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 indivi dual as well as cooperative.

The policy thus created two sectors—private 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 co ordination 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 d’etre can bring out five factors.

Better distribution of property and reduction in the concen tration 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 under takings 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.

INDIA’s 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 risingIndia 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 decliningIndia 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 gainsIndia Story

8. India is now the 4th largest economy

India Story

And it will cross Japan between 2012

and 2014 to become the 3rd 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 Services Manufacturing Consumption Investment

DRIVERS OF GROWTH


Domestic Exports Services Manufacturing 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

India’s success is market led

whereas China’s is state induced. The entrepreneur is at centre of

the Indian model

Rise of globally competitiveIndian 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


> 100 Indian Companies have market cap of US$ 1 billion > 1000 Indian Companies have received foreign institutional investment


> 100 Indian Companies have market cap of US$ 1 billion > 1000 Indian Companies have received foreign institutional investment> 125 Fortune 500 companies have R&D bases in India

India has a vibrant private space > 100 Indian Companies have market cap of US$ 1 billion > 1000 Indian Companies have received foreign institutional investment> 125 Fortune 500 companies have R&D bases in India> 390 Fortune 500 companies have outsourced software development to India.


> 100 Indian Companies have market cap of US$ 1 billion > 1000 Indian Companies have received foreign institutional investment> 125 Fortune 500 companies have R&D bases in India> 390 Fortune 500 companies have outsourced software development to India.< 2% bad loans in Indian banks (vs ~ 20% in China)

India has a vibrant private space > 100 Indian Companies have market cap of US$ 1 billion > 1000 Indian Companies have received foreign institutional investment> 125 Fortune 500 companies have R&D bases in India> 390 Fortune 500 companies have outsourced software development to 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 + Free, lively media and pressBut there is: - Poor governance


+ Dynamic democracy + Free, lively media and press - Poor governance - High populist subsidies, which

results in a high fiscal deficit


+ Dynamic democracy + Free, lively media and press - Poor governance - High subsidies High fiscal deficit - No money for infrastructure


+ Dynamic democracy + Free, lively media and press - 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 India’s 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


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

2) Young minds are liberated

Mental Revolution

- ‘I want to be Bilgay’ - Raju’s secret of success - Banianisation of society

- 100 cable channels for $3 - Hinglish


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 21st century

• Why convergence is intuitive• Convergence didn’t happen in the 20th

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

420800

0200400600800

1,0001,2001,4001,600

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 factorsAge 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

India’s 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 world’s 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

• Can’t 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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