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
 GROUP MEMBERS:

GROUP MEMBERS ROLL NO.

1.Praveen Kumar 108
2.Praveen kumar niranjan 109
3.Praveen Pandey 110
4. Prayag Salvi 111
5. Premin Toprani – G.L 112
6.Priya Pradhan 113
7.Ranjit Sinha 127

ACKNOWLEDGEMENT
First of all we would like to take this opportunity to thank
D.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 this

project, and many supported us through it. We express our
sincere gratitude to Prof. Sapna Suri for assigning us a
project on Indian Economics, which is an interesting and
exhaustive subject.

She has been an inspiration and role model for this topic. Her
guidance and active support has made it possible to
complete the assignment.

1 Last but not the least we would like to thank the

Almighty for always helping us.
 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 India’s Gross Domestic Product5
(GDP) and was a key employment generator. 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.
With the policy focus shifting on the public sector, the period from
1960s to the 1980s witnessed a declining contribution of the private
sector 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 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. The reform
agenda included, apart from a fiscal consolidation program,
deregulation of industry, liberalization of foreign trade, foreign
investment and the financial sector. An enhanced the role of private
sector 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 of
investment and GDP across broad sectors (all tables and charts in this
Chapter are based on NAS data). This helps in identifying directional
changes in public and private sector participation in the economy. In
what follows, we examine the impact of the reforms on the investment
and GDP originating in the private sector vis-à-vis the public sector.
TRENDS IN INVESTMENT AND GDP- 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. Only during the first half of nineties (1990H1) did both public
and private sectors register growth rates of 4.9 percent each. But in
the second half, GDP growth in public sector again outpaced the
private sector GDP growth. 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.
[1990H1 = 1990-91 to 1994-95; 1990H2 = 1995-96 to 1998-99 (public sector data is
available only upto 1998-99). ]
The only period in 1990s when the private sector grew faster (7.6
percent 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 of
reform 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 not
be sustained and the private sector is still struggling to come out of the
downturn that set in during 1997-98.
Despite public sector registering higher growth rates than the private
sector, the contribution of private sector to overall growth was always
higher because of its significantly higher share in GDP. As the policies
of the government in the past were aimed at promoting the public
sector, its share in total GDP kept on rising till the 1980s. Even in
1990H1, the share of public sector in total GDP was rising. This trend
has been checked in 1990H2, which witnessed a marginal drop in
public sector share in GDP. 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.
As opposed to the poor growth in private sector GDP, there has been a
clear shift in the composition of investment in the favour of private
sector. The share of private sector in total investment shot up from 56
percent in 1990s to 71 percent by 1990H2.
Although private investment at the aggregate level picked up
significantly in the 1990s, a commensurate increase in its share in GDP
was not witnessed.

TRENDS IN INVESTMENT AND GDP- SECTOR TRENDS

All the sectors of the economy did not mimic the aggregate trends. The
private sector was better placed in some areas to respond to reform
initiatives and consequently displayed buoyancy in investment and
growth. A sector analysis helps in identifying these sectors.
Agriculture

Almost the entire GDP in agriculture originates in the private sector. In

the 1990s, the share of private sector in agricultural GDP was over 97
percent.
The growth in agricultural GDP in the public sector has been
decelerating since the 1960s and by 1990H2 it turned negative. In
contrast, the private sector GDP in agriculture grew at almost 4
percent in 1990s. As against its low contribution to GDP, the share of
public investment in agriculture has historically been quite large,
although it has consistently fallen throughout the nineties. Share of
public investment in agriculture fell from 45 percent in the 1980s to
below 27 percent by 1990H2. Despite falling public sector investment
in agriculture, overall investment in agriculture measured as a
proportion of GDP in agriculture did not suffer.

Although the shortfall in public sector investment in agriculture has

been made up by private sector investment, the nature of private
sector investment raises doubts about the viability of such investment.
As opposed to public investment, which is associated with positive
externalities, private investment is primarily geared towards
appropriation. The negative impact of falling public investment has
started manifesting itself in falling productivity and depleting ground
water 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-à-vis public sector has
quite been poor. Even during 1990s, on the average the public sector
outpaced the private sector, the difference in growth rates became
more noticeable in 1990H2.
Private sector always had a dominant share in GDP originating in the
industrial sector. 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. But
with a renewed focus on private sector in the 1990s, the contribution
of private sector to industrial GDP increased to 67 percent in 1990H2
Investment by the private sector increased significantly in 1990s. The
private sector’s share in total investment in industry increased by
almost 20 percentage points in the last decade.

Clearly, 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.
Manufacturing

The manufacturing sector, with a dominant share in industrial GDP,

mimics the overall trends of industry in the nineties. The share of
private sector in investment in the manufacturing sector increased
from 80.4 percent in 1980s to 93.3 percent in the 1990H2- an
unambiguous sign of government withdrawing from this sector. The
growth the private sector GDP in the manufacturing sector in the
nineties stayed below that in public sector. Only during the short
period 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 public sector.

Services

Services is the fastest growing sector of the economy. 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 1999-
00. Here, services excludes public administration and defence as they
are exclusively provided by the public sector. 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 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 sector
in the services sector investment went up from 69.7 percent to 73.3
percent.
Within services, the private sector GDP growth during the nineties was
particularly buoyant in the financial sector, transport (without 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 nineties. The trend growth in real GDP in the private sector too was
close to 17 percent per annum in 1990s.
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.
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 the
private 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 the
share private sector in GDP originating in this sector had fallen from 72
percent in 1960s to 69 percent in 1980s.
In the nineties this trend was significantly reversed. Not only did the
share 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 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 percent in 1960s to 61 percent by 1990H1.
Private sector investment in community and social services increased
from 51 percent in 1980s to 65 percent in 1990H1 and 72 percent in
1990H2. 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 sector
in GDP was checked.

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. While there has
been a significant pick up in private investment in some sectors, a
corresponding increase in growth rates in private sector GDP has not
been witnessed. Only the period of mid nineties witnessed a noticeable
increase in growth in GDP originating in the private sector.
The sectors that saw higher growth rates in the private sector include
banking and insurance, transport (excluding railways) and community
and social services. The boom of private sector growth in
manufacturing activity (of the mid nineties) has fizzled out.
 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, the
Posts and Telegraphs, the Port Trust, the Ordnance and the Aircraft
factories and few Government managed undertakings like the
Government salt factories, quinine factories etc. After independence
and with the advent of planning, India opted for the dominance of the
public sector, firmly believing that political independence without
economic self-reliance was not good for the country. 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. It was believed that a dominant public sector would reduce the
inequality of income and wealth, and advance the general prosperity of
the nation. 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 main objectives for setting up the
Public Sector Enterprises as stated in the Industrial Policy Resolution of
1956 were:

1. To help in the rapid economic growth and industrialization of the

country and create the necessary infrastructure for economic
development;

2. To earn return on investment and thus generate resources for

development;

3. To promote redistribution of income and wealth; · To create

employment 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 for

the economy.

In tune with the widespread belief at that time, the 2nd Five Year Plan
stated very clearly that ' the adoption of socialist pattern of society as
the national objective, as well as the need for planned and rapid
development, require that all industries of basic and strategic
importance, or in the nature of public utility services, should be in the
public sector. Other industries, which are essential and require
investment on a scale, which only the state, in the present
circumstances, could provide, have also to be in the public sector. The
state 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 to
expand rapidly. It has not only to initiate developments which the
private sector is either unwilling or unable to undertake, it has to play
the dominant role in shaping the entire pattern of investment in the
economy, whether it makes the investments directly or whether these
are made by the private sector. The private sector has to play its part
within the framework of the comprehensive plan accepted by the
community.'

If we read the recommendations of the divestment commission, the

first thing they say is that you must give autonomy to PSUs and they
will do well. This government is not interested in improving the
finances or strengthening the management or modernisation of PSUs.
They just want to sell off the family jewels for a song. The public sector
was 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, which

cannot be revived, could be sold off. 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.

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. 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 currently

profitable ones into cash rich units. But we must give autonomy,
restructured remuneration, invest in modernisation and new
technology. It can be done. If NTPC, BHEL and oil companies can be
profitable, so can others. But sometimes, politicians want to run down
the public sector so that it loses value and can be sold for a song to
their business cronies. The common man must guard against this
crony capitalism.
PUBLIC SECTOR
Yesterday, Today, Tomorrow

It was almost two generations ago that public sector started on

massive expansion spree with a great deal of enthusiasm amongst
politicians, bureaucrats and general public. The politicians were happy
since most of them had different degrees of so-called socialistic views,
which involved the Marxist belief that capitalists will be ruining the
society by exploiting the masses. 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. 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, Birla or Dalmia; but for the
poor people of India. 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.”

The bureaucrats were happy that covering the industrial activity would
increase their
range of influence. They were jealous of the remuneration, 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.

The common people were happy because they always felt that the rich
are becoming
richer essentially by making others poor. In the agricultural society the
main wealth is land and anybody can get more land only by depriving
somebody of his land. So the poor people looked at the rich as the
cause of their poverty and were happy that the
process will be stopped. There was also a feeling that the public sector
will create
employment in the underdeveloped areas.

The middle class was happy to have another important avenue for
career. 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.
The technically qualified people were happy to have another avenue
opened through
the technocrat and professional management appointments in the
public sector. In
fact, in the 50’s and 60’s, the top rankers in most professional and
technical
examinations opted for the public sector. This gave public sector a
strong base of
intelligent technical and managerial staff.
Then there were jolts…
The situation started receiving a jolt when several large units in the
public sector
started making large-scale losses. The public had believed that money
gets money
and investing big money means automatically getting big profits.
However, now it
was clear that big investments could also mean big losses. In the first
instance, the
blame was put onto the bureaucrats, particularly the IAS officers who
had occupied
the top positions in the public sector. They were therefore evicted from
the Central
Public Sector, although they are still occupying top positions in the
State Public
Sector.

The politicians also started getting disillusioned with socialism and the
public sector.
They started getting influenced by persons like C. Rajagopalachari who
had
predicted doom through the “License-permit Raj” that would be
created by the role of
the public sector and the government.

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

public sector had
virtual monopoly and were profitable. However, 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. 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.
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. Basically persons run an
organisation
between 35 and 50 years of age. Those below 35 do not have much of
authority;
they are essentially apprentices under various labels. Persons over 50
have a
tendency to “settle down” and plan their life after retirement. They
would like to have
the least changes so that they can have “peace in their time.” 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.
However, in the last 10 years, this group has been under the hanging
sword of Voluntary Retirement Scheme. Whether the company is
profitable or not, there is a pressure for privatisation.

A profitable company today can get a good price, its position tomorrow
can be
uncertain in view of experiences with Indian Airlines, SAIL, HMT, etc. In
the case of
the companies, which have been losing money, there is a clamour to
get rid of them
to stop the hemorrhage through annual losses. The aggressive
employees in the
public sector have been looking around to get opportunities where
private sector
alternatives have become available e.g. power generation, airlines,
banks, etc. This
outflow comprises mainly persons between 35 and 50 years of age.
Although the
actual numbers migrating are small, they form a significant percentage
of persons in
this category. Furthermore, their migration at lucrative opportunities
creates a feeling
of deprivation among those left behind, thus lowering the general
morale.
The Voluntary Retirement Scheme (VRS) has accentuated the problem.
The
employees of public sector are unlikely to have entrepreneurial talents
and giving
them a sizeable amount has not made many of them into self-
employed persons.
They are still looking for jobs or have declared themselves as
“consultants.” A
consultant without a client is as ridiculous as a leader without a
follower. The VRS
has also created the problem of utilising the time. Most of the
managers have no
interests outside their job. So they have proved a source of
harassment to their
immediate family. 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.” With the stoppage of
recruitment for the
last 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 50
years.
Working with all old people around you, can indeed be depressing.

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, possibility of harsh work expectation, particularly at the
old age
after having had a fairly relaxed time for years, becomes a black
specter.
The requirement at this stage is a change in mindset. Most people join
the public
sector for a life of stability and security. There is a feeling that if a
person keeps his
nose clean, he would raise several levels and will retire at the
retirement age with
fairly sizeable retirement compensation. This kind of career may not be
possible any
more. In many organisations people are being hired on contract basis,
as
organisations would not like to carry permanent load. Frankly this is
not a new
phenomenon. It has been happening in the construction industry
where most of the
employees including the managerial staff are hired on contractual
basis. Industries
like the film industry have been operating on this basis almost from the
beginning.
A person working in this situation has to carry out a SWOT analysis
(analysis of
Strengths, Weaknesses, Opportunities and Threats) periodically. While
stability in
terms of a job in the same organisation might not be possible, a
dynamic stability by
having a sustained demand for his skills for years can be possible. For
this, 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. Particularly the
managerial staff
would have to “expose” themselves to professional colleagues through
conferences,
conventions and seminars so that their abilities are well known and
they would be
approached wherever such abilities are required.
Most managers have done such SWOT analysis for their organisations
but not for
themselves. As says an Urdu poet:
“Sab ka mudava kar dala, apna hi mudava kar na sake
Sab ke gireban see dale, apna hi gireban bhool gaye”
(I solved everybody’s problems – except my own; I repaired
everybody’s clothes, but
left mine in tatters).
The new generation will have to be prepared for this approach right
from their
formative years. The effort to give entrepreneurial education in the
management
institutes has not been a great success. It is necessary to inculcate the
mindset that
will encourage looking for opportunities and taking calculated risks.
This new breed
of managers who may be termed “Intrepreneurs” will be working in
organisations but
will keep on “smelling” entrepreneurial opportunities.
This is essential both for private sector and public sector managers.
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. As President Roosevelt once put it, “We cannot prepare the
future for
the next generation, all we can do is to prepare the next generation for
the
future !”