Private, Public and Global Enterprises

3.1 Introduction

**Private Sector** consists of business enterprises owned and operated by individuals or groups of individuals. Examples include sole proprietorships, partnerships, cooperative societies, and private companies.

**Public Sector** consists of organisations wholly or partly owned and managed by the central or state government. These are established either as departments of a ministry or through a Special Act of Parliament.

**Mixed Economy** refers to an economy where both private and government enterprises are allowed to operate simultaneously. India is a mixed economy where both sectors coexist and contribute to economic development.

Key Point: The Indian economy comprises businesses of all types—small or large, industrial or trading, privately owned or government owned—reflecting its mixed economy structure.

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3.2 Private Sector and Public Sector

Definition of Private Sector

The private sector comprises business organisations owned and controlled by individuals or groups of individuals, not by the government. Various forms include sole proprietorship, partnership, joint Hindu family, cooperative, and company.

Definition of Public Sector

The public sector comprises organisations wholly or partly owned by the central government, state government, or both. These organisations may be:

Part of a government ministry

Established by a Special Act of Parliament

Autonomous bodies created for specific purposes

The government participates in economic activities through these public enterprises.

Industrial Policy and Sector Roles

**Industrial Policy Resolution, 1948:** Specified the approach towards development of the industrial sector. Clear roles were defined for both private and public sectors, with government overseeing economic activities through various Acts and Regulations.

**Industrial Policy Resolution, 1956:** Laid down specific objectives for the public sector to accelerate growth and industrialisation. The public sector received significant emphasis, while the mutual dependency of public and private sectors was emphasised.

**Industrial Policy Resolution, 1991 (Liberalisation Phase):** Radically different from earlier policies. Key features include:

Government started disinvesting its shares in public sector companies

Greater freedom and flexibility given to the private sector

Foreign Direct Investment (FDI) invited from multinational corporations

Entry of global enterprises (multinational corporations) into the Indian economy

**Outcome:** The Indian economy now has public sector units, private sector enterprises, and global enterprises coexisting, creating a vibrant mixed economy.

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3.3 Forms of Organising Public Sector Enterprises

Public sector enterprises require organisational frameworks to function effectively. The government has established three main forms of organising public enterprises, each suited to different operational requirements and strategic objectives.

3.3.1 Departmental Undertakings

**Definition:** Departmental undertakings are the oldest and most traditional form of organising public enterprises. They are established as departments of a ministry and function as an integral part of the government administration itself.

**Characteristics:**

Established as extensions of government ministries

Not constituted as autonomous or independent institutions

Not separate legal entities

Operated through government officers and employees

Subject to central/state government rules and regulations

**Examples:** Indian Railways, Post and Telegraph Department

#### Features of Departmental Undertakings

**Funding:** Funds come directly from Government Treasury as annual appropriation from budget; revenue earned is paid back into treasury

**Accounting:** Subject to same accounting and audit controls as other government activities

**Employees:** Staff are government servants with same recruitment conditions and service rules as other government employees; headed by IAS officers who are transferable between ministries

**Control:** Subject to direct control of the concerned ministry; major subdivision of government department

**Accountability:** Accountable to the ministry since management is directly under concerned ministry

#### Merits (Advantages)

**Parliamentary Control:** Facilitate Parliament to exercise effective control over their operations

**Public Accountability:** Ensure high degree of public accountability

**Revenue Generation:** Revenue earned goes directly to treasury, serving as source of income for government

**National Security:** Most suitable form where national security is concerned due to direct control and supervision by ministry

#### Limitations (Disadvantages)

**Lack of Flexibility:** Fail to provide flexibility essential for smooth business operation

**Delayed Decision-Making:** Employees cannot take independent decisions without ministry approval, leading to delays in matters requiring prompt action

**Missed Opportunities:** Unable to take advantage of business opportunities; bureaucratic over-cautiousness prevents risky ventures

**Red Tapism:** Excessive bureaucracy in day-to-day operations; all actions must follow proper channels of authority

**Political Interference:** Significant political interference through the ministry

**Poor Consumer Service:** Usually insensitive to consumer needs; unable to provide adequate services

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3.3.2 Statutory Corporations

**Definition:** Statutory corporations are public enterprises established by a Special Act of Parliament. The Act defines their powers, functions, rules, regulations governing employees, and relationship with government departments. They are corporate bodies created by legislature with defined powers and financial independence.

**Nature:** A corporate person with capacity to act in its own name; they possess power of government combined with considerable operating flexibility of private enterprises.

#### Features of Statutory Corporations

**Legal Creation:** Set up under Act of Parliament and governed by Act's provisions; Act defines objects, powers, and privileges

**Ownership:** Wholly owned by state; government has ultimate financial responsibility and power to appropriate profits; state bears any losses

**Legal Entity:** Body corporate with capacity to sue and be sued; can enter into contracts; can acquire property in own name

**Independent Financing:** Usually independently financed; obtains funds through borrowings from government or public; derives revenue from sale of goods and services; has authority to use its revenues

**Accounting Procedures:** Not subject to same accounting and audit procedures as government departments; not concerned with central budget

**Employees:** Not government or civil servants; not governed by government rules; conditions of service governed by Act's provisions; sometimes officers taken from government on deputation

**Examples:** State Bank of India (SBI), Life Insurance Corporation of India (LIC), Indian Oil Corporation (IOC)

#### Merits (Advantages)

**Operational Flexibility:** Enjoy independence in functioning and high degree of operational flexibility; free from undesirable government regulation and control

**Financial Autonomy:** Funds do not come from central budget; government generally doesn't interfere in financial matters including income and receipts

**Policy Formulation:** As autonomous organisations, they frame own policies and procedures within powers assigned by Act

**Economic Development:** Valuable instrument for economic development; possess government power combined with private enterprise initiative

#### Limitations (Disadvantages)

**Limited Flexibility in Practice:** Despite stated flexibility, all actions subject to many rules and regulations

**Political Interference:** Government and political interference occurs in major decisions or where huge funds are involved

**Corruption:** Rampant corruption exists where dealing with public

**Governance Restrictions:** Government appoints advisors to Corporation Board, curbing freedom in entering contracts and decisions; disagreements referred to government for final decisions, further delaying action

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3.3.3 Government Company

**Definition (Section 2(45), Companies Act 2013):** A government company means any company in which not less than 51 per cent of the paid-up capital is held by the central government, or by any state government, or partly by central government and partly by one or more state governments. Includes companies that are subsidiaries of a government company.

**Nature:** Established under The Companies Act, 2013; registered and governed by Act's provisions; established for purely business purposes; competes with private sector companies in true spirit. Shares are purchased in the name of President of India.

#### Features of Government Companies

**Legal Creation:** Created under Companies Act, 2013 or previous Company Law

**Legal Capacity:** Can file suit against third party and be sued; can enter into contracts; can acquire property in own name

**Management:** Regulated by Companies Act provisions like any other public limited company

**Employee Appointment:** Employees appointed according to company's own rules and regulations in Memorandum and Articles of Association (these contain company objects and rules)

**Accounting and Audit:** Exempted from standard accounting and audit rules; auditor appointed by Central Government; Annual Report presented to Parliament or State Legislature

**Funding:** Obtains funds from government shareholdings and private shareholders; permitted to raise funds from capital market

**Examples:** NTPC Limited, Steel Authority of India Limited (SAIL), Hindustan Petroleum Corporation Limited (HPCL)

#### Merits (Advantages)

**Easy Establishment:** Can be established by fulfilling requirements of Indian Companies Act; separate Act in Parliament not required

**Separate Legal Entity:** Has separate legal entity apart from government

**Autonomy:** Enjoys autonomy in all management decisions; takes actions according to business prudence

**Market Regulation:** By providing goods and services at reasonable prices, able to control market and curb unhealthy business practices

#### Limitations (Disadvantages)

**Limited Relevance of Companies Act:** Where government is sole shareholder, Companies Act provisions lack much relevance

**Constitutional Responsibility:** Evades constitutional responsibility that government-financed company should have; not answerable directly to Parliament

**Concentrated Management:** Government being sole shareholder means management and administration rest with government; main purpose of government company (registered like other companies) is defeated

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3.4 Changing Role of Public Sector

Initial Role (At Independence)

At the time of Independence, public sector enterprises were expected to:

Play important role in achieving economy's objectives through direct business participation or as catalyst

Build up infrastructure for other sectors

Invest in key areas

Provide goods and services essential for economy

**Reason:** Private sector was unwilling to invest in projects requiring heavy investment and having long gestation periods (extended development time before returns).

Five Year Plans Era

Initial Five Year Plans gave substantial importance to public sector enterprises for industrial development and infrastructure building.

Post-1990s Economic Reforms (Liberalisation Phase)

**New Economic Policies emphasised:**

**Liberalisation:** Reducing government control and regulations

**Privatisation:** Converting public sector enterprises into private enterprises

**Globalisation:** Opening Indian economy to foreign enterprises and investment

Redefined Role of Public Sector

The role transformed from passive participation to:

**Active Competition:** Actively participate and compete in market with private sector companies in same industry

**Accountability:** Held accountable for losses and return on investment

**Performance Standards:** Subject to performance evaluation and efficiency benchmarks

**Restructuring Mechanism:** Inefficient public sector units referred to Board for Industrial and Financial Reconstruction (BIFR) for either overhauling or shutdown

**Result:** Public sector enterprises now operate more like private companies, focusing on profitability, efficiency, and competitive performance while maintaining public interest objectives.

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Comparative Analysis Table

| **Aspect** | **Departmental Undertaking** | **Statutory Corporation** | **Government Company** |

|---|---|---|---|

| **Establishment** | Department of Ministry | Special Act of Parliament | Companies Act, 2013 |

| **Legal Entity** | Not separate entity | Body corporate | Separate legal entity |

| **Funding** | Government budget | Independent/self-financed | Government + market funds |

| **Autonomy** | Minimal | Moderate to High | High |

| **Flexibility** | Low | Moderate | High |

| **Employees** | Civil servants | Not civil servants | Company employees |

| **Accountability** | To ministry | To ministry + public | To shareholders + ministry |

| **Audit** | Government audit | Special audit procedures | Company audit + CAG |

| **Examples** | Railways, Post Office | SBI, LIC, IOC | NTPC, SAIL, HPCL |

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Key Examination Points

**Definition Questions:** Be prepared to define private sector, public sector, mixed economy, departmental undertaking, statutory corporation, government company, and disinvestment.

**Comparison Questions:** Frequently asked—compare any two forms of public sector organisation on basis of establishment, autonomy, funding, control, employees, or accountability.

**Merit-Demerit Questions:** Explain advantages and disadvantages of each form for 5-mark questions.

**Case-Based Application:** Apply forms of public sector organisation to real-world scenarios (e.g., "Which form is most suitable for a manufacturing unit? Why?").

**Policy Changes:** Understand transition from Five Year Plans approach to liberalisation phase and changing government role.

**Real-Life Examples:** Use Indian examples (Railways, SBI, NTPC, LIC) when answering questions about public enterprises.