concentration of economic wealth in the hands of few.
5) INDUSTRIAL UNREST: The labor unrest is quite alarming in the private sector especially
amongst small scale and medium-sized enterprises. The wages in these enterprises are quite low
and there exists adverse working condition. The industrial disputes are quite high as compared to
the public sector. This often results into strikes, lockouts, gheraos etc. The harmful consequences
are obvious: work stoppage leading to the non-utilization of capital equipment, idle labor,
resulting in the wastage of economic resources.
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6) SICKNESS: The large number of total unit in the private sector is either sick or prone to
become sick. The sickness is the result of many problems such as bad management, old
production methods, outdated technology, inadequate capital and labor unrest.
Suggested Measures
The focus of post-reform policy in India has been to attract private investments in expanding
India’s infrastructure, which would catalyse the economic growth and poverty reduction. The
public sector has been allowed to focus on few strategic areas. However, the results of these
reforms measures have been mixed. Existing imperfections system has constrained the projects
in the private sector.
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SUGGESTION FOR REFORMS
The following measures are suggested to improve investment climate for the private sector in
India:
1. Better Public Administration and Governance: Poor governance in the government
departments has had adverse impacts on India’s private sector. Public bodies such as state
electricity boards ( SEBs), Municipal bodies and others have a poor governance record manifest
in the form of poor record keeping, lack of integrity in accounting, information delayed,
employee indiscipline, etc, which severely restricts their ability to contract with the private
sector. Thus the private participation in the infrastructure development is inhibited.
2. Competition Policy: Excessive regulation of entry and exit from business relative to most
countries is a key factor contributing to less competitive markets in India. this has resulted in
lower private foreign investments in the country.
3. Legal and Judicial Reform: Legal delays and uncertainty on property rights, speed of the
courts, inadequacy of bankruptcy and foreclosure laws, inflexibility of labour laws significantly
increase risk perception and consequent costs to the private sector.
4. Infrastructure Development and Reforms: By most standards, and in all sectors, delivery of
infrastructure services has lagged behind demand mainly due to the tremendous increase in
population, accelerating urbanization and faster India’s industrial growth. The delays, cost
overruns, and lack of competitiveness results in the slow growth of basic infrastructure facilities.
The infrastructure development would improve the investment climate for the private sector in
India.
Though considerable progress has been made in increasing the role of the private sector in the
economy, significant investment potential could be unleashed if key reforms are initiated in the
energy sector and the financial health of the public utilities that will transact with the private
sector is improved.
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BIBLIOGRAPHY
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http://shodhganga.inflibnet.ac.in/bitstream/10603/3798/10/10_chapter%204.pdf'
http://indiabefore91.in/1991-economic-reforms
http://www.economicsdiscussion.net/essays/role-of-private-sector-in-the-economic-
development-of-india/2116
http://www.economicsdiscussion.net/essays/private-sector-of-india/17689
https://www.jagranjosh.com/general-knowledge/new-economic-policy-of-1991-
objectives-features-and-impacts-1448348633-1
http://www.yourarticlelibrary.com/india-2/private-sector/private-sector-in-india/62913
https://educate.itsfacile.com/current-scenario-of-indian-private-sector/
Majumdar, S.K. Public Choice (1998) 96: 1. Retrieved from
https://doi.org/10.1023/A:1004941023587.
Bellante, D. (1981). Are Public Sector Workers More Risk Averse Than Private Sector
Workers? ILR Review, 34(3), 408–412. Retrieved from
https://doi.org/10.1177/001979398103400307.
Feder,G. (2011). The private sector's role in agricultural extension systems: potential
and limitations. Journal of Agribusiness in Developing and Emerging Economies, Vol. 1
Issue: 1, pp.31-54. Retrieved from https://doi.org/10.1108/20440831111131505..
Vasanthagopal, R. (2008). Nature & Causes of Disputes in Public and Private Enterprises
in Kerala. Indian Journal of Industrial Relations, 44(1), 112-116. Retrieved from
http://www.jstor.org/stable/27768176.
Zeffane, R. (1994). Patterns of Organizational Commitment and Perceived Management
Style: A Comparison of Public and Private Sector Employees. Human Relations, 47(8),
977–1010. Retrieved from https://doi.org/10.1177/001872679404700806.
Rajan, R. (2011, April). Role of the Government: Create fair & competitive market for
private sector. Economic Times. Retrieved from
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competitive-market-for-private-sector/articleshow/7922820.cms
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