Industrial Environment

By: Neeraj Chaudhary

Role of Government Policies in Business Environment

Government plays four important roles in an economy .

Regulatory Role: (protecting consumers, ensuring fair competition, and
maintaining financial and market stability.)
Promotional Role: ( incentives such as subsidies, tax breaks, and financial
assistance, infrastructure, education, and health services to improve the
general well-being of citizens)
Entrepreneurial Role: (operating enterprises, especially in sectors like
infrastructure, utilities, and essential services where private sector
participation may be limited.)
Planning Role: (formulation of five-year plans, setting goals for economic
growth, poverty reduction, and industrial development)
Providing a Stable Economic Environment: This involves managing inflation, interest
rates, and exchange rates to create a favourable business climate.
Establishing and Enforcing Law s and Regulations:
Promoting Competition: by creating policies that prevent monopolies and promote
fair competition.
Protecting Intellectual Property Rights: Governments protect intellectual property
rights by creating law s that protect patents, copyrights, and trademarks.
Providing Financial Assistance: Governments provide financial assistance to
businesses through loans, grants, and subsidies.
Providing Infrastructure: Governments invest in infrastructure such as roads,
bridges,airports, and ports.
Implementing Tax Policies:Tax policies such as tax breaks, tax credits, and tax
deductions can incentivize businesses to invest in new technologies,
research and development, and other activities that can contribute to
business growth.
Regulating Business Activities: by creating compliance, limiting business
activities, creating opportunities.
Political Stability and Business Environment: Governments that are unstable or
have frequent changes in leadership can create uncertainty for businesses.
This uncertainty can lead to a lack of investment and slow economic growth.
International Trade Policies: Governments negotiate trade agreements with
other countries that can increase or decrease business opportunities.
Environmental Policies: Governments create environmental policies to
protect natural resources, reduce pollution, and promote sustainable
development.

Labour Policies: These policies can affect the cost of labour, the productivity of
workers, and the ability of businesses to attract and retain talent.

Technology Policies:Governments create policies that promote research and

development, patent protection, and intellectual property rights.These policies
can create new opportunities for businesses and promote economic growth.
Benefits of Government Policies in Shaping Business Environment:
Promotes Economic Growth:
Protects Consumers:
Fosters Job Creation:
Promotes International Trade:
Encourages Innovation:
Drawbacks of Government Policies in Shaping Business Environment:
Creates Red Tapeism:
Can be Costly:
Can be Inconsistent:
Can Create Market Distortions:
 Public Sector

Industrial Policy resolutions 194 8 and 1956 divided industries into different
categories. Some fields were left for public sector whereas some were divided
between public and private sectors and some others were left only for private
sector.
In 1951, there were five PSUs under the ownership of the government. By
March 2021, the number of such government entities had increased to 365
 Characteristics of Public Sector

O wned and governed by the government

O ften not driven by profit but rather by the desire to provide the public
with essential products and services.
Provides critical commodities and services for the well- being of
individuals, including education, healthcare, and infrastructure.
Financed by taxes citizens pay instead of profits from selling products
and services.
Redistributes resources through progressive taxes and social programs
to minimize economic inequality and assist the disadvantaged.
 Role or Functions of Public sector Enterprises (PSEs)
1. Employment Generation:
Full employment is the most cherished goal of economic policy of the
government.
Govt. of India and state government are making contribution to employment
generation both directly and indirectly.
Indirect Employment generation is through public investment in Anti-
unemployment programme.(eg: (MGNREGA,PMKVY,PMEGP )
Direct employment generation is through expansion of its administration
department and economic enterprises.
More than 20 lakh of people are employed in Indian Railways.
2. Contribution to Capital Formation:

These industries require huge capital investment and involve long- gestation.
Public sector contributed in collection in savings and investing them during
the planned era.
During the first and second plans, 54% of the total investment was in public
sector and remaining in the private sector.
The share increased to 60% in the Third Five Year Plan before declining to
45.7% in the Seventh Plan.
After 1990 it declined sharply to less than 24% in eleventh plan & nearly 20%
now.
Development of Infrastructure:
Irrigation, power and energy, rail road network,transport and communication,
heavy machinery and machine tools are the backbone of a nation.
Private sector lacks resources and motive to build infrastructure because of
long gestation period and lack of profit.
Public sector have resources and enabled economy to develop strong
infrastructure for future growth.
Import substitution and Export Promotion:
Public sector played an important role in import substitution and export
promotion after second five year plan.
Strong Industrial base:
The share of industrial sector in GDP has been accelerated by public sector.
In 1st five year plan it was 16.6 % it increased to 24% in 1970-71and 27% in 1990-91.
Then it remained stagnant and till 2021-22 it was 28.2% .
Economies of Scale:
In the case of those industries where for technological reasons, the plant has to be
large requiring huge investments to get economies of scale the investment can be
made by public sector.
Balanced Regional Development:
Public sector industries are set up in backward areas to promote balance regional
grow th.
Public Sector –3 Major Classifications

The public sector can be classified into:-

Departmental Undertaking –Directly managed by concerned ministry or

department. (e.g. Railways, Posts, etc.)

Non-Departmental Undertaking –PSU (e.g. HPCL, )

Financial Institution (e.g. SBI, UTI, LIC, etc.)

State- Owned Enterprises: These entities are government- owned and operate as
for- profit corporations. Examples of nationalized businesses include electric and
water utilities and public transportation services.
Public- Private Partnerships: These organizations result from a partnership between
the corporate and public sectors. The private sector oversees day- to- day
operations, while the public sector provides money and oversight.
Local Governments: They are responsible for delivering services to inhabitants
within a certain geographic region. City councils, county boards, and municipal
administrations are examples.
Nonprofit Organizations: Nonprofit organizations collaborate with the government
to provide public goods and services. Examples include organizations and
nonprofits that support vulnerable populations with shelter and health care.
 Causes of Poor Performance of Public Sector:

Slow decision Making

Lack of efficiency
Long Gestation period
Industrial disputes
Underutilization of production capacity
High capital output ratio
O verstaffing
O ld technology
O ver Regulation and Political intervention
 Measures and Suggestions

Reforms in the board of directors

Efficient management and able workers
Inspection of public enterprises
Proper auditing
Full utilization of productive capacity
Commercial outlook
Increase in efficiency
Transparency in operations of PSEs
Revival and Restructuring of Sick PSEs
Disinvestment and Privatization
Public Sector Development since Independence:

The public sector undertakings (PSUs) have also made significant progress since
their inception. The PSUs have contributed immensely to the development of
infrastructure and the promotion of industrialization in the country. The eight
core industries, coal, steel, cement, electricity, crude oil, refinery products,
natural gas, and fertilizers, account for about 38% of the total industrial
production in India. These eight sectors are dominated by the public sector. The
PSUs have also made significant contributions to the exports of the country.

The public sector has always been an important part of the Indian economy.
However, its performance has not been up to the mark.
 NEW INDUSTRIAL POLICY, 1991

O n July 24 , 1991, the Government headed by P.V. Narsimha Rao announced a

new industrial policy which was altogether different from all previous policies.
This policy laid emphasis on increasing foreign collaboration, setting
economy free from unnecessary controls and making public sector to work in
a free environment.
In place of 17 industries only two have been reserved exclusively for public
sector atomic energy and railway transport. Shares of public sector
enterprises are being disinvested
 OBJECTIVES OF NEW INDUSTRIAL POLICY, 1991

To abolish the monopoly of any sector in any field of manufacturing except on

strategic or security grounds.
To encourage private entrepreneurship and investment in industrial activities.
To enhance support to small scale sector.
To bring overall changes in the economic structure of the country and build a
sound and diversified industrial base.
To increase the competitiveness of industries for the welfare of common man.
To maintain a sustained growth in productivity & gainful employment.
To remove regulatory system and other weaknesses.
To achieve technological dynamism in the country.
 FEATURES OF NEW INDUSTRIAL POLICY 1991

The Government reduced the number of industries under compulsory

licensing.
Many of the industries reserved for the public sector under the earlier policy,
were de-reserved. The role of the public sector was limited to industries of
strategic importance.
Disinvestment was carried out in case of many public sector industrial
enterprises.
Policy towards foreign capital was liberalised. The share of foreign equity
participation was increased and in many activities 100 percent Foreign Direct
Investment (FDI) was permitted.
Automatic permission was now granted for technology agreements with
foreign companies.
Foreign Investment Promotion Board (FIPB) was set up to promote and
channelize foreign investment in India.
Government has decided to reduce its share in public sector by selling its
share to private sector.
Voluntary Retirement Scheme, 1988 (Golden Handshake)
Board for reconstruction of Public Sector Enterprise (BRPSE) to suggest
measures for reconstruction and revival of PSE.
Navratnas, Maharatnas,and Miniratnas -
Navratnas: nine major public sector undertaking were declared as Navratnas by
the govt. in July 1997.

Till 2024 the Government has declared 24 Navratnas, 14 Maharatnas and 54

Miniratnas in category — I and 11miniratnas in category — II.
 Private sector

The private sector is a section of the national economy that the government
does not own. The business conducted under this sector is carried out by
companies or entrepreneurs who focus on profit maximization and customer
satisfaction.The private sector is an essential part of the economy because it is a
principal job provider and helps in urban and economic development.
 Main Features of The Private Sector

Profit motive:
Independent management:
Private finance:
No government participation:
Excellent work culture of employees:
 Types of Companies In The Private Sector

Sole proprietorship:
Partnership firms:
Large multinational corporations:
Non-profit organisations:
Private and Public Sector Partnerships:
Professional and trade associations:
 The Role of The Private Sector

Significant stakeholders of the economy:

W hen private firms develop industrial areas, plants, and job-hubs, they also develop the areas around
them. For example, as per a 2017 study, in India, the private sector’s share in providing jobs had been over
90 percent, while it also contributed over 75 percent to domestic capital formation

Private Sector and Poverty Alleviation:

Private sector by providing employment and producing large scale consumer goods and services helps the
economy in poverty reduction.

Employment Generation:

Private sector plays a dominant role for generating employment opportunities inside the country. A huge
number of large scale, small scale, cottage scale units are under the control of private sector.
Private Sector and Trading:
The private sector is playing important role in retail and wholesale trading.This sector is
enjoying almost monopoly status.
Private Sector and Agriculture:
Agriculture and allied sector is the dominant primary sector completely managed by
private sector and contributes more than 30 percent of the domestic GNP. It also
provides employment to nearly 67 percent of the working population.
Private Sector and Education:
India’s improved education system most particularly the higher education system is
often cited as one of the main contributors to the economic rise of India. Much of the
progress in education has been credited to various private Institutions.
Private Sector and Health:
The investment in the private health sector is huge.The quality of service and
facilities in private hospital are better.The service is more efficient prompt, and
instant at the same time its functioning is more transparent and accountable
Assist in development:
The private sector enhances the process of industrialization. By introducing new
commodities, equipment, machinery and technology, companies in the private
sector produce innovative ideas that modify methods of production and lead to
better economic development.
Promote diversification of business: The private sector encompasses varied
businesses and provides new companies with the opportunity to develop, with
this freedom, private companies are able to diversify their operations.
 PROBLEMS OF PRIVATE SECTOR

Profit Motive:
Almost all industrial houses in the private sector operate with the sole motive of
maximizing the profits. They therefore tend to ignore to build the industrial
base of the country. So the capital goods sector and basic industries remain
neglected.
Consumer Durables:
The private sector operators focus on the needs of elite class and urban
consumers as they have ample purchasing power. Therefore the core economic
activity suffers as production structure of the country is distorted.
Monopoly Concentration:
The big industrial and business houses tend to expand continuously. .
Infrastructural Bottleneck:
The business sector of India faces the severe problem of infrastructure
bottlenecks. The most important is power shortage and lack of transport
facilities. Acute power shortfalls, unscheduled power cuts, delay in new
power connection and high energy costs adversely affects the
performance and competitive strength of industries in India
Trade deficit:
A large number of private sector sector companies have been resorting to
massive imports in the post liberalization period in order to upgrade their
technology in a bid to brace up to global competition. As a result their
import expenditure has increased at a much faster rate than their export
earnings. This has pushed up the trade deficit of many developing
countries including our country.
Industrial Disputes:

As compared to public sector companies the private sector companies suffer

more from industrial disputes.

Industrial Sickness:

The private sector units big or small face the problems of industrials sickness.
Significant amount of loanable funds are locked up in sick industrial units which
causes the wastes and affects the healthy growth of the entire industrial sector
 Joint Sector in India

Joint Sector refers to a form of partnership between the public sector and the
private sector in the context of the economy.
The idea of the joint sector was initially introduced by the Industrial Policy
Resolution of 1956,
In a memorandum submitted to the Government of India, J.R.D. Tata observed
that, a joint sector enterprise is intended to form a partnership between the
private sector and the government in which the government participation of
capital will not be less than 26 % day- to- day management will normally be in
the hands of the private sector partners
The Industrial Licensing Policy Inquiry (Dutt) Committee, 1969 recommended creation
of joint sector to curb private monopolies and concentration of economic power in a
few hands. The committee in its report used three different concepts of joint sector:
1. "Existing private enterprises belonging to large Industrial houses should be brought
under the joint sector by public financial institutions converting their loans into equity.
2. The joint sector would include those industrial units in w hich both public and private
investment had already taken place and here the State has already been taking an
active part in direction and control.
3. Large sized Industrial units in Schedule B & C categories necessitated on account of
technical and economic advantages of large scale, should necessarily be in the joint
sector to prevent concentration of economic power.
 General objectives of the joint sector scheme

Social control over Industries: Participation in the ow nership and management of

enterprises jointly w ith private entrepreneurs gives the state an effective instrument
of controlling monopolies, concentration of economic power and business
malpractices.
Development of Backward areas: Due to the active role assigned to the state, joint
sector enterprises can be made to be located in relatively industrially backward areas
w hich would help in achieving balanced regional development.
Resource Mobilization: State participation to the extent of 25 per cent or more in
equity capital in an enterprise would lead to the mobilization of 70-75 percent of the
resources by the private promoters and general public.
 Features of Joint Sector

1. Shared Ow nership: In the joint sector, ow nership of the enterprise is shared

between the government and private partners. The government typically holds a
significant stake,

2. Shared Control and Management: The joint sector involves the joint control and
management of the enterprise. Both the government and private partners have a say
in decision-making and play a role in shaping the strategic direction of the project.

3. Shared Risks and Rewards: The risks and rewards of the joint sector project are
shared between the government and private investors. Any profits or losses incurred
are distributed proportionately based on the ow nership structure.
4 . Combination of Resources: O ne of the key advantages of the joint sector is the
pooling of resources. The government brings in financial resources, infrastructure,
and political support, while private partners contribute capital, technology,
management expertise, and market knowledge.

5. Perpetual existence: A joint stock company is perpetual in existence. This implies

that the only way for a joint stock company to cease into existence is by a
function of law. The company is not affected by the death, insolvency, or transfer
of shares to other members
 Role of Joint Sector

Resource Pooling: The joint sector allows for the combination of financial resources from
the private sector and managerial, organisational, and technological expertise from the
public sector.
Operational Autonomy : Joint sector enterprises enjoy more operational autonomy and
flexibility compared to fully state- ow ned enterprises. They can make business decisions
and implement strategies w ithin the framework of socio- economic policies set by the
government.
Sound Industrial Grow th: public and private sector combined their strengths to Establish
joint enterprises. Thus, it led to better industrial grow th.
The Broad- Basing of Entrepreneurship: The participation of a government in a particular
industry w ill broaden the scope of industrial entrepreneurship in the country. It is possible
by providing financial support, equipment, and machinery to small and medium
enterprises.
The Growth with Welfare:. The most crucial formula is to run the joint
sector on business lines by strongly emphasizing the community's Welfare.
Curbing Monopoly and Concentration of Economic Power: The joint sector
serves as a useful tool to curb monopoly and concentration of economic
power in the country.
Suitability for Mixed Economy: The joint sector concept is well- suited for
countries with mixed economies, like India, where both growth and social
justice are essential goals.
Viable Alternative: It combines the advantages of private sector efficiency
with public sector control and representation, striking a balance between
different interests.
 Government Policies on Joint Sector

Government Policies are designed to foster collaboration between the public

and private sectors, harnessing their respective strengths for mutual benefit.
The Guidelines for the ownership and management of joint sector enterprises:
Eligible Industries: Joint sector projects are welcome in industries from which
the private sector has been excluded.
Foreign Participation: If a big business house or a foreign majority company
wants to participate in a joint sector project, prior permission of the Central
Government is essential.
Equity O wnership: Government –26 percent, Private Enterprise –25 percent,
Investing Public and Financial Institutions –49 percent.
Limit on Shareholding: No single party can hold more than 25 percent of
shares without prior approval of the Central Government.
Decision-making: Strategic or basic policy decisions in joint sector enterprises
are made by the board of directors, on which all partners are represented.
Tactical or operational decisions are made by the Chief Executive and his
team of executives.
Composition of the Board: The board of directors may consist of a majority
of government nominees, a majority of non- government directors, or
directors in proportion to the equity ownership of various partners in the joint
sector enterprise.
 Co- Operative Sector in India

Cooperative ("coop") or co- operative ("co- op") is an autonomous association of

persons who voluntarily cooperate for their mutual social, economic, and
cultural benefit.Cooperatives include non-profit community organizations and
businesses that are owned and managed by the people who use its services.Eg.

Amul.
Indian Farmers Fertiliser Cooperative (IFFCO )
Shree Mahila Gruh Udyog (Lijjat Papad),
 Types of Cooperative Societies

Consumer Cooperative Society: Consumer cooperative societies are formed with

the objective of protecting the consumer interests. Individuals who wish to
purchase products at reasonable rates most likely join consumer cooperative
societies.
Producer Cooperative Society: Producer cooperative societies are formed with the
objective of protecting the interests of small producers.
Credit Cooperative Society: These cooperative societies are set up with the
objective of helping people by providing credit facilities.
Housing Cooperative Society: Housing cooperative societies are formed with the
objective of providing housing facilities to the members of the society.
Marketing Cooperative Society: These societies are formed with the objective of
providing small producers a platform to sell their products at affordable prices and
also eliminate middlemen from the chain, thus ensuring adequate profits.
 Characteristics of Cooperative Societies

1. Voluntary Association: The membership of a cooperative society is voluntary

in nature, i.e it is as per the choice of people. Any individual can join the
cooperative society and can also exit the membership as per his/her desire.
2. O pen Membership: The membership of a cooperative society is open to all i.e,
membership is open to all, irrespective of their caste, creed and religion.
3. Registration: A cooperative society needs to get registered in order to be
considered a legal entity. After registration it can enter into contracts and
acquire property in its name.
4 . Limited liability: The members of a cooperative society w ill have limited liability. The
liability is limited to the amount of capital contributed by the member.
5. Democratic Character: Cooperative society forms a managing committee and
elected members have the power to vote and choose among themselves. The
managing committee is formed so as to take important decisions regarding the
operations of the society.
6. Service Motive: The formation of a cooperative society is for the welfare of the
weaker sections of the community. If the cooperative society earns profit it w ill be
shared among the members as dividend.
7. Under state control: In order to safeguard the interests of society members, the
cooperative society is under the control and supervision of the state government. The
society has to maintain accounts, w hich w ill be audited by an independent auditor.
 Importance of the Cooperative Society in India

It provides agricultural credits and funds where state and private sectors have
not been able to do very much.
It provides strategic inputs for the agricultural sector; consumer societies
meet their consumption requirements at concessional rates.
It helps to overcome the constraints of agricultural development.
A cooperative society plays a key role in representing the needs of its
members in a larger market and fostering their independence.
 Challenges of Cooperative Society

The infrastructure and organization of cooperatives need to be regulated

primarily due to a shortage of funding.For these reasons, there is a need for
assistance or financial support for the cooperatives.
A cooperative society’s ability to raise money from its members is severely
constrained thats why cooperative societies are dependent on the govt.for
assistance and patronage in the form of grants, loans, subsidies, etc.
Due to the low rate of return, the members do not increase their investment.
Most cooperative societies frequently find the help of the government to be
insufficient.
In general, it is observed that a lack of administrative skills is the main reason
why cooperative societies do not operate effectively.
 Industrial Sickness

The Reserve Bank of India, “a sick unit is one such industrial unit that has
been in loss for the past year of operations and has been declared on a
loss for the present and coming year as well by the financing bank. An
increase in such units leads to industrial sickness in India which can spread
and affect the country’s economy in a very bad manner.”
 Causes of industrial sickness

Internal Causes of industrial Sickness

Lack of Finance:These problems are generally faced by small units. Generally,

they are unable to meet their debt obligation in time and these debts
accumulate. Bank normally do not help at this stage when symptoms begin to
show the problem and sickness become chronic.

Improper Choice of Technology: An improper choice of technology, unsuitable

product mix and single product technology contribute to industrial sickness.
Management Problem: Another reason for the industrial sickness is ineffective
or bad corporate management which includes:

Improper corporate planning

Poor Inventory Management
Lack of Integrity in top Management
Lack of coordination and control
Poor implementation of Projects etc.
Bad Production Policy: Another important reason for sickness could be wrong
production policies like:
W rong selection of product location
Defective selection of Plant & Machinery
Bad maintenance of Plant & Machinery
O verestimation of demand
Lack of quality control
Lack of standard Research & Development and so on.
Increase in cost due to delay in implementation of project
Incompetent Entrepreneurs: Lack of knowledge about market, customers,
costing, marketing ,accounts, finance etc. could also leads to industrial sickness.
 External Causes of industrial Sickness

Recession in the Market: Industrial sickness is also caused because of increase in

recession in local and global market. Recession leads to downturn of economy
lending to major loss and closure for various industrial units.
Decline in Market Demand for the product: A product may reach a stage of
decline. This happen when new and better products invade the market and
made the old product redundant.
Excessive competition in the market: Excessive competition in the market will
justify the survival of only the fittest firm. The high cost unit over time will
become weak and fall sick.
Marketing Constraints: Another external reason for industrial sickness is
marketing Constraint .The sickness can arrive due to:
Changes in global marketing scenario
Changes in Technology
Changes in consumer behaviour
Changes in customer tastes, preference and demand
Government Policy: Frequent changes in government policies(in respect
industrial licensing, taxation, Power tariff, imports, exports, duties etc.) may also
lead to industrial sickness.
Shortage of Power Supply:
Delay in getting any financial assistance:
 Remedial to overcome for Industrial Sickness

Effective Planning : It is essential for every small and medium sized enterprise to
conduct in- depth survey of prevailing circumstances in small scale sector and
productive programmes

Identifying sickness at initial stage: Industrial sickness is not an overnight

occurrence but it is a gradual process taking from 5 to 7 years Corroding the
health of a unit beyond cure. Therefore, the identification and detection of
sickness at the incipient stage is the first and foremost measure to detect and
reduce industrial sickness.
Financial Assistance - For avoiding industrial sickness, firms and industries
should arrange adequate credit for running their business efficiently.

Improving Infrastructure- Firms require many important facilities to ensure

smooth functioning of its operations such as finance,water supply, power
arrangement, etc.

Technology Up- gradation -W ith the advent of technological advancements,

firms must attempt to upgrade their process of production.They must adopt
the latest technology for producing goods/ services.
Marketing assistance- Every firm must emphasize on their market, brand and
product development. They must strive to persist in the market by paying
exceptional significance on quality enhancement programme.
Liquidation -In view of limited resources at the disposal, a large number of sick
units may have to be permitted to close/liquidate
Government Intervention- In order to arrest sickness, at the initial stage, banks
and financial institutions should periodically review the accounts of small-scale
industries borrowers to identify units which are becoming sick or are prone to
sickness.
Training — A proper environment must be created where an entrepreneur will
be educated and will have a proper knowledge, Skill & experience about internal
& external environment of business to compete with large scale industries and
multinational companies