Private Sector in India

 It refers to all those individual units which are engaged in production and are owned
by private individuals and managed by them for profit motive.
 After independence India adopted a system of mixed economy. Under the Industrial
policy resolutions, the country was divided into public and private sectors. Basic and
heavy industries like iron and steel, coal, railways etc were exclusively reserved for
the public sector. Consumer goods industry and agriculture were left to the private
entrepreneurs.
 Since the industrial policy of 1991, the role of private sector has increased. Now
except for two areas (Atomic energy and Railways), the rest of the sectors are open to
investment by the private sector.
 Growth of private sector:

a) There has been a tremendous growth in the no. of private sector companies in
India.

Year No. of private sector companies

1957 19283
2014 9,36,045

b) There has been a huge increase in employment in the private sector. Out of 2.9
crore people employed in the organised sector in India, 1.2 crore are employed in the
private organised sector.
c) Another important indicator of private sector is the growth of Small Scale
industries. The MSMEs (Micro, Small and Medium enterprises) come under the
private sector. In 1986-87, there were 15 lakh small scale units operational in India. In
2014-15, there were 5.11 crore MSMEs operational in India. They provide
employment to 1171 lakh people. Value of their total production in 2012-13 was Rs
18, 09,976 crore.
d) Big business houses have made substantial progress in the country like Tata,
Reliance, Birla, ITC, Bajaj etc.

Importance of the Private sector

 The private sector has a huge share in GDP of the country as compared to the public
sector. In 2012-13, the share of private sector in the GDP was 79.6% as compared to
20.4% of the public sector.
 Similarly, the private sector has a huge contribution in gross capital formation of the
country which is 78.1% compared with 21.9% share of the public sector, as per 2011-
12.
 Private sector has played an important role in the Industrial development of the
country. After independence, many basic industries like Tata Iron and Steel and Tata
Electricity Station and many consumer goods industries such as Sugar, textiles etc
were established in the private sector. Many Export oriented units have been
established in this sector earning huge foreign exchange. Big business houses have
 also collaborated with their foreign counterparts to set up industrial ventures outside
India.
 Private sector’s contribution in the Agricultural Development in India has been
significant. With agriculture contributing nearly 15.4% to the national income of the
country and 48% to employment, India has achieved self-sufficiency in food grain
production. India is 2nd larger producer of agriculture products. India accounts for
7.39% of total global agricultural output. The credit for the success of Green
Revolution largely goes to the private sector.
 Private sector has played an important role in growth of Small Scale industries which
are highly labour intensive. In 2014-15, there were 5.11 crore MSMEs operational in
India. They produce about 45% of the total industrial output. They provide
employment to 1171 lakh people.
 Private sector is more efficient than the public sector. It is generating on an average,
9.8% profit as compared to the average of 5.6% in the public sector.
 Private sector also plays a major role in trading activity. The bulk of India’s domestic
and external trade is being undertaken by this sector.
 This sector is also a major earner of foreign exchange. It has been exporting
readymade garments, precious gems, stones, engineering goods, leather goods,
handicrafts etc.

Defects of the Private sector

 Private sector works for profit motive. They produce only such commodities which
generate maximum profits. They tend to produce non-essential goods, mainly luxury
goods which are demanded by the rich section of the society. The goods demanded by
the poor sections of the society are not the focus of the private sector since they do not
work for social welfare.
 Private sector has encouraged the concentration of economic power and growth of
monopolies. Only the big enterprises succeed in getting the licenses (for production).
Small industrialists get competed out of the market. Big industrialists manipulate the
government policies to suit their needs. This adds to the problem of inequality in the
distribution of income and wealth and distribution in the favour of rich sections of the
society.
 Industrial disputes are common in private sector due to the clash between ‘Haves’ and
‘Have-nots’. The latter are in dispute with the former over maximising their wages
and the former are always aiming at minimising their cost of production by offering
low wages. So strikes and lockouts are quite common.
 The biggest problem of private sector is that it promotes black money. Private
entrepreneurs evade taxes, their sales; production and income are not disclosed
properly and are under-recorded. They tend to pay less tax on sales and their income.
This leads to the creation of a parallel economy in the country.
 Private entrepreneurs are also responsible for promoting corruption in the country.
They bribe government officials to get the necessary permits and licenses, give
donations to the political parties and get government policies made in their favour.
  Since private players work only for profit motive, they ignore social welfare
completely. They exploit their employees, pay lesser wages to them, make poor
quality products, and ignore pollution control. They also indulge in unfair trade
practices like forming cartels to reduce competition and charge higher prices for their
products.
 Private sector sets up enterprises mainly in the well-developed regions of the country
having sufficient infrastructural facilities. They do not set up units in the backward
regions due to non-profitability. This promotes Regional Imbalances.
 Industrial sickness is a common feature of the private sector. Due to excessive use of
machinery, poor management and lack of quality control, many units in the private
sector start facing losses leading them towards bankruptcy and closure. This results in
wastage of resources, unemployment, loss of production and loss of revenue to the
government.

Although the New Industrial Policy of 1991 envisaged the growth of privatisation in order to
create a competitive climate but privatisation cannot be treated as a complete solution for
industrial and economic growth. So the government needs to work in coordination with the
private sector to achieve the economic goals.

Ekjyot Kaur Gujral

Assistant Professor of Economics

Army Institute of Law, Mohali