group 6 project private sector

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D.Y. PATIL INSTITUTE OF

MANAGEMENT STUDIES

PROJECT REPORTON

1. PUBLIC SECTOR: FUTUREPERSPECTIVE

2. PRIVATE SECTOR: SPRAWL ANDHORIZON

SUBJECT:INDIAN ECONOMY

Submitted to:-

Prof: Sapna Suri

Submitted By:-GROUP: 6

M.B.A.(CORE)Class-4/B

Submission Date:

10th April, 2005


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GROUP MEMBERS:

GROUP MEMBERS ROLL NO.

1.Praveen Kumar 108

2.Praveen kumar niranjan 109

3.Praveen Pandey 1104. Prayag Salvi 1115. Premin Toprani G.L 1126.Priya Pradhan 1137.Ranjit Sinha 127

ACKNOWLEDGEMENT


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First of all we would like to take this opportunity to thankD.Y.PATIL INSTITUTE OF MANAGEMENT STUDIES College for

having Assignments as a part of the M.B.A curriculum.

Many people have influenced the shape and content of thisproject, and many supported us through it. We express oursincere gratitude to Prof. Sapna Suri for assigning us aproject on Indian Economics, which is an interesting andexhaustive subject.

She has been an inspiration and role model for this topic. Herguidance and active support has made it possible tocomplete the assignment.

1 Last but not the least we would like to thank theAlmighty for always helping us.


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PRIVATE SECTOR : SPRAWL AND HORIZON

INTRODUCTION

Despite the existence of a not very encouraging environment, the

private sector always occupied an important place in the economy. In

the 1960s it contributed 87 percent to Indias Gross Domestic Product5

(GDP) and was a key employment generator. One reason for this wasthat a large chunk of GDP originated in the agriculture sector andalmost the entire GDP in agriculture originated in the private sector.With the policy focus shifting on the public sector, the period from1960s to the 1980s witnessed a declining contribution of the privatesector to overall investment and GDP.

In the beginning of 1990-91, India faced a severe Balance of Payments(BoP) crisis, to tide over which it had to take assistance from the

International Monetary Fund (IMF) and the World Bank (WB). The crisisof 1990-91 provided an opportunity to re-examine Indias developmentstrategy and the new direction adopted was based on the thinking thateconomic activity would be boosted by removal of discretionarycontrols and according a greater role to market forces. The reformagenda included, apart from a fiscal consolidation program,deregulation of industry, liberalization of foreign trade, foreigninvestment and the financial sector. An enhanced the role of privatesector was a key component of the reform process.

The National Accounts Statistics (NAS) data, now available with 1993-

94 as the base year, permits us to examine the changes in structure ofinvestment and GDP across broad sectors (all tables and charts in thisChapter are based on NAS data). This helps in identifying directionalchanges in public and private sector participation in the economy. Inwhat follows, we examine the impact of the reforms on the investmentand GDP originating in the private sector vis--vis the public sector.

TRENDS IN INVESTMENT AND GDP- ALL-SECTORS

The growth rate of GDP originating in the public sector has alwaysbeen higher than the growth rate of GDP originating in the privatesector. Only during the first half of nineties (1990H1) did both public

and private sectors register growth rates of 4.9 percent each. But inthe second half, GDP growth in public sector again outpaced theprivate sector GDP growth. The most important reason for highergrowth in public sector GDP was due to increases in salaries and wagesafter the implementation of the Fifth Pay Commissionsrecommendations for Government employees.


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[1990H1 = 1990-91 to 1994-95; 1990H2 = 1995-96 to 1998-99 (public sector data isavailable only upto 1998-99). ]


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The only period in 1990s when the private sector grew faster (7.6percent per annum) than the public sector (5.7 percent per annum)was from 1993-94 to 1996-97. This was the period when a number ofreform measures were unleashed to attract the private sector viz.liberalizing the FDI inflows, industrial de-licensing and the economy got

a significant external demand boost from devaluation. This could notbe sustained and the private sector is still struggling to come out of thedownturn that set in during 1997-98.

Despite public sector registering higher growth rates than the privatesector, the contribution of private sector to overall growth was alwayshigher because of its significantly higher share in GDP. As the policiesof the government in the past were aimed at promoting the publicsector, its share in total GDP kept on rising till the 1980s. Even in1990H1, the share of public sector in total GDP was rising. This trendhas been checked in 1990H2, which witnessed a marginal drop in

public sector share in GDP. The trend of the declining share of publicsector in GDP was more marked during 1993-94 to 1996-97 the boomperiod for the private sector.

As opposed to the poor growth in private sector GDP, there has been aclear shift in the composition of investment in the favour of privatesector. The share of private sector in total investment shot up from 56percent in 1990s to 71 percent by 1990H2.

Although private investment at the aggregate level picked upsignificantly in the 1990s, a commensurate increase in its share in GDPwas not witnessed.

TRENDS IN INVESTMENT AND GDP- SECTOR TRENDS

All the sectors of the economy did not mimic the aggregate trends. Theprivate sector was better placed in some areas to respond to reforminitiatives and consequently displayed buoyancy in investment andgrowth. A sector analysis helps in identifying these sectors.

Agriculture

Almost the entire GDP in agriculture originates in the private sector. Inthe 1990s, the share of private sector in agricultural GDP was over 97percent.

The growth in agricultural GDP in the public sector has beendecelerating since the 1960s and by 1990H2 it turned negative. Incontrast, the private sector GDP in agriculture grew at almost 4percent in 1990s. As against its low contribution to GDP, the share ofpublic investment in agriculture has historically been quite large,


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although it has consistently fallen throughout the nineties. Share ofpublic investment in agriculture fell from 45 percent in the 1980s tobelow 27 percent by 1990H2. Despite falling public sector investmentin agriculture, overall investment in agriculture measured as aproportion of GDP in agriculture did not suffer.

Although the shortfall in public sector investment in agriculture hasbeen made up by private sector investment, the nature of privatesector investment raises doubts about the viability of such investment.As opposed to public investment, which is associated with positiveexternalities, private investment is primarily geared towardsappropriation. The negative impact of falling public investment hasstarted manifesting itself in falling productivity and depleting groundwater resources.

Industry

Overall

The industrial sector includes manufacturing, mining and quarrying,electricity, gas, water supply and construction.

The industrial growth in the private sector vis--vis public sector hasquite been poor. Even during 1990s, on the average the public sectoroutpaced the private sector, the difference in growth rates becamemore noticeable in 1990H2.

Private sector always had a dominant share in GDP originating in theindustrial sector. The government policy of encouraging the publicsector led to a decline in the share of the private sector in industrialGDP from 85 percent in the sixties to 66 percent in the nineties. Butwith a renewed focus on private sector in the 1990s, the contributionof private sector to industrial GDP increased to 67 percent in 1990H2

Investment by the private sector increased significantly in 1990s. Theprivate sectors share in total investment in industry increased byalmost 20 percentage points in the last decade.

Clearly, heavy investment by the private sector did not translate intocorresponding performance on the growth front. Only during 1993-94to 1996-97 was the growth in real GDP of private sector industry higherthan that of the public sector. The industrial slowdown after 1996-97accentuated this differential even further.


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Manufacturing

The manufacturing sector, with a dominant share in industrial GDP,mimics the overall trends of industry in the nineties. The share ofprivate sector in investment in the manufacturing sector increased

from 80.4 percent in 1980s to 93.3 percent in the 1990H2- anunambiguous sign of government withdrawing from this sector. Thegrowth the private sector GDP in the manufacturing sector in thenineties stayed below that in public sector. Only during the shortperiod 1993-94 to 1996-97 when the economy as a whole wasbooming, did the private sector GDP growth was in double digits andhigher than public sector.

Services

Services is the fastest growing sector of the economy. The servicesector GDP grew at 7-8 percent per annum and increased its share inoverall GDP from 41 percent in 1990-91 to almost 50 percent by 1999-00. Here, services excludes public administration and defence as theyare exclusively provided by the public sector. During 1990s, both theprivate and the public sector increased their growth performance overthe earlier period with private sector GDP growing faster than publicsector GDP in 1990H1.

The share of private sector in service sector GDP too increased from 61

percent in 1980s to 64 percent in 1990H2. The share of private sectorin the services sector investment went up from 69.7 percent to 73.3percent.

Within services, the private sector GDP growth during the nineties wasparticularly buoyant in the financial sector, transport (without railways)and community and social services (excluding public administrationand defence).

Banking and Insurance

Real GDP in banking and insurance clocked double-digit growth rates inthe nineties. The trend growth in real GDP in the private sector too wasclose to 17 percent per annum in 1990s.

The share of private sector in total investment in banking andinsurance went up from 36 percent in the 1980s to almost 70 percentin 1990H2.


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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 increased share of theprivate sector in GDP.

Transport (other than railways)Transport (other than railways) includes road, water and air transport.This sector always had a dominant private sector presence but theshare private sector in GDP originating in this sector had fallen from 72percent in 1960s to 69 percent in 1980s.

In the nineties this trend was significantly reversed. Not only did theshare of private sector go up from 74 percent to 83 percent in 1990s,its share in GDP also increased from 70 percent to 77 percent in thecorresponding period.

Community and Social Services

Community and Services include health, education and a variety ofpersonal services. The share of private sector in GDP had come downfrom 83 percent in 1960s to 61 percent by 1990H1.

Private sector investment in community and social services increasedfrom 51 percent in 1980s to 65 percent in 1990H1 and 72 percent in1990H2. The increased investment share of private sector in 1990H1,did not translate into a higher growth in that period

However, 1990H2 witnessed a pick up in private sector GDP growth(8.7 percent). Consequently, the trend of falling share of private sectorin GDP was checked.

CONCLUSION

The above analysis of trends in investment and growth in public andprivate sectors at the broad sector level reveals the differential impactof the reform process that was unleashed in the 1990s. While there hasbeen a significant pick up in private investment in some sectors, acorresponding increase in growth rates in private sector GDP has not

been witnessed. Only the period of mid nineties witnessed a noticeableincrease in growth in GDP originating in the private sector.

The sectors that saw higher growth rates in the private sector includebanking and insurance, transport (excluding railways) and communityand social services. The boom of private sector growth inmanufacturing activity (of the mid nineties) has fizzled out.


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PUBLIC SECTOR: FUTURE PERSPECTIVE

Before independence, there was almost no 'Public Sector' in the Indian

economy. The only instances worthy of mention were the Railways, thePosts and Telegraphs, the Port Trust, the Ordnance and the Aircraftfactories and few Government managed undertakings like theGovernment salt factories, quinine factories etc. After independenceand with the advent of planning, India opted for the dominance of thepublic sector, firmly believing that political independence withouteconomic self-reliance was not good for the country. The passage ofIndustrial Policy Resolution of 1956 and adoption of the socialistpattern of the society led to a deliberate enlargement of our publicsector. It was believed that a dominant public sector would reduce theinequality of income and wealth, and advance the general prosperity of

the nation. The planners also seemed to believe that by placing themanagement and workers in public enterprises in a position ofresponsibility and trust, they would be so imbued with a sense of thepublic good that their actions and aspirations would naturally reflectwhat was best for the country. The main objectives for setting up thePublic Sector Enterprises as stated in the Industrial Policy Resolution of1956 were:

1. To help in the rapid economic growth and industrialization of thecountry and create the necessary infrastructure for economic

development;

2. To earn return on investment and thus generate resources fordevelopment;

3. To promote redistribution of income and wealth; To createemployment opportunities;

4. To promote balanced regional development;

5. To assist the development of small-scale and ancillary industries;and

6. To promote import substitutions, save and earn foreign exchange forthe economy.

In tune with the widespread belief at that time, the 2nd Five Year Planstated very clearly that ' the adoption of socialist pattern of society asthe national objective, as well as the need for planned and rapiddevelopment, require that all industries of basic and strategic


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importance, or in the nature of public utility services, should be in thepublic sector. Other industries, which are essential and requireinvestment on a scale, which only the state, in the presentcircumstances, could provide, have also to be in the public sector. Thestate has, therefore, to assume direct responsibility for the future

development of industries over a wider area '.

The Second Plan further emphasized that ' the public sector has toexpand rapidly. It has not only to initiate developments which theprivate sector is either unwilling or unable to undertake, it has to playthe dominant role in shaping the entire pattern of investment in theeconomy, whether it makes the investments directly or whether theseare made by the private sector. The private sector has to play its partwithin the framework of the comprehensive plan accepted by thecommunity.'

If we read the recommendations of the divestment commission, thefirst thing they say is that you must give autonomy to PSUs and theywill do well. This government is not interested in improving thefinances or strengthening the management or modernisation of PSUs.They just want to sell off the family jewels for a song. The public sectorwas created as a result of great sacrifice by the poor people of India.They deserve better. You must try to restructure PSUs.

The loss-making PSUs or those with outdated technologies, whichcannot be revived, could be sold off. But what is the logic of sellingprofit-making ones? I think the divestment targets are not being

reached because the government is not clear about its objectives.

Most of the loss-making PSUs are those which went sick in the privatesector and were taken over or with change of technology have becomeirrelevant. The government must get out of these sectors. And yes,there will be buyers for the real estate value alone.

We should convert loss-making ones into profitable units and currentlyprofitable ones into cash rich units. But we must give autonomy,restructured remuneration, invest in modernisation and newtechnology. It can be done. If NTPC, BHEL and oil companies can be

profitable, so can others. But sometimes, politicians want to run downthe public sector so that it loses value and can be sold for a song totheir business cronies. The common man must guard against thiscrony capitalism.


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PUBLIC SECTORYesterday, Today, Tomorrow

It was almost two generations ago that public sector started onmassive expansion spree with a great deal of enthusiasm amongst

politicians, bureaucrats and general public. The politicians were happysince most of them had different degrees of so-called socialistic views,which involved the Marxist belief that capitalists will be ruining thesociety by exploiting the masses. Most politicians believed that thecapitalists with the help of their managerial staff were squeezing theworkers and this will be eliminated by the expansion of the publicsector. Nehru remarked poetically: The workers in the public sectorwill work with greater dedication because they would know that theyare not working for the profit of some Tata, Birla or Dalmia; but for thepoor people of India. The profits which are going into the coffers of thecapitalists will go to the public exchequer and will be used for the

benefit of the masses.

The bureaucrats were happy that covering the industrial activity wouldincrease theirrange of influence. They were jealous of the remuneration, perquisitesand amenitiesreceived by the private sector managers and the public sector wouldgive them anopportunity to cross swords with the private sector managers.

The common people were happy because they always felt that the rich

are becomingricher essentially by making others poor. In the agricultural society themain wealth is land and anybody can get more land only by deprivingsomebody of his land. So the poor people looked at the rich as thecause of their poverty and were happy that theprocess will be stopped. There was also a feeling that the public sectorwill createemployment in the underdeveloped areas.

The middle class was happy to have another important avenue forcareer. So far an

intelligent person was able to make his career to higher echelons ofsociety only byjoining the Indian Administrative Services or taking the medical or legalprofession.The technically qualified people were happy to have another avenueopened throughthe technocrat and professional management appointments in thepublic sector. In


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fact, in the 50s and 60s, the top rankers in most professional andtechnicalexaminations opted for the public sector. This gave public sector astrong base ofintelligent technical and managerial staff.


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Then there were joltsThe situation started receiving a jolt when several large units in thepublic sectorstarted making large-scale losses. The public had believed that moneygets money

and investing big money means automatically getting big profits.However, now itwas clear that big investments could also mean big losses. In the firstinstance, theblame was put onto the bureaucrats, particularly the IAS officers whohad occupiedthe top positions in the public sector. They were therefore evicted fromthe CentralPublic Sector, although they are still occupying top positions in theState PublicSector.

The politicians also started getting disillusioned with socialism and thepublic sector.They started getting influenced by persons like C. Rajagopalachari whohadpredicted doom through the License-permit Raj that would becreated by the role ofthe public sector and the government.

As long as the industry had a protected market, many units of thepublic sector had

virtual monopoly and were profitable. However, the service provided tothe customers suffered appreciably in the absence of competition andvery soon the so-called common man turned against the public sector.The governments economic policy based on central planning andpublic sector took a U-turn to give the new policy based onliberalization and privatization. The policy formulated a decade agoremained in operation in spite of several changes in governments andseems to havebecome a permanent economic strategy for the foreseeable future.


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Public sector todayThe demand for privatisation has been increasing. This has had a greatimpact onthe morale of the public sector at all levels. Basically persons run anorganisation

between 35 and 50 years of age. Those below 35 do not have much ofauthority;they are essentially apprentices under various labels. Persons over 50have atendency to settle down and plan their life after retirement. Theywould like to havethe least changes so that they can have peace in their time. Thepersons between35 and 50 feel that they have both the authority and a long inningswith the organisation and so provide the dynamism for change.However, in the last 10 years, this group has been under the hanging

sword of Voluntary Retirement Scheme. Whether the company isprofitable or not, there is a pressure for privatisation.

A profitable company today can get a good price, its position tomorrowcan beuncertain in view of experiences with Indian Airlines, SAIL, HMT, etc. Inthe case ofthe companies, which have been losing money, there is a clamour toget rid of themto stop the hemorrhage through annual losses. The aggressiveemployees in the

public sector have been looking around to get opportunities whereprivate sectoralternatives have become available e.g. power generation, airlines,banks, etc. Thisoutflow comprises mainly persons between 35 and 50 years of age.Although theactual numbers migrating are small, they form a significant percentageof persons inthis category. Furthermore, their migration at lucrative opportunitiescreates a feelingof deprivation among those left behind, thus lowering the general

morale.The Voluntary Retirement Scheme (VRS) has accentuated the problem.Theemployees of public sector are unlikely to have entrepreneurial talentsand givingthem a sizeable amount has not made many of them into self-employed persons.


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They are still looking for jobs or have declared themselves asconsultants. Aconsultant without a client is as ridiculous as a leader without afollower. The VRShas also created the problem of utilising the time. Most of the

managers have nointerests outside their job. So they have proved a source ofharassment to theirimmediate family. Looking at such retired people lowers the morale ofthose who arestill employed in the public sector with the feeling : What hashappened to themyesterday would happen to us tomorrow. With the stoppage ofrecruitment for thelast ten to twenty years in various organisations in the public sector,the average age

of employees is rising. In some places it is creeping dangerously to 50years.Working with all old people around you, can indeed be depressing.

Public sector tomorrowEach public sector unit feels itself at crossroads:* One possibility is private sector acquiring the unit and closing down

literallythrowing them on the street* Another possibility is the private sector bringing its own people at thetopechelons depriving persons with long service of any opportunities ofadvancement* Furthermore, possibility of harsh work expectation, particularly at theold ageafter having had a fairly relaxed time for years, becomes a blackspecter.The requirement at this stage is a change in mindset. Most people join

the publicsector for a life of stability and security. There is a feeling that if aperson keeps hisnose clean, he would raise several levels and will retire at theretirement age withfairly sizeable retirement compensation. This kind of career may not bepossible any


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more. In many organisations people are being hired on contract basis,asorganisations would not like to carry permanent load. Frankly this isnot a newphenomenon. It has been happening in the construction industry

where most of theemployees including the managerial staff are hired on contractualbasis. Industrieslike the film industry have been operating on this basis almost from thebeginning.A person working in this situation has to carry out a SWOT analysis(analysis ofStrengths, Weaknesses, Opportunities and Threats) periodically. Whilestability interms of a job in the same organisation might not be possible, adynamic stability by

having a sustained demand for his skills for years can be possible. Forthis, a personhas to identify and exploit his strengths to build an image for himselfnot only withinthe organisation but also outside the organisation. Particularly themanagerial staffwould have to expose themselves to professional colleagues throughconferences,conventions and seminars so that their abilities are well known andthey would beapproached wherever such abilities are required.

Most managers have done such SWOT analysis for their organisationsbut not forthemselves. As says an Urdu poet:Sab ka mudava kar dala, apna hi mudava kar na sakeSab ke gireban see dale, apna hi gireban bhool gaye(I solved everybodys problems except my own; I repairedeverybodys clothes, butleft mine in tatters).The new generation will have to be prepared for this approach rightfrom theirformative years. The effort to give entrepreneurial education in the

managementinstitutes has not been a great success. It is necessary to inculcate themindset thatwill encourage looking for opportunities and taking calculated risks.This new breedof managers who may be termed Intrepreneurs will be working inorganisations butwill keep on smelling entrepreneurial opportunities.


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This is essential both for private sector and public sector managers.The change willbe more drastic for the public sector managers who have beenreposing in thedelusion of lifelong commitment with the organisation like the

traditional Hindumarriage. As President Roosevelt once put it, We cannot prepare thefuture forthe next generation, all we can do is to prepare the next generation forthefuture !

group 6 project private sector

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