Big picture
India has a mixed economy: businesses are owned both by private individuals and by the government. The private sector is owned by individuals or groups; the public sector is owned, wholly or partly, by central or state governments.
The public sector was meant to build infrastructure, develop backward regions and prevent the concentration of economic power. Since 1991 its role has changed, and India has opened up to global enterprises, joint ventures and public-private partnerships. Exam questions ask you to identify the form of enterprise from its features and to explain the changing role of the public sector.
Learning goals
Distinguish the private and public sectors.
Explain the features, merits and limitations of departmental undertakings, statutory corporations and government companies.
Explain the changing role of the public sector and government policy since 1991.
Explain the features of global enterprises.
Explain joint ventures, their types and benefits.
Explain public-private partnership.
Core ideas
1. Private and public sectors
Basis | Private sector | Public sector |
|---|---|---|
Ownership | Individuals or groups | Central or state government, or both |
Aim | Profit | Public welfare and development (with financial viability) |
Forms | Sole proprietorship, partnership, company, cooperative | Departmental undertaking, statutory corporation, government company |
Example | A privately owned steel company | Indian Railways, Life Insurance Corporation, Steel Authority of India Ltd |
2. Departmental undertakings
These are enterprises run as departments of a ministry, financed and controlled like any other government department. Examples: Indian Railways, India Post, All India Radio (as part of Prasar Bharati's history), ordnance factories.
Features: funded by annual appropriations from the government budget, and revenue goes to the treasury; subject to the same accounting and audit controls as other government departments; staffed by government employees; under the direct control of the concerned ministry; enjoy sovereign immunity (can't be sued without government consent).
Merits | Limitations |
|---|---|
Effective control by Parliament | Lack of flexibility, essential for business |
High public accountability | Delays in decisions due to red tape |
Revenue goes to the treasury | Unable to take advantage of business opportunities |
Suitable where secrecy and national security matter (defence) | Officials lack business experience; insensitive to consumer needs |
3. Statutory corporations
These are public enterprises created by a special Act of Parliament or a state legislature, which defines their powers, functions, rules and relationship with government. Examples: Life Insurance Corporation of India (LIC), Reserve Bank of India, Food Corporation of India, Airports Authority of India.
Features: set up by a special Act; a separate legal entity that can sue and be sued; usually independently financed (can borrow and earn revenue) but may get funds from government; staff are not civil servants; not subject to the budget, accounting and audit procedures of government departments; has financial autonomy.
Merits | Limitations |
|---|---|
Independence and flexibility in operations | Operational flexibility is limited in practice by government and political interference |
Government cannot interfere in financial matters (largely) | Corruption where dealings with the public are involved |
Self-contained organisation | Rigid rules (any change needs an amendment of the Act) |
Valuable service to the nation through autonomy | Profit is not the main aim, so losses may be tolerated |
4. Government companies
A government company is any company in which not less than 51% of the paid-up share capital is held by the central government, state government(s), or both. It is registered under the Companies Act, 2013. Examples: Steel Authority of India Ltd (SAIL), Bharat Heavy Electricals Ltd (BHEL), Hindustan Aeronautics Ltd (HAL), Coal India Ltd.
Features: registered under the Companies Act; a separate legal entity; management governed by the Companies Act; employees appointed according to its own rules; obtains funds from government shareholding and other shareholders, and can raise funds from the capital market.
Merits | Limitations |
|---|---|
Easy to establish (only Companies Act formalities) | Being mostly government-owned, it escapes the full constitutional accountability of departmental bodies |
Its own memorandum and articles, so it is free in management | Government is the major shareholder, so it may be run by government whims |
Takes decisions quickly; flexible | Directors are often government officials who may lack business focus |
Can curb unhealthy practices of the private sector |
Comparison of the three forms
Basis | Departmental undertaking | Statutory corporation | Government company |
|---|---|---|---|
Formation | By a government order, part of a ministry | By a special Act of the legislature | Registered under the Companies Act |
Legal entity | Not separate | Separate | Separate |
Finance | Annual budget appropriations | Independent; may get government funds | Government and private shareholders; capital market |
Employees | Government servants | Not civil servants; own rules | Own rules |
Autonomy | Least | Considerable | Most |
5. Changing role of the public sector
At independence, the public sector was expected to:
Develop infrastructure (railways, power, steel, ports) that private investors couldn't fund.
Promote regional balance by setting up industries in backward areas.
Achieve economies of scale in industries that need huge capital (power plants, gas).
Check the concentration of economic power in a few private hands.
Promote import substitution in heavy engineering and capital goods.
Government policy towards the public sector since 1991
Reduction in the number of industries reserved for the public sector to a very small list (atomic energy and railway operations being the main ones remaining), opening the rest to private firms.
Disinvestment: selling part of the government's shares in public sector enterprises to private investors and the public, to raise funds and improve efficiency.
Policy regarding sick units: sick public sector units were referred to the Board for Industrial and Financial Reconstruction (BIFR) for revival or closure.
Memorandum of Understanding (MoU): agreements between government and PSU management that give management more autonomy in return for accountability for specified results. Profitable PSUs were given greater autonomy as Maharatnas, Navratnas and Miniratnas.
6. Global enterprises (multinational corporations)
A global enterprise or MNC is a large company with operations in many countries, through branches, factories and subsidiaries, while its headquarters remains in its home country.
Feature | Meaning |
|---|---|
Huge capital resources | They raise large funds from many sources, including international capital markets |
Foreign collaboration | They enter into agreements with local firms on technology, brands and production |
Advanced technology | They use the latest technology, giving world-class quality |
Product innovation | Large research and development budgets create new products |
Marketing strategies | Aggressive marketing and strong global brands |
Expansion of market territory | Operations across many countries |
Centralised control | Headquarters controls policies of all branches and subsidiaries |
7. Joint ventures
A joint venture (JV) is formed when two or more businesses agree to pool resources for a common purpose, sharing ownership, control, risks and rewards.
Types
Contractual joint venture: no new business entity is created; the partners work together under an agreement (for example, a franchise arrangement).
Equity-based joint venture: a new, separate business entity is created, jointly owned by the partners, who share capital and management.
Benefits of joint ventures
Benefit | Example |
|---|---|
Increased resources and capacity | Partners pool finance, skills and production facilities |
Access to new markets and distribution networks | A foreign firm uses an Indian partner's established distribution network |
Access to technology | An Indian firm gains advanced foreign technology |
Innovation | Partners combine ideas to create new products |
Low cost of production | A foreign firm benefits from lower costs in India |
Established brand name | One partner's well-known brand helps the venture's products sell |
8. Public-private partnership (PPP)
PPP is an arrangement in which the government and a private company work together to deliver public infrastructure or services, sharing resources, risks and rewards. Typically the government provides land, approvals and policy support; the private partner provides finance, technology and management, and recovers its investment through user charges or government payments over a contract period.
Features: an agreed sharing of risks and rewards; a long-term contract with defined responsibilities; used in sectors such as roads and highways, airports, ports, power, urban transport (metro rail), water supply and health.
Examples: modernisation of major airports such as Delhi and Mumbai under PPP, and many national highway projects.
A reliable approach to case-based questions
Part of a ministry, funded by the budget, staffed by civil servants: departmental undertaking.
Created by a special Act, separate legal entity: statutory corporation.
Registered under the Companies Act, with government holding at least 51%: government company.
Operations in many countries with centralised control: global enterprise.
Two firms pooling resources for a shared venture: joint venture; with government as one partner for infrastructure: PPP.
Connections that matter
Forms of business organisation covers private sector forms; this chapter adds public sector forms.
Class 12 business environment discusses the 1991 reforms (liberalisation, privatisation, globalisation) that changed the public sector's role.
International trade explains how global enterprises and joint ventures enter foreign markets.
Common mistakes
Saying a government company needs 100% government ownership. At least 51% of paid-up capital is enough.
Calling a statutory corporation part of a ministry. It is a separate legal entity created by an Act.
Treating a contractual joint venture as a new company. Only an equity-based JV creates a new entity.
Thinking disinvestment means closing a PSU. It means selling part of the government's shares.
Revision checklist
I can distinguish the private and public sectors.
I can explain and compare the three forms of public enterprise.
I can explain the role of the public sector and policy since 1991.
I can explain the features of global enterprises.
I can explain joint ventures, their types and benefits, and PPP.