D.Y.

PATIL INSTITUTE OF MANAGEMENT STUDIES

PROJECT REPORT ON 1. PUBLIC SECTOR: FUTURE PERSPECTIVE 2. PRIVATE SECTOR: SPRAWL AND HORIZON SUBJECT: INDIAN ECONOMY Submitted to:Prof: Sapna Suri

Submitted By:GROUP: 6 M.B.A.(CORE) Class-4/B

Submission Date:

10th April, 2005

Praveen Pandey 4.L 6.GROUP MEMBERS: GROUP MEMBERS 1.Priya Pradhan 7.Praveen Kumar 2. Premin Toprani – G.Ranjit Sinha ROLL NO.Praveen kumar niranjan 3. Prayag Salvi 5. 108 109 110 111 112 113 127 ACKNOWLEDGEMENT .

. Sapna Suri for assigning us a project on Indian Economics.First of all we would like to take this opportunity to thank D. We express our sincere gratitude to Prof.B.Y. and many supported us through it.A curriculum.PATIL INSTITUTE OF MANAGEMENT STUDIES College for having Assignments as a part of the M. which is an interesting and exhaustive subject. Many people have influenced the shape and content of this project. 1 Last but not the least we would like to thank the Almighty for always helping us. She has been an inspiration and role model for this topic. Her guidance and active support has made it possible to complete the assignment.

we examine the impact of the reforms on the investment and GDP originating in the private sector vis-à-vis the public sector. The National Accounts Statistics (NAS) data. permits us to examine the changes in structure of investment and GDP across broad sectors (all tables and charts in this Chapter are based on NAS data). In the 1960s it contributed 87 percent to India’s Gross Domestic Product5 (GDP) and was a key employment generator. An enhanced the role of private sector was a key component of the reform process. One reason for this was that a large chunk of GDP originated in the agriculture sector and almost the entire GDP in agriculture originated in the private sector. In the beginning of 1990-91.9 percent each. the period from 1960s to the 1980s witnessed a declining contribution of the private sector to overall investment and GDP. . With the policy focus shifting on the public sector. liberalization of foreign trade. India faced a severe Balance of Payments (BoP) crisis. The reform agenda included. the private sector always occupied an important place in the economy. to tide over which it had to take assistance from the International Monetary Fund (IMF) and the World Bank (WB).PRIVATE SECTOR : SPRAWL AND HORIZON INTRODUCTION Despite the existence of a ‘not very encouraging’ environment. The crisis of 1990-91 provided an opportunity to re-examine India’s development strategy and the new direction adopted was based on the thinking that economic activity would be boosted by removal of discretionary controls and according a greater role to market forces. GDP growth in public sector again outpaced the private sector GDP growth. TRENDS IN INVESTMENT AND GDP. apart from a fiscal consolidation program. This helps in identifying directional changes in public and private sector participation in the economy. The most important reason for higher growth in public sector GDP was due to increases in salaries and wages after the implementation of the Fifth Pay Commission’s recommendations for Government employees. deregulation of industry. But in the second half. In what follows. foreign investment and the financial sector. now available with 199394 as the base year. Only during the first half of nineties (1990H1) did both public and private sectors register growth rates of 4.ALL-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.

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

Agriculture Almost the entire GDP in agriculture originates in the private sector. Even in 1990H1. industrial de-licensing and the economy got a significant external demand boost from devaluation. This was the period when a number of reform measures were unleashed to attract the private sector viz. In the 1990s. Although private investment at the aggregate level picked up significantly in the 1990s. As against its low contribution to GDP.6 percent per annum) than the public sector (5. liberalizing the FDI inflows. which witnessed a marginal drop in public sector share in GDP. The growth in agricultural GDP in the public sector has been decelerating since the 1960s and by 1990H2 it turned negative. the share of public investment in agriculture has historically been quite large.7 percent per annum) was from 1993-94 to 1996-97. . The private sector was better placed in some areas to respond to reform initiatives and consequently displayed buoyancy in investment and growth. The trend of the declining share of public sector in GDP was more marked during 1993-94 to 1996-97 – the boom period for the private sector. The share of private sector in total investment shot up from 56 percent in 1990s to 71 percent by 1990H2. the contribution of private sector to overall growth was always higher because of its significantly higher share in GDP.SECTOR TRENDS All the sectors of the economy did not mimic the aggregate trends. This trend has been checked in 1990H2.The only period in 1990s when the private sector grew faster (7. its share in total GDP kept on rising till the 1980s. a commensurate increase in its share in GDP was not witnessed. there has been a clear shift in the composition of investment in the favour of private sector. TRENDS IN INVESTMENT AND GDP. the share of public sector in total GDP was rising. the private sector GDP in agriculture grew at almost 4 percent in 1990s. In contrast. A sector analysis helps in identifying these sectors. As opposed to the poor growth in private sector GDP. the share of private sector in agricultural GDP was over 97 percent. This could not be sustained and the private sector is still struggling to come out of the downturn that set in during 1997-98. As the policies of the government in the past were aimed at promoting the public sector. Despite public sector registering higher growth rates than the private sector.

As opposed to public investment. water supply and construction. Although the shortfall in public sector investment in agriculture has been made up by private sector investment. Share of public investment in agriculture fell from 45 percent in the 1980s to below 27 percent by 1990H2. Industry Overall The industrial sector includes manufacturing. The industrial slowdown after 1996-97 accentuated this differential even further.although it has consistently fallen throughout the nineties. Private sector always had a dominant share in GDP originating in the industrial sector. The private sector’s share in total investment in industry increased by almost 20 percentage points in the last decade. Clearly. overall investment in agriculture measured as a proportion of GDP in agriculture did not suffer. . gas. The negative impact of falling public investment has started manifesting itself in falling productivity and depleting ground water resources. the difference in growth rates became more noticeable in 1990H2. private investment is primarily geared towards appropriation. But with a renewed focus on private sector in the 1990s. Only during 1993-94 to 1996-97 was the growth in real GDP of private sector industry higher than that of the public sector. electricity. the nature of private sector investment raises doubts about the viability of such investment. The industrial growth in the private sector vis-à-vis public sector has quite been poor. which is associated with positive externalities. heavy investment by the private sector did not translate into corresponding performance on the growth front. The government policy of encouraging the public sector led to a decline in the share of the private sector in industrial GDP from 85 percent in the sixties to 66 percent in the nineties. Despite falling public sector investment in agriculture. Even during 1990s. the contribution of private sector to industrial GDP increased to 67 percent in 1990H2 Investment by the private sector increased significantly in 1990s. on the average the public sector outpaced the private sector. mining and quarrying.

The growth the private sector GDP in the manufacturing sector in the nineties stayed below that in public sector.4 percent in 1980s to 93. Banking and Insurance Real GDP in banking and insurance clocked double-digit growth rates in the nineties.7 percent to 73. mimics the overall trends of industry in the nineties. the private sector GDP growth during the nineties was particularly buoyant in the financial sector. with a dominant share in industrial GDP. . The share of private sector in total investment in banking and insurance went up from 36 percent in the 1980s to almost 70 percent in 1990H2. Within services. services excludes public administration and defence as they are exclusively provided by the public sector. The trend growth in real GDP in the private sector too was close to 17 percent per annum in 1990s. Services Services is the fastest growing sector of the economy. Here. 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 1990H1. The share of private sector in investment in the manufacturing sector increased from 80. The service sector GDP grew at 7-8 percent per annum and increased its share in overall GDP from 41 percent in 1990-91 to almost 50 percent by 199900.3 percent. During 1990s. did the private sector GDP growth was in double digits and higher than public sector. transport (without railways) and community and social services (excluding public administration and defence). The share of private sector in the services sector investment went up from 69.3 percent in the 1990H2.an unambiguous sign of government withdrawing from this sector. Only during the short period 1993-94 to 1996-97 when the economy as a whole was booming. The share of private sector in service sector GDP too increased from 61 percent in 1980s to 64 percent in 1990H2.Manufacturing The manufacturing sector.

While there has been a significant pick up in private investment in some sectors. which translated into higher growth rates and increased share of the private sector in GDP. In the nineties this trend was significantly reversed.7 percent). water and air transport. education and a variety of personal services. transport (excluding railways) and community and social services. Not only did the share of private sector go up from 74 percent to 83 percent in 1990s. a corresponding increase in growth rates in private sector GDP has not been witnessed. Transport (other than railways) Transport (other than railways) includes road. 1990H2 witnessed a pick up in private sector GDP growth (8. The share of private sector in GDP had come down from 83 percent in 1960s to 61 percent by 1990H1.Thus. Consequently. The increased investment share of private sector in 1990H1. The boom of private sector growth in manufacturing activity (of the mid nineties) has fizzled out. The sectors that saw higher growth rates in the private sector include banking and insurance. its share in GDP also increased from 70 percent to 77 percent in the corresponding period. Private sector investment in community and social services increased from 51 percent in 1980s to 65 percent in 1990H1 and 72 percent in 1990H2. private banking and insurance witnessed increases in investment. This sector always had a dominant private sector presence but the share private sector in GDP originating in this sector had fallen from 72 percent in 1960s to 69 percent in 1980s. did not translate into a higher growth in that period However. Community and Social Services Community and Services include health. the trend of falling share of private sector in GDP was checked. Only the period of mid nineties witnessed a noticeable increase in growth in GDP originating in the private sector. . CONCLUSION The above analysis of trends in investment and growth in public and private sectors at the broad sector level reveals the differential impact of the reform process that was unleashed in the 1990s. unlike the trends in overall private sector investment and GDP.

The passage of Industrial Policy Resolution of 1956 and adoption of the socialist pattern of the society led to a deliberate enlargement of our public sector. 5. To promote redistribution of income and wealth. 2. After independence and with the advent of planning. the Posts and Telegraphs. firmly believing that political independence without economic self-reliance was not good for the country. The only instances worthy of mention were the Railways. To promote balanced regional development. as well as the need for planned and rapid development. quinine factories etc.PUBLIC SECTOR: FUTURE PERSPECTIVE Before independence. To assist the development of small-scale and ancillary industries. the Port Trust. To earn return on investment and thus generate resources for development. and advance the general prosperity of the nation. In tune with the widespread belief at that time. the Ordnance and the Aircraft factories and few Government managed undertakings like the Government salt factories. The main objectives for setting up the Public Sector Enterprises as stated in the Industrial Policy Resolution of 1956 were: 1. To promote import substitutions. there was almost no 'Public Sector' in the Indian economy. It was believed that a dominant public sector would reduce the inequality of income and wealth. 4. · To create employment opportunities. 3. The planners also seemed to believe that by placing the management and workers in public enterprises in a position of responsibility and trust. they would be so imbued with a sense of the public good that their actions and aspirations would naturally reflect what was best for the country. the 2nd Five Year Plan stated very clearly that ' the adoption of socialist pattern of society as the national objective. save and earn foreign exchange for the economy. require that all industries of basic and strategic . To help in the rapid economic growth and industrialization of the country and create the necessary infrastructure for economic development. India opted for the dominance of the public sector. and 6.

And yes. . Most of the loss-making PSUs are those which went sick in the private sector and were taken over or with change of technology have become irrelevant. to assume direct responsibility for the future development of industries over a wider area '. Other industries. whether it makes the investments directly or whether these are made by the private sector. The Second Plan further emphasized that ' the public sector has to expand rapidly. which cannot be revived. BHEL and oil companies can be profitable. If NTPC. The common man must guard against this crony capitalism. politicians want to run down the public sector so that it loses value and can be sold for a song to their business cronies. could provide. which are essential and require investment on a scale. invest in modernisation and new technology. It can be done. have also to be in the public sector. The public sector was created as a result of great sacrifice by the poor people of India. The private sector has to play its part within the framework of the comprehensive plan accepted by the community. so can others. in the present circumstances. it has to play the dominant role in shaping the entire pattern of investment in the economy. or in the nature of public utility services. The state has. should be in the public sector.' If we read the recommendations of the divestment commission. The loss-making PSUs or those with outdated technologies. there will be buyers for the real estate value alone. The government must get out of these sectors. could be sold off. They just want to sell off the family jewels for a song. They deserve better. It has not only to initiate developments which the private sector is either unwilling or unable to undertake. But sometimes. This government is not interested in improving the finances or strengthening the management or modernisation of PSUs. therefore. But we must give autonomy. restructured remuneration.importance. which only the state. the first thing they say is that you must give autonomy to PSUs and they will do well. But what is the logic of selling profit-making ones? I think the divestment targets are not being reached because the government is not clear about its objectives. We should convert loss-making ones into profitable units and currently profitable ones into cash rich units. You must try to restructure PSUs.

The technically qualified people were happy to have another avenue opened through the technocrat and professional management appointments in the public sector. Nehru remarked poetically: “The workers in the public sector will work with greater dedication because they would know that they are not working for the profit of some Tata. Most politicians believed that the capitalists with the help of their managerial staff were squeezing the workers and this will be eliminated by the expansion of the public sector. They were jealous of the remuneration. In the agricultural society the main wealth is land and anybody can get more land only by depriving somebody of his land. Today. Birla or Dalmia. which involved the Marxist belief that capitalists will be ruining the society by exploiting the masses. There was also a feeling that the public sector will create employment in the underdeveloped areas. So far an intelligent person was able to make his career to higher echelons of society only by joining the Indian Administrative Services or taking the medical or legal profession. perquisites and amenities received by the private sector managers and the public sector would give them an opportunity to cross swords with the private sector managers. Tomorrow It was almost two generations ago that public sector started on massive expansion spree with a great deal of enthusiasm amongst politicians. The politicians were happy since most of them had different degrees of so-called socialistic views.PUBLIC SECTOR Yesterday. but for the poor people of India. bureaucrats and general public. The middle class was happy to have another important avenue for career. The profits which are going into the coffers of the capitalists will go to the public exchequer and will be used for the benefit of the masses. In . The common people were happy because they always felt that the rich are becoming richer essentially by making others poor.” The bureaucrats were happy that covering the industrial activity would increase their range of influence. So the poor people looked at the rich as the cause of their poverty and were happy that the process will be stopped.

in the 50’s and 60’s.fact. This gave public sector a strong base of intelligent technical and managerial staff. . the top rankers in most professional and technical examinations opted for the public sector.

. The policy formulated a decade ago remained in operation in spite of several changes in governments and seems to have become a permanent economic strategy for the foreseeable future. However. now it was clear that big investments could also mean big losses. the blame was put onto the bureaucrats. many units of the public sector had virtual monopoly and were profitable. The public had believed that money gets money and investing big money means automatically getting big profits. As long as the industry had a protected market. although they are still occupying top positions in the State Public Sector. They were therefore evicted from the Central Public Sector. In the first instance.Then there were jolts… The situation started receiving a jolt when several large units in the public sector started making large-scale losses. They started getting influenced by persons like C. particularly the IAS officers who had occupied the top positions in the public sector. the service provided to the customers suffered appreciably in the absence of competition and very soon the so-called common man turned against the public sector. The government’s economic policy based on central planning and public sector took a U-turn to give the new policy based on liberalization and privatization. Rajagopalachari who had predicted doom through the “License-permit Raj” that would be created by the role of the public sector and the government. The politicians also started getting disillusioned with socialism and the public sector. However.

in the last 10 years.” The persons between 35 and 50 feel that they have both the authority and a long innings with the organisation and so provide the dynamism for change. this group has been under the hanging sword of Voluntary Retirement Scheme. Furthermore. They would like to have the least changes so that they can have “peace in their time. Although the actual numbers migrating are small.Public sector today The demand for privatisation has been increasing. This has had a great impact on the morale of the public sector at all levels. airlines. . etc. SAIL. Whether the company is profitable or not. their migration at lucrative opportunities creates a feeling of deprivation among those left behind. they are essentially apprentices under various labels. there is a clamour to get rid of them to stop the hemorrhage through annual losses.g. thus lowering the general morale. HMT. which have been losing money. Those below 35 do not have much of authority. In the case of the companies. However. The Voluntary Retirement Scheme (VRS) has accentuated the problem. This outflow comprises mainly persons between 35 and 50 years of age. The aggressive employees in the public sector have been looking around to get opportunities where private sector alternatives have become available e. its position tomorrow can be uncertain in view of experiences with Indian Airlines. Basically persons run an organisation between 35 and 50 years of age. they form a significant percentage of persons in this category. Persons over 50 have a tendency to “settle down” and plan their life after retirement. there is a pressure for privatisation. banks. The employees of public sector are unlikely to have entrepreneurial talents and giving them a sizeable amount has not made many of them into selfemployed persons. etc. power generation. A profitable company today can get a good price.

So they have proved a source of harassment to their immediate family.” A consultant without a client is as ridiculous as a leader without a follower. The requirement at this stage is a change in mindset.” With the stoppage of recruitment for the last ten to twenty years in various organisations in the public sector. Working with all old people around you. In some places it is creeping dangerously to 50 years. Public sector tomorrow Each public sector unit feels itself at crossroads: * One possibility is private sector acquiring the unit and closing down literally throwing them on the street * Another possibility is the private sector bringing its own people at the top echelons depriving persons with long service of any opportunities of advancement * Furthermore. particularly at the old age after having had a fairly relaxed time for years.They are still looking for jobs or have declared themselves as “consultants. The VRS has also created the problem of utilising the time. There is a feeling that if a person keeps his nose clean. Most of the managers have no interests outside their job. the average age of employees is rising. can indeed be depressing. Most people join the public sector for a life of stability and security. becomes a black specter. This kind of career may not be possible any . he would raise several levels and will retire at the retirement age with fairly sizeable retirement compensation. possibility of harsh work expectation. Looking at such retired people lowers the morale of those who are still employed in the public sector with the feeling : “What has happened to them yesterday would happen to us tomorrow.

The effort to give entrepreneurial education in the management institutes has not been a great success.more. This new breed of managers who may be termed “Intrepreneurs” will be working in organisations but will keep on “smelling” entrepreneurial opportunities. as organisations would not like to carry permanent load. a person has to identify and exploit his strengths to build an image for himself not only within the organisation but also outside the organisation. For this. apna hi gireban bhool gaye” (I solved everybody’s problems – except my own. Frankly this is not a new phenomenon. . a dynamic stability by having a sustained demand for his skills for years can be possible. apna hi mudava kar na sake Sab ke gireban see dale. While stability in terms of a job in the same organisation might not be possible. Weaknesses. It is necessary to inculcate the mindset that will encourage looking for opportunities and taking calculated risks. The new generation will have to be prepared for this approach right from their formative years. A person working in this situation has to carry out a SWOT analysis (analysis of Strengths. In many organisations people are being hired on contract basis. As says an Urdu poet: “Sab ka mudava kar dala. Opportunities and Threats) periodically. Industries like the film industry have been operating on this basis almost from the beginning. Particularly the managerial staff would have to “expose” themselves to professional colleagues through conferences. Most managers have done such SWOT analysis for their organisations but not for themselves. It has been happening in the construction industry where most of the employees including the managerial staff are hired on contractual basis. conventions and seminars so that their abilities are well known and they would be approached wherever such abilities are required. I repaired everybody’s clothes. but left mine in tatters).

This is essential both for private sector and public sector managers. all we can do is to prepare the next generation for the future !” . The change will be more drastic for the public sector managers who have been reposing in the delusion of lifelong commitment with the organisation like the traditional Hindu marriage. “We cannot prepare the future for the next generation. As President Roosevelt once put it.

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