ECONOMICS

Project Report

On

PROBLEMS OF PRIVATE SECTOR IN INDIA

SUBMITTED TO ARMY INSTITUTE OF LAW IN PARTIAL

REQUIREMENT OF BA.LLB. DEGREE

SUBMITTED TO: SUBMITTED BY:

MS. Gaganpreet Kaushal Mayank Digari

B.A. LL.B (3rd

SEM)

ROLL.NO-246

ACKNOWLEDGEMENT

I would like to thank Ms Gaganpreet Kaushal for providing me this topic and her valuable guidance without which it would have been difficult to complete the project.

I would also like to thank my friends and my seniors who helped me in completing this project.

Mayank Digari

ROLL NO-246

T ABLE OF C ONTENTS

Introduction

Private Sector

Importance of private sector in Indian Economy

Problems faced by private sector in India

Delay in approval by bureaucrats.

Corruption in Private Sector

Job security of individual

Problem of finance and credit in small sector

Conclusion

Bibliography

I NTRODUCTION

“The private sector is where much more focus is going to have to be meet overarching challenge

of the poverty reduction and human development. Growth, jobs and opportunity belong there not

in the gift of government.” Mark Malloch Brown, administrator, UNDP1

In , the Private Sector is that part of the economy, sometimes referred to as the citizen sector,

which is run by private individuals or groups, usually as a means of enterprise for profit, and is

not controlled by the state. By contrast, enterprises that are part of the state are part of the public

sector; private, non-profit organizations are regarded as part of the voluntary sector.

UNDP recognizes that achieving the millennium development goals depends on vibrant

economic growth, driven by private enterprise that create jobs and provide goods and services

for the poor, as well as generate tax revenues to finance essential social and economic

infrastructure. The private sector from large multi-national companies to small enterprises and

cooperatives servicing local markets – also has an essential role to play in achieving broader

goals in areas such as energy and environmental services delivery, crisis prevention, gender

quality and democratic governance.2

1 United Nations Development Programme.2 Retrieved from < http://www.undp.org/poverty/focus_private_sector.shtml> on 02.09.2001 at 11:10AM

PRIVATE SECTOR

The European Commission defines the private sector as:  

“The sphere of economic activity where financial capital, physical is in the main privately

owned and where business decisions are made as a result of private initiative in the

context of markets which are in the main competitive”3

Private sector is broadly classified into 3 categories

Large scale industrial units

Small scale industrial units

Unorganized production units

PRIVATE SECTOR: PERFORMANCES AND PROBLEMS IN INDIA

Over the years in the past, in particular since the independence, the private sector in industries

has grown rapidly. As a result, this sector has become a quite big force in Indian economy. The

private sector has since the departure of British Government in 1947, grown much both in

respect of the areas covered by it and nature of activities falling in its scope.

Private sector has played a significant role in the process of industrialization in India. It refers to

all those individual units or corporations engaged in production which are owned by private

individuals and managed by them for profit motive. It is responsible for the allocation of most of

the resources of economy.

A variety of legal structures exist for private sector business organizations, depending on the

jurisdiction in which they have their legal domicile. Individuals can conduct business without

necessarily being part of any organization.

The main types of businesses in the private sector are:

Sole trader

Partnership, either limited or unlimited liability

Private Limited Company or LTD-limited liability, with private shares

Public Limited Company – shares are open to the public. Two examples are:

3 Retrieved from <http://www.developmentportal.eu/wcm/funding/european-aid-guide-on-thematic-instruments/private-sector-development/key-definitions/private-sector-definition-according-to-the-eu.html> on 08.09.2011 at 4.00PM

Franchise – business owner pays a corporation to use their name, receives spec for the

business

Workers cooperative – all workers have equal pay, and make joint business decisions

Importance of private sector in Indian Economy

The Importance of private sector in Indian economy over the last 15 years has been

tremendous. The opening up of Indian economy has led to free inflow of foreign direct

investment (FDI) along with modern cutting edge technology, which increased the importance of

private sector in Indian economy considerably

Previously, the Indian market were ruled by the government enterprises but the scene in Indian

market changed as soon as the markets were opened for investments. This saw the rise of the

Indian private sector companies, which prioritized customer's need and speedy service. This

further fueled competition amongst same industry players and even in government

organizations. 

The post 1990 era witnessed total investment in favor of Indian private sector. The investment

quantum grew from 56% in the first half of 1990 to 71 % in the second half of 1990. This trend

of investment continued for over a considerable period of time. These investments were

especially made in sector like financial services, transport and social services. 

The late 1990s and the period thereafter witnessed investments in sector like manufacturing,

infrastructure, agriculture products and most importantly in Information technology and

telecommunication. The present trend shows a marked increase in investment in areas covering

pharmaceutical, biotechnology, semiconductor, contract research and product research and

development.

The importance of private sector in Indian economy has been very commendable in generating

employment and thus eliminating poverty. Further, it also effected the following - 

Increased quality of life

Increased access to essential items

Increased production opportunities

Lowered prices of essential items

Increased value of human capital

Improved social life of the middle class Indian

Decreased the percentage of people living below the poverty line in India

Changed the age old perception of poor agriculture based country to a rising

manufacturing based country

Effected increased research and development activity and spending

Effected better higher education facilities especially in technical fields

Ensured fair competition amongst market players

Dissolved the concept of monopoly and thus neutralized market manipulation practices

PROBLEMS FACED BY PRIVATE SECTOR

1:-Delay in approvals by the bureaucrats in getting permits and necessary government

approvals:-

Inordinate delay in approvals, bureaucratic stonewalling and a policy paralysis — the deadly

cocktail is dampening the spirit for many private sectors in their quest to operate in the already

difficult domestic environment. The shadow of the government is also increasingly looming

large over transactions which in the past had seen limited regulatory interference.

For example: The 10-month delay over the approval of the Cairn-Vedanta deal is just one example of this.

Mergers and acquisition in the telecom sector is becoming tougher though it is fraught with

stringent conditions stipulated to avoid competition, say lawyers and sector experts.

The Delhi High Court's order against Idea on six overlapping licenses of Spice has put Idea on

the back foot. The court had earlier approved the merger between the two telcos. The 52-page

judgment says Idea suppressed information from the courts to get the approval. This setback will

also affect the industry, which is on the verge of getting a new telecom policy with mergers and

acquisition guidelines

2:- Corruption in Private Sector:-

There is wide scope for corruption between business and government in an environment where

rules and regulations are ambiguous, and where oversight is weak. It is a natural tendency for

businesses to seek advantage over their competitors, and it is not surprising that public officials

would take advantage of weak institutional frameworks to peddle their influence for personal

gain.

Again, the many are more incorruptible than the few; they are like the greater quantity of water which is less easily corrupted than a little. The

individual is liable to be overcome by anger or by some other passion, and then his judgment is necessarily perverted; but it is hardly to be supposed that a great number of persons would all get into a passion and go wrong at the same moment.4

 

Weak institutions, an uncertain rule of law, insecure property rights and the like encourage the

kind of short term focus on day-to-day business survival that makes corruption appear more

beneficial than it in fact is. imagine for a moment two people each running a different business.

The first is a small shop owner who makes and sells pastries, cakes and other delectable treats to

many satisfied customers, from local townsfolk to the many tourists that visit from spring to fall

each year. He’s been in business for five pretty good years, but he’s starting to worry about the

future. He’s noticed the health inspector is making more visits, unannounced, and asking the

usual questions that lead up to the inevitable, subtle, and unspoken cash transaction, followed by

a smile and topped off with a gratis espresso and slice of his renowned chocolate torte. Other

officials were on the move too for some reason. The tax inspector had already made twice as

many visits this year than last. And, just the other day the director from the local business

licensing office unexpectedly stopped by. After small talk, complimentary cakes and ice cream,

he mentioned that, “oh by the way,” our shop-owner-friend should stop by the licensing office

soon to discuss some “irregularities” in the licensing papers he’d filed this year. This of course

could mean only one thing more: yet another payment to keep his business “legal.” His

“unofficial payments” to government officials this year would certainly do.

The correlation between the rule of law and the “marketplace for corruption” is an inverse one. A

strong rule of law would be characterized by:

A rational set of laws governing the operations of private business, the protection of property rights, and the enforcement of contracts.

Anti-monopoly policies and procedures to enforce them. A reasonable rate of taxation on private business. An efficient system of patents and protection for intellectual property. An efficient and stable set of regulations governing licensing, inspections and audits on

business. An efficient judiciary (and ADR mechanisms) for sorting out contract disputes. Administrative procedures that guarantee public access to government decision makers

and to their deliberations that shape policies and laws. Laws and administrative procedures that protect “whistle blowers” from reprisal.

4 Aristotle’s Politics, Book III Part X, 350 B.C

Laws and enforcement mechanisms that ensure accountability of private firms to their shareholders and capital markets.

Disclosure laws that compel those in public office to disclose private financial interests.

In addition to public laws and governmental institutions, the private sector can also play a role in

supporting the rule of law by promoting, for example: efficient capital market systems and

institutions; practice of good corporate governance and business ethics (here is a role for

associations for example), and; quality standards for goods and services in the marketplace.

There is also an obvious role here for education and training institutions that target entrepreneurs

and business managers.

 The economic reforms of 1991 reduced the red tape, bureaucracy and the Licence Raj that were

largely blamed for the institutionalized corruption and inefficiency. Yet, a 2005 study

by Transparency International (TI)5 found that more than half of those surveyed had firsthand

experience of paying bribe or peddling influence to get a job done in a public office.

3:- Job security of individual:-

In the private sector however, job security is more based on performance. These are mostly listed

or privately owned companies with one purpose in mind, namely to show a profit at the end of

the financial year. Dividends need to be paid out to shareholders, who in most cases started the

companies from scratch with a lot of blood sweat and tears. They have no tolerance for dead

wood and want their companies to run like a well oiled machine. If this means streamlining the

company and getting rid of the drift wood they will do so without hesitation.

Private companies also prefer employees that fit in with the company's culture, vision and

mission and will without hesitation get rid of employees who don't make the grade.

If employees want a pay increase they have to work for it and salary increases are based on the

individual’s performance as well as the profit margin the company showed for that financial

year.

5 "2009 Corruption Perceptions Index reinforces link between poverty and corruption".

Even if you perform well, the changes are that if the company goes through a slump and budget

cuts have to be made even top performers are at risk. Obtaining job security in this sector entails

hard work, good networking and effective communication.

4:-Problem of finance and credit for small scale sector:-

It is spring in the Capital and there is a lot of cheer all round. The business community is

generally happy with life as profits are good and order books are bulging. Their perennial

headache, namely infrastructure, appears to be improving. There is, of course, the Inspector Raj

and corruption but they are intelligent enough to know that this won’t disappear overnight.

Amidst all this, Small Scale Industries are not sharing this optimism and are looking around for

success.

To say that small scale units are an important part of the manufacturing sector is a very big

understatement. Just consider some of the facts — 95 per cent of all industrial units in India are

in the small scale sector. And 49 per cent of manufacturing output in the country is from this

sector. Eighty per cent of the employment in manufacturing is in the small scale. Thirty-four per

cent of the country’s exports are from these units. Clearly, after agriculture, this is the single

biggest group in the country.

There are many reasons why small scale units should be supported, but just two would suffice.

First, these units are employment intensive. When we reform and modernize the economy,

invariably the large sector replaces men with machines. This is inevitable since they have to

reach global size and compete on costs. So there is the strange phenomenon of jobless growth.

This is where small scale comes in. It is able to generate employment in a much bigger way than

large manufacturing. Further, it achieves another big objective of economic policy, namely

dispersal of economic prosperity. If the economy grows only with a few Reliances growing, how

does it help the people? When small scale grows, it automatically fulfills the tasks of growth

with social justice.

The development of this sector is the only way to make trickle down more effective. Agriculture

already employs 65 per cent of the work force, though it gives us only 20 per cent of the GDP.

However much we invest into agriculture and create jobs there, it will only enable us to absorb

the rural unemployed but will not take care of unemployment in the unorganized sector.

Another big strength that small scale has and which large units often lack is entrepreneurship.

Some of the best minds in the country educated in the IITs have left top jobs to start small scale

units. This is in sharp contrast to the captains of large industry who are often occupying the

corner seat purely because they happened to have the right fathers. And when one considers that

entrepreneurship is the need of the hour to improve productivity, we realize the full potential of

small scale units.

The private sector had not been given a significant role in the economic development. The

government has entrusted the basic and capital goods industries to the public sector and made it

the prime mover of economic development. As a consequence, the private sector has to be

satisfied with the secondary role assigned to it.

The most important problem was delays due to regulatory structure. There have been too many

regulations imposed by the government on the private sector which often resulted in procedural

delays. It is estimated that on an average it takes seven years from the conceptual stage to the

production stage for any significant investment project to materialize in India.

Unrealistic controls influenced by contradictory motives hampered private sector initiative and

flexibility. For example, the price controls imposed by the government on many of the goods do

not give proper incentive for additional production. Capacity restrictions (with a view to prevent

concentration of wealth and economic power) further aggravated the problem. Actually, the

government should encourage competition among the rival firms and the resulting increase in

production would automatically bring down prices. In complete contrast to this, price controls

under conditions of shortage tend to perpetuate shortages, rise of black markets, and possible

shifting of investment from controlled items to the production of non-controlled items.

Reservation for small scale sector and special initiatives to units in that sector made the large

scale sector to stand at a disadvantage. Further the complementarity of the two sectors in the

process of growth has been lost.

The decentralized sector has been facing the problem of inadequate credit facilities despite the

existence of a network of financial institutions. With the economic reforms initiated in 1991, the

private sector's prospects appear to be very bright

C ONCLUSION

The private sector of Indian economy is the past few years have delineated significant

development in terms of investment and in terms of its share in the gross domestic product. The

key areas in private sector of Indian economy that have surpassed the public sector are transport,

financial services etc.

Indian government has considered plans to take concrete steps to bring affect poverty alleviation

through the creation of more job opportunities in the private sector of Indian economy, increase

in the number of financial institutions in the private sector, to provide loans for purchase of

houses, equipments, education, and for infrastructural development also. The private sector of

Indian economy is recently showing its inclination to serve the society through women

empowerment programs, aiding the people affected by natural calamities, extending help to the

street children and so on. 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 of Indian economy in the arena

of infrastructural development, like regulatory policies, legal procedures etc.

The most interesting fact about the private sector of India economy is that though the overall

pace of its development is comparatively slower than the public sector, still the investment of

private sector in the recent past, i.e. in the first quarter of 1990 registered approximately 56 %

which rose to nearly 71 % in the next quarter, accounting for an increase of 15 %. Certain steps

taken by the Indian government are acting as the stepping stone of the private sector continued

journey to success, include industrial delicensing, devaluation that was implemented previously. 

The private sector of Indian economy is also adversely affected by the huge number of permits

and enormous time required for the processing of documents to initiate a firm, however the

central government has decided to abolish MRTP Act and incorporate a Competition

Commission of India to bring the public sector and the private sector at the same platform. 

The participation of the private sector of Indian economy is desired by the government of India

for infrastructural development including specific sectors like power, development of highways

and so on. As the contribution of public sector in these sectors have been arrested due to the shift

of the attention of the Indian government to issues like population increase, industrial growth.

The main reasons behind the low contribution of the private sector in infrastructural development

activities are that:

The small and medium scale companies in the private sector of Indian economy suffer

from lack of finances to welcome the idea of extending their business to other states or

diversify their product range. 

The private sector of Indian economy also suffers from the absence of appropriate

regulatory structure, to guide the private sector and this speaks for its unorganized

framework.

The unorganized framework of the private sector is interrupting the proper management of

this sector resulting in the slowdown of its development.

BIBLIOGRAPHY

Retrieved from

http://wiki.answers.com/Q/Problems_faced_by_private_sector_in_india> on

11.09.2011 at 1400hrs

Indian Economy by A.N Agarwal

Retrieved from <http://kautilya.chhabra-inc.com/node/30> on 12.09.2011 at 06.00PM

Problems of India’s development by Dutt, R.C.

Retrieved from <http://www.adb.org/Documents/csps/ind/2003 /appendix3_private

_sector _assessment.pdf> on 12.09.2011 at 08.00PM

Retrieved from <http://www.undp.org/poverty/focus_private_sector.shtml> on

13.09.2011 at 3.00 PM

Private Investment in India by Bagchi, Amiya Kumar