Unit - 5 (E).docx.pptx

Unit:5
GOVERNMENT AND BUSINESS
Government and Business - Performance of
public enterprises in India - Price policy in
public utilities, public sector–Goals–Types and
classification– Evolution and objectives of
public sector in India.

Government and Business
• It is widely recognized that “the two
most powerful institutions in society
today are business and government;
where they meet on common ground,
together they determine public policy,
both foreign and domestic for a
nation”.
• Securities and Exchange Commission
(SEC)

How Business Organizations Influences the Government
• 1) Personal Conducts and Lobbying - The corporate executives and political
leaders and government officials. organizations formally from the group to
present their issues to government bodies.
• 2) Forming Trade Unions And Chamber Of Commerce - business organizations
with a common interest, common issues , holds dialogue to discuss them with
government bodies.
• 3) Political Action Committees- rich executives donate money to the political
candidates whose political views are similar to them.
• 4) Large Investment - developing countries where foreign corporate wants to
invest in these countries.

How Government Influences the Business Organizations
• Shape the business practices through both, directly and indirectly, implementing
rules and regulations.
• Most often directly influences organizations by establishing regulations, laws,
and rules that dictate what organizations can and cannot do.
• Creates special agencies to monitor and control certain aspects of business
activity.
• For example, the environment protection agency handles central bank, food and
drug administration, labor commission, securities, and exchange commission
and much more.
• Take an indirect approach to shaping the activities of business organizations, by
implementing laws or regulations but they are not always mandatory.

• change organizations’ policies by their tax codes.
• give tax incentives to companies that have an environment-friendly waste
management system , Or tax incentives , less developed region in the country.

Price policy in public utilities
• 1. Promotion aspect – It refers to promotion of demand of services provided by public
utility undertakings, example like transport services such as roadways and railways, issue
monthly or season tickets at concessional rates to a large number of regular passengers.
• 2. Price discrimination – The demand for the products of a public utility undertaking is
elastic in some markets and inelastic in other markets. Example take the case of transport
services, in the case of general public’s or tourist’s demand for bus service is elastic.
Because these persons do not depend upon public buses alone. They May have other
transportation choices. But in the case of regular officer-goers or students depend mainly
on public buses only, their demand is inelastic. In the same way here, undertakings have to
charge less from students and office-goers, and more from tourists.
• 3. Social considerations - Some of the public utility undertakings touch everyday life of the
people and are affected with public interests. Price of the product is not fixed purely on
economic basis. Social welfare plays an important role in the price fixation.

Pricing of Public Utility Services:
• Public utilities like education, sewage, roads, etc. which may be supplied free
to the public and their costs should be covered through general taxation.
Dalton calls it the general taxation principle. Such services are pure public
goods whose benefits cannot be priced because they are indivisible.
• It is not possible to identify the individual beneficiaries and charge them for
the services. In some cases, the beneficiaries may be identified but they
cannot be charged for their use. For instance, the users of a bridge (flyover)
over the railway line can be identified, but it may be inconvenient to the
taxing authority to collect the road tax and for the road users to pay the tax
due to the time involved.

• finance the flyover out of general taxation. J.F. Due’ has mentioned the
following four rules where public services should be provided free and their
costs covered from general taxation.
• First, in the case of such services where little waste will occur if they are
provided free.
• Second, where charging a price will restrict the use of the service.
• Third, where the cost of collecting taxes is high.
• Fourth, where the pattern of distribution of tax burden on services is
inequitable.

• compulsory cost of service principle whereby the government should charge a
price for the service provided to the people. This is essential because
municipal services such as sewage, sweeping streets, street lighting, etc. are
under-priced. Every family of a locality may be asked to pay for them. But
since they are public utilities, they may be charged nominally and the gap
between revenues and costs remains.
• consumers of a public service are required to pay the price fixed by the PSE
(Public sector enterprise). The PSE may- have a monopoly in a particular
service, such as water or power supply and it may fix a price for it. But the
service being a public utility, it may set a price lower than its cost of
production so that the welfare of the community is not adversely affected.

• General principle for pricing such public services is to recover costs without
distorting the allocation of resources. This is done by making selling price
equal to short-run marginal cost while keeping productive capacity constant.
But water and power systems periodically require large investments.
• In such cases, average costs fall as production is increased and the actual
price charged is below the average cost. Charging that price would lead to a
loss to the PSE. In such a situation, the public price has to be revised to cover
the cost of providing the service. This is usually done by increasing-block or
multi-part tariff and time-of-use rate structures.

• Under an increasing-block or multi-part:- tariff the consumption of water or
power is priced at a low initial rate upto a specified volume of water or
power used (block) and at a higher rate per block thereafter. The number of
blocks may vary from 3 to 10. For instance, power charges for domestic light
for the first 100 units may be Re. 1 per unit, Rs. 2 for the next block of 200
units and Rs. 4 for the block of next 400 units and above.
• Under the time-use-rate structure:- consumers pay a premium during
periods of high demand. It increases the overall utilisation capacity of the
service and profits of the PSE supplying the service. But its main advantage is
that this rate structure encourages consumers to shift demand to lean (off-
peak) periods.
• For instance, time-of-use rates vary by time of day for telephones, and
mobiles Time-of- use rates vary by season.

Public Sector
• The public sector is the segment of the economy owned, operated, and
controlled by government agencies.
• It provides services to the general public that contribute to societal well-being,
such as law enforcement, national defense, public transportation, transit
infrastructure, educational institutions, and health services.
• Unlike the private sector, the public sector does not seek to make a profit off
its services.
• s. It does not include private companies, voluntary organizations.

Important Goals/ objectives of the public sector in India
• 1. Acceleration of Economic Growth and Industrialization: some industries
need to be brought within public ownership and control in order to achieve
rapid economic growth.
• 2. Distribution of Income and Wealth: pattern of resource allocation
necessitated expansion of public sector.
• 3. Promotion of Balanced Regional Development: underdeveloped and where
local resources are not adequate.
• 4. Promotion of the Growth of Strategic Defence oriented Industries:
surpluses from public enterprises, reinvested or can be used for the
establishment and expansion of other industries.

• 5. Assistance of the Development of small and Ancillary Industries:
employment growth
• 6. Creation of Employment Opportunities: The expansion of public sector
creates the employment opportunities.
• 7. Achievement of Socialist Pattern of Society: production will have to be
centrally planned and secondly to bring about reduction in the in realities and
increase in wealth.
• 8. To avoid the limitations and abuses of the private sector: When initial
capital requirements are large private sector fails to come forward in a big way,
in such eases public sector enterprise is the answer.
• 9. Generation of forces of economic and technological self-reliance:
responsible for the building of the economic overheads like transport, power,
fuel, and basic capital goods.

Some of the other important objectives are :-
• Removal of poverty
• Reduction in income inequalities
• Expansion of employment opportunities
• Removal of regional imbalances
• Acceleration of economic development

Types and classification of public sector:
• 1. Departmental Undertakings
• 2. Statutory Corporations
• 3. Government Companies

Type1#Departmental Undertakings
• Public sector enterprise which is run as a part of a government department and under the direction of the Minister concerned.
• These include the following:
• (a) The Indian Post and Telegraph Department
• (b) All India Radio
• (c) The Doordarshan
• (d) The Indian Railways
• (e) Defence
• Features of Departmental Undertakings:
• 1. Formation – These form a part of government are associated with a particular ministry.
• 2. Control – These are considered as a major sub-division of a ministry of Government and are under direct control of the minister.
• 3. Appointments – These undertakings act through government officers. Their employees are appointed through Union Public Service Commission
and Staff Selection Boards.
• 4. Management – These are managed by IAS (Indian Administrative Services) officers and civil servants.
• 5. Audit – The accounts of these undertakings are audited by the Comptroller and Auditor General of India (CAG).
• 6. Finance – The funds of these enterprises come directly from Government Treasury. The revenue earned by these is also paid into the Government
Treasury.
• 7. Administrative Autonomy – These do not have any administrative autonomy, from government department. There is a lot of political interference.
• 8. Accountability – These are accountable to the concerned ministry as their management is directly under the control of the concerned minister.

Merits of Departmental Undertakings:
1. Easy Formation – These are established just by the administrative orders of
Government.
2. Effective Control – Parliament can exercise effective control over them as the
control is centralized in the hands of government.
3. Source of Revenue for Government – Revenue earned by these undertakings
goes directly into Government Treasury.
4. Proper Utilization of Funds – All actions are approved by the Government.
There can’t be any misutilization of funds.
5. Decrease in Tax Burden on Public – The departmental undertakings earn
profit for Government. The Government gets enough funds and there is little
need for taxes. The tax burden on public is reduced.
6. Accountability – These are accountable to public through the parliament as
these are established for public benefit.

Demerits of Departmental Undertakings:
1. Rigidity – These are not flexible due to strict government rules and
regulations. Operations must be flexible for the smooth functioning of business.
2. Red-Tapism – There is a lot of red- tapism and excessive and slow paperwork
leads to heaps of files moving at slow speed and no work is done on time.
3. Delay in Decision Making – Officers of such departmental undertakings are
not allowed to take independent decision without the approval of concerned
ministers. It delays the decision making.
4. Lots of Political Interference – These undertakings are under the supervision
of a minister who is politically active and gives priority to political party over the
country.
5. Insensitive to Consumer Needs – These undertakings don’t provide adequate
services to the consumers directly because there is a lack of competition and
profit motive.

Type 2. Statutory Corporations or Public Corporations
• Statutory Corporations are created by a special Act of Parliament or State Legislature.
The Act defines their powers, functions, rules and regulations of governing them.
These have a separate legal existence and have to act in their own name. These are
backed (funded) by the power of government and have considerable flexibility as
these are corporate bodies.
• The entire capital of statutory corporation is financed by Government, and these also
have right to borrow from public.
The following are major statutory corporations:
• ii. Reserve Bank of India (RBI)
• ii. Unit Trust of India (UTI)
• iii. Industrial Development Bank of India (IDBI)
• iv. Oil & Natural Gas Commission (ONGC)
• v. Employee State Insurance Corporation (ESIC)

Features of Statutory Corporations:-
• 1. Ownership – These are owned and controlled by Central or State
governments. The government has a complete authority to appropriate profits
and also to bear losses. These are completely accountable to the Government.
• 2. Formation – These are set up by the Special Act of the Parliament or State
Legislatures. The Act defines the objects and privileges of these statutory
corporations.
• 3. Body Corporate – These have a separate legal entity. These can sue and be
sued. These can purchase property in their own name and enter into contracts
with third parties, and the contracts will be legally bound.
• 4. Freedom from Government Budgetary Provision – These are not concerned
with budget of the government. These have a financial autonomy and prepare
their own budgets.

• 5. No Interference – These are autonomous bodies. Government does not
interfere in day to day working of these corporations. Directors are appointed
according to the provisions of the Acts.
• 6. Appointments of Employees – These have their own rules regarding
appointment and fixing of the remunerations of employees. The service
conditions are framed by Board of Directors. The employees of such
organizations are not government employees. The service conditions are also
given in the specific Acts under which they are set up.
• 7. Audit – Their audit is conducted by the Comptroller and Auditor General
(CAG) departments. It is done by professional chartered accountants as in other
commercial establishments.
• 8. Financing – Financing is done mostly by Government. These also have a right
to borrow from public. These have full authority to manage their profits earned
from the sale of goods and services.

Merits of Statutory Corporations:-
1. Financial Independence – These do not get funds from central budget. The
government does not interfere in their financial matters. These have complete
financial autonomy.
2. Autonomous Organizations – These have their own policies and procedures within
the powers and duties assigned to them under Act. However, the Act provides for a
few issues that require the prior approval of the ministry. These are autonomous and
independent in their functioning. There is no interference of government. These are
free from unnecessary and undesirable government interference and regulations.
3. Social Service Motive – Their main aim is social service and their secondary
objective is earning profit. Profit earned by such corporation is used for providing
services to the society.
4. Protection of Public Interest – These are accountable to the Parliament. Thus, it is
ensured that the public money is properly utilised.
5. An Instrument for Economic Development – These have the backing of government
power along with private sector initiative. Thus, the economic development is ensured.

Demerits of Statutory Corporations:-
1. Political Interference – Politicians have their own benefit in mind wherever
huge funds are involved. They interfere in the working of these corporations for
personal and party gains.
2. Ignoring Service Motive – The directors utilise their influence and powers for
their own benefit instead of the social service.
3. Lack of Competition – This has led to carelessness and lethargy in their
activities. There is always a fear of loss due to slackness.
4. Misuse of Financial Autonomy – These take loans at high rate of interest to
meet urgent requirements due to delay in projects. This leads to increase in
cost of projects. It becomes difficult to pay back these loans.
5. Corruption – In public dealings there is bound to be corruption. These
corporations are no exception.

6. Incomplete Operational Autonomy – The fact is that the operational
autonomy which they have is only theoretical. Actually, there is government
interference, and the management is not free to take decisions.
7. Delay in Decision Making – The Government generally seeks professional
advice which hinders the freedom of these corporations to enter into new
contracts. The disagreement with the professionals further delays decision
making.

Type # 3. Government Companies:
• The Companies Act, 2013 defines a Government Company thus- “A
Government Company means any company in which not less than
51% of the paid-up capital is held by Central Government or by any
State Government or partly by Central Government and partly by one
or more State Governments.”
• It is established under the Indian Companies Act and is managed by
provisions of this act.
• These companies are established for business purpose and these can
compete with companies in private sector.
• The government is the majority shareholder in these enterprises, and
it exercises full control over- paid up capital of the company.

Government companies are of two types:
• (i) Wholly owned government companies where entire capital is held by the
government.
• (ii) Partly owned government companies where government and public are
joint owners but major part of the capital is provided by the government.
Examples of government companies are:
• (i) Steel Authority of India Ltd. (SAIL)
• (ii) Bharat Heavy Electricals Ltd (BHEL)
• (iii) Gas Authority of India Ltd (GAIL)
• (vi) State Trading Corporation (STC) etc.

Features of Government Companies:
1. Formation – It is formed according to the provisions of Indian Companies Act,
2013.
2. Ownership – Minimum 51% of their paid-up capital is in the name of Central
Government or State Government or partly in the name of Central Government
and partly in the name of a State Government. It can be a wholly owned
Government Company where all shares are held by the Government.
3. Management – It is managed by a Board of Directors who are appointed by
shareholders or nominated by the Government.
4. Separate Legal Entity – It has a separate legal entity. It can sue and can be
sued. It can enter into contracts with third parties. It can hold property in its
own name.

5. Appointments of Employees – Its employees are appointed according to its
own rules and regulations as contained in its Memorandum and Articles of
Association which contain objective and internal rules and regulations of
company respectively.
6. Audit Procedure – These companies are also subject to accounting and audit
procedures. An auditor is appointed by the Central Government on the
recommendation of the CAG.
7. Financing – Capital of such companies comes from government shareholdings
and private shareholders. It is allowed to raise funds from share market.
8. Annual Reports – The annual reports are presented to the Parliament.
9. Relaxation – Relaxations from the rules under Companies Act can be given to
them provided it is authorized by the Parliament.
10. Registration – It is registered like any other Joint-Stock Company with the
Registrar of Companies.

Merits of Government Companies:
1. Easy Formation – The government companies can be established by following the
provisions of the Companies Act 2013. No separate Act of parliament is required.
2. Separate Legal Entity – It has a separate legal entity. It can hold property in its own
name. It can enter into contracts with third parties. It can sue and be sued by others.
3. Autonomy in Operations – They are free to conduct their activities. There is no
departmental interference by bureaucrats. So they can take prompt decisions
according to business needs as and when required.
4. Control Unhealthy Competition – These companies can control unhealthy
competition by providing goods and services at reasonable prices to consumers.
5. Easy Financing – Their financial needs are met by the Government, and these can
also go to capital market as and when they like.
6. Benefits of Private Participation – Since private sector can have a share in such
companies, professional managers from private sector can be included in Board of
Directors. They can improve operational efficiency.

Demerits of Government Companies:
1. Parliament Interference – The directors are nominated by the government.
They work under the political pressure of the party in power. The directors who
are chosen from various ministries, interfere in the operation of company.
2. Lack of Continuity in Policies – The chairman and senior officers of
government companies are frequently changed. The new persons try to run
company according to their own will. Political parties in power keep on changing,
resulting in lack of continuity as the officers are changed with these changes.
3. Lack of Professional and Managerial Efficiency – Professional managers are
required to run a company. Such proficiency and initiative are not found in
bureaucratic directors of a government company.
4. No Say of Minority Private Shareholders – The private shareholders are in
minority. They have no say in financial and administrative matters.

The main objectives of this new economic policy:-
• 1. To maintain a sustained growth in productivity
• 2. To enhance gainful employment
• 3. To achieve optimum utilization of human resources
• 4. To transform India into a major partner and player in the global arena.
• 5. To take out Indian economy from the vicious circle of poverty.
• 6. Open the Indian economy to interact openly with the rest of the world.
• The main result of this new policy was that reserved sectors were opened for
the private players. Public sectors were not able to operate at its optimum
pace.

The public sector in India aims at achieving the following objectives:
• 1) To generate financial resources for development
• 2) To promote redistribution of income and wealth
• 3) To create employment opportunities
• 4) To promote balanced regional growth
• 5) To encourage the development of small-scale and ancillary industries, and
• 6) To accelerate export promotion and import substitution

Evolution public sector in India:
• In the era of British Colonialism, there were few public sector units in India, namely,
Defense Production, Railways, Post, and Telegraph. The role of Defense Production
was to ensure that the nation maintained a strictly guarded border, Railways helped in
the transport of resources, and Post and Telegraph were crucial for functional and
strategic reasons.
• However, after independence, Jawaharlal Lal Nehru, the first Prime Minister of India
laid the foundations of public enterprises in India.
• The total investment in 1951 in the public sector was less than half a billion Euros. In
today’s time, there are about 247 enterprises with a growing investment of around
130 billion Euros.
• During 1888, Commission stressed the need for governmental help for the creation of
new industries. It also suggested that the government should start manufacturing of
sugar, cotton, wool, silk, paper, pottery, glass. Etc. However, no action was taken by
the then government as India's role was restricted to that of an exporter of raw
materials for manufacturers to England.

• Even in the Report of the Indian Industrial Commission (1904) the government's
policy of industrial development was confined(restricted) to a few provisions of
technical and industrial education, collection and distribution of commercial
information on Indian industries.
• In 1905, the government established a Department of Commerce and Industry. It
was hoped that public sector would be initiated. Though some steps were taken in
this regard, it aroused opposition by the European Communities.
• This led to the appointment of Industrial Finance Commission in 1916. It
recommended that the government must play an active part in industrial
development. It also felt there was a need for establishing certain industries. Later,
under the Government of India Act 1935, the development of industry became a
provincial subject and the Centre had only the powers to give directions and provide
technical education.
• In 1937, when the Congress came to power in many provinces, the Conference of
Industry Ministries of the provinces under the Chairmanship of Subhash Chandra
Bose emphasised the need for industrialization and recommended a comprehensive
national plan for the purpose. industry like machine tools, manufacture of
machinery, heavy engineering, automobiles, chemicals and fertilizers were
recommended to be under the direct operation of the state.

• In April 1945, the government issued a statement on industrial policy under
which continuation of ordnance factories, railways and public utility services
already under the state ownership and operation was confirmed. It declared
that some of the’ basic industries should also be under the ownership of the
state.
• 1946, suggested that the state should take into its own hands the ownership
and management of large industries.
• the Indian Government announced an Industrial Policy in July 1991.
Liberalization, Privatization, and Globalization of the Indian economy were
explicitly stressed.
• In July 1997, nine central public enterprises, namely BPCL, BHEL, HPCL, GAIL,
SAIL, IOC, ONGC, MTNL, and NTPC, were identified , promotes research and
development but also contributes to promoting export and foreign exchange
earnings in India.

Performance of public enter
prises in India - Refer PDF

Unit - 5 (E).docx.pptx

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