Short Answer Questions
Question 1: Explain the concept of public sector and private sector.
Answer:
Public Sector: The sector, which includes all those enterprises which are managed and owned partly or wholly by the Central or State Government by the Central or State Government is known as Public Sector. The Public Sector is the sector that is involved in the operations of supplying government products and services to the general public. The government owns, controls, and runs all enterprises, agencies, and bodies, whether it is central government, state government, or local government.
Private Sector: The sector, which includes all those enterprises which are managed and owned by individuals or groups of individuals is known as Private Sector. The private sector is the section of the economy formed up of profit-seeking companies. Companies in the private sector face little state regulation and compete for the money of consumers. Individuals or corporate entities own, control, and manage the private sector firms.
Question 2: State the various types of organisations in the private sector.
Answer: The sector, which includes all those enterprises which are managed and owned by individuals or groups of individuals is known as Private Sector. The various types of organisations in the private sector are:
1. Sole Proprietorship: A popular form of business organization in which the business is owned, managed, and controlled by an individual is known as a sole proprietorship. This individual is the recipient of every profit and loss of the business and bears every risk coming to the business. Here, the word sole means only and proprietor means owner; hence, the only owner of the business. Usually, businesses with personalized services like hair salons, beauty parlours, retail shops, etc., run under sole proprietorship.
2. Hindu Undivided Family Business: A form of business organization found only in India in which the business is owned and carried on by the HUF(Hindu Undivided Family) members is known as Joint Hindu Family Business. It is one of the oldest forms of business organization in India. This form is governed by the ‘Hindu Law’. The eldest member and head of the family, also known as “Karta,” controls the business. Membership in this form of business organization is based on the birth in a specific family.
3. Partnership: According to the Indian Partnership Act, 1932, a partnership is a form of business organization in which there is a relation between two or more people with an agreement to share the firm’s profits carried on by every partner or any one of the partners acting for all. It solves the need to acquire greater capital investment, risk-sharing, and a variety of skills in the business, which is not available in Sole Proprietorship and Joint Hindu Family Business. The minimum number of partners required in a partnership firm is two.
4. Cooperative Society: A voluntary association of people joining together with the main objective of members’ welfare is known as a cooperative society. As the name suggests, people in this form of business organization work together and with other people for the accomplishment of a common purpose. The power to make decisions in a Cooperative Society is in the hands of an elected managing committee. The Cooperative Societies Act, of 1912 states that it is compulsory to register a Cooperative Society.
5. Joint Stock Company: An association of different individuals formed to carry out business activities is known as a joint stock company. This form of organization has an independent legal status from its members. Basically, a joint stock company is an artificial individual with a separate legal entity, common seal and perpetual succession. The Joint Stock Company form of organization is governed by the Companies Act, 2013.
Question 3: What are the different kinds of organisations that come under the public sector?
Answer: In the Public Sector, Government plays a major role in organizing and formulating the key points related to an organization. These public enterprises are owned by the public and accountable to the public through the parliament. A public enterprise may take any particular form of organization depending upon the nature of its operation and its relationship with the government.
The different kinds of organisations that come under the public sector are:
1. Departmental Undertaking: Departmental enterprises are established as departments of the ministry and are considered part or an extension of the ministry itself. They have not been constituted as autonomous or independent institutions and as such are not independent legal entities. These undertakings are under the Central or State Government and the rules of the Central/State Government are applicable. Eg. Railways
2. Statutory Corporation: Statutory Corporations are public enterprises that are brought into existence by a Special Act of Parliament. The Act defines its powers and functions, rules and regulations governing its employees, and its relationship with government departments. It enjoys the legal identity of a corporate person and has the capacity of acting under its name.
3. Government Company: A Government company is established under the Indian Companies Act and is registered and governed by the provisions of the Indian Companies Act. According to the Indian Companies Act 2013, any company in which not less than fifty-one percent of the paid-up share capital is held by the Central Government, or by any State Government or Government, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company is called Government Company.
Question 4: List the names of some enterprises under the public sector and classify them.
Answer: A public sector company or a public sector organisation is also known as a government-owned corporation in India. These businesses are controlled by the federal Indian government, one of several states or local governments, or both. As a PSU, the government must own the stock options in the majority. PSUs may be classified as either central government or state-wide public enterprises (SLPEs).
Many public-sector enterprises include:
- Indian Railways → Departmental Undertaking
- Indian Post and Telegraph → Departmental Undertaking
- Steel Authority of India Limited (SAIL) → Government Company
- Bharat Heavy Electricals Limited (BHEL) → Government Company
- Life Insurance Corporation (LIC) of India → Statutory Corporation
- State Trading Corporation → Statutory Corporation
Question 5: Why is the government company form of organisation preferred to other types in the public sector?
Answer: According to Section 2(45) of the Indian Companies Act 2013, any company in which not less than fifty-one percent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of a Government company is called Government Company.
The government company form of organisation is preferred to other types in the public sector because of its following advantages:
1. Easy Formation: A Government Company can be easily established by just fulfilling the requirements of the Indian Companies Act. It means that one does not have to acquire separate legislation from the Parliament for the formation of a Government Company.
2. Operational Autonomy: There is no bureaucratic control and political interference of the Government in the management of the Government Company; therefore, a Government Company takes actions according to their own judgement and can manage its activities independently.
3. Independent Status: As a Government Company has a separate legal entity, independent of the Government, it can perform its activities just like any other Private Company.
4. Prevents Unhealthy Business Practices: As a Government Company exercises major control of Government on its management, the goods offered by these companies are of good quality and are sold at reasonable prices. This merit of a Government Company helps in controlling the market and reducing unhealthy business practices.
Question 6: How does the government maintain a regional balance in the country?
Answer: The government has the responsibility of developing a country’s various regions. Earlier, most developments was limited to a few regions, such as port towns. Many industries were established by the public sector in backward regions to provide employment and accelerate economic growth.
The government took the following initiatives to maintain a regional balance in the country:
1. In order to speed up economic growth, four large steel plants were built in underdeveloped regions.
2. The government also makes efforts to avoid the proliferation of private sector units in already developed areas.
3. The government gave numerous benefits to the private sector, such as tax concessions and low-interest rates on loans, etc., to encourage them to establish businesses in backward areas.
Question 7: State the meaning of public private partnership.
Answer: A public-private partnership commonly referred to as a PPP, 3P, or P3, is a long-term collaboration between two or more public and private sectors. Generally, the government collaborates with private enterprises to finish projects under the Public-Private Partnership model. Currently, this approach is used to construct many of the country’s roadways. Funds are secured for the construction of any public service or infrastructure using this method. In this way, the government and private institutions work together to attain a predetermined aim.
PPP refers to any long-term management contract that involves finance, planning, construction, operation, maintenance, and disinvestment. PPPs are beneficial for major projects that need highly trained labor as well as considerable financial investments. They’re also helpful in nations where the government is legally required to have a public infrastructure.
Long Answer Questions
Question 1: Describe the Industrial Policy 1991, towards the public sector.
Answer: In 1991, the Indian government introduced four major reforms in the public sector as part of its new industrial policy. The following are the key elements of government policy:
- Restructure and revitalise potentially viable public-sector enterprises,
- Close down PSUs, which cannot be reviewed,
- Reduce government equity in all non-strategic PSUs to 26% or less, if necessary and,
- Fully protect workers’ interests.
a) Reduction in the number of industries reserved for the public sector from 17 to 8: In the 1956 Industrial Policy Resolution, 17 industries were designated as public. Only eight industries were reserved for the public sector in 1991, and they were restricted to atomic energy, arms and communication, mining, and railways. Only three industries were exclusively reserved for the public sector in 2001. These are atomic energy, arms, and rail transportation. This meant that the private sector could enter all areas (except three), forcing the public sector to compete.
b) Disinvestment of shares: Disinvestment usually involves selling equity shares to the private sector and the public. The goal was to raise resources and encourage greater public and worker participation in the ownership of these enterprises. The government had chosen to withdraw from the industrial sector and reduce its equity in all undertakings. This was expected to result in improved managerial performance and financial discipline. However, there is still much work left to be done in this area.
c) Policy regarding sick units to be the same as that for the private sector:
All public sector units were referred to the Board of Industrial and Financial Reconstruction to determine whether a sick unit should be restructured or closed down. The Board has reconsidered revival and rehabilitation schemes for some cases, as well as the closure of a number of units. There is a lot of resentment among the workers of the units that will be closed down. The government established the National Renewal Fund to retrain or redeploy retrenched labour and to compensate public sector employees seeking voluntary retirement.
Many enterprises are sick and cannot be revived because they have accumulated massive losses. With public finances under severe pressure, both the central and state governments simply cannot sustain them for much longer. In such cases, the government’s only option is to close these businesses after providing a safety net for the employees and workers. The National Renewal Fund’s resources have not been sufficient to cover the costs of the Voluntary Separation Scheme or the Voluntary Retirement Scheme.
d) Memorandum of Understanding: Performance enhancement via an MoU (Memorandum of Understanding) system in which management is granted more autonomy but held accountable for specific results. Under this system, public sector units were given specific goals and operational autonomy to accomplish those objectives. The MoU defined the relationship and autonomy of the specific public sector unit and their administrative ministries. For example: In the telecom sector, consumers have benefited from more options, lower prices, and higher product and service quality.
Question 2: What was the role of the public sector before 1991?
Answer: Before 1991, the public sector played a significant role.
1. Development of Infrastructure and Heavy Industries: Industrialisation was challenging at the time of independence because there was insufficient infrastructure for transportation and communication, fuel and energy, and basic and heavy industries. As a result, fundamental infrastructure was not developed. Heavy capital requirements and long gestation periods associated with these projects prevented the private sector from taking the initiative to invest in heavy industries and infrastructure.
2. Regional Balance: After planning started in 1951, the government started giving particular attention to the regions that were falling behind, and public sector industries were purposefully established in those underdeveloped areas. In order to speed up economic development, employ the population, and create ancillary industries, four large steel plants were established as public sector units in underdeveloped regions.
3. Economies of Scale: When production is carried out on a big level, the average cost of production is reduced. However, large-scale businesses need large financial investments, so the public sector had to get involved to take benefit from economies of scale. Electric power, natural gas, petroleum, and other units were established in the public sector because they needed a large base to operate profitably, which was only feasible with government funding and mass production.
4. Concentration of Economic Power: If public sector units were not established, wealth might become consolidated in a few hands, giving rise to monopolistic practices. At the time of independence, there were very few industrial companies with the required capital to invest in heavy industries. The public sector makes sure that a large number of workers and employees participate in the income and benefits that accrue are shared.
5. Self-reliance: In the Five Year Plans, this was one of the main goals. The lack of foreign currency made it challenging to import the heavy machinery needed for a strong industrial foundation. Heavy engineering public sector firms at the time supported import substitution. Besides that, public sector companies like STC and MMTC were important in increasing the country’s exports.
Question 3: Can public sector companies compete with the private sector in terms of profits and efficiency? Give reasons for your answer.
Answer:
Public Sector: The sector, which includes all those enterprises which are managed and owned partly or wholly by the Central or State Government by the Central or State Government is known as Public Sector. The Public Sector is the sector that is involved in the operations of supplying government products and services to the general public. The government owns, controls, and runs all enterprises, agencies, and bodies, whether it is central government, state government, or local government.
Private Sector: The sector, which includes all those enterprises which are managed and owned by individuals or groups of individuals is known as Private Sector. The private sector is the section of the economy formed up of profit-seeking companies. Companies in the private sector face little state regulation and compete for the money of consumers. Individuals or corporate entities own, control, and manage the private sector firms.
In terms of productivity and profit, the public sector cannot compete with the private sector. This is so because the private sector typically operates more profitably and efficiently than the public sector. The reasons are clear from the following statements:
1. Objective Difference: Private sector firms work with the goal of profit maximisation, whereas public sector companies have societal benefit as their prime aim and thus cannot be entirely profit-oriented.
2. Ownership Difference: In public sector companies, the government is the sole or major shareholder. As a result, the management and administration of these companies are in the hands of the government, which may not make economically sound policies due to political concerns.
3. Management Difference: Government employees who may or may not be professionally trained manage public sector companies; whereas, professional managers operate and manage private sector companies. This results in increased efficiency in the private sector.
4. Difference in Areas of Operation: The private sector operates in all areas with a sufficient return on investment; whereas, the public sector primarily functions in basic and public utility sectors with low returns.
Question 4: Why are global enterprises considered superior to other business organisations?
Answer: A company whose business operations extend beyond the country in which it is incorporated is known as Global Enterprise or Multinational Company (MNC). Global enterprises are thus large-scale industrial organisations that extend their industrial and marketing operations across multiple countries via a network of branches. These enterprises operate in several areas, producing a variety of products, and their business strategy spans several countries. They do not aim to make a profit from one or two products but rather spread their branches widely. For example, Pepsi and Coca-Cola are registered in the USA, but they operate across the world.
Global enterprises have huge sizes, a large number of products, advanced technology, marketing strategies, and a network of operations all over the world, and because of these factors, they are able to influence the international economy.
Global enterprises are considered superior to other business organisations because these enterprises have distinguishing characteristics that set them apart from other private-sector firms and public-sector enterprises. Such as:
1. Huge Capital Resources: These businesses are distinguished by substantial financial resources and the ability to raise funds from various sources. These enterprises can raise funds from a variety of sources. They may sell public equity, debentures, or bonds. They can also borrow from financial institutions and foreign banks. They are well-known in the capital market. Even local investors and banks are interested in investing in them. Because of their financial strength, they can survive in any situation.
2. Foreign Collaboration: Global enterprises typically enter into agreements with Indian companies regarding the sale of technology, the manufacture of goods, use of brand names for final products, and so on. These MNCs may work with both public and private sector companies. The agreement usually contains a number of restrictive clauses pertaining to the transfer of technology, pricing, dividend payments, tight control by foreign technicians, and so on. Collaboration with MNCs has benefited large industrial houses looking to diversify and expand in terms of patents, resources, foreign exchange, and so on. However, these foreign collaborations have resulted in the growth of monopolies and the concentration of power in a few hands.
3. Advanced Technology: These enterprises have technological advantages in their production methods. They are able to meet international standards and quality specifications. This leads to industrial progress in the country where such corporations operate because they are able to optimally exploit local resources and raw materials. Computerization and other inventions have resulted from MNCs’ technological advances.
4. Product Innovation: These enterprises are distinguished by highly sophisticated research and development departments tasked with developing new products and superior designs for existing products. Qualitative research necessitates significant investment, which only global corporations can afford.
5. Marketing Strategies: Global companies’ marketing strategies are far more effective than those of other companies. They use aggressive marketing strategies to boost sales in a short period of time. They have a more trustworthy and up-to-date market information system. Their advertising and sales promotion strategies are extremely effective. As they have already established a presence in the global market and their brands are well-known, selling their products is not a problem.
6. Expansion of Market Territory: Global enterprises operate through a network of subsidiaries, branches and affiliates in host countries as their activities extend beyond the physical boundaries of their own countries. This expands their territory and enables them to become international brands.
7. Centralised Control: Their headquarters are in their home country, and they have authority over all branches and subsidiaries. However, this control is limited to the parent company’s broad policy framework. There is no disruption to day-to-day operations.
Question 5: What are the benefits of entering into joint ventures and public private partnership?
Answer:
Joint Venture:
A joint venture is a common strategy for entering international markets. When two business enterprises agree to join together for a common objective and mutual gain, it gives rise to a Joint Venture. These enterprises can be private, government, or foreign companies. Joint Venture refers a partnership in which companies share management, risks, investments, and profits in the development, production, or selling of products. In Joint Venture, two or more firms join together for a common purpose and mutual benefit.
The benefits of entering into joint ventures are:
1. Increased Resources and Capacity: By collaborating or teaming up, one can increase capacity and resources, which helps joint venture companies grow and expand more quickly and efficiently. Joint venture results in the pooling of financial, physical, and human resources of two or more firms. With this, companies take advantage of new opportunities and face new challenges in the market.
2. Economies of Scale: In joint venture strength of one organization can be utilized by the other. It helps businesses to expand despite their limited resources. In a joint venture, the businesses split operating costs, labour costs, advertising, marketing, and promotion expenses. The organization can reduce its cost and maximize its profits. This gives a competitive advantage to both organizations to produce economies of scale.
3. Innovation: Today’s market is demanding new and innovative products. Joint venture proves to be useful in providing new and innovative products. It provides the benefits of updated technology for goods and services. Advanced technology helps make high-quality goods at low costs. Moreover, international partners in a joint venture often generate new ideas, which can help to produce innovative products in our country.
4. Gaining Access to New Markets and Distribution Networks: When a company forms a joint venture with the other, it unlocks a vast market with the potential for growth and development. For example, when a firm from the United States of America forms a joint venture with an Indian company, the joint venture gives the American company access to a huge Indian market. It is simple for them to sell their products in new areas after they have attained saturation in their original markets. It also provides the benefit of an established distribution channel, i.e., retail outlets in the domestic market. Otherwise, opening their retail shops may prove expensive. On the other hand, the Indian company can access a diverse American market.
5. Brand Exposure: When two or more parties form a joint venture, the established brand name of one company can be used by another organization to acquire a competitive gain over the other traders. It saves a lot of investment in developing a brand name for the products as there is a ready market waiting for the product to be launched. For example, if an Indian company enters into a joint venture with a foreign company, the Indian company can get the benefit of goodwill and the brand name of the foreign company in the market.
6. Access to Technology: Technology is one of the major reasons for most businesses to enter into a joint venture. With advanced technology, high-quality goods can be produced that save time, energy, and resources. It also adds to efficiency and effectiveness. When a joint venture is formed, one can get access to the same technology as other businesses as there is no need to develop own technology. Thus there is no need for further investment.
Public-private Partnership:
A public-private partnership commonly referred to as a PPP, 3P, or P3, is a long-term collaboration between two or more public and private sectors. Generally, the government collaborates with private enterprises to finish projects under the Public-Private Partnership model. Currently, this approach is used to construct many of the country’s roadways. Funds are secured for the construction of any public service or infrastructure using this method. In this way, the government and private institutions work together to attain a predetermined aim.
PPP refers to any long-term management contract that involves finance, planning, construction, operation, maintenance, and disinvestment. PPPs are beneficial for major projects that need highly trained labor as well as considerable financial investments. They’re also helpful in nations where the government is legally required to have public infrastructure.
The benefits of entering into Public-private partnership are:
1. Facilitate Partnership: The government has exclusive discretion in selecting the partner to whom the contract may be awarded. The government may pick a partner using any of the following methods: competitive bidding or competitive negotiation with appropriate organizations, followed by a selection of the most suitable.
2. Management for a Specified Time: PPPs are appropriate for high-priority projects, such as those in the infrastructure sector. PPP is employed in public-benefit projects like the construction of the Delhi metro and bridges, among others.
3. Revenue Sharing: PPP revenue is split in an agreed-upon ratio between the government and the private partner. The key issue with PPP projects is that private investors earn a better rate of return than government bondholders, despite the fact that the public sector bears the majority of the risk.
4. Risk Sharing: Risk allocation in PPPs is simple in theory. Risks must be assigned to the party best able to handle them (at the lowest cost), but difficult in practice. Generic applications of this principle have resulted in more or less uniform notions about how public and private sectors should share risks.
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