Private Public & Global Enterprises
Long Answer Type
Question 1: Describe the Industrial Policy 1991, towards the public sector.
Answer: The government had introduced four major reforms in the Industrial Policy 1991; as far as public sector is concerned. Following are the main elements of new industrial policy:
- Restructure and revive potentially viable PSUs.
- Close down PSUs, which cannot be revived.
- Bring down government’s equity in all non-strategic PSUs to 26% or less if necessary.
- Fully protect the interest of workers.
Some major changes in government policies after the new industrial policy was implemented are as follows:
- Reduction in number of industries reserved for public sector from 17 to 8 (and then to 3): In 1956 resolution on industrial policy, 17 industries were reserved for the public sector. This number was reduced to 8 in 1991 industrial policy. In 2001, a review of the policy was done and only 3 industries are now reserved for public sector. Now, only atomic energy, arms and rail transport are reserved for public sector. This means that all other industries have been thrown open for the private companies. This was done to ensure a higher level of competition so that consumers would get more choices in terms of various offerings. This was also done to emphasize that both public and private sector can coexist mutually and would benefit each other and the general public.
- Disinvestment of shares of a select set of PSUs: Disinvestment was done so that general public and workers could get ownership in these PSEs. It was also done with many other objectives. The government wanted to withdraw from the industrial sector and reduce its stakes so that it could focus on governance which is the main job of the government. The government also wanted to liquidate large sum of money which was locked in non-strategic PSEs. This fund could then be utilized for various works related to public welfare. The government also wanted to get least exposure to market risks and pass on such risks to the private players. This could ensure better efficiency in management of those PSEs. It was also done to end government monopoly in many sectors like telecommunications.
- Policy Regarding Sick Units: The sick PSUs were to be treated on the same basis as private companies. A sick PSU was referred to BIFR which had to decide if the PSU was to be revived or shut down. There was huge resentment among the workers of companies which had to be shut down. But the government formulated suitable policies for rehabilitation and financial compensation of those workers.
- Memorandum of Understanding: Fresh MOUs were signed between the management and the concerned ministries. These MOUs provided greater autonomy to the management and clear cut objectives so that performance could be improved.
Question 2: What was the role of the public sector before 1991?
Answer: Following was the role of the public sector before 1991:
- Development of Infrastructure: During the initial years after independence, the private sector in India did not have technical capability and financial resources to invest in infrastructure. It is important to note that infrastructure needs huge amount of capital and a very long gestation period. A good infrastructure; in terms of road, railways, ports, telecommunications, power generation, etc. is mandatory to lay solid foundation of an economy. Moreover, infrastructure also needs to be developed in backward areas which may not be lucrative for a private player. A well developed infrastructure facilitates overall economic activities and helps in boosting the economy.
- Regional Balance: During the colonial rule in India, development was concentrated in certain pockets and these pockets were limited to port towns. Most of the other areas remained backward and people were in abject poverty. This had to be rectified so that every part of the country could enjoy the benefits of development. Thus, ensuring regional balance was one of the major aims of the public sector.
- Economies of Scale: It is a common business dictum that a large business organization achieves economy of scale and hence remains profitable in the long run. Since private players did not have the requisite capital, it was left to the government to build large companies so that economies of scale could be achieved. Apart from achieving profitability, economy of scale also ensures that products can be made more affordable to the general public.
- Check over-concentration of economic power: In the private sector, there are a few business houses which have the financial capability to invest in large infrastructure projects. They can execute the projects quite efficiently and may end up being monopoly player. This will result in concentration of economic power in a few hands. Monopoly is never good from a customer’s perspective and hence it is important that over-concentration of economic power should be prevented. Thus, PSUs helped in preventing over-concentration of economic power.
- Import Substitution: In the Third Five Year Plan, self reliance was one of the key objectives for the country. During that period, obtaining foreign exchange was a major problem and thus it was difficult to import heavy machineries for long term use. Dependency on foreign exchange could only be reduced by implementing suitable steps for import substitution. Many PSUs improved their productivity and helped in reducing our reliance on imports. Moreover, many other PSUs contributed significantly towards foreign exchange earnings through exports.
Question 3: Can the public sector companies compete with the private sector in terms of profits and efficiency? Give reasons for your answer.
Answer: It is a general perception that PSUs are behemoths which move like elephants. This perception has been created because many PSUs are examples of inefficiency and continue to incur losses year after year. So, a prompt reply to this question would be that public sector companies cannot compete with the private sector in terms of profits and efficiency. But we need to be careful while answering this tricky question.
There are many PSUs; especially the navaratnas which are generating healthy profits year after year. These PSUs are good examples of efficiency and best practices. Not very long back, Maruti Udyog Limited was a PSU because the government of India had majority stake in this company. This is the same company which changed the scenario in car market in India. Many people could afford to buy a car because of Maruti.
Inefficiency and loss making is not only seen in PSUs but also in many private sector companies. There can be many examples of private companies which had to shut down shop because of various problems; especially because they were loss making entities.
The above examples show that there is no reason why the PSUs cannot compete with the private companies in terms of efficiency and profitability. For ensuring that, the PSUs need to be given more autonomy along with the desired level of accountability. They should also be thrown open to competition because facing the competition is the best way to learn a game.
Question 4: Why are global enterprises considered superior to other business organisations?
Answer: Global enterprises are considered superior to other business organizations because of various reasons. The main reasons are as follows:
- Huge Capital Resources: These companies have huge capital resources. They can access almost any source of funding; like public issues, debentures, loans, etc. Because of their good credibility, they can easily get loans from any financial institution. Even the government and leading financial institutions in the host country are willing to invest money in these companies. Because of strong financial muscles, these companies can survive in almost any situation; because they have the capability to withstand long periods of gestation.
- Foreign Collaboration: Global enterprises usually enter into collaboration with a private company or government company while entering a new market. Because of their very good brand equity, the local companies are more than willing to make an alliance with global enterprises. We can take example of Hero Honda which was collaboration between Hero (India) and Honda (Japan). By entering into collaboration, these companies transfer the technology and rights of using a brand name to the host country. Thus, these companies easily spread their footprints across the world and sell their products in different markets. Their ability to forge alliances gives them an edge over local players.
- Advanced Technology: These companies conform to international standards of quality and follow the best practices of operations management. They can afford to hire highly talented people for research and development so that they can come with new products and solution. All these things need lot of investment which is possible by large organizations only.
- Product Innovation: Most of the global enterprises have made their mark because of their ability to come with innovative products. We can take the example of a simple product; like PostIt notes. This is an innovative product by a company called 3M. This simple; low technology product sells almost everywhere in the world. These companies invest huge time and money on designing innovative products which can radically change the life of a customer. Till date no local company has been able to do that.
- Marketing Strategies: The global enterprises use aggressive marketing strategies to promote and sell their products. They invest huge amount of money in promotion. They build a very efficient distribution network so that the product can be made available in every nook and corner of the country. Let us take the example of Pepsi and Coke. Before these two brands entered the Indian market, cold drink used to be a luxury and could only be found in cities and towns. Now-a-days, you can find a bottle of Coke or Pepsi even in a remote village. This could have been possible because of efficient and aggressive marketing strategy of these companies.
- Expansion of Market Territory: The global enterprises operate in most parts of the world. This gives them the access to a huge market which results in huge volume of sales. A larger number of customers obviously translate into better profitability.
- Centralized Control: These companies usually control their global operations through their headquarters in their home country. However, country managers in different countries are given a fair degree of autonomy.
Question 5: What are the benefits of entering into joint ventures?
Answer: The benefits of entering into a joint venture are as follows:
- Increased resources and capacity: By entering into a joint venture, a company gets access to increased resources and capacity. The company gets access to more capital, more assets; in terms of factories and offices. It gets the services of a larger pool of human resources. Thus, the company becomes better equipped to face the market challenges.
- Access to new markets and distribution networks: When a company enters into a joint venture with another company both the companies get access to new markets and distribution networks. This gives them access to a larger number of customers which has the potential to grow the sales manifold.
- Access to technology: Making a new product can be time consuming and would involve investment of huge amount of money. A joint venture is an easier way to get access to new technology. During the 1980s, the automobile sector in India began its phase of growth and this could be possible because of several joint ventures between Indian companies and various global brands.
- Innovation: A joint venture also enables a company to come with innovative product. Innovations can also be in the realms of day to day management of business.
- Low cost of production: When a global corporation enters into a joint venture with an Indian company, it gets the benefit of low cost of production. Wages are very low in India; compared to in the developed countries. This enables the MNCs to lower their cost of operations when some parts of business process are being done in a low wage country like India. Lowering the cost is one of the ways of improving profitability.
- Established brand name: There are many brands which have a strong goodwill among the public. Most of the people know about them even before their introduction in India. A good recall value of a brand helps in winning prospective customers and in ensuring sales.