Despite the important role played by the public sector in India, the contribution of private sector to overall growth was always higher than public sector because of its significantly higher share in GDP. The importance of private sector can be assessed in terms of its share in domestic saving and gross domestic capital formation. The gross domestic savings and gross domestic capital formation of private sector accounts for around 25 percent and 18 percent respectively of total GDP at market price. The plan wise statistics depicts that private sector dominates the savings and capital formation in the economy. Under the new economic policy the private sector has become more preponderant than public sector.

Profile of Private Sector in India

Considerable Growth
Over the years in the past since independence, the private sector has gown rapidly. There has been an impressive accretions in the number of persons employed, value of output produced and the extent of national income generated. The share of private sector is dominant in agriculture, forestry, fishery and small-scale industries. Though the share of private sector in the heavy industries is not significant but in the recent years an uptrend is witnessed. Further the private sector has grown faster as a result of the FDI liberalization measures, industrial delicensing and external demand boost from devaluation.

Diversified Structure
The private sector in India has a diversified product profile i.e. private sector encompasses a large variety of industries scattered all over the country.

Reasonably Profitable
The private sector has shown profitability greater than its public counterparts. Further the sale, production and investment growth in the private sector exceeds that of public sector.

Shortcomings and Limitations of Private Sector
Private sector though has depicted a spectacular growth profile but it suffers from the limitations discussed as follows:

1) Unhealthy Working:

Barring few exceptions, private sector in India often indulge in unfair business practices of generation of black-economy and corrupt business dealings like evasion of tax, charging higher prices for goods, creating artificial scarcity of Goods etc. A series of capital market scams by big corporate and cooperative banks has brought into sharp focus the need for improvement of regulation of private sector.

2) Lack of Social Orientation:

Private sector is motivated towards short-term gain and often fails to maximize production of essential goods. Private sector has been extremely cautious to venture into innovative products and processes.

3) Slow Progress in R&D:

The private sector has been hesitant to invest in the research and development of technology. Huge public investments are made in the universities and research institutes by the government. The commercial behavior guide the investment and funding of research projects.

4) Monopoly and Concentration of Power:

The restrictive production policies and charging of higher price have resulted in monopoly gains to the private sector. The policy of mergers, acquisition has been used to prevent competition in the industry. The increased foreign investment that targets the small domestic industry to enter the domestic market has further aggravated the problems of concentration of economic wealth in the hands of few.

5) Industrial Unrest:

The labor unrest is quite alarming in the private sector especially amongst small scale and medium-sized enterprises. The wages in these enterprises are quite low and there exists adverse working condition. The industrial disputes are quite high as compared to the public sector. This often results into strikes, lockouts, gheraos etc. The harmful consequences are obvious: work stoppage leading to the non-utilization of capital equipment, idle labor, resulting in the wastage of economic resources.

6) Sickness:

The large number of total unit in the private sector is either sick or prone to become sick. The sickness is the result of many problems such as bad management, old production methods, outdated technology, inadequate capital and labor unrest.

Public vis-à-vis Private Sector in the Post Liberalized Period

The public sector in India has played a significant role in the overall development of the economy. The reform process has redefined the role of public sector to focus on strategic areas which are considered essential for accelerating economic growth. The public sector will focus on the regulatory aspects so as to allow the smooth operations of competitive markets. Further, government is expected to play a greater role in the development of social and physical infrastructure in the country. The role of private sector has increased tremendously in the areas which have a scope of competitive markets. Strengthening the private sector’s capability is also an important need. This could be achieved through enhancing their capital base and widening the range of debt instruments available in the market. Supporting deserving projects through insurance and guarantee products would moderate the risk profile of the projects and improve the private participation in the infrastructure sector.

Role of the private sector in Governance

The private sector is a key stakeholder in both urban and economic development, being a major contributor to national income and the principal job creator and employer. The private sector provides around 90% of employment in the country (including formal and informal jobs), delivers critical goods and services and contributes to tax revenues and the efficient flow of capital. Further, it will undertake the majority of future development in urban areas. It is increasingly being encouraged to help leverage the opportunities, and mitigate the challenges, of rapid urbanisation. Private sector actors are perceived as playing a role in urban governance: they influence whether urban areas develop in inclusive and sustainable ways, and they affect poverty reduction and drivers of fragility and conflict such as unemployment, exclusion and instability. Interactive planning and decision-making processes are needed to support private sector participation in urban governance, and to co-ordinate this participation with municipalities. comments that municipalities can strengthen urban governance in co-operation with the private sector by fostering partnerships and local economic development (LED) strategies that combine local skills, resources and ideas to stimulate the local economy, enabling it to respond innovatively to national and global economic changes. For example, effective LED strategies detail how the municipality will:

  • develop and maintain infrastructure and services;
  • promote and expand existing businesses;
  • address inefficiencies in the local economy;
  • promote human capital development, to help vulnerable groups especially to participate in the labour market;
  • encourage community development by promoting community business and co-operatives, local exchange systems and informal credit etc.;
  • promote small, micro and medium enterprises (SMME) through supply-side measures (training, provision of space and facilities for commercial activity etc.) and demand-side measures (reforms to procurement policy to ensure access for SMMEs to contracts);
  • attract investment in the city.

  • An explicit LED strategy links long-term economic growth issues with short-term concerns about joblessness, inequality and the role of the private sector in a sustainable development strategy. In fostering partnerships, municipalities need to build relations with local and foreign private sector interests by involving associations and companies in city-wide strategic planning processes. This can build commitment to a broader vision for the city that goes beyond short-term interests. This might involve a formalised partnership with organised business (e.g. PPPs) based on the municipality’s strategic vision. Other innovative collaborations include private sector provision of managerial and technical training and support to help municipalities improve the strategic management of urban areas.

    In India, the informal sector is the main provider of goods and services to the poor. City-wide development initiatives need to assist businesses with potential to mature by eliminating punitive regulations that discourage the informal sector. But programmes need to balance two objectives: maximising the potential of informal enterprises to create jobs and alleviate poverty, while ensuring that necessary social protections and regulations are in place. A comprehensive strategy to respond to informal enterprises should include:

  • supportive policies on finance and credit that involve the formal banking sector, government and NGOs;
  • support for local exchange trading and barter systems where these can equitably be sustained;
  • supply-side measures such as the creation of incubators where informal entrepreneurs can grow businesses with some measure of protection, alongside the development of markets;
  • consideration of home-based enterprises in planning and infrastructure development initiatives;
  • reform of procurement policies to promote links between established and emerging businesses.
  • As noted, a common approach to engaging with the formal private sector is through PPPs. They can be defined as contracts between a private enterprise and government, providing a public asset or service in which the private enterprise bears the risk and management responsibility and remuneration is linked to performance. Involving the private sector in the design, construction and maintenance of infrastructure and the provision of services has been highlighted as an area where PPPs can be particularly influential. The rationale for PPPs is that they provide a mechanism for governments to procure and implement public infrastructure including services, using the resources and expertise of the private sector (World Bank, ADB & IDB, 2014).

    Building more and better infrastructure is an important goal for many economies with limited public revenues (UNDESA, 2013a). The quality of urban infrastructure determines the growth-enhancing benefits of urban concentration. Countries with good urban infrastructure can accommodate rapid population increases in urban areas and sustain high economic growth. The quality of a city’s infrastructure (housing, electricity, roads, airports, public transport, water, sanitation, waste management, telecommunications, hospitals, schools, etc.) also influences social inclusion, economic opportunity and quality of life (UNU, 2013).

    The OECD (2007) notes the scale of the challenge: global infrastructure investment is forecast to cost $71 trillion by 2030 (about 3.5% of forecasted global GDP). Much of this investment is required in emerging economies like India. PPPs have been identified as one possible solution (WEF, 2014).

    Partnering with the private sector could: extend services into poorer or informal communities, provide safer work places, promote adoption of non-discriminatory employment policies, help the poor access credit, and boost investment in low-cost housing. Examples such as the slum networking project in Ahmedabad highlight that partnerships among urban stakeholders need to be based on a thorough understanding of community needs and pursued in tandem with other initiatives. In that context, the private sector actively sought out partnerships with residents of informal settlements, NGOs and municipal government. Such collaborative ventures involve information, education and community campaigns to ensure that residents of informal settlements were involved and had some ownership of programmes. They also sought to provide assistance to the poorest families through the provision of micro-finance. The requirements for successful partnerships include a buoyant private sector alongside a capable and authoritative local government motivated by a common economic interest. Policymakers need a clear vision of PPP objectives and a sound understanding of the local context to appreciate advantages and limitations. A thorough analysis of the long-term development objectives and risk allocation is essential. However, in many regions the legal frameworks dealing with tendering, contracts and oversight are weak or unimplemented, and this lack of clarity discourages domestic and foreign business investment. At the same time, PPPs have proved complex to implement, involving pre-feasibility studies and requiring high technical expertise and negotiation capacities (UN-Habitat, 2016). National and local governments often lack the information and expertise necessary to negotiate on an equal footing with companies that have extensive experience in public service delivery.

    To enable the private sector to engage in urban planning, public policy and development objectives, the public sector needs to (UN, 2008):

  • Consider incentives that encourage private sector participation. World Bank research (2005) suggests legal and regulatory reform is necessary to support more sustainable economic growth and enhance the private sector’s impact.
  • Consider arrangements beyond PPPs to meet its financial needs (e.g. fiscal decentralisation, issuing municipal bonds, etc.) and non-financial obligations (improving service provision through better management of operating systems, reducing distribution and transmission costs, reducing water and electricity theft by informal network providers, combating corruption, promoting e-governance, etc.)
  • Implement specific policy instruments and interventions that complement, coordinate and collaborate with the private sector rather than compete against it.

  • Whilst the emergence of the private sector as a key player in delivering large-scale land development and infrastructure has been beneficial to many financially challenged cities, when poorly managed, PPPs and privatisation can lead to a weakening of public regulation, and contribute to urban fragmentation and increasing inequality – particularly in access to land and services (UNESCAP & UN-Habitat, 2015). We caution that privatisation has often failed to improve services for the majority of urban dwellers and been accompanied by price increases that have led to disillusionment. Where privatisation has led to improvements, it has usually been at the expense of universal coverage, with low-income areas excluded.