IIIE SECTION A ECONOMICS NOTES

1. Public and Private Sector inPublic and Private Sector in
IndiaIndia
SUNEEL GUPTASUNEEL GUPTA
ASSOCIATE PROFESSORASSOCIATE PROFESSOR
GHS-IMR,KANPURGHS-IMR,KANPUR

2. PUBLIC SECTOR
A public enterprise is an organization
which is
i) Owned by public authorities including
central state or local authorities to an
extent of 50% or more
ii)It is established for achievement of a
defined set of public purpose ,which
may be multidimensional

3. Objective
1. To help in rapid growth and
industrialization and create necessary
infrastructure for economic development.
2. Promote redistribution of income & wealth
3.Create employment opportunities
4.Promote regional balance development
5. Promote import substitution save and earn
foreign exchange for country.
6. Basic Infrastructure (STC, Railways, SAIL)

4. Organization of Public Sector
•Ministry ( Railway,Finance etc)
•Departmental Undertaking (Defence,Post &
Telegraph,Defence production unit)
•Statutory Corporation( LIC, AIR India,
IFC,RBI,ONGC,NTC etc..)
•Central Board (Bhakra Nangal, Hira Kund
,Nagarjun Sagar dam)
•Government Companies ( Ashok Hotels, ITI, HMT
Hindustan shipyard etc)

5. Pricing Practice
Administrative Price : Price fixed by Government
No profit –No loss Price ( DVC, Hindustan
antibiotics, Hindustan Insecticides)
Cost Plus Price – ITI, HAL, Bharat electronic
Competitive Price
Follow the leader
Subsidized Prices
Discriminatory Prices

6. Private SectorPrivate Sector
 Privatization: Transfer of ownership andPrivatization: Transfer of ownership and
control of an existing public sectorcontrol of an existing public sector
enterprise ,activity or service to the privateenterprise ,activity or service to the private
sector. Privatization may be full or partial.sector. Privatization may be full or partial.
It may be selective ie. Some function areIt may be selective ie. Some function are
transformed to the private sector, whichtransformed to the private sector, which
other are retained in public sector.other are retained in public sector.
The entry of new private sector could introduceThe entry of new private sector could introduce
competition where PSU’s enjoy monopoly The existingcompetition where PSU’s enjoy monopoly The existing
PSU’s will be forced to go commercial and respond toPSU’s will be forced to go commercial and respond to
the market disciplinethe market discipline..

7. The Privatization movement
The move towards privatization has gained
momentum since 70’s. The following are
usually mentioned reasons
1 The emergence of conservative government
in principal industrial countries
2 The emergence of multinational entities
3 Technological changes

8. 4 Emergence of local capital market and
entrepreneurship
5 Dissatisfaction with performance of public
sector
( 1960’s &1970’s saw emergence of literature
pointing out the inefficiency of Import
substitution policies and gave rise to question
that why government Should intervene in the
market place when it does not have any
information about market players)

9. Reason for Indian Privatization
1. Crippling Budget deficit
2. Spectacular growth by economies of
Korea, Taiwan, Malaysia in private
sector
3. Galloping cost of government
intervention I trade and industry &
procedural difficulty
4. Collapse of USSR& communist
government in eastern Europe

10. 5. Changes in China
6. Emergence of professional
management
7. IMF & World Bank extended arm
to capitalism
8.Gulf crisis
9.Lack of demand in economy
10.Integration of world trade
11. Developed local capital market
and Financing Institution

11. Recent Reasons
•To STENGTHEN Competition
•To improve public finance
•To fund Infrastructure Growth
•Accountability of share holders
•To reduce unnecessary interference
•More disciplined Labour force

12. The main reason for increased efficiency gain
as a result of privatization are attributed to
(i)Less political interference in decision making
(i)Staff remuneration is more closely linked to
productivity and profitability
(ii)Firm are exposed to financial market discipline
as opposed to government support
(iii)Firm’s cost reducing effort are higher under
competitive private ownership

13. Key obstacle to privatization
(i)Lack of strong and high level political
commitment to the privatization program
(ii)Inappropriate design of privatization
strategy( eg. In term of scope, technique
sector and institutional capability of the
government)
(iii) Unclear and weak institutional frame work-
decentralized or centralized.
( ministry and provincial level)

14. iv) Lack of proper preparation of
enterprise for privatization or
divestiture eg. Accounting and auditing
, treatment of losses, social and
environmental safety net
(v) Insufficient transparency and
flexibility in term of the method of
privatization, balancing, ownership,
and control ( corporate governance)

15. (vi) Vested interest of manager,
employees and customer
(vii) Lack of appropriate legal frame
work (eg. Property right, foreign
ownershipbankruptcy law )
(viii) Underdeveloped capital
markets

16. WAYS OF PRIVATIZATIONWAYS OF PRIVATIZATION
 DISINVESTMENTDISINVESTMENT
 CONTRACTINGCONTRACTING
 FRANCHISINGFRANCHISING
 PREMITING PRIVATE SECTOR ENTER INTO PSUPREMITING PRIVATE SECTOR ENTER INTO PSU
RESERVED AREARESERVED AREA
 LIQUIDATIONLIQUIDATION
 LEASINGLEASING

17. DisinvestmentDisinvestment
Long Term strategy on disinvestmentLong Term strategy on disinvestment
1. Strengthen profitable PSU to promote greater1. Strengthen profitable PSU to promote greater
competitiveness to enable payment of higher dividends tocompetitiveness to enable payment of higher dividends to
the government to enhance Valuethe government to enhance Value
2. Financial restructure and revive loss making PSU to invite2. Financial restructure and revive loss making PSU to invite
private capital for long term turnaround.private capital for long term turnaround.
3. Enhance government receipt by disinvestment in3. Enhance government receipt by disinvestment in
profitable PSUsprofitable PSUs
Initially 40 out of the 245 PSUs were referred to theInitially 40 out of the 245 PSUs were referred to the
disinvestment committeedisinvestment committee

18. The said industries were grouped into
I. Strategic Group.
Arms and ammunitions and defense equipment
Atomic energy
Rialway transport.
II Core Group
ONGC,OIL,BRPL,SAIL,GAIL,AI,CONOR,PHL,NLC,SECFL,
WCFL,NALCO,IBP,NTPC,PGCL,NHPC,KIOCL.
III Non core
SCI,ITDC,IPCL,FACT,NFL,HCIL,HTI,ITI,MFIL,HLL,HEML,
HZL,MOIL

19. YEARYEAR TARGETTARGET
RECEIPTRECEIPT
ACTUAL RECEIPTACTUAL RECEIPT
1991-921991-92 25002500 30833083
1992-931992-93 25002500 19131913
1993-941993-94 35003500 NILNIL
1994-951994-95 40004000 48434843
95-9695-96 70007000 362362
96-9796-97 50005000 380380
97-9897-98 48004800 902902
98-9998-99 50005000 53715371
99-0099-00 10’00010’000 18291829
00-0100-01 10’00010’000 18701870
01-0201-02 12’00012’000 56325632
02-0302-03 12’00012’000 33423342
TOTALTOTAL 78’30078’300 29’48229’482

20. DISINVESTMENT PROCEDURE
GOI CARRIES DISINVESMENT IN ACCORDANCE
WITH PRESCRIBED PROCEDURE TO ENSURE
TRANSPERENCY
PROPOSAL OF DISINVESTMENT IS BASED (OF
PSU) RECOMMENDATION OF DISIN. COMMOSSION
CONSIDERATION OF CCD (CABINET COMMTTE.ON
DISINV.) CCD CLEAR THE PROPOSAL &
SELECTION OF ADVISOR IS DONE THROUGH
COMPETITIVE BIDDING

21. ADVISOR ASSIST IN ADVERTISEMENT IN NEWSPAPER
INVITING EOI
ADVISOR PREPARE INFORMATION MEMORANDOM WITH
PSU &SHORTLIST THE BIDDER ( GOI+ Rep of PSU+ BIDDER)
THE FINAL AGREEMENT ARE THEN VETTED BY MIN. OF LAW
& APPROVED BY GOVT.
THE BIDS ARE EXAMINED & ANALYZED BY IMG & ITS
RECOMMENDATION ARE PLACED BEFORE CCD FOR FINAL
APPROVAL
AFTER ALL TRANSACTION IS COMPLETE CAG EVALUATES
FOR PLACING IN THE PARLIAMENT & RELESEING TO
PUBLIC