34. The Private Sector – Business Environment

34

THE PRIVATE SECTOR

In this chapter, we study the Indian private sector, its phenomenal growth, the government's role in its growth and its importance. We scrutinize the consequences of liberalization on the private sector, its performance and sectoral growth, its relation to socio-economic development, the rise of private sector giants and the problems faced by the private sector and the lack of corporate governance.

Since the adoption of the country's planned economic development in 1951, especially after the Industrial Policy Resolutions of 1948 and 1956, the private sector has been assigned a complementary role to the public sector. As per the then government's policy, key and strategic industries were earmarked for the public sector while mostly consumer goods and service-based industries were allotted to the private sector, with a few exceptions. The government was also aware of the fact that all possible opportunities and incentives were needed to make the private sector grow to its full potential and contribute to the overall development of the Indian industry. However, over the years, private sector confronted several problems, much of it from the government itself that stood in its way by adopting policies and practices that were inimical to its growth. The Industrial (Development and Regulation) Act, 1951, the Monopolies and Restrictive Trade Practices Act 1969 and the Foreign Exchange Regulation Act 1973 were some of the legislations that caused severe impediments to the orderly growth of the private sector. The private sector was also adversely affected by the huge number of permits and enormous time required for the processing of documents for a firm to obtain an industrial license. Moreover, the licensing policy, whatever the merits during its introduction, was administered by the government bureaucracy in such a manner that it resulted in extensive regulation, protectionism, excessive State ownership and bureaucratization, leading to slow growth and corruption. When the government realized its mistake of going in too much for public ownership and control of the industrial sector, it was too late and things came to such a pass that it was left with no option but to change its track. The government started reversing its policy in 1991. The New Economic Policy of 1991 and the accompanying economic reforms have moved the economy to a market-based system. Within the next one and half decades since 1991, India has established itself as the world's second fastest growing economy.

THE PHENOMENAL GROWTH OF THE PRIVATE SECTOR

Notwithstanding the lip service meted out to the private sector in the Industrial Policy Resolution which emphasized that “it would continue to be the policy of the State to give fair and non-discriminatory treatment” to the private sector and called for their mutual cooperation and help, the private sector felt neglected under the rigorous patronage extended to the public sector under Nehruvian socialism. However, the private sector was able to take advantage of the loopholes and the grey areas found in the Industrial Policy Resolution of 1956 and started establishing industries even in areas earmarked for the public sector. The private sector was also able to wrest more and more concessions from the government to expand its business activities. They were able to manipulate the Industries Development and Regulation Act and bend it to their advantage, through their liaison work and political patronage. They were able to influence the licensing committee to get licenses in their favour or in favour of their benami. There was wide spread criticism of the working of IDRA among entrepreneurs and industrialists. Researchers found and proved with empirical evidence that the policy as it was administered favoured only big industrialists in selected regions and ignored under-developed states. Stung by such criticism, the government considerably diluted the industrial licensing policy. The New Economic Policy of 1991 abolished industrial licensing, belittled the role of the public sector, opened the doors for foreign direct investment and introduced a new era of liberalization to the industrial scenario of India. government also provided a great deal of incentives and encouragement to expand the industrial activities of the private sector. The private sector too demonstrated its mettle and proved itself to be second to none in terms of managerial efficiency and in seizing with alacrity the incentives that were offered for its growth. As of March 2006, the number of private sector companies was 730,817 out of a total of 732,169 joint stock companies, constituting 99.8 per cent of the total companies. However, in terms of fixed capital, gross output and value addition, the share of the private sector worked out to be much lower. In terms of employment, public sector employed much more people than the private sector. As on 31 March, 2004 public sector employed approximately 18.2 million workers, while the private sector employed only about 8.25 million workers.1

Previously, the Indian market was ruled by the government enterprises but the scene in the Indian market changed as soon as the markets were opened for investments. This saw the rise of the Indian private companies which prioritized the customer's needs and offered speedy service. This further brought in competition amongst players from the same industry and even from public sector organizations. Further, the policy of disinvestment of the government of India ensured profitable functioning of these once loss-making units. government also went for the formation of joint ventures with private companies, especially in sectors such as housing, infrastructure, telecommunication and petroleum. This inculcated healthy competition and benefited the end consumers, since the cost of service or products had come down substantially. The best thing that happened to the overall Indian market with the growth of private sector is that it has helped to do away with irritating and bothersome bureaucracy and lengthy official process and supplemented it by customer-eccentric service, good work ethics, professionalism and transparency of accounts. The phenomenal growth of private sector of India is due to political initiatives, financial reforms, use of advanced technology, and young and large English-speaking working class.

ROLE OF THE GOVERNMENT

Though initially the government seemed to favour the growth of the public sector at the cost of the private sector, it tried to balance its tilt in several ways in the 1970s and 1980s. Both the Five year Plans and government's policies helped the growth of private sector. They provided the required infrastructure and big markets. Private sector was helped immensely by government and its institutions. A good number of developmental and financial institutions were established by the government to ensure that private industries were assured of their legitimate finances. The institutions such as IFCI, IDBI and SFCs not only catered to their long-term financial requirements and underwrote their share and debenture issues, but also offered feasibility studies and other services relating to their industrial projects. “A recent study of 400 large companies that account for over 50 per cent of private corporate turnover revealed that the public sector has a significant presence in most of these owning over 50 per cent equity in large number of these companies”.2 Private sector industries were given extensive tax concessions, rebates and tax holidays. In every budget, the corporate sector is given tax exemptions and other fiscal incentives. State governments like those of Tamil Nadu have provided lands at subsidized prices, infrastructural facilities and industrial sheds. One of the least appreciated acts of governments to help the private sector immensely has been the establishment of Industrial Training Institutes (ITIs), polytechnics and engineering colleges that trained thousands of technicians and engineers who manned private sector industries skillfully and efficiently.

IMPORTANCE

The private sector has been gaining tremendous importance in Indian economy over the last two decades. The deregulation and delicensing of the economy under the New Economic Policy has led to free flow of foreign direct investment (FDI) along with modern cutting edge technology, which strengthened the private sector considerably. Previously, the Indian market was dominated by government enterprises but the scenario changed as soon as the markets were opened for investments with the rise of the Indian private sector companies.

The importance of private sector has been very significant in creating employment opportunities and eliminating poverty. Apart from generating considerable employment, the private sector has contributed to

  • Enhanced quality of life
  • Increased access to essential goods and services
  • Increased production opportunities
  • Reduced prices of essential commodities
  • Increased value of human capital
  • Improved social life of the Indian middle class
  • Reduced the percentage of people living below the poverty line
  • Changed the age old perception of India being a poor agricultural country to a growing manufacturing country
  • Helped in increased R&D activity and spending
  • Has brought about better higher education facilities especially in technical education
  • Ensured fair competition amongst market players
  • Neutralized the market manipulation practices to an extent

The importance of private sector in Indian economy can also be gauged from the commendable growth of Indian BPOs, Indian software industry, private sector banks and financial service institutions. The Indian manufacturing industry is flooded with private Indian companies and, in fact, they dominate it. Manufacturing companies comprising sectors such as automobile, chemicals, textiles, agri-foods, computer hardware, telecommunication equipment, and petrochemical products have been the main drivers of the growth of the services' sector. The Indian BPO sector renders services primarily to overseas clients while the KPO sector delivers knowledge-based high-end services to clients. It is estimated that out of the total 15 billion USD KPO service business, approximately 12 billion USD of business will be outsourced to India by the end of 2010.3

INCREASED INVESTMENT FOLLOWING LIBERALIZATION

In the past few years, especially ever since the economy has been liberalized, the private sector has delineated significant development in terms of investment and in terms of its share in the gross domestic product. The key areas in private sector that have surpassed the public sector are transport, communications, financial services, etc. Emphasizing on the role of the corporates in pushing up the economy, B. K. Chaturvedi, a Planning Commission member, admitted at the fourth National Convention of Global Compact Society that private sector accounts for 80 per cent investment in the Indian economy. “Resources of corporate world are huge. As India launches its 11th Five-Year Plan, you will be surprised that of the total investment in the economy, only 20 per cent is public investment and 80 per cent is private investment,” he said and added that private players can do a massive job by taking new initiatives for the society in some key areas like health, literacy and climate change.4

The post-1990 era witnessed total investment in favour of the Indian private sector. This trend of investment has been going on for quite a long period. These investments were especially made in financial services, transport and social services sectors. The 1990s and the period thereafter witnessed investments in manufacturing, infrastructure, agriculture products sectors and most importantly in information technology and telecommunication. The most significant and noteworthy fact about the private sector is that though the overall pace of its development is relatively slower than the public sector, still the investment of private sector in the recent past has been very significant. Certain steps taken by the Indian government have acted as the catalysts for the private sector's continued journey to success.

COMPARATIVE PERFORMANCE OF THE PUBLIC AND THE PRIVATE SECTORS

The growth rate of GDP originating in the public sector has always been higher than the growth rate of GDP originating in the private sector. Nevertheless, despite public sector registering higher growth rates than the private sector, the contribution of private sector to overall growth has always been higher because of its significantly higher share in GDP.

In a brief period between 1993–94 and 1996–97, the private sector grew faster (7.6 per cent per annum) than the public sector (5.7 per cent per annum) as a result of the FDI liberalization measures, industrial de-licensing and external demand boost from devaluation. However, this has not been sustained and the private sector is still in the throes of a downturn since 1997–98.

As opposed to the poor growth in private sector GDP, there has been a clear shift in the composition of investment in favour of the private sector. The share of private sector in total investment shot up from 56 per cent in the first half of 1990 to 71 per cent by the second half of 1990. Sector analysis shows that the private sector was better placed in some areas such as financial services, transport, community and social services to respond to reform initiatives and consequently displayed buoyancy in investment and growth.

However, heavy investment by the private sector did not translate into corresponding performance on the growth front. Only during 1993–94 to 1996–97 was the growth in real GDP of private sector industry higher than that of the public sector. The industrial slowdown after 1996–97 accentuated this differential even further.

SECTORAL GROWTH IN THE PRIVATE SECTOR

The Indian private sector industry has grown remarkably well since the country became free and adopted an industrial policy resolution, notwithstanding several constraints. In this chapter, we analyse its growth sector wise, which include such sectors as manufacturing services, banking and insurance, transport and community, and social services.

Manufacturing

The manufacturing sector, with a dominant share in industrial GDP, mimics the overall trends of industry in the 1990s. The share of private sector in investment in the manufacturing sector increased from 80.4 per cent in 1980s to 93.3 per cent in the second half of 1990s, a clear-cut sign of government withdrawing from this sector. The growth the private sector GDP in the manufacturing sector in the 1990s stayed below that in public sector. Only during the short period of 1993–94 to 1996–97, when the economy as a whole was booming, did the private sector GDP growth was in double digits and higher than that of the public sector.

Services

Services are the fastest growing sector of the economy. The service sector GDP grew at 7–8 per cent per annum and increased its share in overall GDP from 41 per cent in 1990–91 to almost 50 per cent by 1999–2000. Here, services exclude public administration and defence as they are exclusively provided by the public sector. During 1990s, both the private and the public sectors increased their growth performance over the earlier period with GDP of the private sector growing faster than public sector GDP in the first half of 1990.

The share of private sector in service sector GDP too increased from 61 per cent in 1980s to 64 per cent in the second half of 1990. The share of private sector in the services sector investment went up from 69.7 per cent to 73.3 per cent.

Within services, the private sector GDP growth during the 1990s was particularly buoyant in the financial sector, transport (excluding railways) and community and social services (excluding public administration and defence).

Banking and Insurance

Real GDP in banking and insurance clocked double-digit growth rates in the 1990s. The trend growth in real GDP in the private sector too was close to 17 per cent per annum in 1990s. The share of private sector in total investment in banking and insurance went up from 36 per cent in the 1980s to almost 70 per cent in the second half of 1990.

Thus, unlike the trends in overall private sector investment and GDP, private banking and insurance witnessed increases in investment which translated into higher growth rates, and also increased the share of private sector in the GDP.

Transport

Private sector transport in the Indian context includes road, water and air transport. This sector always had a dominant private sector presence but the share of private sector in GDP originating in this sector had fallen from 72 per cent in 1960s to 69 per cent in 1980s. This trend was largely reversed in the 1990s. Not only did the share of private sector go up from 74 per cent to 83 per cent in 1990s, but also its share in GDP increased from 70 per cent to 77 per cent in the corresponding period.

Community and Social Services

Community and services include health, education and a variety of personal services. The share of private sector in GDP had come down from 83 per cent in 1960s to 61 per cent by the fist half of 1990. Private sector investment in community and social services increased from 51 per cent in 1980s to 65 per cent in the fist half of 1990 and 72 per cent in the second half of 1990. The increased investment share of private sector in the fist half of 1990, did not translate into a higher growth in that period. However, the second half of 1990 witnessed a pick up in private sector GDP growth (8.7 per cent). Consequently, the trend of declining share of private sector in GDP was arrested.

Goods or services considered essential may have simply not been available before, implying zero consumption or infinite prices. The change in the operating environment in a sector, or sectors, may make these available. Their presence in the consumption basket implies a favourable impact on poverty. Under different circumstances, these may be available, but at prohibitive prices. Any change that increases their supply and contributes to a price reduction will, likewise, have a favourable impact on poverty.

“Direct impacts are, by definition, manifested in relatively short periods of time. Whether the beneficial impacts of sectoral changes are sustainable over time depends on the strength of what may be classified as indirect impacts.”5

PRIVATE SECTOR AND SOCIO-ECONOMIC DEVELOPMENT

The Indian government has been planning to take concrete steps to effect poverty alleviation through the creation of more job opportunities in the private sector, increase in the number of private financial institutions, providing loans for purchase of houses, equipment, education, and for infrastructural development. The private sector is recently showing its inclination to serve the society through women empowerment programmes, aiding people affected by natural calamities, extending help to the street children and so on as part of their Corporate Social Responsibility (CSR). CSR is increasingly being factored into the corporate business strategy of companies like Tata Steel, Infosys, Wipro, Reddy's Laboratories and many others. The government of India is being assisted by a number of agencies to identify the areas that are blocking the entry of the private sector in the arena of infrastructural development, like regulatory policies, legal procedures, etc.

The main reasons behind the poor contribution of the private sector in infrastructural development activities are described below:

  • The small- and medium-scale companies in the private sector suffer from paucity of finances to extend their business to other states or diversify their product range.
  • The private sector also suffers from the absence of appropriate regulatory structure, to guide the private sector and this speaks for its unorganized setup
  • The unorganized setup of the private sector is interrupting the proper management of this sector resulting in the slowdown of its development.6

The participation of the private sector is desired by the government for infrastructural development including specific sectors such as power, development of highways, ports and so on. As the contribution of public sector in these segments of the economy has been arrested due to the shift of the attention of the Indian government to issues such as population control, inclusive growth and social progress, the Indian government desires that the private sector takes its place.

GROWTH OF PRIVATE SECTOR CORPORATE GIANTS

Notwithstanding the efforts of the government to curb private monopolies and their adverse impacts on consumers and the society, family promoted joint stock companies could not be suppressed. In fact, corporate groups like Tatas, Birlas, Mafatlals, Singhanias, TVS and Seshasayee Brothers seemed to thrive and grow many times over in spite of IDRA, MRTP Act and FERA. Apart from these age-old companies, newer ones such as Reliance, Hindalco and Sterlite industries grew much faster than the most sanguine hopes of their promoters, both in terms of turnover and market capitalization. For instance, in the case of Reliance Industries, its market capitalization more than doubled in just about 2 years from INR. 329.92 billion in 2002–03 to INR 670.36 billion in the first half of the year 2004–05. Software companies like Tata Consultancy Services, Infosys Technologies and Wipro have been doing extremely well both in terms of growth and market capitalization. Likewise, pharmaceutical companies such as Reddy's Laboratories, Ranbaxy Laboratories and others have acquitted themselves creditably and are now Indian MNCs. There are other corporate players such as Tata Motors, Tata Steel, Larsen & Toubro, Hindustan Lever, Maruti Udyog, ITC, ICICI Bank, Bharati Tele-ventures and Adani Exports who have become industrial stalwarts in their own right.

Among India's most valued companies, the top 10 by market capitalization as on 8 December, 2008 are given in Table 34.1.

The top list is equally split between public sector and private sector companies. Reliance, Airtel, Infosys, ITC and HUL are the private sector units while ONGC, NTPC, SBI, BHEL and NMDC are the public sector units in the list.7

PRIVATE SECTOR CAUSED THE GROWTH OF MODERN INDUSTRY

Even before the public sector was envisaged to quicken the pace of industrialization and the economic development in the country, private sector industries contributed their mite to realize these goals. A number of modern industries were established before independence by native entrepreneurs in cotton textiles in and around Bombay, Surat and Coimbatore, jute mills around river Hooghly in Bengal, sugar industry in Tamil Nadu, Uttar Pradesh and elsewhere, and iron and steel, paper and edible oil in different parts of the country. Private entrepreneurs preferred to invest in industries manufacturing consumer goods that had sufficient demand to absorb their production and offered good profit with the least gestation period. Engineering industries and capital goods industries were in their nascent stage. After independence, private sector began to dominate chemical-based industries such as paints, varnish and plastics, manufacturing industries such as machine tools, automobiles and spare parts, ferrous and non-ferrous metals and miscellaneous into industries such as paper, rubber etc. Private sector also dominated several groups of export and technology-based industries including electronic hardware and software, BPO, and other ITES, drugs and pharmaceutical industries established themselves as Indian MNCs through the efforts of a new wave of entrepreneurs.

 

Table 34.1 The Top Ten Companies with the Highest Market Capitalization in December 2008

Company name Market cap (in INR billion)
Reliance Industries (RIL)
1,760.44
Oil and Natural Gas commission (ONGC)
1,400.63
National Thermal Power Corporation (NTPC)
1,329.58
Bharti Airtel
1,262.87
State Bank of India (SBI)
720.96
Bharat Heavy Electricals Limited (BHEL)
655.46
Infosys Technologies
650.18
ITC Ltd
638.39
National Mineral Development Corporation (NMDC)
520.16
Hindustan Unilever Limited (HUL)
518.81
PROBLEMS FACED BY THE PRIVATE SECTOR

The private sector has been facing innumerable problems over the years not only because of demand-supply mismatches, but also due to the policy changes initiated by successive governments. Due credit should be given to the private sector for not only overcoming these constraints, but also growing phenomenally. The problems faced by the private sector are enumerated below:

  1. Complementary role in economic development: Though the private sector has been contributing a sizable portion of the country's output and employment especially after the liberalization of the economy, it has played a rather diminutive role in the economic development of the country. Both by the virtue of the Industrial Policy Resolution of 1956 and on their own volition, the private sector entrepreneurs motivated as they were purely by profit, preferred to be engaged and invest in consumer goods industries where profits were high and the gestation period short. The private sector did not evince any interest in investing in basic and capital goods' industries where the capital requirement is large and the gestation period long. As a result, it appeared that the private sector was unwilling to undertake any risk and bear the uncertainty associated with such industries and in promoting the industrial development of the country.
  2. Engaged only in low-priority industries: The Indian private sector used the public sector and its services to its advantage while investing its resources in consumer goods and low-priority industries. While doing so, they made good use of the financial assistance and infrastructural facilities provided by the public sector. The private sector also favoured their engagement in such consumer goods industries such as automobiles and consumer durables which offered them higher profit, lesser gestation periods and greater visibility. This attitude of private sector entrepreneurs to cater to the needs of elitist consumers' show that they were interested in earning quicker and earlier profits while being least concerned about the long-term requirements of the economy. This, to great extent, has hindered the economic development of the country inasmuch as the economic surplus of the country is being wasted on not so essential industrial activities.
  3. Monopoly and concentration of wealth: During the later stages of the British rule in India, indigenous industry was developed by managing agents like Tata and Sons, Birla and Sons, TVS and Sons, etc, which tried to fill in the lacunae faced by stand-alone entrepreneurs such as shortage of capital, and lack of technical expertise and managerial skills. With the increasing opportunities and the establishment of several industries, these promoter families' controlled managing agents acquired monopoly power in their respective areas of operations. After India's independence, industrial monopoly houses have been sprouting on the roots of managing agents. Instead of regulating monopolies, the IDRA and the licensing policies had actually created conducive conditions for the concentration of wealth and economic power in the hands of few industrial houses. These monopolistic tendencies have been further reinforced by the government's policy of liberalization since 1991. As a result of these developments, many large industrial houses have grown bigger in terms of turnover, wealth, market capitalization and the consequent strengthening of economic clout, which they have been using to their advantage to widen their reach and areas of influence.
  4. Infrastructure bottlenecks: Even while industries that have been growing in an environment of liberalization and market-driven economy, further growth of private sector industries have been checkmated by serious and increasing infrastructural bottlenecks such as the paucity of power and bottlenecks in transport. Power shortages coupled with erratic power quality have been causing enormous problems to Indian industries. Lack of power supply, especially during the summer months, has been causing serious problems to thousands of industries including cement manufacturing and chemical industries, which use power continuously. Apart from shortfalls in power, the cost of energy has also been rising which is making Indian products uncompetitive vis-a-vis products from China, Indonesia and Thailand. Another infrastructural constraint is the lack of adequate transport facilities. Though there has been a substantial growth in railways and roadways, their growth has not been commensurate with the increase in the demand for transport, both for industrial and domestic uses.
  5. Widening trade deficit: Many private sector companies in their efforts to upgrade their technology and use cutting edge technical processes have been importing technology heavily with a view to meeting global competition. Moreover, many private sector companies including Reliance Industries, Tata Steel, Infosys Technologies, and Tata Motors have been resorting to heavy external commercial borrowing running into several billions of dollars. Since many of these industries have to establish themselves to face global competition from very well-established MNCs, they are not able to bring in much export earnings, which widened the country's trade deficits.
  6. Industrial disputes : Unlike public sector enterprises, the private sector companies have to face a much larger number of industrial disputes and conflicts arising due to problems of fixing wages, granting bonus, retrenchment, and leading to strikes and lockouts. Even though there are dispute-settlement mechanisms established by the government, it takes long time to settle the disputes as the employers have better bargaining strength. Using this to their advantage, employers do not agree even to the genuine demands of workers, and the conflicts which could be settled amicably with give-and-take dispositions become long drawn out struggles. In the 1980s, India confronted innumerable strikes and lockouts and lost many million man days. In 1981, for instance, India had 2,589 strikes and lockouts involving 1.6 millions workers and a loss of 36.6 millions man days. However, since 1991, there have been a lesser number of strikes and lockouts.
  7. Industrial sickness : This is one of the important problems faced by industrial units in the private sector. Though it is the small-scale industries in the private sector which has mostly been exposed to problems of industrial sickness, there are also a sizable number of large and medium units that are undergoing problems. For instance, in March 2006, 4,729 large and medium units were sick with an outstanding bank exposure of INR 338.38 billion. There are several factors responsible for this large number of industrial sickness, of which high input cost, power cut-induced losses, falling demand due to recession, labour disputes and changing government policies are the important ones.
  8. Difficulties in obtaining finance and working capital: A large number of private sector companies have difficulties in getting finance for their long-term financial requirements and arranging working capital for the day-to-day business operations. With comparatively inadequate savings and capital formation, the available capital resources have to be rationed between demanding enterprises and banks and financial institutions. Though the government has set up several development and financial institutions, they are unable to meet the increasing demands for funds. Moreover, a large number of private sector units are not in a position to repay the loans given by financial institutions in time, leading to increase in non-performing assets of these institutions.
  9. Difficulties in facing foreign competition: The New Economic Policy of 1991 has opened up the flood gates of foreign investors and multinational corporations. Though globalization and global integration is welcome to expose the Indian economy to international competition with its resultant advantages, it has brought to surface the weakness of the Indian industry. Even the biggest Indian companies are mere dwarfs before some of the MNCs. Some of our Indian companies are not established enough to face competition from MNCs that have been established for long with superior technology, economies of large- scale production and can outclass ours in terms of price, quality, and technology and after-sales services. Several Indian companies have already been taken over by the MNCs as in the case of soft drinks, and many others are likely to follow suit. As once noted by an MP from West Bengal, “The globalization of Indian economy is like integrating a mouse into a herd of elephants”.8
LACK OF CORPORATE GOVERNANCE IN THE PRIVATE SECTOR

A look at the evolution of corporate governance in the country, reveals a large number of scams through which the scamsters have tried to defraud share holders year after year. The situation has been ripe to enable scamsters manipulate it to their advantage and make illegal wealth at the cost of the shareholders. For too long, the Indian corporates have insulated themselves from wholesome developments evolving elsewhere. A closed economy, a sheltered market, limited need and access to global business/trade, lack of competitive spirit, a regulatory framework that enjoined mere observance of rules and regulations rather than realization of broader corporate objectives marked the contours of corporate administration for well over 40 years, say between 1951 and 1991, ever since we adopted a socialistic pattern of society. Apart from forces militating against healthy and transparent governance is the fact that a vast majority of Indian corporates is controlled by promoter families which while owning a negligible proportion of share capital in their companies, rule them as if they are their personal fiefdoms. According to a survey conducted in 1984, family shareholdings in big business groups averaged a mere 3.3 per cent of the aggregate paid-up capital. Under the New Economic Policy, the fear of hostile raids has made several business houses enhance stakes but the units still remain captive for a small stake. These so-called owners view with disdain any suggestion of professional management, which, after all, is the core and essence of corporate governance. In such an unhealthy scenario, corporate democracy, professionalization of management and transparency of operations were mere rhetoric used to drum up support or elicit a degree of acceptability from gullible investors.

Those who continue to mismanage the affairs of public limited companies, however, have to face the winds of change in the form of market-driven reforms that are shaking their feeble foundations. Economic liberalization, a steady dismantling of the control and quota regime, deli censing and deregulation of industries, changes in export-import and overall commercial policies, globalization of the economy within and outside the ambit of the World Trade Organisation (WTO), the entry of trans nationals and the takeover bids in an open and competitive environment have all ripped open the cocoons within which the Indian corporates had laid out their cosy existence. These dramatic changes have exposed them to the merciless forces of international competition and forced them to shed their old ways, if not switch over to the newer norms of corporate governance.9

SUMMARY
  • Since 1951, the private sector has been assigned a complementary role to the public sector. Over the years, private sector confronted several problems, much of it from the government that adopted policies and practices that were inimical to its growth. When the government realized its mistake it started reversing its policy in 1991.
  • Earlier, the private sector felt neglected under the rigorous patronage extended to the public sector under Nehruvian socialism. Even then, the private sector took advantage of the loopholes and the grey areas in the Industrial Policy Resolution of 1956 and started establishing industries even in areas earmarked for the public sector. The private sector was also able to wrest more and more concessions from the government to expand its business activities. It was able to manipulate the Act and bend it to their advantage. They were able to influence the licensing committee to get licenses in their favour or in favour of their benami. The New Economic Policy of 1991 abolished industrial licensing, belittled the role of the public sector, opened the doors for foreign direct investment and introduced a new era of liberalization to the industrial scenario of India.
  • Further, government of India's policy of disinvestment ensured profitable functioning of these once loss-making units. government also went for the formation of joint ventures with private companies. Though initially government seemed to favour the growth of the public sector at the cost of the private sector, it tried to balance its tilt in several ways in 1970s and 1980s. Both the Five year Plans and government's policies helped the growth of the private sector. A good number of developmental and financial institutions were established by the government to ensure that private industries were assured of their legitimate finances.
  • The deregulation and delicensing of the economy under the New Economic Policy has led to the free flow of foreign direct investment (FDI) along with modern cutting edge technology, which strengthened the private sector considerably. The importance of private sector has been very significant in creating employment and eliminating poverty. The importance of private sector in Indian economy can also be gauged from the commendable growth of Indian BPOs, Indian software industry, private sector banks and financial service institutions.
  • In the past few years, especially ever since the economy has been liberalized, the private sector has delineated significant development in terms of investment and in terms of its share in the GDP. The key areas in private sector that have surpassed the public sector are transport, communications, financial services, etc.
  • The post-1990 era witnessed high investment in favour of the Indian private sector. The growth rate of GDP originating in the public sector has always been higher than the growth rate of GDP originating in the private sector. Nevertheless, the contribution of private sector to overall growth has always been higher because of its significantly higher share in GDP. As opposed to the poor growth in private sector GDP, there has been a clear shift in the composition of investment in favour of the private sector. The manufacturing sector, with a dominant share in industrial GDP, mimics the overall trends of industry in the 1990s. Services are the fastest growing sector of the economy.
  • During 1990s, both the private and the public sector increased their growth performance over the earlier period with private sector GDP growing faster than public sector GDP in the first half of 1990.
  • The participation of the private sector is desired by the government for infrastructural development including specific sectors such as power, development of highways, ports and so on. Notwithstanding the efforts of the government to curb private monopolies and their adverse impacts on consumers and the society, family promoted joint stock companies could not be suppressed. There are corporate players such as Tata Motors, Tata Steel, Larsen & Toubro, Hindustan Lever, Maruti Udyog, ITC, ICICI Bank, Bharati Tele-ventures and Adani Exports who have become industrial stalwarts in their own right.
  • Problems faced by the private sector are (i) Private sector played only a complementary role in economic development; (ii) Private sector was engaged only in low-priority industries; (iii) Monopoly and concentration of wealth; (iv) Infrastructure bottlenecks; (v) Widening trade deficit; (vi) Industrial disputes; (vii) Industrial sickness; (viii) Difficulties in obtaining finance and working capital and (ix) Difficulties in facing foreign competition.
  • Economic liberalization, a steady dismantling of the control and quota regime, delicensing and deregulation of industries, changes in export-import and overall commercial policies, globalization of the economy have exposed them to the merciless forces of international competition and forced them to shed their old ways if not switch over to newer norms of corporate governance.
KEY WORDS
bureaucratization community services complementary role
corporate governance economic development extensive regulation
industrial licensing infrastructural bottlenecks Nehruvian socialism
planned economic development production opportunities protectionism
role of government social services state ownership
strategic industries    
DISCUSSION QUESTIONS
  1. What are the problems faced by private sector enterprises in India? What are the important areas of concern?
  2. Critically examine the contribution of private sector enterprises in some of the macroeconomic indicators.
  3. Private sector in India is a mixed bag of failures and successes. Comment.
  4. Examine the role of private sector enterprises in the economic development of India.
  5. What decisions have been taken under the Industrial Policy of 1991 to improve the performance of private sector enterprises?
SUGGESTED READINGS

Basu, Kaushik (Ed.). India's Emerging Economy. Cambridge, MA: MIT Press, 2004.

“BS 1000—India's Corporate Giants”, Business Standard, February 2005, pp 32–3.

Debroy, Bibek. Indian Economy on a Fast Track. Delhi, India: Konark, 2005.

Gokam, Subir, Anindya Sen, and Rajendra R. Vaidya (Eds.). The Structure of Indian Industry. New Delhi, India: Oxford University Press, 2004.

Jha, Raghbendra (Ed.). Indian Economic Reforms. Hampshire, U.K.: Palgrave MacMillan, 2003.

Joshi, V. and I. Little (Eds.). India's Economic Reforms 1991–2001. New Delhi, India: Oxford University Press, 2002.

Jugale, V. B. Globalisation, Growth and Poverty (2004) New Delhi, India: Serial Publications, 2004. Indira Awas Yojna in collaboration with I.I.D.S.

Kalirajan, K. P. and U. Sankar (Eds.). Economic Reform and the Liberalization of the Indian Economy. Cheltenham, U.K.: Edward Elgar, 2002.

Kelkar, V. “India's Economic Reforms Agenda: Micro, Meso and Macro Economic Reforms”, Fourth Annual Fellows' Lecture, Centre for the Advanced Study of India, University of Pennsylvania, 2001.

Mooij, Jos. The Politics of Economic Reforms in India. New Delhi, India: Sage, 2005.

Nayar, Baldev Raj. Globalisation and Nationalism. Thousand Oaks, CA: Sage Publications, 2001.

Odedokun, Mathew (Ed.). External Finance for Private Sector Development. New York, NY: Palgrave, 2004.

Rangarajan, C. “Economic Reforms: An Assessment”, B.R. Ambedkar Lecture, University of Mumbai, 2001.

Reed, Darryl and Sanjay Mukherjee (Eds.). Corporate Governance, Economic Reforms and Development: The Indian Experience. New Delhi, India: Oxford University Press, 2004.

World Bank. Economic Growth in the 1990s—Learning from a Decade of Reforms. Washington, D.C.: World Bank, 2005.

World Bank. India: Country Framework Report for Private Participation in Infrastructure. Washington, DC: World Bank, 2000.

World Bank. India: Sustaining Reform, Reducing Poverty. New Delhi, India: Oxford University Press, 2003.