Wednesday, May 18, 2011

Explain the reasons for the growth of private sector.

Explain the reasons for the growth of private sector.

Ans. In the mixed economy of India, private sector plays a complementary role to the public sector. Undoubtedly the dice was loaded heavily in favor of the public sector in the strategy of development adopted in our plans, but at no stage the private sector was pushed back to the graveyard . on the contrary, it was explicitly recognized that the private sector possess unparalleled advantage in terms of entrepreneurial talent, skill and initiative. Its basic limitation may be that it may not be in a position to garner large resources required for building up key and basic industries and other industries that require large capital investment. The industrial policy Resolution, 1956, set the mood and tore for future. While reserving the key and basic industries for the public sector it made it clear that the private enterprise and initiative were to be provided all possible opportunities and incentives for growth with in the parameters by planned economic development.

More recently, the new economic policy and the accompanying economic reforms have opened up unlimited opportunities for growth in the private sector.

Entrepreneurial talent is the biggest asset of the private sector . as such all those functions that are expected to be performed by Schumpeterian dynamic entrepreneur during the process of economic growth come to be associated with the private sector.
We can briefly sum up these functions follows:-
(a) To promote new industrial units.
(b) To mobilize financial resources for meeting diverse heads of economy.
(c) To provide managerial skill.
(d) To carry out and intensify industrial research and development programmes so as to promote appropriate technology and help in the modernization of the economy and rationalization of industries.
(e) To facilitate global integration.
Privatization is a term that is employed to convey a variety of ideas such as part or full transfer of public assets to the private sector, providing autonomy in management with respect to investment decisions or liberalization administrative pricing or other controls without change in ownership of assets, dismantling and regulating monopolies owned by the public sector hitherto, the variety of ideas reflects diversity in perceptions regarding privatization. They have resulted partly from political circumstances; partly from country specific attitudes to growth and equity and partly from ethnic preference for foreign capital.

The reasons for growth of private sectors are:-
1. The private enterprise has gained immensely from governments
plan policies. The plans have provided the necessary infrastructure for the development of private business as well as very big market.

2. The Indian domestic market has been completely sheltered since the policy of developing indigenous resources led to almost total banning of such imports as might compete, with the products of local industry. This is the further reason why the private enterprise has been able to make good profits even when some of their products were sub standard.

3. Various developmental and financial institutions have been set up by the Government to see that industries are not standard of legitimate financial needs. These institutions provide long-term loans, underwrite their share and debenture issues, provide feasibility studies and other services relating to their projects. A study of the balance sheet of a large number of companies shows that the finance provided by these institutions has enabled the private sector to grow and prosper.

4. Private sector has received various direct incentives from the government. The finance set has often contained various tax concessions such as tax holiday as regards new undertakings, developmental rebate, etc. income tax Act also provides fiscal incentives to the individual and corporate sectors. State finance Acts have provided facilities to industry regarding land, factory, building, power, etc.

(b) Discuss the problems faced by the private sector.
Ans. Problems faced by the Private sector:-
1. Private sector in India has been operating in an environment heavy taxation before the recent scaling down of tax rates in 1997-98. heavy taxation acted as a disincentive to increased production and immobilized funds which might have focused industrial undertakings.

2. corporate sector, not with sanding all the recent reforms, continues to be subject to a number of restrictions. In a recent study conducted to gauge the extent of economic freedom, India has been ranked a lowly 118th in a list of 150- countries, the world over, India is also way down at the 20th position in the list of 25 countries in the Asia Pacific region.

3. there is heavy dependence of the corporate sector on the financial institutions and other government agencies. A recent study of 400 large companies that account for over 50 per cent of private corporate turnover revealed that the public sector has a significant presence in moist of these owning over 50 percent equity in a large number of these companies.

In the new economic policy environment dice is heavily loaded against private enterprise viz a viz foreign capital and enterprise. This is so on the following counts:
Foreign companies have the advantage of business friendly environment in their countries, while Indian private enterprise has still to cope with many controls and regulations.

ii) Indian business companies of high interest rates. High interest rates bring down profits and returns on equity employed. This again hampers its ability to make fresh investments and grow.

iii) Indian business complains of outmoded company law. This makes it difficult for Indian companies to become multinationals in the sense of the term.

iv) Indian business complains of unduly large delays in approvals for land, pollution, etc.

v) The Indian business is captive of its old ways. It is so set in its ways that it cannot get its act together under liberalization. Overawed by threat perception, business only talks of buying back shares of companies under its control. This is its one point programme. Indian business must realize that oligopolistic enterprise with no exportable surplus may be large in a self-sufficient economy but are puny. Unviable, in an economy going global.

vi) Large majority of industrial sectors with high growth potential are faced with legal barriers to growth. Food processing has attracted the highest share of investment but has to cope with a potently outdated food adulteration Act, software industry’s growth is threatened by VSNL’s monopoly over the Internet.In every sector of the infrastructure , the need for governing legislative reform has grown steeply. Consequently, growth in almost all sectors of interest to the private enterprises is paralyzed by the slow development of laws.

7. the issue of disinvestment has raised wider questions such as the need for restructuring PSUs, the extent of disinvestment of government shareholding in operating sectors and the partial / total withdrawal of government from certain industries.

The main dimensions of the disinvestment process are: preparation of the PSU; valuation and finally choosing appropriate disinvestment and sale modalities so as to meet overall goals.
The studies of global experiences indicate that it may often be useful to restructure the PSU before privatization as it can maximize sale proceeds. In particular, restructuring with a clear view to disinvest in a time fashion has been found to enhance share value. On the other hand; if restructuring requires considerable effort, or is laced with uncertainties it has been found prudent to disinvest on an as is where is basis.

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