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Multiple Type Questions
Question 1. A government company is any company in which the paid-up capital held by the government is not less than
(a) 49 percent
(b) 51 percent
(c) 50 percent
(d) 25 percent
Answer (b) 51 percent
In a government company, the paid-up capital held by the state or central government is at least 51 percent of the total shares. In case the percentage of shares held by the government falls below 51, then the organisation cannot be regarded as a government company. In case, the government holds 49 per cent of shares in a company, the company is considered as a private organisation. Hence, the correct answer is option (b).
Question 2. Centralised control in MNC's implies control exercised by
Answer (c) Headquarters
Centralised control in the context of MNCs refers to the control exercised by the corporation’s headquarters. In the case of MNCs, the headquarters exercise (centralised) control over all its branches and subsidiaries across all the countries where the MNC has a presence. Hence, the correct answer is option (c).
Question 3. PSE's are organisations owned by
(a) Joint Hindu Family
(c) Foreign Companies
(d) Private entrepreneurs
Answer (b) Government
The term ‘PSEs’ stands for public sector enterprises, which are completely owned and controlled by the government. On the other hand, the other types of organisations given in the question, namely, Joint Hindu family, foreign companies and private entrepreneurs, are controlled and owned by private individuals. Hence, the correct answer is option (b).
Question 4. Reconstruction of sick public sector units is taken up by
Answer (c) BIFR
The responsibility of reviving sick public sector units lies with of The Board of Industrial and Financial Reconstruction (BIFR). It decides whether the sick PSUs are to be reconstructed or these should be shut down. Hence, the correct answer is option (c).
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Question 5. Disinvestment of PSE's implies
(a) Sale of equity shares to private
(b) Closing down operations sector/public
(c) Investing in new areas
(d) Buying shares of PSE's
Answer (a) Sale of equity shares to private
Disinvestment refers to the process of selling equity shares of a public sector enterprise to the private or the public sector. Through disinvestment, the ownership of the government in a PSE gets diluted, and simultaneously, the quantum of shares held by the private sector in that enterprise increases. Hence, the correct answer is option (a).
Question 6: The equity-based joint venture does not include
(a) Cooperative development
(d) Limited liability partnership
ANSWER: The form of equity-based joint venture includes Company, Partnership, and Limited liability partnership. However, it does not include Cooperative development. Hence, the correct answer is option (a).
Short Answer Questions
Question 1. Explain the concept of private sector and public sector?
Private sector: It refers to that part of an economy which is owned and managed by individuals or companies with the sole motive of earning profits. In other words, it encompasses all organisations that are not owned or operated directly by the government. In most of the free economies (where the government has a minimal role), the private sector employs a significant portion of the workforce. The private sector consists of the following types of organisations.
• Sole proprietorship
• Joint Hindu Family
• Cooperative societies
Public sector: This sector consists of organisations that are directly owned and operated by the government. These organisations are either partly or completely owned by the central or a state government—Bharat Heavy Electricals Ltd, Oil India Ltd and Life Insurance Corporation of India are examples of public sector industries.
Question 2. State the various types of organisations in the private sector.
Answer: The various types of private sector organisations in India are:
• Sole proprietorship
• Joint Hindu Family
• Cooperative societies
Question 3. What are the various types or organistions that come under the public sector?
Answer: The public sector consists of organisations that are directly owned and operated by the government. These organisations are either wholly or partially under government control.
The following are the various forms of public sector organisations.
• Departmental undertakings
• Statutory corporations
• Government companies
Question 4. List the name of some enterprises under the public sector and classify them.
Answer: (a) Departmental undertakings: Posts and Telegraphs, Indian Railways
(b) Statutory corporations: Food Corporation of India (FCI), Life Insurance Corporation of India (LIC)
(c) Government company: Bharat Heavy Electricals Ltd, Hindustan Machine Tools Ltd
Question 5. Why is the government company form of organisation preferred to other types in public sector?
Answer:In a government company, at least 51 per cent of the company’s shares are held either by the central or by the state government. This form of organisation was established under the Indian Companies Act of 1956. The following are the reasons that the government-company form of organisation is preferred over the other forms in the public sector.
(a) A government company enjoys the maximum autonomy in all its managerial actions and decision-making processes.
(b) It faces no undue interference by the department concerned in its operations.
(c) It has its own, separate entity−that is, a government company is different from the government.
(d) It provides goods and services at reasonable rates and at the same time also ensures safe marketing activities.
Question 6. How does the government maintain a regional balance in the country?
Answer: The following are the ways in which the Government of India has employed to maintain regional balance in the country.
(a) Setting up steel industries in rural areas: During the 1950s, the Government of India established four major steel plants in rural areas. The basic rationale behind this move was to facilitate the economic development and growth of rural and backward areas.
(b) Creating employment opportunities: The steels plants and many other enterprises in rural areas provided the rural people with employment opportunities, helping them to earn a higher income and enjoy a better standard of living.
(c) Facilitating development through linkages: The setting up of the industries contributed to the development of various forward and backward linkages, besides providing employment opportunities. These linkages encouraged the agricultural sector, which in turn spurred the development of ancillary industries (i.e., related industries).
(d) Ensuring infrastructure development: The establishment of industries in rural and backward areas necessitated infrastructure development, including better roads, railways and bridges. The infrastructure made the backward areas well connected with the rest of the country, facilitating the growth and development of these areas.
Question 7. State the meaning of public private partnership
Answer: The Public Private Partnership is that model of partnership wherein the tasks, obligations, responsibilities and risks are optimally allocated among the public and the private partners. In a PPP, the public partner may include government entities, such as ministries, government departments, municipalities, etc., whereas the private partner may include local or foreign businesses or investors with relevant technical or financial expertise.
Long Answer Questions
Question 1. Describe the industrial policy 1991, towards the public sector?
Answer: The following are the major points that describe the industrial policy of 1991.
(a) Fall in the number of industries reserved for the public sector
From the table above, it can be seen that the number of industries reserved for the public sector fell from 17 in 1956 to eight in 1991. This implies that in 1991, there were more industries in which the private sector could play a role, compared with 1956. In this way, the industrial policy of 1991 aimed at
(i) infusing competition (as the public sector had to compete with the private sector)
(ii) increasing the efficiency of public sector enterprises (PSEs), by facilitating stiff competition from the private sector
(b) Disinvestment of shares of the selected public sector enterprises (PSEs): For disinvestment from PSEs, the government reduced its stakes in these enterprises and aimed at encouraging greater participation of the private sector and the general public in industrial sectors. The following were the main rationale behind disinvestment.
(i) Divert resources to social priority areas: By disinvesting from PSEs (the less important ones), the government aimed at diverting funds from the less important PSEs to social priority areas, such as health and education, for improving the people’s welfare.
(ii) Transfer risk : Often, the funds allocated to PSEs had not been optimally utilised. This misutilisation of funds, together with bureaucratic corruption, led PSEs to incur heavy losses, which exerted an acute financial burden on the government. Therefore, by disinvesting from PSEs, the government aimed at shifting this commercial risk to the private sector, which would invest their funds only in feasible projects.
(iii) Reduce public debt: As the government did not have to allocate funds to PSEs where disinvestment had taken place, the need for incurring fresh public debts was reduced.
(iv) Introduction of corporate governance: Disinvestment helped the government to reduce its role in PSEs and encouraged the introduction of corporate governance. This made these enterprises work in a more disciplined and professional manner.
(c) Policies for sick PSEs: The Board of Industrial and Financial Reconstruction was assigned the task to evaluate the sick PSEs and decide whether they could be revived or should be shut down. The decision to shut down sick PSEs freed the government from intense financial pressure, as it no longer needed to financially support these units.
(d) Memorandum of Understanding (MoU): Under an MoU with sick PSEs, their managements were given greater freedom to operate and achieve specified targets. This led to the PSEs operating freely and efficiently.
Question 2. What was the role of the public sector industries before 1991?
Answer: During the initial years of economic planning, particularly in the 1960s and 1970s, the public sector was accorded a pivotal role in the development of industries in India. The following points highlight the role of the public sector in industrial development in the pre-1991 period.
(a) Infrastructure development: Infrastructure such as communication, transport, energy supply and banking are the basic prerequisites for industrial development. But, because of the requirement of heavy initial investment and long gestation periods (for earning returns on such investments), the private sector lacked the initiative for undertaking infrastructure development projects. In such a scenario, it was only the public sector that could mobilise the huge amount of investment required. Hence, this sector was assigned the role of developing infrastructure.
(b) Maintaining regional balance: During the 1960s and 1970s, India faced acute regional disparities in development. Some regions were comparatively much better developed than other regions. The regional disparities impeded the nation’s growth and development. In order to bring about regional balance, public sector enterprises (PSEs) were set up in backward and rural areas. These PSEs not only provided employment but also encouraged the development of ancillary units (or supporting industries) in these areas.
(c) Economies of scale: Large-scale industries, such as natural gas and petroleum, enjoy economies of scale (benefits derived from them are greater when operated on a large scale). In the years just after independence, the private sector was not big enough to operate these large-scale industries because they required huge capital investments. Operating these industries on a small-scale was not an option as this would have caused losses. Hence, the public sector was required to start and operate these industries.
(d) Import substitution and exports: Attaining self-sufficiency was one of the important objectives of India’s economic planning. The aim was to restrict imports and at the same time maximise exports. Thus, PSEs were established to manufacture heavy machinery and engineering goods domestically, which would restrict imports. Simultaneously, with the aim of expanding exports, PSEs such as the Metals and Minerals Trading Corporation of India (MMTC) and the State Trading Corporation (STC) were established.
Question 3. Can the public sector companies compete with the private sector in terms of profit and efficiency? Give reasons for your answer.
Answer: No, the public sector cannot compete with the private sector in terms of profit and efficiency. This is because the private sector is usually more efficient and earns more profit than the public sector. The following points make the reasons clear.
(a) Profit motive: Profit is the prime objective of private sector industries. This motive is achieved by choosing those combinations of capital, labour and other inputs that minimise the business costs. Further, these companies have various research and development centres which come up with new technologies to minimise the costs. However, in the case of the public sector, profit is not the only important objective. Besides profits, it is the welfare motive that normally drives the public sector. The prime objective of the public sector is to produce goods and services that enhance the well-being and welfare of society. Moreover, PSEs make their goods and services available to consumers at a nominal cost, in order to keep them within the reach of the poor.
(b) Efficiency: An organisation is said to be efficient when it uses optimum amount of inputs at low costs to produce a given amount of output. As private sector industries have structures to ensure quick decision making, they set their goals in a manner such that the efficiency targets are met well on time. This is because, in private industries, the management keeps a constant eye on its employees, which helps check inefficiencies and reduce wastages. In public sector industries, on the other hand, the decision-making process is slow and rigid. This is because of the numerous procedures that employees have to follow, which slow down decision making and affect the overall efficiency of the industries. Moreover, public sector industries are slower to adopt new and efficient technologies, and consequently, they lag behind private sector industries.
Question 4. Why are global enterprises considered superior to other business organisations?
Answer: Multinational corporations (MNCs) are enterprises with operations in more than one country. They are huge industrial organisations characterised by their large size, wide range of products and use of advanced technologies and sophisticated marketing strategies. It is because of all these characteristics that MNCs are able to capture a bigger share of market compared with other enterprises. The following features make MNCs superior to other business organisations.
(a) Huge capital resources: MNCs have huge resources as they are capable of generating capital from all over the world. As they have goodwill, they can also borrow from international banks and from a large number of investors who are willing to invest in them for huge returns.
(b) Foreign collaborations: MNCs generally enter the market with the help of local private companies. This is mainly because of the restrictions imposed on them by the government and also to take advantage of the brand image of the Indian company.
(c) Advanced technology: These companies invest huge amounts in research and development of technology. Thus, new technology helps them to increase their efficiency and attain a superior position in the market.
(d) Product innovation: Multinational corporations have refined research and development centres for the innovation of new products. This helps them to sustain in the market and retain their large consumer base
Question 5. What are the benefits of entering into a joint venture and public private partnership?
Answer: A joint venture is a business agreement in which two or more organisations come together for mutual benefits and gains. Business organisations in a joint venture share not only the physical, financial and human resources available but also the risks and profits of the business. The following are some of the benefits for a company entering into a joint venture.
(a) Increased resources and capacity: In a joint venture, the resources and operational capacities of the individual business are pooled. A joint venture is able to expand and grow better than an individual business enterprise.
(b) Access to new markets and distribution networks: Entering into a joint venture with an enterprise located in another region widens the market base for each of the individual enterprises.
(c) Access to technology: Through a joint venture, a company can acquire new and modern technology more easily with less investment and less time and effort compared with the technology that individual enterprises may be able to acquire working independently.
(d) Innovation: A joint venture, especially with a foreign partner, gives a company access to new ideas and technology which help in the innovation of new products. These new products enable businesses to sustain in today’s complex and competitive market.
(e) Low cost of production: The costs of raw material and labour, etc., are very low in India compared to other countries. Thus, international corporations that enter into joint ventures with Indian companies reap huge benefits.
The Public Private Partnership is that model of partnership wherein the tasks, obligations, responsibilities and risks are optimally allocated among the public and the private partners. In a PPP, the public partner may include government entities, such as ministries, government departments, municipalities, etc., whereas the private partner may include local or foreign businesses or investors with relevant technical or financial expertise.
The key benefits of PPP are as follows:
(a) Sharing of risk: With the public and the private entities, both coming together for the construction and designing of projects, the risks are shared and thus reduced.
(b) Accelerating project: The public and private partnership ensure that the project work is accelerated by sharing the tasks and responsibilities with the aim of completing the project on time.