Public Private Sector

Public and Private Secor
In recent years role of private and public sectors

have become a great controversy.

For long, industries in India have been entirely
within the private lector.

The Government was just a silent spectator.

Since Independence significant departure has been
made.

These were left to the enterprise and individuals and
the Government remained a silent During World War
II.
But these were artatag more than a Jwc measures to
meet the exigency, there was a sign of a well thought
out and systematic
Similarly, the Government did take some measure
some laws in respect of industrial labor and like these
were adopted in the spirit of routine regulatory
measure to own and run industries and the limits
imposed on the private enterprise.
Industries were divided in four categories.
The first of these included the manufacture of arms and
ammunition, production and control of economic
energy and the ownership and management of railway
transport.
These were the exclusive monopolies of the State.
The second category included six important
industries
coal, iron and steel, aircraft manufacture, ship
building, mineral oils and manufacture of
telephones, telegraph and wireless apparatus
(excluding radio sets).
The development of these in future was
primarily a responsibility of the State.
The existing undertakings in these industries
were left with the private seetor rot a period of
ten years during which they were allowed all
facilities for efficient working and reasonable
expansion.
The third category comprised certain basic industries
of importance including
salt, automobiles, traction prime moving, electric
engineering, , heavy machinery, machine tools, heavy
chemicals, fertilisers, electrochemical industries,
nonferrous manufactures rubber manufactures, power and
industrial alcohol, cotton and woollen textiles, cement,
sugar, paper and newsprint, air and sea transport, minerals
and industries relating to defence.
These industries were regarded important for national
interest and were, therefore, subjected to Central
control and regulations.
The fourth category of industries covred the rest of the
industrial held and it was left open normally to the
private enterprise individual as well as cooperative.
The policy thus created two sectorsprivate and public.

The policy was given mixed reception.
The supporters of the private sector described it onesided and
unduly prejudiced against the capitalists while the protagonists
of Socialism regarded it as the first act to lay down the
foundation of democratic socialism.
This policy remained in force upto 1956.
During these eight years private investment in industries
increased considerably The immediate apprehensions
regarding the circumscribing of the private sector proved
unfounded.
There was, however, one weakness in the policy and its
implementation. No priorities were laid down and even if laid
down were not followed in practice. State Governments
adopted measures to nationalise electric supply concerns.
Air transport, though not included in schedule, was
nationalized.
Road transport, received a very high priority in the
nationalisation programme of State Governments.
On the other hand, the Government adopted a rigid
approach in some cases;, insisted that steel works in
future could be taken only in the public sector.
This gave the harmful consequences of slow
expansion.
There was Jack of coordination between the various
Departments of the Central Government on the one
hand and the centre and the State Governments on th
other.
The New Industrial policy Resolution of 1956 included
seventeen industries in schedule I and twelve in
schedule II.
The public sector now has a much wider field to itself.
Its obligation has thus gone up.
Once again the supporter of the private sector,
Dr. John Mathai pleaded for making free
enterprise the normal practice.
Mr. Bhabha saw in it the beginning of State
Capitalism and the ultimate extinction of
entrepreneurial activities.
Mr. Eugene Black, the then President of the
World Bank thought that the Government was
exceeding its capacity.
The expansion of the public sector is a matter of
policy and is also being reflected in
implementation.
In context of the Indian conditions the Raison
detre can bring out five factors.
Better distribution of property and reduction in the
concentration of wealth and economic power and
facilitating the speedy accelerated industrialisation of
the country.
In the past, industries were entirely in the private sector
which became a repository of wealth and economic
power. This had its harmful repercussions.
A country accepting the socialist pattern of society and
working within a politically democratic setup cannot
permit these tenancies to continue undeterred.
To prevent excessive concentration of power in a few
hands, the undertaking of industrial enterprisesin
public sector is very wisfly regarded as an effective
remedy.
The success of the public sector is reducing economic
concentration and widely diffusing the benefits of
industrialisation. However it depends upon a number
of factors.
The public sector undertakings should be efficiently
managed and should generate profits and excesses.
The second factor is more pressing. Indian industries
recorded a very slow rate of progress in the pre-
Independence period.
To give it speed and directive, faster expansion of the
public sector was thought necessary.
The factors of controversy have been two.
First the Government has reserved the fields in which
the private sector could effectively function and has
restricted its area of operation.
Secondly the Government has placed unduly harsh
restrictions and regulations on the expansion of private
sector industries.
But a little more thorough examnation will prove that
these changes are not well founded.
INDIAs
FUTURE

Even though the world has just
discovered it, the India growth
story is not new. It has been
going on for 30 years old

What is the India story?
1) Rising GDP growth
% average annual GDP growth

1900 1950 1.0
1950 1980 3.5
1980 2002 6.0
2002 2006 8.0

Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 1990-2000:Census of India (2001), 2000-
2005 Finance Ministry

India Story
2) Population growth is slowing
% average annual growth

1901 1950 1.0
1951 1980 2.2
1981 1990 2.1
1991 2000 1.8
2001 2010 1.5

Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 1990-2000:Census of India (2001)

India Story
%
1950 17
1990 52
2000 65
2010 (proj) 80

Source: Census of India (2001)
3. Literacy is rising
India Story
% Million
People

1980 8 65

2000 22 220

2010 (proj) 32 368

Source: The Consuming Class, National Council of Applied Economic Research, 2002
4. Middle class is exploding
India Story

1980 46%
2000 26%
2010 (proj) 16%

1% of the people have been crossing poverty line
each year for 20 years. Equals ~ 200 million.
5. Poverty is declining
India Story
6. Productivity is rising

India Story

30% to 40% of GDP growth is due to
rising productivity
(US$ ppp)

1980 1178

2000 3051

Source: World Bank
7. Per capita income gains
India Story
8. India is now the 4
th
largest
economy

India Story

And it will cross Japan between 2012
and 2014 to become the 3
rd
largest

THE INDIA MODEL IS
UNIQUE

DRIVERS OF GROWTH
India East and S.E. Asia

Domestic Exports
DRIVERS OF GROWTH

Domestic Exports
Services Manufacturing
DRIVERS OF GROWTH

Domestic Exports
Consumption Investment
DRIVERS OF GROWTH

Domestic Exports
Consumption Investment
High tech, capital Low tech, labour
intensive industry intensive industry
IMPLICATIONS OF INDIA MODEL
Domestic led

Insulation from global downturns
Less volatility
IMPLICATION OF INDIA MODEL
Services led

Have we skipped the industrial
revolution?
How do we take people from farms
to cities?
IMPLICATION OF INDIA MODEL
Consumption led

People friendly: Consumption as % of GDP
India 64
Europe 58
China 42

Less inequality GINI INDEX
India 33
U.S 41
China 45
Brazil 59

The world needs another big consuming economy after the U.S.

Reasons for Success

Indias success is market led
whereas Chinas is state induced.
The entrepreneur is at centre of
the Indian model

Rise of globally competitive
Indian companies:

Reliance, Jet Airways, Infosys, Wipro,
Ranbaxy, Bharat Forge, Tata Motors,
TCS, Bharati, ICICI and HDFC Banks

India has a vibrant private space

> 100 Indian Companies have market
cap of US$ 1 billion
> 1000 Indian Companies have
received foreign institutional
investment
investment
> 125 Fortune 500 companies have
R&D bases in India
investment
R&D bases in India
outsourced software development to India.
investment
R&D bases in India
< 2% bad loans in Indian banks (vs ~ 20% in China)
investment
R&D bases in India
< 2% bad loans in Indian banks (vs ~ 20% in China)
> 80% credit goes to private sector (vs~10% in
China)
But public space is a problem
Although we have a:
+ Dynamic democracy with
honest elections
Public space is a problem
Although we have a:
+ Dynamic democracy
+ Free, lively media and press

+ Dynamic democracy with
But there is:
- Poor governance
+ Dynamic democracy
- Poor governance
- High populist subsidies, which
results in a high fiscal deficit
+ Dynamic democracy
- Poor governance
- High subsidies High fiscal deficit
- No money for infrastructure
+ Dynamic democracy
- Poor governance
- High subsidies High fiscal deficit
- Creaky infrastructure
- Inefficient government companies

Earlier we had world class
institutions, but they are now failing
Bureaucracy
Judiciary
Police
Contrast between public and private
space raises the question :

Is India rising despite the state ?

Economy grows at night when
government is asleep

What explains Indias economic
success?

1) Even slow reforms add up
- state getting out of the way
- every government has reformed
since 1991

Key Reforms
Opened economy to trade and investment
Dismantled controls
Lowered tariffs
Dropped tax rates
Broke public sector monopolies
success?
1) Even slow reforms add up-state
getting out of the way

2) Young minds are liberated

Mental Revolution

- I want to be Bilgay
- Rajus secret of success
- Banianisation of society
- 100 cable channels for $3
- Hinglish

success?
1) Even slow reforms add up-state
getting out of the way

2) Young minds are liberated

3) India has found its competitive
advantage in the knowledge economy

Looking Forward
7% - 8% economic growth
Democracy will not permit more than 8%
1.5% Population growth
($)

2000 2100
2005 3050
2020 5800
2040 16,800
2066 37,000

This means a per capita income
roughly of (on a ppp basis):
Convergence in the 21
st
century
Why convergence is intuitive
Convergence didnt happen in the 20
th

century because the world was closed
Returning to a world of equality prior to
1750
When China and India accounted for 45%
of world GDP

Why will growth continue?

Demographic dividend

Demographic trend points to sharp increases in input factors
54%
46%
25+
yrs
0-25
yrs
Demographic Split
420
800
0
200
400
600
800
1,000
1,200
1,400
1,600
2005 2025
1.5 bn
1.1 bn
Labor
Force
Labor Force will double in the next 20 years
Demographic trend points to sharp increases in input factors
Age Dependency
72%
45%
<50 %
62%
0%
20%
40%
60%
80%
1980's 2002 2025 China 2002
17%
42%
35+%
24%
0%
10%
20%
30%
40%
50%
1980's 2002 2025 China 2002
Savings Rate
Higher savings and investment rate will translate into higher GDP growth
Indias demographic advantage
means that its high growth will
continue longer term while China
will slow
%
1980 8
2000 22
2010 32
2020 50 West of the
Kanpur-Chennai line
2040 50 East of the
Kanpur-Chennai line

INDIA WILL GRADUALLY TURN
MIDDLE CLASS

By 2010 India will have worlds
largest number of English speakers

When 300 million Indians speak a
word in a certain way, that will be
the way to speak it.
-Prof. David Crystal, Cambridge Encyclopedia of the English Language

What could stop the show?
Fiscal deficit
Infrastructure
Bad governance
Nuclear war

REFORM SCHOOL

Labour
REFORM SCHOOL

Labour
Agriculture
Second Green Revolution

technologically led, based on
GM seeds
labor intensive
needs reforms

REFORM SCHOOL

Labour
Agriculture
Power
REFORM SCHOOL

Labour
Agriculture
Power
Red tape
REFORM SCHOOL
Labor
Agriculture
Power
Red tape
Governance
Corporate Governance

- High in India
- Low in China

Bottom Line
Indian prosperity is on auto pilot
Cant do without government. But governance
reform will take time, till middle class is
dominant.
Human capital will continue to flower based on
private initiative, and drive the nation

India has law, China has order

-India got democracy before
capitalism and this has made all the
difference
-It will be slower than China but its
path will be surer
-India more likely to preserve its
way of life

The Wise Elephant

Public Private Sector

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Public Private Sector

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Public and Private Secor

In recent years role of private and public sectors

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