P3

Role of the Private Sector and Inclusive Growth
in an Emerging Economy: Two Sides of the Story
in the Indian Scenario

MANOJ KUMAR AGARWAL

University of Lucknow, India

E-mail: mk_agarwal@hotmail.com; mkagarwal_lu@rediffmail.com

International Conference on
“The Role of the Private Sector In Development : Assessment and Prospects ”
(23-25 March 2009, Beirut - Lebanon)

"Role of the Private Sector and Inclusive Growth
in an Emerging Economy: Two Sides of the
Story in the Indian Scenario"

Manoj Kumar Agarwal

“The US is the only role model is an idea that does not hold any more. We’re
looking at India as a successful model. It has mastered the process of change.
When India decided to change in 1991, they knew they had to balance
economic development with social progress.” Samir Qasim Fakhro, Director
of Arab Open University, Bahrain, Times of India, New Delhi, 7th November

I. Introduction:
In the last two decades there have been remarkable changes in the world economy as many
economies that were emphasizing upon the public sector in the economic domain of their
respective economies found a new manta of economic progression by emphasizing upon
greatly or switching over to the privatization1. This shift from public sector to the private
sector has been slow or fast; partial or substantial; fruitful or painful2. 3. We would better like
to concentrate on economic reforms and implications in India for the private sector. While
taking clue from China, Feltenstein and Nsouli (2003) argue that

...the implications of alternative paths of economic reform in the context of an
economy with a large public sector that is being transformed to become more
market oriented. Two alternative paths to reform can be envisaged. First, the
country can move gradually by selectively introducing reforms and spacing them
over time. Second, the country can pursue a "big-bang" approach, under which all
reforms are immediately and simultaneously introduced. (p. 458)

This implies that the privatization is essential. The choice is only between the gradualism and
the big-bang. They conclude that

1 According to Sun and Tong (2002):
Since the Thatcher government in the United Kingdom implemented a privatization program
during the late 1970s, privatization has developed into a global phenomenon. Countries in different
stages of development and of different ideologies and sizes have all adopted, in one form or
another, privatization strategies as an important element of their economic policies. It has become
accepted wisdom that privatized firms are better than state-owned enterprises (SOEs). As D'Souza
and Megginson (1999) put it, results of academic studies collectively speak with a consistent
voice: privatization induces output, efficiency, and profitability improvements. (p.79)

2 Dharwadkar et al (2000) argue that ‘Privatization will continue to be an important part of global economic

restructuring’.

3 Brada (1996) has put forward during the discussion of privatization while accomplishing transition from public

sector to private sector that “Privatization, it is argued, will unleash dynamic small businesses, act as a lure for
foreign direct investment and speed the painful process of restructuring industry” (p.68).

2

...in looking at complete policy packages, the big-bang approach is better from a
welfare point of view: both consumers are better off under a package where
adjustment and reform policies reinforce each other. Although under the big-bang
approach the drop in real GDP is initially greater than under the gradual approach,
real GDP rises to higher levels in subsequent periods. (p.476)

This can be easily traced even in the Indian scenario that it has been pursuing a policy of
gradualism instead of the big-bang strategy4. This also depends upon the nature of political
conditions5 because in a vibrant democracy, generally any type of big-bang approach becomes
untenable6. The point is well articulated by the prime Minister of India, Dr Manmohan Singh
in foreword to the Eleventh Plan of India:

Planning in a market economy which is becoming increasingly integrated with the
world is bound to be different from what it used to be in earlier years. Much of
what used to be done by governments, including especially the establishment of
production units producing manufactured goods and commercial services, is now
being done by the private sector. India is blessed in having a long tradition of
private entrepreneurship and the private sector has responded magnificently to the
new opportunities opened up by economic reforms. However, this does not mean
that the role of the government must shrink. On the contrary, the government must
play a much larger role in some areas even while shifting out of others. (Vol. I,
p.iv)

However, it is simultaneously made clear that the economy has now to derive impulses
mainly from the private sector7 but there the role of the public sector would continue to be
important though its size is shrinking. Deputy Chairman of the Planning Commission of India
Motek Singh Ahluwalia writes about the economic strategy in the preface of the Eleventh
Plan that:

As in most market economies, the dominant impulse for growth will come from
the private sector. India is fortunate in having a strong private sector capability
ranging from agriculture, which is entirely dependent on private farmers, most of
whom have modest land holdings, through small and medium entrepreneurs in
industry and services to larger domestic corporate entities, many of which benefit
from FDI to varying degrees. The Eleventh Plan must ensure a policy
environment that is supportive of this vibrant and globalized private sector which

4 Ahluwalia (2002) says that “The impact of ten years of gradualist economic reforms in India on the policy

environment presents a mixed picture”. (p.86)
5 Biais and Perotti (2002) have shown that “the large size of many privatization programs suggests they have

significant economic and political consequences” (p. 240) and they have concluded that “a political economy
theory of the design of privatization sales to shift the political preferences of the median class to en-sure
reelection. We show that under-pricing and rationing, which implicitly tar-gets certain income classes, may be
needed to conduct successfully this Machiavellian strategy” (p.255).
6
Durant and Legge (2002) infer from a study using citizen attitudes toward privatization culled from the 1995
French National Election Study that “Whatever the source of citizens' calculus of consent for market-based
administrative reforms such as privatization of SOEs, these findings in France (and our earlier research in Great
Britain) suggest the normative, political, and strategic utility of practitioners tapping the unique perspectives of
their citizens in terms of the six factors identified in this study”. (p.319)
7
It is made clear by Rafael La Porta and Florencio López-de-Silanes (1999) that privatization has helped in
registering higher profitability in Mexico.

3

has an important contribution to make in India’s future development. (Vol. I,
p.viii).

Even the western countries where privatization has already reached a zenith and it has been
active in virtually all the sectors and has consolidated its position long ago, there is still a
feeling that limited activism of the government at crucial juncture may further help the private
sector to continue to discharge its responsibilities in the economy as per expectation8.
According to Blanchard (2004)

After three years of near stagnation, the mood in Europe is definitely gloomy. The
two economics books on the bestseller's list in France in 2003 were called La
France qui tombe (The fall of France) (Baverez, 2003) and Le desarroi Francais
(The French disarray) (Duhamel, 2003). Both books offer the vision of a France
falling behind, and offer little hope for the future. Governments are trying to put
on a good face, but their boasts, such as the goal adopted at the European Union
conference in Lisbon in March 2000 to make the EU "the world's most dynamic
and competitive economy within ten years" are seen as largely empty and
pathetic. (p.3)

Blanchard cautions that even the European countries have to continue the reforms and keep
on emphasizing the efficient public sector along with the fiscal discipline etc.:

Are there reasons to worry? There always are. The tensions coming from the
pressure on labor market institutions may lead to political instability and policy
reversals. As the rents of firms decrease, attempts by workers to extract them
instead from the state may lead to fiscal deficits and a fiscal crisis. There are other
challenges as well. I shall mention four, realizing that each one would deserve a
much longer treatment.

The first challenge is the current business cycle slump affecting Europe: Even if
the medium-run path looks good, the European economy has to return to that path.
The second challenge is the state of the public sector. As I have argued, pressure
for reform is much weaker there, and the public sector remains inefficient. The
third challenge is that the quality of higher education is mediocre in many
European countries. Even if it is difficult to pinpoint the effect of higher education
on growth, it is clearly likely to be a handicap for Europe in the future. (pp. 23-24)

Based upon the experience of the Latin American economies, Biglaiser and Brown (2003)
have derived from multivariate analysis that

Successful privatization requires changes that run the gamut from establishing
effective and stable regulatory institutions to providing an efficient and well-
functioning infrastructure that guarantees future competitiveness for the newly
privatized company. Consequently, treating privatization as just another

8 Foote et al (2004) have observed in the context of the reconstruction of Iraq that “In the long run, economic
growth in Iraq will depend on fostering private-sector growth outside the oil sector. This, in turn, will hinge on
whether the future political system maintains the pro-market outlook of Coalition policy” (p.68). However, their
inference derives from the fact that Iraq is largely deriving its growth stimulus currently from the public
investments and help by America in a significant manner.

4

component of structural adjustment can lead to misleading results and mistaken
conclusions. (p.86)

In the following sections, my efforts would be to bring out the positive impacts of the
privatization in the Indian economy while elaborating upon the contours of the privatization
in this emerging Asian economy where the impact of the current global crisis has not been as
serious as in the major economies around the world as there is still hope that it would be
growing by not less than 7 percent.

II. Economic Growth and Privatization in India:
Indian economy is a big and rapidly growing economy – both in terms of the share in global
population as well as in terms of its production structure and size. India resides more than one
billion population now and it makes one-sixth of the world population. As far economic
progress is concerned, now India ranks among the few fastest growing economies in world.
We can first look at the pattern of economic growth in India since 1951. The pattern of
economic growth in India has been quite curious and its understanding will help us in taking
the story forward. Growth pattern of the Indian economy has been since 1950s when India
started taking its own independent economic decisions after getting independence from the
British rule in 1947. We can find that the growth pattern of the Indian economy has not been
very smooth. It has been highly uneven as can be seen from Chart-1that there is clearly a
divide between the long period of the economic growth in India where 1980-81 seems to have
become a true turning point as before that there has been more uneven and slow economic
performance. However, since 1980-81 there has been upward trend with better performance
quantitatively as well as qualitatively. It can be seen for national income as well as for the per
capita income.

5

It is also to be noted that the per capita income in India initially doubled in 43 years, that is,
during 1950-51 t0 1993-94 (from Rs 6122 to Rs 12160 at 1999-2000 prices) whereas it
doubled now in 16 years from Rs 11357 in 1991-92 (when economic reforms were initiated in
big way) to Rs 22483 in 2006-07. The pattern is more obvious when we look at the plan-wise
journey of economic growth (Chart-2). It can be seen that India was not mature in terms of
economic performance till it entered the 1980s as the growth rates remained subdued and
highly unstable. However again since the Sixth Five Year Plan (1980-85) there has been
remarkable improvement as the growth rates showed accelerated performance and India has
been able to maintain consistently higher and higher growth rates and in the ongoing Eleventh
Plan a target of 9.0 percent has been put forth. Before the Sixth Plan, plan growth targets
could not be achieved whereas the targets have been either largely attained have been
surpassed giving a sense of optimism in the Indian economy. Otherwise also, the annual
growth rate during the initial three decades (1950-81) was low at 3.3 percent; it rose to 5.1
percent in the 1980s and during 1991-2007 it rose further to 6.6 percent. Thus, growth rate in
the last period has been exactly double of what it was in the initial three decades.

It is in this backdrop that understanding of the major factors becomes inevitable, particularly
role of the private sector. Before that, some macroeconomic features need to be understood.
There has been normal pattern of sectoral shifts in the Indian economy as well. Chart-3
highlights that the Indian economy is no longer an agrarian economy if one looks at the
sectoral composition of its GDP. The agriculture and allied activities was the largest sector in
the early 1959s followed by the services and the industry had the smallest contribution of
below 15 percent in the 1950s. However, due to economic growth the structural change got
inevitable and since the mid 1970s the services sector moved ahead of the predominant
agricultural sector. Thereafter, the gap has been widening and the process got speeded up
since the 1990s.

6

It is for this reason that the scissor has been formed between the agriculture and the services
whose front blades are getting more and more distanced from each other reflecting rapid
expansion of the services sector and its role in economic growth as it is now contributing
more than 60 percent of the GDP. Now, the agriculture has become the smallest sector with
below 20 percent contribution whereas the industrial sector has also become larger than the
latter despite almost stagnant share of the industrial sector with around 20 percent share since
last more than two decades. Moreover the agriculture is now making scissor with the
industrial sector since the last few years. All these suggest that the service sector is growing
at the highest pace followed by the industrial sector which has a tendency to grow at a pace
similar to GDP while the agriculture is growing at quite slow pace9. It is remarkable that
despite such changes the population structure between agriculture and non-agriculture
remains almost unchanged as the latter has been sheltering around two-third of the total
population since last many decades. This suggests that the population shifting is not taking
place despite accelerated pace of economic development and increasing population size.

According to the Department of Economics & Statistics, Tata Services Limited there has been
improvement in the total factor productivity in the Indian manufacturing sector during the
1990s over the 1980s. As Chart-4 suggests that the total factor productivity index has
increased from 100.94 in the 1980s to 111.84 in the 1990s. The index has increased at much
higher rate for the labour productivity than for the capital productivity. This is indicative that
there has been capital deepening process in the economy. This is corroborated to some extent
from Chart-5 wherein it is derived that the pace of depreciation has been increasing in the

9 According to Rakesh Mohan (2008):
A closer review of the performance of the Indian economy, however, suggests a continuing
increase in real GDP growth over each decade since Independence, interspersed with an
interregnum during the 1970s (Table 1). Interestingly, growth of manufacturing production, in
terms of decadal averages, was roughly constant at around 5.6-5.9 per cent in the first five decades
after Independence, except for the 1970s. There are two other features of our growth history that
are notable. First, agricultural growth has been subject to large variation over the decades. The
1970s interregnum is particularly marked by the severe deceleration in agricultural growth,
followed by a marked recovery in the 1980s, and a slowdown thereafter. Second, until the 1990s,
little note had been taken of growth in the services sector. A glance at the growth record suggests
that it is the continuing and consistent acceleration in growth in services over the decades, that had
earlier been ignored, that really accounts for the continuous acceleration in overall GDP growth,
once again, except for the 1970s interregnum.

7

Indian economy which is a growing and developing economy and the same has reached
almost 11 percent in the recent years. In the growing and developing economy like India, this
may imply that there has been replacement of the capital stock at much higher rate to
modernize the economy for maintaining high growth trend. It is well known that the Indian
economy has been one of the fastest growing economies in the world. It is further established
from Chart-5 that there has been positive relationship between the growth rate of GDP and
CFC. During the 1980s, there has been lower growth rate as compared to the period beyond
that and it is also found that the CFC has also been higher in the period beyond 1980s.

Besides, it can be found that the private sector is gradually stepping up its participation in new
areas like infrastructure ranging from the road construction, electricity generation and
distribution to the social sector like health, education and rural development. Anupam Rastogi
(2004) notes that “After more than a decade of liberalization, one can witness some private
sector investments in the provisioning of infrastructure services at varied levels. The sectors
such as telecom, roads and sea ports, oil and gas etc., which were opened to private sector
earlier, are very competitive and service providers are going out of their way to get business.
The consumers have shown increased sophistication over the years. They are price savvy and
demanding in other ways”. (p.50)

8

III. Emergence of the Private Sector in Indian Economy:

Indian economy has been mainly under colonial rule before 1947 and therefore generally
there was not much government participation in the direct business activities even if it would
have been profitable as the colonial rulers were interested in their native country’s welfare
and progress and therefore they were not much interested to invest in the Indian economy.
Therefore, before 1947 there was no national government and not much investment in the
economy by the government in any meaningful way. Alternatively, it might be inferred that
there was mainly the private sector that played the role whatever it could do in that situation
where market was not developed. However, since 1950-51 there have been conscious efforts
on the part of the Government of India, given its federal structure, to take the economy
forward with limited resources. Government started playing active role in the economy and
started investing in the economy in a big way.

9

Somehow it can be seen that the public sector has gained prominence in the Indian context as
the economy started making forward movement and the journey has been almost smooth since
1950s and this trend continued up to 1980s and even beyond as share of the public sector in
GDP was just 8.4 percent in 1960-61 that increased to 21 percent in 1980-81. The share
further went up in this decade and hovered around 25 percent towards the end. As it appears
from Chart-6 that now the public sector finds it difficult to maintain the level. Since the
1990s, there seems to be continuous pressure on this sector to get moderated see the
southward trend. But it is also creditable for this sector that despite such seemingly growing
pressure on this sector, it is able to withstand even in the era of economic reforms when there
is all round indications that the private sector is fast emerging on the economic horizon of the
nation. This issue would be dealt further later on to explain strength of the public sector when
the private sector has been expanding all around and it has the strength of 75 percent of GDP.
However, before we go further to elaborate upon the surging ahead of the private sector, we
can peep into the past to understand contours of changes with regard to the private sector in
the economy.

The pattern of policies and approaches towards the private sector has been summarized in
Box-A.

Box-A: Contours of Privatization in the Indian Economy since the 1950s

Nature of steps having bearings on
Year Impact on Privatization
privatization or the private sector
India attained Independence on 15th August It had mixed impacts on the
from the British rule that lasted for around two perceptions of the private
1947
centuries sector with greater hope for the
latter to get more scope
Industrial Policy Resolution of August 1948
advocated for the mixed economy pattern of
economic functioning by categorizing the entire Private sector had to content
1948 range of economic activities into four major with small range of economic
groups that left small room for the private activities
sector
India embarked upon the planned course of
economic development to catch up with the
development of the developed nations in an It set in process the coexistence
abridged time period. In 1951, the First Five of the mixed economy wherein
1951
Year Plan (1951-56) was launched and the leadership in decisive role
currently we are having the 11th Five Year Plan was to be played by the state
(2007-2012)
Industrial sector in the private
Industrial Development (and Regulation) Act sector could not take
1951 1951and it set the tone for licensing system for independent business decisions
the industries and they were to be regulated
by the state

India adopted socialistic pattern of development This went against the interests
that necessitated curbing the concentration of of the market economy where
1954
economic power in few hands the private sector would have
performed better

10

The Industrial Policy Resolution 1956 has set
the tone of not only the pattern of
industrialization but also the overall economic
strategy in India. Herein, the industries were This left the private sector with
classified into three categories and in Category limited space in the overall
1956 – A, eighteen major and significant industries industrial programmes of the
were reserved for the public sector while in B, country that needed to develop
there was provision for the joint venture itself almost from a scratch
between the public and the private sector and
activities in the Category –C were for the
private sector.
The private sector was kept
busy in handling the
Throughout the two decades, the government government in its own way to
was busy in making the licensing system more procure the license as a
1950s and and more foolproof and stringent. Two major gateway to success instead of
1960s reports (viz. The Hazari Committee Report and developing its enterprising skill
the Dutta Committee Report) in true business sense that
conforms to the established
market practices.
It showed that government
14 major private banks were nationalized to would be more interested in its
1969 mainstream the banking network and spread it own capacity building even if
to rural areas it required bringing the privates
units in the PSU fold
A landmark law, popularly known as the MRTP
(Monopoly and Restrictive Trade Practices) Act
1969 came into effect that restricted the It definitely constrained the
expansion of the private firms in terms of expansion of the private sector
1969
investments and geographical spread as the act despite these being gradually
required a firm to get prior permission if it more matured
wants to invest more than Rs 200 millions
The Government of India enacted FERA Many private sector firms took
(Foreign Exchange Regulation Act) 1973 to it as a constraint and yet
1973 regulate the flow of foreign exchange from the another restriction imposed on
country them
First ever change of government with different
political combination in India after defeating
the Congress that ruled the country since This would have disappointed
1977 independence and it was a bit more liberal and the private sector in the
more for small industries but failed to do much country
as it was a short-lived government
With the return of the Congress regime in The private sector wanted
power in 1980, it started making slow but better deal in the economic
gradual change in the economic regime by space of the growing India and
moving towards reforms and privatization; the was getting more united for
Early 1980s private sector was also getting more vocal and less control and more freedom
demanding as it has acquired more strength, to it. The private sector was not
confidence and experience. Although the getting any clear signal about
government again nationalized some of the the wind of policy change with
private banks regard to this sector
1984 A new leadership in Congress came in Rajiv Private sector got more

11

Gandhi who was young and energetic Prime optimistic about better deal at
Minister and he wanted to change the face of the hands of the government
the India. He initiated many economic reforms
in different directions that helped in instilling a
sense of hope in the private sector

An isolated but a very strong message went to This was a good reason for the
the private sector when the government raised private sector to get more
the investment limit for the latter from Rs 200 optimist in future and they
1985 millions to Rs 1000 million under MRTP Act accordingly started making
1969 even though the most optimist did not more demands and hoped to
expect to raise the limit beyond Rs 600 million occupy major share in the
economy in the coming years
This gave a sense of further
Many important economic reforms were confidence and challenge too
initiated and some of these were like the fiscal for performing better and this
Late 1980s reforms, trade policy reforms, monetary reforms got reflected in the capital
and reforms in the regulations and licensing etc market that began to reflect its
vibrant trend
From 1989 up to early 1991, the economy
suffered badly due to severe economic crisis, This was not a good time to
particularly due to external crisis when the expect any substantial
1989-1991
country did not have foreign exchange reserves economic reforms nor a good
to meet imports of even two weeks period for the private sector

There was a mixed type of
reaction in the country from
extreme situation of happiness
It proved to be the historic turning point in the due to high expectations to a
Indian economy as the new government situation marred by
assumed power in New Delhi in the end of June apprehensions. But all believed
1991 and in the next three weeks it rolled out that gradually the days of the
1991 major strategy of economic reforms that public sector would be over
encompassed LPG that took the country by and the space would be fast
surprise as no such discussion took place before occupied by the jubilant
for such a massive policy shift in the country private sector. This somehow
gave way to some misgivings
as it happens in any type of
transition from one
environment to another
This had a desired impact on
The Congress party that launched the economic the private sector as it pulled
reforms in India was in the saddle of the power its socks to face the challenge
in this period and started unfolding the as well as grab the
strategies of liberalization, privatization and opportunities. Challenge or
globalization in a phased manner that gave threats were being perceived
more autonomy to the private sector and due to opening up of the
1991-1996
regulation were being eased; besides economy to external players
disinvestments of the PSUs were started before they were given enough
gradually that still continues with some political time to equip themselves for
resistance that still continues; the economy was that competition. This led to
being gradually opened to the foreign players divide in the private sector
about the timing and more than
that the sequencing of the

12

economic reforms
Government started selling out select public
sector undertakings to the private sector so that
it has to taker lesser and needful burden of The private sector has now
managing the production units that might be more access over the already
1995 better managed now by the private sector10. The created capacities and further
process is still continuing and the proceeds from assured of its entrepreneurial
disinvestments is accounted in the capital dividends
account of the government budgets
A group of smaller political parties opposed to
two major political parties formed the coalition The private sector was assured
government that was supported by the Congress of its role as despite change of
1996-1998 from outside and this could not last its full five political climate, the reforms
year term. However, this government continued process continued
to further strengthen the reforms process
Another coalition government came to power
where the major political party, BJP, played the
pivotal role. Many major reforms like abolition
of licensing system; enactment of the Private sector was more
Competition Act (so that the competition taking emboldened and many major
place due privatization does not become reforms were there that raised
1998-2004
unhealthy) making the MRTP Act redundant; the status and size of the
replacement of FERA Act 1973 by the FEMA private sector horizontally and
(Foreign Exchange Management Act) etc; vertically
opening up of the most of the activities hitherto
reserved for the public sector, etc

The Congress gets back to power albeit after The private sector has been
forming a coalition of many small parties but contributing a lot while sparing
the agenda of reforms continues despite usual the government to concentrate
pricks from those who are not in power as it on the governance and the
2004-2008
used to do when others were in power. This has social sector and these are now
been called by Ahluwalia (2002) ,as creating a the major blockades in the
strong consensus for weak reforms’ (p.87) economic progress of the
economy
Significant level of financial crisis has gripped
the global economy in which USA is considered
to be the birthplace of this crisis. Many
capitalistic countries led by USA & UK have
given huge amount of bailout packages and also Such a gesture has only
there has been isolated events of nationalizing emboldened the private sector
some of the financial institutions in their and makes it more confident
2008 economies even though modestly. But still there and responsible so that they
has not been any financial dole out by the can brace up more efficiently
government unlike neighbouring China nor is for future challenges where
there any effort to prune the private sector in prospect seems to be bright.
any form. Rather there is emphasis on
continuity on economic reforms where private
sector finds the pivotal role.

10
Poland has been the first central European country to make a shift from controlled economy to market
oriented economy and “the lesson to be learned by governments in other transitional countries is that Poland's
transformation to a market economy has been driven far more by private sector expansion than by privatization
of SOEs”. (Rondinelli and Yurkiewicz, 1996, p.157)

13

From this Box, it is abundantly made clear that how the Indian economy has evolved itself
and how it has made the atmosphere for the market economy more encouraging with
assurances by developing the economy in many ways – like social capital and infrastructure;
economic infrastructure; development of basic and heavy industries; making India self reliant
in terms of food supply to feed its growing population that has been a major constraint in the
Indian economy up to the mid-seventies. While explaining the essence of the demographic
dividend in the Indian economy, the Eleventh Five Year Plan argues that:

The decline in the rate of growth of population in the past few decades implies that in the coming
years fewer people will join the labour force than in preceding years and a working person would
have fewer dependents, children or parents. Modernization and new social processes have also led
to more women entering the work force further lowering the dependency ratio. This decline in the
dependency ratio (ratio of dependent to working age population) from 0.8 in 1991 to 0.73 in 2001 is
expected to further decline sharply to 0.59 by 2011 as per the Technical Group on Population
Projections. This decline sharply contrasts with the demographic trend in the industrialized
countries and also in China, where the dependency ratio is rising. Low dependency ratio gives
India a comparative cost advantage and a progressively lowering dependency ratio will result in
improving our competitiveness. (Volume – I; p. 90)

Furthermore,

India has the youngest population in the world; its median age in 2000 was less than 24 compared
38 for Europe and 41 for Japan. Even China had a median age of 30. It means that India has a
unique opportunity to complement what an ageing rest of the world needs most. The demographic
structure of India, in comparison with that of the competing nations, would work to the advantage to
the extent our youth can acquire skills and seize the global employment opportunities in the future.
(Volume – I; p. 91)

This demonstrates that the Indian economy is now enjoying the benefit of the demographic
dividend that would help it in being more competitive in the coming years where the private
sector would be bestowed with the supply of cheap and continuous flow of skilled labour
force.

IV. The Farm Sector:
India seemingly has overcome the problem of food shortages that has constrained its growth
trend in the 1950s and 1960s in a very disturbing way. In fact, the compounding and
persisting food shortages since the 1950s has derailed the plan targets and growth trend in a
very serious way as the small size of the resources and foreign exchange reserves were to be
used for food imports and it further reduced the prospects for the private sector in the
economy along with the public sector as well as overall economic prospects. However, it can
be found that the various measures undertaken by the government through public investments
have been instrumental in raising the level of food production making India self sufficient in
food requirements after the 1970s and economy also turned surplus producer towards the late
1980s and beyond11.

11 According to the Tenth Five Year Plan (2002-2007) of India:
After remaining a food deficit country for about two decades after Independence, India has not only
become self-sufficient in foodgrains but now has a surplus of foodgrains. The situation started
improving gradually after the mid 1960s with the introduction of high yielding varieties (HYVs) of
crops, and the development of agriculture infrastructure for irrigation, input supply, storage and
marketing. The high production potential input responsive HYVs motivated farmers to adopt

14

It can be found from Charts 8&9 that during the 1980s there has been sharp increase in food
grains production in India and this trend got moderated since the 1980s. Rather, India has
been not been now able to achieve the production targets set in the five year plans recently.

During the years of the Tenth Plan, there has always been gap between the foodgrains
production target and the actual output and on an average the gap has been hovering around

improved production technologies with the use of water, fertilisers and agrochemicals. Besides the
public sector rural infrastructure, farmers developed their own 'onfarm' resources. (Volume 2; p.
513)
Furthermore,
The main factors for the all-round success of agriculture have been: increase in net sown area;
expansion of irrigation facilities; land reforms, especially consolidation of holdings; development
and introduction of high yielding seeds, fertilisers, improved implements and farm machines,
technology for pest management; price policy based on MSP and procurement operations;
infrastructure for storage/cold storage; improvements in trade system; increase in investments, etc.
(Volume 2; p. 514)

15

10 percent. This can be better understood from the facts that the growth rate of the agriculture
was 4.72 percent during the Eighth Plan (1992-97) but thereafter there has been declining
tendency and its growth rate went down to 2.44 and 2.30 percent during the Ninth (1997-
2002) and the Tenth Plan (2002-2007). For the Eleventh Plan, a target of 4.0 percent has been
suggested. The sagging performance of the farm sector might be attributed to many factors
like technological stagnation; over dependence of the increasing population on this sector as
two-third of the population continues to derive livelihood from agriculture even though its
share in GDP has gone below 20 percent; declining investments in this sector where the
public investment has been greatly shrinking for the last two decades. All these factors may
not augur well for the growth and its sustainability and thereby having implications for the
private sector in the economy. Some of its reflections are found in traces like emergence of
the inflationary trend in the economy, shrinking demand due to stagnating or low harvests in
the agriculture; and inter-state tensions etc.

V. Private Sector and Savings:
Generally, in developing economies there is problem of savings and capital formation where
the private sector may contribute in a big way if this sector is growing and vibrant. As it has
been seen above that the Indian economy has been showing a very high growth trend since
the 1980s. One factor responsible for this has been the upward movement in the savings rate.
The savings rate in India increased from just 8.6 percent in 1950-51 to 18.5 percent in 1980-
81. Thereafter the improvement has been at faster pace as it went up to 22.8 percent in 1990-
91 and now in 2006-07 it stands at 34.8 percent. The Eleventh Plan aims it to be even higher.
While looking at Chart-9 we can derive that the contribution of the public sector in the
savings have remained subdued and it had gone in the negative side also since the late 1990s
for many years together just to be positive a bit better now. Thus the major contribution in the
savings has been by the private sector.

16

The private sector might be split into the household and private corporate sectors. It is known
that in India much of the activities are in the hands of the private sector and particularly the
household sector. Its contribution in the savings has been the most and there have been
regular increases in its savings rate. But in recent years there has been stagnation in its
contribution as is apparent from the chart. Still, the overall savings rate has been increasing
wherein the contribution of the private corporate sector has been mainly responsible that has
been on the increase since the mid 1980s. But in recent years its increase has been
phenomenal due to resurgent private corporate sector in the Indian economy. Its effect could
be seen on the public sector as well that has been now showing some improvement12.
However, the private sector and the public sector made the first scissors around 1990-91
when the former became higher for the first time than the latter and the gap has been
widening and now getting stagnated as both are showing the increasing trend in recent years.

Even as far capital formation is concerned, it has been mainly dominated now by the private
sector that includes the household sector. It is obvious from the Chart-10 that now the capital
formation in India is almost one-third of the GDP wherein the private sector contributes more
than three-fourth. Initially, there was very low level of capital formation in the economy as it
was just below 10 percent level in the early 1950s. Beyond this there has been improvements
and it was mainly contributes by the public sector but its contribution was almost matched by
the private sector that includes the household and the private corporate sectors. However, as
the private sector got space since the mid-1980s, it made effective and widening scissors that

12 Its evidence is to be found in the description of the achievements of the public sector provided by the

Eleventh Plan as under:
The Central Public Sector Enterprises (CPSEs) on the whole have registered a strong performance
during the Tenth Plan. The number of profit-making CPSEs has gone up and the number of loss-
making ones has reduced. Granting of full autonomy to CPSEs remains an unfinished agenda
before the government. A great deal of progress has been made in the revival of sick CPSEs, but
close monitoring would be needed to implement their restructuring plans. Another issue of
importance is the development of a mechanism to ensure optimum investment decisions by large
profit-making enterprises. (Vol. I, p.10)
It also makes obvious that the government would continue to emphasize on the public enterprises as well.

17

made the role of the private sector more and more important whereas there has been either
stagnation in the public sector capital formation or even some declining tendency can be
observed.

Such a growing size of the private sector has been for two reasons. One, there has been
expansion in the economic activities where the private sector (household as well as the
private corporate) has been occupying more and more space. Second, the public sector was
failing in its commitment to contribute in the economy to the extent it had planned. This
tendency had been for many reasons and some of these have been discussed in the Box-A.
Still, if we can have a look at Chart-11 many things become obvious. India adopted the
planned course of development since 1951 to bridge the gap with the progressive countries as
the country started developing late. In this venture, public sector was assigned special and
dominating role in many ways discussed earlier. Such a pattern is reflected through
investments under various five year plans. In the First Plan the public sector planned to invest
more than 60 percent of the total investments and increased to almost 64 percent in the Fourth
Plan. After that, there has been sharp and consistent decline in the public sector’s role due to
changing role of the private sector in the economy. In the Eleventh Plan, the public sector is
supposed to invest only less than 22 percent and the rest is to be taken care of by the private
sector. More than this, what has been a matter for consideration is that the public sector could
never come up to the expectation as the targeted investments could never be made by the
public sector and the private sector has to bridge the gap by shouldering greater
responsibilities. The greater it came forward more the space was left by the public sector for
the private sector. In a way, this also resulted in examining the growing strength of the
private sector and then leaving the space for it in the rapidly growing Indian economy
particularly since the 1980s and since then the growth trend has been in general on an
acceleration path.

18

VI.Employment and Industrial Disputes:

Indian economy is plagued by the problems of poverty and unemployment even amidst now
the rapid economic growth. As per the latest estimates, 27.5 percent of the population still
lived in absolute poverty and this population was not able to get food for basic subsistence.
The situation between the urban and rural India did not differ substantially as the poverty
ratio was 25.7 and 28.3 percent respectively (Economic Survey – 2007-08; p.243). Thus, in
India 300 million people lived below poverty line and this is the population more than that in
the USA. Moreover, in 2004-05, according to NSSO estimates size of the labour force was
almost 420 million and of this 8.28 percent was unemployed. These are the chronic problems
in the Indian contexts that have been the major challenges before the economy. Ironically,
agriculture is still the mainstay of the majority of the labour force although they want to shift
from this low paying occupation. The next major employment is to be found in the service
sector and the manufacturing sector has low employment potential in India.

19

So far it is well established that the economic growth rate in India has fuelled a deep sense of
optimism in its economic performance even amidst the widespread apprehensions about the
global slowdown leading to recessions; role of the private sector as well as the private sector
is fast improving in terms of its contribution to the GDP, saving rate and the gross capital
formation. Still, it is ironical that growth rate of employment in the India’s organized sector
has gone gradually southward with the onset of the economic reforms and as the pace of
economic reforms is getting raised, growth rate of the employment is getting more
pessimistic. Employment in the organized sector in creased up to 2000 with varying rates and
thereafter it has been showing declining trend. It is found from Chart-12 that the growth rate
of employment in the overall organized sector was positive up to 2000 albeit with lower and
lower rates but thereafter it has become negative and the size has been shrinking. The
difference between the private sector and the public sector is it that the growth rate of
employment has in general been declining in the latter and since 2000 it has always been
negative. On the other hand, the trend has not been uniform in the private sector and it is
gripped by highly unstable pattern and since 2000 there has been more instability and there
seems to be delinking between overall performance of the private sector and employment
growth in the organized private sector. Besides, we find that there is no significant change in
the composition of the private and public sector in the organized sector employment. In 1981,
the private sector had a share of 32.3 percent that went down to 28.7 percent in 1991 but
thereafter after showing some improvement it has been now 31.9 percent in 2005. This
suggests that the private sector has failed to generate employment opportunities in the
organized sector notwithstanding its increase share in the overall output in the economy as
reflected through its contribution in savings and capital formation besides the contribution in
the tax collection of the government of India13.

In the private sector, total employment size went up from 74 million in 1981 to the highest of
86.5 million in 2001 and thereafter declined to 84.5 millions in 2005. Chart-13 provides one
very interesting feature of the employment in the organized private sector of India. It is seen
that although the size of male employment has been either stagnating in the private sector or
getting down whereas the share of the female workers is on the increase. In fact, the size of

13 Contribution of the corporation tax (tax imposed on the earnings of the corporate sector) has become the
largest now as it contributed 30.7 percent of the total tax revenue of the Government of India in 2007-08 (BE)
and the next has been the excise duty (23.8 percent). In 1995-96 the two contributed 14.8 and 36.1 percent
respectively. Otherwise also, the corporation tax mobilization has become ten times during 1995-96 to 2007-08
and no other tax could match this velocity. (Economic Survey – 2007-08; p. 34)

20

women workers increased from 13.9 million in 1990 to 21 million in 2005 whereas that the
male workers it changed from 61.9 to 63.6 million only and this is the reason that the share of
the women has increased from just 18 percent to around 25 percent during this period.
Although such change is taking place in the public sector as well but there the share of the
women workers in the corresponding period went up from 13 to 16 percent showing that
women workers are being preferred now in the organized sector where the private sector has
been ahead of the public sector. Thus, in the era of growing privatization the employment
scenario is getting more gender balanced.

Another major hallmark of growing privatization in the Indian economy is reduced labour
unrest as gets known from sharp reduction in the number of industrial disputes since 1990. It
is found from Chart-14 that the number of industrial disputes has come drastically and it has
been less than one-fourth during 1991 to 2006. Total number of disputes was 1810 in 1991
that came down to 430 in 2006. Moreover, the decline has been rapid and almost consistent
creating a congenial atmosphere for the private sector to grow with certainty. Looking at the
number of man days lost in such disputes one derives that there has in general been not a
regular decline. Rather there seems to be some upward trend in the early years of the current
decade that now seems to be getting moderated. On the whole, it can be said that the
industrial disputes are coming down and even the loss of man days also seemingly reflect
some trend of moderation albeit in an unsteady manner so far. Even this much has been good
enough for the private sector.

VII. Fiscal Reforms :
Structure and pattern of the government finances play critical role in economic growth,
development and also functioning of the private sector. It is known that the size of public
expenditures keeps on increasing. Poor management of finances by the government may
become counterproductive for the public sector. In India, it may be found that with the
passage of the 1980s fiscal trend worsened as the major indicators like revenue deficit, fiscal
deficit etc became larger and unmanageable resulting in poor prospects for the private sector.
This also reduced the government’s ability to spend on capital account. Poor fiscal
management also resulted in low borrowing capacity of the government. Consequently, the
government has to leave behind discretionary and subjective approach towards fiscal

21

management and rather it shifted towards mechanical and institutional approach that left little
scope for subjectivity.

In this regard, The Eleventh Plan observes that “The Fiscal Reforms and Budget Management
Act (FRBMA) enacted in 2003, is an important institutional mechanism to ensure fiscal
prudence and support for macroeconomic balance. According to the Rules framed under the
Act, revenue deficit is to be eliminated by 31 March 2009, and fiscal deficit is to be reduced
to no more than 3% of estimated GDP by March 2009. The process of fiscal consolidation
under FRBMA has been continuous. It has yielded rich dividends in terms of creating fiscal
space for increased spending on infrastructure and social sectors” (Volume I, p.37). It can be
found from Chart-15 that really it has been yielding the dividends as there have been
sufficient improvements in the fiscal management in the country and it has been highly
helpful for the growth of the private sector14.

14 According to the Reserve Bank of India’s Annual Report 2007-08:
The combined finances of the Central and State Governments continued to improve in 2007-08. The
key deficit indicators, viz., gross fiscal deficit (GFD) and revenue deficit were lower by 0.3-0.4
percentage points of GDP than the preceding year; primary balance turned surplus. The improvement
was facilitated by a significant increase in revenue receipts, especially direct tax revenues...The
buoyancy in tax revenue of the Central Government as well as the State Governments’ own tax
revenue reflected the impact of both sustained economic growth and continued efforts at improving
the efficiency of the taxation system through moderation of rates and broadening of the base. A
noteworthy feature of combined finances was enhanced allocation for development expenditure even
while staying on course of fiscal consolidation by both the Centre and the States under the rules-based
fiscal framework. ( p. 96)

22

It is clearly brought out from Chart-16 that the government has been able to reprioritize its
expenditures to some extent and as a result there is some downtrend in the non-development
expenditures in the current decade whereas there has been some improvement in the
developmental expenditures. Improvement in the latter is reflected in the form of improved
expenditures on the economic services and the social sectors. These are ultimately helping the
overall economy including the expanding private sector in capacity building in many direct
and indirect ways. However, it can be argued that the government is still not spending
sufficiently on the social sector development considering the severity of poverty,
unemployment, illiteracy, health related problems, drinking water etc. In this regard, there
have been varied opinions of the scholars wherein some scholars do not find careless thrust
on privatization good for the social sector development at this stage15, 16.

15
According to Shariff et al (2002):
While over the years public expenditures on the social sectors and poverty alleviation has
increased substantially in absolute terms, relatively speaking the rate of increase during the
reforms of 1990s has been at a declining rate until 1997-98. Somewhat noticeable increase in real
terms has taken place during 1998-99 and 1999-2000, evident only from central budgets that are
not adequate to get a consolidated picture.
Furthermore,
The year 1991 was the beginning of a fairly explicit phase of economic reforms in India. The basic
philosophy of reforms has been to reduce public involvement in a number of production and
distribution mechanisms whose performance can better be sustained and even enchased by private
sector. It appears that this process has also affected the commitment and performance of the public
machinery in implementing social sector and poverty alleviation programmes. The private
participation while improving quality of service are also likely to become too expensive for the
majority of the people to afford. The state, therefore, cannot absolve its constitutional duty of
providing basic services to people on its own cost.

16
Sebastian Morris (2004) also observes in the Indian context that “Government services on vital social services
with vast positive external effects need to be stepped up, but doing this the old way would be wasteful and
pointless even if they have some positive demand-side effects”. (p.20)

23

VIII. Regional imbalances:

India is a huge country and economy with federal structure. It can be narrated in brief that
there has always been inter-state imbalances for so many reasons. These are reflected in
terms of demographic variables, human development, per capita incomes, per capita plan
investments, poverty, unemployment, growth rates, infrastructure, etc. However, what is
coming out clearly is the fact that since the process of economic reforms in India was
initiated in a big way and in a consistent manner since 1991, the inter-state disparities have
widened. Such disparities within a state are also on the increase causing much tension in the
economy. The ratio of highest per capita income state to lowest the per capita income state
among the major states of India increased consistently from 2.9 in 1980-81 to 3.2 in 1990-91
to 4.4 in 1999-2000 and now to 4.9 in 2005-06. Similarly, HDI also varied widely from 0.638
in Kerala in 2001 to 0.367 in Bihar, 0.388 in Uttar Pradesh and 0.395 in Madhya Pradesh.
Incidence of poverty varied from 6.6 percent in Punjab in 1999-2000 to 31.2 percent in Uttar
Pradesh and 42.6 percent in Bihar.

In fact, the states which had higher per capita public investments earlier were better equipped
to invite the private investments as compared to the states that could not benefit from that
level of public investments. This has been acknowledged even by the Eleventh Plan of India
as it observes that

As the Eleventh Plan commences, a widespread perception all over the country is
that disparities among States, and regions within States, between urban and rural
areas, and between various sections of the community, have been steadily
increasing in the past few years and that the gains of the rapid growth witnessed in
this period have not reached all parts of the country and all sections of the people
in an equitable manner. That this perception is well founded is borne by available
statistics on a number of indicators. (p.137)

Governance has also become an important determinant for the private sector investments as it
could be traced that poorly governed states like Bihar, Uttar Pradesh have not been a good
destination for private sector investments in contrast to a better governed states like
Karnataka, Haryana etc. This underlines the significance of an active and well meaning state
that creates a sufficient launching ground for the private sector to grow.

IX. Concluding Observations:

The above discussion about the nature of economic changes and privatization has revealed
that the Indian economy shifted from mainly private sector influence in the economy up to
the 1940s and then made mixed economy as its strategy to take away the economy from low
level of economic stagnation to higher and self sustaining goals and in this process there has
now been increasing emphasis on the privatization of the economy through conscious efforts
and as a part of well thought out strategy. Moreover, being a multi-party democracy with
federal economic structure, there is sufficient unanimity about the privatization though often
some differences are voiced. This has resulted in accelerated growth performance in the
recent period. Before we can summarize how the process of privatization in the emerging
Indian economy may be speeded up further, we need to understand Figure-1. This makes
obvious critical role of the governance and social capital as much as the economic capital and
economic reforms.

24

Figure-1: Major determinants of the Private Sector in an Economy

However, in a developing economy like India while emphasizing upon the greater space to
the private sector in the economy, care should be taken that basic gaps and challenges like
poverty, unemployment, food security, illiteracy, etc along with the development of
economic infrastructures are tackled properly and without much time loss. In this context,
role of the public sector assumes greater relevance17. Such a strategy would not only further
release forces of economic growth but would also make the stakeholders more satisfied and
competent for performing in a growing economic environment.

In the immediate context, the Eleventh Five Year Plan (2007-12) has identified some sub
sectors having greater growth potentialities in the economy as given in Box-B (given in the
end). From this, it is abundantly clear that most of these sectors would be dealt mainly by the
private sector and in some instances it would be by the public sector along with the private
sector. Thus, growth prospect in the economy mainly rests upon the private sector.
On the whole it can be inferred that there are clear evidences that the government itself is
now promoting the privatization in various ways. India has travelled quite long and getting
matured as gets reflected from various macroeconomic features. In fact, we may finally infer
the following:

• Privatization has picked up sufficiently in the Indian economy and private sector has
been the major contributor in the economic growth in India.

• Ground for rapid and sustainable privatization in India has been prepared by the huge
public investments, food security, human development, infrastructure development
etc.

• Government is still taking care of strong private sector and at the same time keeping a
vigil and providing support through the public sector that has also gained strength
from privatization.

17
Massimo Florio (2002) argues that “There is now a wide understanding that in the absence of the basic
institutional and social prerequisites, market reforms in Russia (and elsewhere) back-fired in a most damaging
way”. (p.391)

25

• However, privatization has helped only the better off segment of the economy and
thus compounded the problem of regional disparities.

• Rapid privatization has not been helpful in reducing poverty, unemployment and
social backwardness although there is no evidence that privatization is an obstacle.
However, if the government deals with such challenges, ground may be prepared
further for further higher economic growth where private sector may play desired
role.

Box-B: List of twenty high growth sectors in India

Public or private sector where
S. No. Industrial sector
this will grow
1 Automobile and Auto-components Private sector
2 Banking/Insurance and Finance Services Public sector and private sector
3 Building and Construction Industry Mainly private sector
4 Chemicals and Pharmaceuticals Mainly private sector
5 Construction Materials/Building Hardware etc. Private sector
6 Educational and Skill Development Services Public sector and private sector
7 Electronics Hardware Private sector
8 Food Processing/Cold Chain/Refrigeration Private sector
9 Furniture and Furnishings Private sector
10 Gem and Jewellery Private sector
11 Health Care Services Mainly private sector
12 ITES or BPO Private sector
13 ITS or Software Services/Products Private sector
14 Leather and Leather goods Private sector
Media, Entertainment, Broadcasting, Content Mainly private sector
15
Creation and Animation
16 Organised Retail Private sector
17 Real Estate Services Public sector and private sector
18 Textiles, Apparel and Garments Private sector
19 Tourism, Hospitality and Travel Trade Mainly private sector
Transportation Logistics, Warehousing and Public sector and private sector
20
Packaging etc.
Source: Eleventh Five Year Plan, Volume – I; p.100

On the whole, the private sector is getting more and more efficient but only where there are
greener pastures. Otherwise, it is left to the government to prepare the ground for the private
sector to expand its operations with efficiency.

26

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