EXERCISES
Short Answer Questions
1. Explain the concept of public sector and private sector.
Answer: The Private Sector consists of businesses owned by individuals or a group of individuals. Examples of forms in the private sector include sole proprietorship, partnership, joint Hindu family, cooperative, and company. The Public Sector comprises various organizations owned and managed by the government. These can be partly or wholly owned by central or state governments, or come into existence through a Special Act of Parliament, through which the government participates in economic activities.
2. State the various types of organisations in the private sector.
Answer: The various types of organizations in the private sector mentioned are sole proprietorship, partnership, joint Hindu family, cooperative, and company.
3. What are the different kinds of organisations that come under the public sector?
Answer: The different kinds of organizations that come under the public sector are:
- Departmental undertaking
- Statutory corporation
- Government company
4. List the names of some enterprises under the public sector and classify them.
Answer: Examples of enterprises under the public sector mentioned are:
- Departmental Undertakings: Railways, Post and Telegraph Department.
(The text does not provide specific examples for Statutory Corporations or Government Companies, only the categories.)
5. Why is the government company form of organisation preferred to other types in the public sector?
Answer: The government company form of organization is preferred because:
- It can be established by fulfilling the requirements of The Companies Act, 2013, without needing a separate Act of Parliament.
- It has a separate legal entity apart from the Government.
- It enjoys autonomy in management decisions and acts according to business prudence.
- It can control the market and curb unhealthy business practices by providing goods and services at reasonable prices.
6. How does the government maintain a regional balance in the country?
Answer: The government maintains a regional balance in the country by deliberately setting up public sector industries in backward areas after 1951. This was done to accelerate economic development in those regions and provide employment opportunities, thereby removing regional disparities.
7. State the meaning of public private partnership.
Answer: Public Private Partnership (PPP) is a model that optimally allocates tasks, obligations, and risks between public and private partners. Public partners include government entities (ministries, departments, municipalities, state-owned enterprises), while private partners are local or foreign businesses/investors with technical or financial expertise. It is defined as a relationship between public and private entities in the context of infrastructure and other services.
Long Answer Questions
1. Describe the Industrial Policy 1991, towards the public sector.
Answer: The Industrial Policy of 1991 brought about radical changes in the government’s approach towards the public sector. Its major reforms included:
- Restructuring and reviving potentially viable Public Sector Undertakings (PSUs).
- Closing down unrevivable PSUs.
- Bringing down government equity in non-strategic PSUs to 26% or lower.
- Fully protecting workers’ interests.
- Reduction in Reserved Industries: The number of industries exclusively reserved for the public sector was significantly reduced from 17 in 1956 to 8 in 1991 (atomic energy, arms and communication, mining, railways), and further to just 3 (atomic energy, arms, rail transport) by 2001. This allowed greater entry for the private sector and increased competition for public sector units.
- Disinvestment of Shares: The policy promoted the sale of equity shares of public sector enterprises to the private sector and the public. The objectives of this disinvestment were to raise resources for the government, encourage wider participation, improve managerial performance, and ensure financial discipline in public enterprises. Privatization aimed to release public resources for social priority areas, reduce public debt, transfer commercial risk to the private sector, and introduce corporate governance.
- Policy Regarding Sick Units: All sick PSUs were referred to the Board of Industrial and Financial Reconstruction (BIFR) for restructuring or closure, similar to the policy for the private sector. The National Renewal Fund was established to retrain or redeploy retrenched labor and provide compensation for voluntary retirement.
- Memorandum of Understanding (MoU): A system was introduced to improve the performance of PSUs by granting managements greater autonomy while holding them accountable for specified results. These MoUs were signed between the PSU and administrative ministries, defining their relationship and autonomy.
2. What was the role of the public sector before 1991?
Answer: Before 1991, especially after Independence, the public sector was expected to play a crucial role in achieving the economic objectives of the country, either through direct participation or by acting as a catalyst. Its significant contributions and objectives were:
- Development of Infrastructure: It was a prerequisite for industrialization. The government mobilized capital, coordinated industrial construction, and trained the workforce to develop essential infrastructure like transport, communication, fuel, energy, and heavy industries. Investments were made in core sectors requiring huge capital and complex technology (e.g., steel, power, railways, petroleum), core sectors where the private sector was not functioning as desired (e.g., fertilizers, pharmaceuticals), and future investments (e.g., hotels, consultancies, textiles).
- Regional Balance: The government was responsible for balanced development and removing regional disparities. Public sector industries were deliberately set up in backward areas to accelerate economic development and provide employment.
- Economies of Scale: The public sector stepped in to establish large-scale industries that required huge capital outlays (e.g., electric power plants, natural gas, telephone industries) to take advantage of economies of scale.
- Check over Concentration of Economic Power: It acted as a check on the private sector, preventing the concentration of wealth and monopolistic practices that could lead to inequalities. Large public sector industries shared income and benefits with a large number of employees.
- Import Substitution: During the Second and Third Five Year Plans, India aimed for self-reliance. Public sector heavy engineering companies were established to aid in import substitution, and companies like STC and MMTC expanded exports to reduce dependence on foreign goods.
3. Can the public sector companies compete with the private sector in terms of profits and efficiency? Give reasons for your answer.
Answer: The text implies that public sector companies, particularly after the 1991 reforms, were expected to actively participate and compete with the private sector. While the 1991 policy aimed for them to be accountable for losses and return on investment, the ability to compete in terms of profits and efficiency depends on several factors and the specific organizational structure.
- Departmental Undertakings: These are generally less likely to compete effectively due to a lack of flexibility, bureaucratic over-cautiousness, red tapism, political interference, and insensitivity to consumer needs. Their funding comes directly from the government treasury, and they are subject to strict accounting and audit controls, which hinder their ability to operate with business efficiency.
- Statutory Corporations: These are designed to combine government power with operational flexibility. However, in reality, they often do not enjoy as much flexibility due to numerous rules, regulations, and government/political interference in major decisions, which can lead to delays and inefficiency. Corruption can also be rampant.
- Government Companies: These are established under The Companies Act, 2013, for purely business purposes and are intended to compete with private sector companies. They have a separate legal entity and are expected to enjoy autonomy in management decisions, acting according to business prudence. This structure makes them the most suitable among public sector forms to compete with the private sector in terms of profits and efficiency, as they are managed more like private companies and can raise funds from the capital market. However, if the government is the sole shareholder, direct accountability to Parliament is sometimes evaded, and management can still be largely controlled by the government, potentially hindering true competition.
In summary, while the structure of government companies is designed for competition, the actual ability of public sector companies to compete with the private sector in terms of profits and efficiency is often challenged by factors like bureaucratic control, political interference, and a lack of complete operational autonomy, which can be inherent in public ownership, especially for departmental undertakings and statutory corporations. The 1991 reforms aimed to address some of these issues to enable better competition.
4. Why are global enterprises considered superior to other business organisations?
Answer: Global enterprises (Multinational Corporations or MNCs) are considered superior to other business organizations due to several distinguishing features:
- Huge Capital Resources: They possess enormous financial resources and can raise funds from various sources globally, enjoying high credibility in capital markets. This financial strength allows them to survive and thrive under diverse economic conditions.
- Foreign Collaboration: They often engage in foreign collaborations, bringing technology, products, and brand names to host countries, which can be beneficial for local businesses.
- Advanced Technology: MNCs typically employ technologically superior production methods, adhere to international standards, and optimally exploit local resources. They contribute to technological advancements and innovation.
- Product Innovation: They invest heavily in sophisticated R&D departments to develop new products and superior designs, leading to continuous innovation that smaller organizations cannot afford.
- Marketing Strategies: They utilize highly effective and aggressive marketing strategies, supported by reliable and up-to-date global market information systems, extensive advertising, and sales promotion activities. Their established global brand names facilitate product sales worldwide.
- Expansion of Market Territory: Their operations extend beyond their home countries through subsidiaries, branches, and affiliates, building an international image and expanding their market reach. Their giant size often allows them to dominate market positions.
- Centralized Control: While headquartered in their home country, they exercise centralized control over broad policy frameworks, allowing branches and subsidiaries sufficient autonomy in day-to-day operations. This balance enables both strategic direction and local responsiveness.
5. What are the benefits of entering into joint ventures and public private partnership?
Answer:
Benefits of Joint Ventures:
Joint ventures are beneficial for both parties involved due to the pooling of resources and expertise.
- Increased Resources and Capacity: They add to existing resources (financial, human) and capacity, enabling faster and more efficient growth and expansion. This helps businesses face market challenges and seize new opportunities.
- Access to New Markets and Distribution Networks: Partnering, especially with a foreign entity, opens access to vast growing markets (e.g., the Indian market for foreign companies). It allows companies to sell products that might have reached saturation in their home markets and leverages established distribution channels, avoiding expensive setup costs.
- Access to Technology: A significant advantage, providing access to advanced production techniques. This leads to superior quality products, saves time, energy, and investment, and enhances efficiency and effectiveness while reducing costs.
- Innovation: Joint ventures facilitate the introduction of new and creative products, as foreign partners often bring innovative ideas and technology.
- Low Cost of Production: International corporations investing in countries like India benefit from lower production costs due to cheaper raw materials, labor, and a technically qualified workforce, enabling them to produce quality products for global requirements.
- Established Brand Name: One party can benefit from the other’s existing goodwill and brand name in the market, saving time and money on brand development and establishing a distribution system with a ready market.
Benefits/Strengths of Public Private Partnership (PPP):
The PPP model focuses on optimal allocation of tasks, obligations, and risks between public and private partners, primarily in infrastructure and services.
- Transfer of Design and Construction Risk: A key driver and strength of PPPs is the transfer of the design and construction risk from the public to the private sector.
- Potential to Accelerate Projects: PPPs have the potential to speed up the implementation and completion of projects, particularly capital-intensive ones.
- Efficiency: The private sector brings its expertise in operations, task management, and innovation to run businesses more efficiently.
- Resource Mobilization: The private sector can bring in technical and financial expertise and investments that might otherwise be unavailable to the public sector alone.
- Social Obligations and Sector Reforms: The public sector’s involvement ensures that social obligations are met, sector reforms are implemented, and public investment goals are achieved.
