ECONOMICS

Project Report
On
PROBLEMS OF PRIVATE SECTOR IN INDIA

SUBMITTED TO ARMY INSTITUTE OF LAW IN PARTIAL REQUIREMENT OF BA.LLB. DEGREE

SUBMITTED TO: MS. Gaganpreet Kaushal

SUBMITTED BY: Mayank Digari B.A. LL.B (3rd SEM) ROLL.NO-246

ACKNOWLEDGEMENT

I would like to thank Ms Gaganpreet Kaushal for providing me this topic and her valuable guidance without which it would have been difficult to complete the project. I would also like to thank my friends and my seniors who helped me in completing this project.

Mayank Digari ROLL NO-246

TABLE OF CONTENTS
Introduction Private Sector Importance of private sector in Indian Economy Problems faced by private sector in India Delay in approval by bureaucrats. Corruption in Private Sector Job security of individual Problem of finance and credit in small sector Conclusion Bibliography

INTRODUCTION
The private sector is where much more focus is going to have to be meet overarching challenge of the poverty reduction and human development. Growth, jobs and opportunity belong there not in the gift of government. Mark Malloch Brown, administrator, UNDP1

In , the Private Sector is that part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state. By contrast, enterprises that are part of the state are part of the public sector; private, non-profit organizations are regarded as part of the voluntary sector. UNDP recognizes that achieving the millennium development goals depends on vibrant economic growth, driven by private enterprise that create jobs and provide goods and services for the poor, as well as generate tax revenues to finance essential social and economic infrastructure. The private sector from large multi-national companies to small enterprises and cooperatives servicing local markets also has an essential role to play in achieving broader goals in areas such as energy and environmental services delivery, crisis prevention, gender quality and democratic governance.2

1 2

United Nations Development Programme. Retrieved from < http://www.undp.org/poverty/focus_private_sector.shtml> on 02.09.2001 at 11:10AM

PRIVATE SECTOR
The European Commission defines the private sector as: The sphere of economic activity where financial capital, physical is in the main privately owned and where business decisions are made as a result of private initiative in the context of markets which are in the main competitive3 Private sector is broadly classified into 3 categories Large scale industrial units Small scale industrial units Unorganized production units

PRIVATE SECTOR: PERFORMANCES AND PROBLEMS IN INDIA

Over the years in the past, in particular since the independence, the private sector in industries has grown rapidly. As a result, this sector has become a quite big force in Indian economy. The private sector has since the departure of British Government in 1947, grown much both in respect of the areas covered by it and nature of activities falling in its scope. Private sector has played a significant role in the process of industrialization in India. It refers to all those individual units or corporations engaged in production which are owned by private individuals and managed by them for profit motive. It is responsible for the allocation of most of the resources of economy. A variety of legal structures exist for private sector business organizations, depending on the jurisdiction in which they have their legal domicile. Individuals can conduct business without necessarily being part of any organization. The main types of businesses in the private sector are:
3

Sole trader Partnership, either limited or unlimited liability Private Limited Company or LTD-limited liability, with private shares Public Limited Company shares are open to the public. Two examples are:

Retrieved from <http://www.developmentportal.eu/wcm/funding/european-aid-guide-on-thematicinstruments/private-sector-development/key-definitions/private-sector-definition-according-to-the-eu.html> on 08.09.2011 at 4.00PM

Franchise business owner pays a corporation to use their name, receives spec for the business Workers cooperative all workers have equal pay, and make joint business decisions

Importance of private sector in Indian Economy

The Importance of private sector in Indian economy over the last 15 years has been tremendous. The opening up of Indian economy has led to free inflow of foreign direct investment (FDI) along with modern cutting edge technology, which increased the importance of private sector in Indian economy considerably Previously, the Indian market were ruled by the government enterprises but the scene in Indian market changed as soon as the markets were opened for investments. This saw the rise of the Indian private sector companies, which prioritized customer's need and speedy service. This further fueled competition amongst same industry players and even in government organizations. The post 1990 era witnessed total investment in favor of Indian private sector. The investment quantum grew from 56% in the first half of 1990 to 71 % in the second half of 1990. This trend of investment continued for over a considerable period of time. These investments were especially made in sector like financial services, transport and social services.

The late 1990s and the period thereafter witnessed investments in sector like manufacturing, infrastructure, agriculture products and most importantly in Information technology and telecommunication. The present trend shows a marked increase in investment in areas covering pharmaceutical, biotechnology, semiconductor, contract research and product research and development. The importance of private sector in Indian economy has been very commendable in generating employment and thus eliminating poverty. Further, it also effected the following

Increased quality of life Increased access to essential items Increased production opportunities Lowered prices of essential items Increased value of human capital Improved social life of the middle class Indian

Decreased the percentage of people living below the poverty line in India Changed the age old perception of poor agriculture based country to a rising manufacturing based country

Effected increased research and development activity and spending Effected better higher education facilities especially in technical fields Ensured fair competition amongst market players Dissolved the concept of monopoly and thus neutralized market manipulation practices

PROBLEMS FACED BY PRIVATE SECTOR

1:-Delay in approvals by the bureaucrats in getting permits and necessary government approvals:Inordinate delay in approvals, bureaucratic stonewalling and a policy paralysis the deadly cocktail is dampening the spirit for many private sectors in their quest to operate in the already difficult domestic environment. The shadow of the government is also increasingly looming large over transactions which in the past had seen limited regulatory interference. For example: The 10-month delay over the approval of the Cairn-Vedanta deal is just one example of this. Mergers and acquisition in the telecom sector is becoming tougher though it is fraught with stringent conditions stipulated to avoid competition, say lawyers and sector experts. The Delhi High Court's order against Idea on six overlapping licenses of Spice has put Idea on the back foot. The court had earlier approved the merger between the two telcos. The 52-page judgment says Idea suppressed information from the courts to get the approval. This setback will also affect the industry, which is on the verge of getting a new telecom policy with mergers and acquisition guidelines 2:- Corruption in Private Sector:There is wide scope for corruption between business and government in an environment where rules and regulations are ambiguous, and where oversight is weak. It is a natural tendency for businesses to seek advantage over their competitors, and it is not surprising that public officials would take advantage of weak institutional frameworks to peddle their influence for personal gain. Again, the many are more incorruptible than the few; they are like the greater quantity of water which is less easily corrupted than a little. The individual is liable to be overcome by anger or by

some other passion, and then his judgment is necessarily perverted; but it is hardly to be supposed that a great number of persons would all get into a passion and go wrong at the same moment.4 Weak institutions, an uncertain rule of law, insecure property rights and the like encourage the kind of short term focus on day-to-day business survival that makes corruption appear more beneficial than it in fact is. imagine for a moment two people each running a different business. The first is a small shop owner who makes and sells pastries, cakes and other delectable treats to many satisfied customers, from local townsfolk to the many tourists that visit from spring to fall each year. Hes been in business for five pretty good years, but hes starting to worry about the future. Hes noticed the health inspector is making more visits, unannounced, and asking the usual questions that lead up to the inevitable, subtle, and unspoken cash transaction, followed by a smile and topped off with a gratis espresso and slice of his renowned chocolate torte. Other officials were on the move too for some reason. The tax inspector had already made twice as many visits this year than last. And, just the other day the director from the local business licensing office unexpectedly stopped by. After small talk, complimentary cakes and ice cream, he mentioned that, oh by the way, our shop-owner-friend should stop by the licensing office soon to discuss some irregularities in the licensing papers hed filed this year. This of course could mean only one thing more: yet another payment to keep his business legal. His unofficial payments to government officials this year would certainly do. The correlation between the rule of law and the marketplace for corruption is an inverse one. A strong rule of law would be characterized by:
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A rational set of laws governing the operations of private business, the protection of property rights, and the enforcement of contracts. Anti-monopoly policies and procedures to enforce them. A reasonable rate of taxation on private business. An efficient system of patents and protection for intellectual property. An efficient and stable set of regulations governing licensing, inspections and audits on business. An efficient judiciary (and ADR mechanisms) for sorting out contract disputes. Administrative procedures that guarantee public access to government decision makers and to their deliberations that shape policies and laws. Laws and administrative procedures that protect whistle blowers from reprisal.
Aristotles Politics, Book III Part X, 350 B.C

Laws and enforcement mechanisms that ensure accountability of private firms to their shareholders and capital markets. Disclosure laws that compel those in public office to disclose private financial interests.

In addition to public laws and governmental institutions, the private sector can also play a role in supporting the rule of law by promoting, for example: efficient capital market systems and institutions; practice of good corporate governance and business ethics (here is a role for associations for example), and; quality standards for goods and services in the marketplace. There is also an obvious role here for education and training institutions that target entrepreneurs and business managers. The economic reforms of 1991 reduced the red tape, bureaucracy and the Licence Raj that were largely blamed for the institutionalized corruption and inefficiency. Yet, a 2005 study by Transparency International (TI)5 found that more than half of those surveyed had firsthand experience of paying bribe or peddling influence to get a job done in a public office.

3:- Job security of individual:In the private sector however, job security is more based on performance. These are mostly listed or privately owned companies with one purpose in mind, namely to show a profit at the end of the financial year. Dividends need to be paid out to shareholders, who in most cases started the companies from scratch with a lot of blood sweat and tears. They have no tolerance for dead wood and want their companies to run like a well oiled machine. If this means streamlining the company and getting rid of the drift wood they will do so without hesitation. Private companies also prefer employees that fit in with the company's culture, vision and mission and will without hesitation get rid of employees who don't make the grade. If employees want a pay increase they have to work for it and salary increases are based on the individuals performance as well as the profit margin the company showed for that financial year.

"2009 Corruption Perceptions Index reinforces link between poverty and corruption".

Even if you perform well, the changes are that if the company goes through a slump and budget cuts have to be made even top performers are at risk. Obtaining job security in this sector entails hard work, good networking and effective communication. 4:-Problem of finance and credit for small scale sector:It is spring in the Capital and there is a lot of cheer all round. The business community is generally happy with life as profits are good and order books are bulging. Their perennial headache, namely infrastructure, appears to be improving. There is, of course, the Inspector Raj and corruption but they are intelligent enough to know that this wont disappear overnight. Amidst all this, Small Scale Industries are not sharing this optimism and are looking around for success. To say that small scale units are an important part of the manufacturing sector is a very big understatement. Just consider some of the facts 95 per cent of all industrial units in India are in the small scale sector. And 49 per cent of manufacturing output in the country is from this sector. Eighty per cent of the employment in manufacturing is in the small scale. Thirty-four per cent of the countrys exports are from these units. Clearly, after agriculture, this is the single biggest group in the country. There are many reasons why small scale units should be supported, but just two would suffice. First, these units are employment intensive. When we reform and modernize the economy, invariably the large sector replaces men with machines. This is inevitable since they have to reach global size and compete on costs. So there is the strange phenomenon of jobless growth. This is where small scale comes in. It is able to generate employment in a much bigger way than large manufacturing. Further, it achieves another big objective of economic policy, namely dispersal of economic prosperity. If the economy grows only with a few Reliances growing, how does it help the people? When small scale grows, it automatically fulfills the tasks of growth with social justice. The development of this sector is the only way to make trickle down more effective. Agriculture already employs 65 per cent of the work force, though it gives us only 20 per cent of the GDP.

However much we invest into agriculture and create jobs there, it will only enable us to absorb the rural unemployed but will not take care of unemployment in the unorganized sector. Another big strength that small scale has and which large units often lack is entrepreneurship. Some of the best minds in the country educated in the IITs have left top jobs to start small scale units. This is in sharp contrast to the captains of large industry who are often occupying the corner seat purely because they happened to have the right fathers. And when one considers that entrepreneurship is the need of the hour to improve productivity, we realize the full potential of small scale units.

The private sector had not been given a significant role in the economic development. The government has entrusted the basic and capital goods industries to the public sector and made it the prime mover of economic development. As a consequence, the private sector has to be satisfied with the secondary role assigned to it.

The most important problem was delays due to regulatory structure. There have been too many regulations imposed by the government on the private sector which often resulted in procedural delays. It is estimated that on an average it takes seven years from the conceptual stage to the production stage for any significant investment project to materialize in India.

Unrealistic controls influenced by contradictory motives hampered private sector initiative and flexibility. For example, the price controls imposed by the government on many of the goods do not give proper incentive for additional production. Capacity restrictions (with a view to prevent concentration of wealth and economic power) further aggravated the problem. Actually, the government should encourage competition among the rival firms and the resulting increase in production would automatically bring down prices. In complete contrast to this, price controls

under conditions of shortage tend to perpetuate shortages, rise of black markets, and possible shifting of investment from controlled items to the production of non-controlled items.

Reservation for small scale sector and special initiatives to units in that sector made the large scale sector to stand at a disadvantage. Further the complementarity of the two sectors in the process of growth has been lost.

The decentralized sector has been facing the problem of inadequate credit facilities despite the existence of a network of financial institutions. With the economic reforms initiated in 1991, the private sector's prospects appear to be very bright

CONCLUSION
The private sector of Indian economy is the past few years have delineated significant development in terms of investment and in terms of its share in the gross domestic product. The key areas in private sector of Indian economy that have surpassed the public sector are transport, financial services etc. Indian government has considered plans to take concrete steps to bring affect poverty alleviation through the creation of more job opportunities in the private sector of Indian economy, increase in the number of financial institutions in the private sector, to provide loans for purchase of houses, equipments, education, and for infrastructural development also. The private sector of Indian economy is recently showing its inclination to serve the society through women empowerment programs, aiding the people affected by natural calamities, extending help to the street children and so on. The government of India is being assisted by a number of agencies to identify the areas that are blocking the entry of the private sector of Indian economy in the arena of infrastructural development, like regulatory policies, legal procedures etc. The most interesting fact about the private sector of India economy is that though the overall pace of its development is comparatively slower than the public sector, still the investment of private sector in the recent past, i.e. in the first quarter of 1990 registered approximately 56 % which rose to nearly 71 % in the next quarter, accounting for an increase of 15 %. Certain steps taken by the Indian government are acting as the stepping stone of the private sector continued journey to success, include industrial delicensing, devaluation that was implemented previously.

The private sector of Indian economy is also adversely affected by the huge number of permits and enormous time required for the processing of documents to initiate a firm, however the central government has decided to abolish MRTP Act and incorporate a Competition Commission of India to bring the public sector and the private sector at the same platform.

The participation of the private sector of Indian economy is desired by the government of India for infrastructural development including specific sectors like power, development of highways and so on. As the contribution of public sector in these sectors have been arrested due to the shift of the attention of the Indian government to issues like population increase, industrial growth.

The main reasons behind the low contribution of the private sector in infrastructural development activities are that:

The small and medium scale companies in the private sector of Indian economy suffer from lack of finances to welcome the idea of extending their business to other states or diversify their product range.

The private sector of Indian economy also suffers from the absence of appropriate regulatory structure, to guide the private sector and this speaks for its unorganized framework.

The unorganized framework of the private sector is interrupting the proper management of this sector resulting in the slowdown of its development.

BIBLIOGRAPHY
Retrieved from > on 11.09.2011 at 1400hrs Indian Economy by A.N Agarwal Retrieved from <http://kautilya.chhabra-inc.com/node/30> on 12.09.2011 at 06.00PM Problems of Indias development by Dutt, R.C. Retrieved from <http://www.adb.org/Documents/csps/ind/2003 /appendix3_private _sector _assessment.pdf> on 12.09.2011 at 08.00PM Retrieved from <http://www.undp.org/poverty/focus_private_sector.shtml> on 13.09.2011 at 3.00 PM Private Investment in India by Bagchi, Amiya Kumar