Role of Private Organization in the Growth of GDP

ROLE OF PRIVATE ORGANISATION IN THE GROWTH OF GDP OF INDIA & ITS IMPACT ON ECONOMIC REFORMS OF INDIA ______________________________________________ ___ A report submitted for the fulfilment of Bachelor’s Degree (B.Design)

A PROJECT Submitted for the award of Degree of

COURSE in

Designing by

Nandini Sah Enrolment Number: 1854043

under the Supervision of Mr. K D Pandey Sr. Faculty Footwear FDDI, Rohtak (Haryana)

FOOTWEAR DESIGN & DEVELOPMENT INSTITUTE, Rohtak 1

Candidate’s Declaration I, hereby, declare that the work presented in this project entitled “ Role of Private Organisation in the growth of GDP of India and its impact on economic reforms of India” for the award of the degree of B. Des Footwear Designing and Production submitted to Faculty of Footwear Mr. K D Pandey , FDDI ROHTAK, is an authentic record of my own research work carried out under the supervision of Mr. K D Pandey (Sr. Faculty Footwear).

I also declare that the work embodied in the present project (i)

is my original work and has not been copied from any Journal/Project/Book, and

(ii)

has not been submitted by me for any other degree or diploma.

Nandini Sah B.des FDP 2018-22

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Certificate This is to certify that the project entitled “ Role of Private Organization in the growth of GDP of India and its impact on economic reforms of India “which is

being submitted by Nandini Sah for the degree of ( B.des Footwear Design and Production) to the Faculty of Mr. K D Pandey, FDDI, is a record of Bonafede investigations and extensions of the problems carried out by him under my supervision and guidance.

To the best of my knowledge, the project embodies the work of the candidate himself and has not been submitted to any other University or Institution for the award of any degree or diploma.

It is further certified that he/she worked with me for the required period in the Faculty/School of Footwear Design and Production, FDDI - ROHTAK

Date: 7th May 2021

Mr. K D Pandey

(Supervisor)

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ACKNOWLEDGEMENT I am grateful to My faculty guide Mr. K D Pandey for providing his guidance in completing my discretion related to topic “roll of private organisation in the growth of GDP of India & It's impact on Economic Reforms of India “

I'm also grateful to Footwear design and development institute for providing me such a platform which helped me in horning my research skills and I'm sure that this study will help me in my future.

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PREFACE As a part of our syllabus and in order to bring the knowledge in the field of Entrepreneur. We are required to make a research project and prepare analytical report on “Role of private organisation in the growth of GDP of India & Its impact on Economic Reforms of India”

The basic objective of doing this project is to gain practical knowledge about how to conduct research and know the importance of entrepreneurs in India.

In this project report I have included various concepts, methodology, questionnaire, and data analysis regarding the advancement of new technology in Market Research.

Doing this helps me to enhance my knowledge in Entrepreneurship.

This project helps us to know the role of devotion towards work, how to do research, and various aspect of research in the field of Indian Economic

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TABLE OF CONTENT S. No 1 2

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5 6

7 8 9 10

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Topics Introduction What is Private organization?

1.1 – Definition 1.2 Types of Private Organisations 1.3 The Difference Between Public & Private Non-profit Organizations Roles of Private Sector in India 6.1 Industrial Development 6.2 Agriculture 6.3 Trading 6.4 Infrastructure 6.5 Services Sector 6.6 Role in the Indian Economy 6.7 Small Scale and Cottage Industry Contributions of Private Sector are Listed Below 7.1 Most Important Sector 7.2 Employment Generation 7.3 Helpful for Development 7.4 Contribution to Agriculture 7.6 High Potentiality What is GDP? How do we determine gross domestic product (GDP)?

3.1 - Production approach 3.2 - Income approach 3.3 - Expenditure approach 3.4 - Description of each GDP component Share of private sector in India’s GDP How Private Sector Contribute to GDP Economic Reforms in India 4.1 - Objective of Reforms Impact of Private Sector in Economic Reforms 5.1 Role of the dominant sector 5.2 Performance of the corporate sector 5.3 Data Interpretation 5.4 Globalization Conclusion Bibliography 6

Page No. 7 8-10

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21-22 23-28 29-31 32-45

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INTRODUCTION The economic performance of a country is intrinsically linked with its standing in international politics. India’s economic performance after the reforms in 1990s has initiated a debate on the strategic consequences of the increased growth rate. Thus, Economic diplomacy has assumed great importance for the country in terms of investing resources for strategic reasons as well as hosting investment in key sectors.

In the wake of reforms, private sector in India has also started playing a key role in the economic diplomacy of the country.

The project looks at the contribution of the private efforts to invest and seek resources in a globalized world and the challenges that it faces in realizing its full potential. It notes the importance of economic diplomacy in an interdependent world and also puts India’s efforts for the same in perspective. An attempt has also been made here to engage with the conceptual discussion of the role of economic diplomacy and its various tools.

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What is private organization?

A private organization is any partnership, corporation, person, or agency that is not operated by a profit or a public body. It includes all businesses that are for-profit that are not government owned or operated.

A private organization can be a non-federal body that is self-sustaining and established on federal property by people that are not acting in a federal government capacity.

A company or corporation that is run by the government are run in the public sector.

Charities and other forms of non-profits are working within the voluntary sector. For instance, a private organization can function on an Army installation as long as it has written permission of the installation commander. POs are not considered a federal entity and are not to be used in that way.

The private sector is the part of the economy that is run by individuals and companies for profit and is not state controlled. Therefore, it encompasses all for-profit businesses that are not owned or operated by the government. Companies and corporations that are government run are part of what is known as the public sector, while charities and other non-profit organizations are part of the voluntary sector.

The private sector consists of all privately owner, for-profit businesses in the economy.

The private sector tends to make up a larger share of the economy in free market, capitalist-based societies. Private sector businesses can also collaborate with government run agencies in arrangements called public-private partnerships.

In most free economies, the private sector makes up a big portion of the economy, as opposed to nations that have more state control over their economies, which have a larger public sector. For example, the United States has a strong private sector because it has a free economy, while China, where the state controls many of its corporations, has a larger public sector.

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Types of Private Sector Businesses The private sector is a very diverse sector and makes up a big part of many economies. It is based on many different individuals, partnerships, and groups. The entities that form the private sector include: 

Sole proprietorships

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Partnerships

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Small and mid-sized businesses

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Large corporations and multinationals

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Professional and trade associations

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Trade unions

Even though the state may control the private sector, the government does legally regulate it. Any business or corporate entity operating in that country must operate under the laws.

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Private and Public Sector Differences Both private companies and public corporations are required to have a board of directors, an annual meeting, to keep meeting records, and to keep a list of shareholders and their holdings. But there are some big differences between how a public company and a private company operate.

Private companies may be exempt from registering their stock offerings with the Securities and Exchange Commission (SEC), if they don't sell stock to the public, if they sell only a limited number of shares, and they meet other requirements.4 Private companies can be corporations, LLC's, or partnerships, but if you want to take your private company public, you will almost certainly need it to be a corporation.

Many states have restrictions on ownership of LLCs, so it's very difficult to take an LLC public.

Because public companies are selling to the public, these companies are subject to many regulations and reporting requirements to protect investors, including the Securities and Exchange Commission (SEC) regulations. Annual reports must be made public and financial statements must be made quarterly. Holding companies, which are set up to hold and control other companies, are almost always public companies.

Public companies also are, by definition, under public scrutiny. That is, their activities and the price of the stock are analysed, and the activities of executives and board members are scrutinized. Annual meetings may be attended by the press, and anyone with just one share of stock can attend.

Private companies enjoy a measure of anonymity. The board may be small and wellknown to each other. Sometimes all the shareholders are on the board. Decisions can be made relatively quickly, and the board can adjust quickly to changing conditions.

The value of each share in a public company is known, so it's easier to buy and sell shares. The value of shares in a private company is not as simple, and it may be difficult for a private company shareholder to sell shares. The valuation of the company, in general, is easier to determine for public companies.

The big advantage to having a public company is that equity investment is shared by a large number of people. That is, there are many shareholders, not just a few. The debts of a corporation must be paid, but the shareholders don't have to be paid in case of bankruptcy.

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Roles of Private Sector in India: i) Industrial Development: During the pre-independence period, the private sector has played a responsible role in Indian economy where it set up and expanded cotton and jute textiles, sugar, paper, edible oil, tea etc. After independence, the national government gave sufficient stress on industrialization.

The private sector also made a serious attempt to invest on industries producing wide range of intermediate products which include machine tools, chemicals, paints, plastic, ferrous and non-ferrous metals, automobiles, electronics and electrical goods etc. In this way, the private sector has developed the consumer goods industry, producing both durables and non-durables and became self- sufficient in the production of different types of consumer goods.

ii) Agriculture: In India agriculture and other allied activities like animal husbandry, dairying, poultry etc. are playing a dominant role as it contributes nearly 30 per cent of GDP and it provided employment to nearly 67 per cent of the total working population of the country. Such a big sector is completely owned and managed by the private sector.

Thus, private sector is quite dominant in respect of agriculture and other allied activities. In India, agriculture is not conducted on commercial basis rather it is managed by the households as much of these activities are in the hands of small and marginal farmers. In India, the new agricultural strategy adopted by the Government has been implemented by the private sector under the active support of the Government.

iii) Trading: Both the wholesale and retail trade in India are in the hands of private sector. In a big country like India, having a huge size of population, the entire trading activities are managed by the private sector in a best possible manner. But in case of scarcity of any essential commodities, the private businessmen have their natural tendency in resorting to hoarding and black marketing of such commodities leading to exploitation of the consumers.

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In order to control such illegal activities, the Government has introduced various control and regulatory measures in the form of controls on price, movement of goods and on storage etc. Moreover, the Government has been procuring food grains through its premier organisation Food Corporation of India (FCI) and has introduced a huge network of the public distribution system (PDS) to participate in the trading of essential commodities for the interest of the consumer.

Moreover, in respect of international trade, the private sector is playing an important role in its promotion through active government support. The State Trading Corporation (STC) and Minerals and Metals Trading Corporation (MMTC) of the Government arc playing a dominant role in this regard. However, in a country like India, the private sector is dominating over the entire trading sector of the country.

6.4 Infrastructure: Private sector is also providing an active support to the infrastructural sector of the country. Although, the major areas of the infrastructural sector lies in the hands of public sector but still the private sector is participating in those areas which remain open for it. Private sector has been playing dominant role in respect of road transport, water transport etc. from the very beginning.

But after the introduction of New Industrial Policy, 1991, the Government has opened some areas like power generation, air transport etc. for the participation of the private sector. Accordingly, in the post- 1991 period, the private sector has been actively participating in those new areas like power generation, air transport, building highways and bridges on Build, Operate and Transfer (BOT) basis etc.

6.5 Services Sector: The services sector of the country is almost totally under the control of the private sector. The entire community and personal services, which contributed nearly 11.1 per cent of GDP in 1994-95, is entirely managed by the private sector. The entire professional services, repairing services, domestic services, entertainment services etc. are solely rendered by the private sector throughout the country.

6.6 Role in the Indian Economy: The private sector is playing an important role in Indian economy. The importance of this sector in the economy of the country can be visualized from the fact that it contributes to the major portion of national income and employment.

As per the latest available statistics for the year 1998-99, the private sector contributed about 76.7 per cent of the net domestic- product and the remaining 23.3 12

per cent was contributed by the public sector. The role of private sector is quite dominant in agriculture and allied activities, small scale industry, retail trade etc.

Again, as per 1991 census, the percentage of population working in the government sector, including public enterprises and government administration was only 7 per cent and the remaining 93 per cent of the working population are engaged in the private sector. Thus, even after making a huge volume of investments in the public sector and completing more than 50 years of planning, Indian economy is still broadly based on the private sector.

6.7 Small Scale and Cottage Industry: In India, small scale and cottage industries are playing an important role in the industrial development of the country. The entire small scale and cottage industry is owned and managed by the private sector. As these industries are mostly labourintensive in nature, thus they can utilize the local employment opportunities suitably.

The importance of these industries can be visualized from the fact that in 2001-02 the small scale and cottage industries, numbering 34.42 lakh units, have generated employment to the extent of 192.23 lakh, produced output worth Rs. 6,90,316 crore and contributed nearly 29 per cent of the total exports of the country.

Considering the importance and the various problems faced by these industries, the Government has taken various steps for the promotion and development of these industries. These measures include both credit and non-credit measures. In India, there is vast potentiality for the expansion of the small sector.

The Government has also announced a small-scale Industrial Policy, 1991 for the promotion and development of the sector. The most important peculiarity of this sector is that the small scale and cottage units of the country, producing variety of products would continue to remain within the control and management of the private sector.

Considering the importance of the private sector, the Government has been undertaking various supporting measures for promotion and development of this sector. But as this sector is mostly guided by the profit motive and have little consideration about the national and social goals, thus the Government has enacted various legislative measures for the control and regulations of the private sector during the last four decades. But too much control and regulations imposed on the private sector has resulted in a lot of hurdles on the path of their development leading to a slow rate of growth of the economy.

Realizing this problem, the Government has introduced the policy of economic liberalization for the uninterrupted growth of the private sector through the announcement of new and liberal industrial policy in 1991 and also introduced some other industrial policy reforms in the subsequent years.

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Contributions of Private Sector are: i) Most Important Sector: In-spite of huge progress of the public sector during the plan period, the importance of private sector is tremendous in the India economy. On the basis of the latest data available for the country’s industrial development as given in the table -1, the number of private sector companies in 2001- 02 was 1, 10, 634 in compare to the total number companies of 1,28,549. In other way 86.1% of the total companies were under the control of private sector in compare to only 11.67o companies under public sector.

ii) Employment Generation: Private sector plays a dominant role for generating employment opportunities inside the country. A huge number of large scales, small scale, cottage scale units are under the control of private sector. It proves that small scale and cottage scale industries contribute four times more employment in compare to large scale industries. According to 2001-02 statistics, as far as employment is concerned, the share of private sector was 51.2% against 44.3% of the public sector.

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iii) Helpful for Development: According to Schumpeter peter private sector plays a dominant role in economic development. It enhances the process of industrialisation. All the private entrepreneurs are worked for profit motive. They actually played a leading role for the introduction of new commodities, new techniques of production, new plants equipment’s and machineries. Private entrepreneur has innovative ideas and always modifies the total method of production. After the introduction of new industrial policy in 1991, private sector leads a vital role in country’s industrial development.

iv) Contribution to Agriculture: India is an agro based economy. The share of agriculture and its allied activities like fishing, poultry, cattle rearing, animal husbandry, dairy farming etc. to the national income is nearly 22%. On the other hand, about 60% of the total working population is engaged in this area. Hence, this large agriculture sector is controlled by the private sector. v) Contribution to Industry: According to 1956 resolution, “industries producing intermediate goods and machines can be set up in the private sector.” A good number of ultra-modern industries are constructed under the control of private sector. This includes several consumers’ good industries like sugar industry, edible oil industry, textile industry, paper industry, spice industry and fast food or semi-finished food industries.

Even in the sphere of capital goods, iron and steel heavy engineering, chemical, motors etc. private sector plays a dominant role for their development. In the post liberalisation phase (after introduction of New Industrial Policy, 1991), the working of few private industries became huge. Table 3, shows the net sales of 10 top giant private sector industries in India during 2004.

vi) High Potentiality: Most of the small scale and cottage scale industries are using labour intersine technologies, they create huge employment opportunities. These industries are owned by private sector. About 80% of the total working forces are employed in either organized or unorganized private sector units. Private sector contributes about threefourth of the country’s national income. Moreover, this sector also plays a vital role to increase gross domestic saving (CDS) and gross domestic capital formation'(GDCF) within the economy.

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What is GDP? Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period. GDP (nominal) per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore, using a basis of GDP per capita at purchasing power parity (PPP) is arguably more useful when comparing living standards between nations, while nominal GDP is more useful comparing national economies on the international market.

The Organization for Economic Co-operation and Development (OECD) defines GDP as "an aggregate measure of production equal to the sum of the gross values added of all resident and institutional units engaged in production and services (plus any taxes, and minus any subsidies, on products not included in the value of their outputs)".

An IMF publication states that, "GDP measures the monetary value of final goods and services—that are bought by the final user—produced in a country in a given period of time (say a quarter or a year)."

Total GDP can also be broken down into the contribution of each industry or sector of the economy. The ratio of GDP to the total population of the region is the per capita GDP and the same is called Mean Standard of Living.

GDP is often used as a metric for international comparisons as well as a broad measure of economic progress. It is often considered to be the "world's most powerful statistical indicator of national development and progress".

Nominal GDP is the value of all final goods and services that an economy produces during a given year; it is not adjusted for inflation. It is calculated by using the prices that are current in the year in which the output is produced. Nominal GDP takes into account all of the changes that occurred for all goods and services produced during the year. If prices change from one period to the next and the output does not change, the nominal GDP would change even though the output remained constant.

Real GDP, on the other hand, is the total value of all final goods and services that the economy produces during a given year, accounting for inflation. It is calculated using the prices of a selected base year. To calculate Real GDP, you must determine how much of GDP has been changed by inflation since the base year, and divide out the inflation each year. Real GDP, therefore, accounts for the fact that if prices change but output doesn’t, nominal GDP would change.

In January 2015, the government moved to the new base year of 2011-12 from the earlier base year of 2004-05 for national accounts. The base year of national accounts had previously been revised in January 2010. In the new series, the Central Statistics Office (CSO) did away with GDP at factor cost and adopted the international practice of valuing industry-wise estimates in gross value added (GVA) at basic prices.

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How do we determine gross domestic product (GDP)?

GDP can be determined in three ways, all of which should, theoretically, give the same result. They are the production (or output or value added) approach, the income approach, or the speculated expenditure approach.

The most direct of the three is the production approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers", colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes.

i) Production approach Also known as the Value-Added Approach, it calculates how much value is contributed at each stage of production.

This approach mirrors the OECD definition that we already read Estimate the gross value of domestic output out of the many various economic activities; Determine the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services.

Deduct intermediate consumption from gross value to obtain the gross value added.

Gross value added = gross value of output – value of intermediate consumption.

Value of output = value of the total sales of goods and services plus value of changes in the inventory.

The sum of the gross value added in the various economic activities is known as "GDP at factor cost".

GDP at factor cost plus indirect taxes less subsidies on products = "GDP at producer price".

For measuring output of domestic product, economic activities (i.e. industries) are classified into various sectors. After classifying economic activities, the output of each sector is calculated by any of the following two methods: By multiplying the output of each sector by their respective market price and adding them together

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By collecting data on gross sales and inventories from the records of companies and adding them together The value of output of all sectors is then added to get the gross value of output at factor cost. Subtracting each sector's intermediate consumption from gross output value gives the GVA (=GDP) at factor cost. Adding indirect tax minus subsidies to GVA (GDP) at factor cost gives the "GVA (GDP) at producer prices".

ii) Income approach The second way of estimating GDP is to use "the sum of primary incomes distributed by resident producer units".

If GDP is calculated this way it is sometimes called gross domestic income (GDI), or GDP (I). By definition, GDI is equal to GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies.

This method measures GDP by adding incomes that firms pay households for factors of production they hire - wages for Labour, interest for capital, rent for land and profits for entrepreneurship.

The Indian "National Income and Expenditure Accounts" divide incomes into five categories:     

Wages, salaries, and supplementary Labour income Corporate profits Interest and miscellaneous investment income Farmers' incomes Income from non-farm unincorporated businesses

These five income components sum to net domestic income at factor cost.

Two adjustments must be made to get GDP: Indirect taxes minus subsidies are added to get from factor cost to market prices.

Depreciation (or capital consumption allowance) is added to get from net domestic product to gross domestic product.

Total income can be subdivided according to various schemes, leading to various formulae for GDP measured by the income approach. A common one is: GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and imports GDP = COE + GOS + GMI + TP & M – SP & M

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Compensation of employees (COE) measures the total remuneration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs.

Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits, although only a subset of total costs is subtracted from gross output to calculate GOS. Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses. This often includes most small businesses.

The sum of COE, GOS and GMI is called total factor income; it is the income of all of the factors of production in society. It measures the value of GDP at factor (basic) prices. The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the government has levied or paid on that production. So, adding taxes less subsidies on production and imports converts GDP(I) at factor cost to GDP(I) at final prices.

Total factor income is also sometimes expressed as: Total factor income = employee compensation + corporate profits + proprietor's income + rental income + net interest

iii) Expenditure approach The third way to estimate GDP is to calculate the sum of the final uses of goods and services (all uses except intermediate consumption) measured in purchasers' prices.

Market goods that are produced are purchased by someone. In the case where a good is produced and unsold, the standard accounting convention is that the producer has bought the good from themselves. Therefore, measuring the total expenditure used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP.

Components of GDP by expenditure Indian GDP computed on the expenditure basis.

GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M).

Y = C + I + G + (X − M)

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3.4 Description of each GDP component: C (consumption) is normally the largest GDP component in the economy, consisting of private expenditures in the economy (household final consumption expenditure).

These personal expenditures fall under one of the following categories: durable goods, nondurable goods, and services. Examples include food, rent, jewellery, gasoline, and medical expenses, but not the purchase of new housing.

I (investment) include, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in investment. In contrast to its colloquial meaning, "investment" in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products; buying an existing building will involve a positive investment by the buyer and a negative investment by the seller, netting to zero overall investment.

G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchases of weapons for the military and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits. X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.

M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.

Note that C, I, and G are expenditures on final goods and services; expenditures on intermediate goods and services do not count. (Intermediate goods and services are those used by businesses to produce other goods and services within the accounting year.

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Share of Private Sector in India’s GDP The share of private corporate sector's profits to India's GDP in 2018 amounted to about 2.2 percent. This was a slight increase compared to the previous year, indicating a growing trend of private sector's contribution to the country's domestic output.

The contribution of the Private sector is about three-fourth of the country's national income. The private sector plays an important role in increasing the gross domestic saving and gross domestic capital formation of the economy.

The Indian economy is dependent on many factors like agricultural production, industrial production, contribution from service sector.

The private sector is the main driver of economic growth which helps in creating jobs, driving growth and paying the taxes that finance services and investment.

The private sector’s role in encouraging a country’s growth and economic development cannot be overstated. Private enterprises are the chief agents in creating employment, providing funds, building competitiveness and driving innovation - all essential instruments for growth.

The private sector, in particular, takes entrepreneurial risks, which is central to how it translates investments into wealth creation and income generation. This role takes on further significance in the current context, as rising uncertainties in a rapidly changing global landscape cause economic growth concerns, particularly for emerging nations.

India has entered the 37-year period of its demographic dividend, which means the expansion of its working-age population will last until 2055. With a rapidly changing employment landscape, including 11-12 million youth entering the labour force every year, jobs need to be created and effective skills initiatives put in place. The private sector plays a pivotal role in meeting this challenge.

The private sector has strong links to higher investments in education and vocational training to bridge skill gaps in the economy, facilitating skills and training programmes, creating partnerships with educational institutes and experts and, most importantly, creating a future-ready and talented workforce. India has more than 900 universities and 39,000 colleges of which 78% are privately managed. In addition, most large, private enterprises have created in-house training and skills programmes to help build the capacities of young workers in line with industry needs.

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Private investment covers gross outlays by the private sector (including private non­profit agencies) on additions to its fixed domestic assets.

Gross fixed capital formation, private sector (% of GDP) in India was reported at 21.88 % in 2018, according to the World Bank collection of development indicators, compiled from officially recognized sources. India - Gross fixed capital formation; private sector (% of GDP) - actual values, historical data, forecasts and projections were sourced from the World Bank on May of 2021.

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How Private Sector Contribute to the growth GDP Private sector contributes about three-fourth of the country's national income.

Moreover, this sector also plays a vital role to increase gross domestic saving (CDS) and gross domestic capital formation'(GDCF) within the economy.

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 developing world (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. 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 23

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 (ibid.).

In many countries 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. suggests 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.

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Building more and better infrastructure is an important goal for many economies with limited public revenues shows that 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.

To enable the private sector to engage in urban planning, public policy and development objectives, the public sector needs to: 



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 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.

In the past, India has shown strong resilience in the face of global volatility and has continued to grow steadily, placing it among the world’s fastest-growing economies.

The Indian economy grew at a rate of 6.8% during 2018 and is projected to grow at a rate of 7% and 7.2% during 2019 and 2020, respectively. The private sector has 25

played a huge role in India’s development and is largely responsible for the phenomenal growth registered by the country since the economy was opened up in 1991.

The Confederation of Indian Industry (CII), a non-governmental trade association and advocacy group based in New Delhi, India founded in 1895, is positioned as a partner in national development and is committed to catalysing, nurturing and driving enterprise competencies for fostering growth. We do this by strengthening the competitiveness of the economic ecosystem, as well as aligning individual enterprises with the needs of society.

Making use of technology With the advent of the Fourth Industrial Revolution, India is at the cusp of a technology revolution that could transform manufacturing and industrial production in the country. An important objective for the private sector must be to facilitate the transfer or spread of new technology through industry-led initiatives or by building new business models that employ technology in new ways, which in turn will increase productivity and lead to sustainable economic growth.

The private sector has the power to harness and use technology to unleash greater prosperity for the nation, but it is also responsible for ensuring that the benefits of technology reach all sections of society. A focus on affordable technology to allow equal access is imperative for inclusive development. Technology-enabled development in sectors such as health and education go a long way in ensuring

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equitable development in emerging economies, which the private sector is best equipped to provide.

Fostering entrepreneurship and innovation Corporates are integral to fostering innovation and entrepreneurship and ensuring the future progress of an economy. Private sector investments provide necessary infrastructure that is sustainable, reliable, and can use modern technology to create new products and services. In most countries, the private sector plays the lead role in research and development spending, working with universities and institutions to translate new research into markets and crafting innovative business models and strategies.

India has emerged as a significant player when it comes to converging technology and entrepreneurship. It is the second-largest start-up nation in the world, with more than 14,000 start-ups recognized under the Startup India scheme. CII has led initiatives to boost innovation in the country and encourage young entrepreneurs, including the CII Startups Coalition and CII Startupreneurs which connect new entrepreneurs, investors, mentors and service providers.

Environmental efficiency Scarcity of natural resources and environmental degradation pose major threats to sustainable growth. Engaging the private sector has become critical to ensuring environmental efficiency through its greater adoption of cleaner, greener technologies and the adoption and sharing of best practices. The private sector’s use of new

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technologies in sustainable production, while coming at some cost, will promote sustainability, efficiency and better use of inputs and raw materials.

Green growth and climate change action require significant financing and investments. The private sector should lead from the front and enable more innovation and mobilization of resources, for example, the funds, budgets, communication systems and necessary infrastructure, which are essential for ecological as well as economic sustainability.

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Economic Reforms in India Economic reforms in India refer to the neo-liberal policies introduced by the Narsimha-Rao government in 1991 when India faced a severe economic crisis due to external debt. This crisis happened largely due to inefficiency in economic management in the 1980s. The revenues that the government was generating were not enough to meet the expenses. Hence, it had to make hefty borrowings from foreign banks to pay the debt. Hence, they were caught up in debt-trap.

To curb this crisis, India approached the world bank and international monetary fund (IMF) for the loan and received $7 million to manage their crisis. Let us look at each one of them: Liberalization: Liberalization was brought about with an idea that any regulations or restrictions that were imposed on free trade must loosen up its grip to allow trade. It allowed opening up the economic borders for foreign investments and MNCs. Several economic reforms that were imposed under Liberalization include expansion of production capacity, de-servicing producing areas, abolishing industrial licensing by the government, and freedom to import goods.

Privatization: Privatization refers to giving more opportunities to the private sector in regulating different services and reducing the role of the public sector (governmentowned enterprises) in them. With privatization, FDI (Foreign Direct Investment) was introduced in India giving healthy competition to the Indian goods and services.

Globalization: In the context of economic reforms, Globalization means integration of the Indian economy with the world economy. It means that the economy of India will now also depend on the world economy and vice versa. It encourages FDI and foreign trade with different countries.

Several other topics that are included under Economic Reforms are Industrial and Labour Policy, Monetary and Fiscal Policy, Labour Law and Role of Economic Planning.

Industrial Policy: An industrial policy of a country, sometimes symbolized as IP, sometimes industrial strategy, is its official strategic effort to encourage the development and growth of all or part of the economy, often focused on all or part of the manufacturing sector.

Labour Law: The term Labour Law is used to denote that body of laws which deal with employment and non-employment, wages, working conditions, industrial relations, social security and labour welfare of industrially employed, persons. Labour has a vital role in growing productivity and management must help create conditions in which workers can make their maximum contribution towards this objective.

Monetary Policy: 29

Monetary policy is the procedure by which the monetary authority of a country, typically the central bank or currency board, controls either the cost of very short-term borrowing or the money supply, often targeting inflation rate or interest rate to ensure price stability and general trust in the currency.

Fiscal Policy: In economics and political science, fiscal policy is the use of government revenue collection and expenditure to monitor and influence a nation's economy. It developed out of the Great Depression, when the laissez-faire approach to economic management was ended and government intervention became the means of influencing macroeconomic variables.

Privatization: Privatization can mean different things including moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when a heavily regulated private company or industry becomes less regulated.

Economic Planning: Economic planning is a mechanism for the allocation of resources between and within organizations which is held in contrast to the market mechanism. As an allocation mechanism for socialism, economic planning replaces factor markets with a direct allocation of resources within a single or interconnected group of socially-owned organizations.

The strategy of reforms introduced in India in July 1991 presented a mixture of macroeconomic stabilization and structural adjustment. It was guided by short-term and long-term objectives. Stabilization was necessary in the short run to restore balance of payments equilibrium and to control inflation. At the same time changing the structure of institutions themselves through reforms was equally important from long term point of view.

The new government moved urgently to implement a programme of macroeconomic stabilization through fiscal correction. Besides this, structural reforms were initiated in the field of trade, industry and the public sector.

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Objective of Reforms As per the Discussion Paper on Economic Reforms brought out by the Ministry of Finance in July 1993, the objectives of the reforms were: “To bring about rapid and sustained improvement in the quality of the people of India.

Central to this goal is the rapid growth in incomes and productive employment… The only durable solution to the curse of poverty is sustained growth of incomes and employment… Such growth requires investment: in farms, in roads, in irrigation, in industry, in power and, above all, in people. And this investment must be productive.

Successful and sustained development depends on continuing increases in the productivity of our capital, our land and our labour.

Within a generation, the countries of East Asia have transformed themselves. China, Indonesia, Korea, Thailand and Malaysia today have living standards much above ours… What they have achieved, we must strive for.”

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EKI FDI One of the principal tasks of Economic Diplomacy is to seek foreign investments.

Private Sector has played an important role in seeking foreign investments for the Indian economy.

Before we discuss the role in detail, it is necessary to understand the 32

              country.

ROLE OF THE PRIVATE SECTOR IN SEEKING FDI One of the principal tasks of Economic 33

Diplomacy is to seek foreign investments.

Private Sector has played an important role in seeking foreign investments for the Indian economy.

Before we discuss the role in detail, it is necessary to understand the        34

       country.

ROLE OF THE PRIVATE SECTOR IN SEEKING FDI One of the principal tasks of Economic Diplomacy is to seek foreign investments.

Private Sector has played an important 35

role in seeking foreign investments for the Indian economy.

Before we discuss the role in detail, it is necessary to understand the            36

   country.

ROLE OF THE PRIVATE SECTOR IN SEEKING FDI One of the principal tasks of Economic Diplomacy is to seek foreign investments.

Private Sector has played an important role in seeking foreign investments for the 37

Indian economy.

Before we discuss the role in detail, it is necessary to understand the               country.

Impact of Private Sector on Economic Reforms i) Role of the dominant sector 38

Despite the rapid progress of the public sector in the period of planning, private sector is the dominant sector in the Indian economy as would be clear the trace. The number of private sector companies in 2006-07 was 1,24,941 out of 1,44,709 total companies. Thus, as many as 86.3 percent of the total companies were in the private sector, but in terms of fixed capital, gross output and value added, private sector’s share was much lower. Its share in fixed capital was only 25.5 percent in 2006-07. Its value added was only 32.2 percent and 30.8 percent respectively in that year. In terms of employment, private sector’s share was greater in 2006- 07. It employment 60 percent of workers as against 34.1 percent employment by the public sector is shown below.

ii) Performance of the corporate sector after 1991 Opening up the economy to foreign competition has also faced considerable restricting of the private corporate sector via. Consolidation, mergers and acquisition as many business houses are concentrating on their core competencies and existing from unrelated and diversified fields. Table provides information on the performance of the corporate sector in the post liberalized period. As is clear from the table, the average rate of growth of sales was 14.0 percent per annum during 1990’s (1990-91 to 1999 -2000) and 14.2 percent per annum during the period 2000-01 to 2006-07. Gross profits increased at an overage rate of 12.5 percent per annum during 1990’s and 20.04 percent per annum during 2000-01 to 2006-07. The performance of the corporate sector in 2007-08 showed some deterioration vis-à-vis 2006-07. For instance growth rate in sales and net profits during this year decelerated to 18.3 percent and 26.2 from 26.2 percent and 45.2 percent respectively in 2006-07. Growth in gross profit of the corporate sector also decelerated from 41.9 percent in 2006-07 to 22.8 percent in 2007-08.

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iii) Data Interpretation The private sector growing rapidly after economic reforms in 1991. India used the strategy of mixed economy and private sector giving good contribution in India’s development. The private entrepreneur is guided by the profit motive. He is responsible for the introduction of new commodities, new technique of production, assembling the necessary plant and equipment labour force and management and organizing them into a going concern. In the new economic reforms that has emerged after the announcement of the new industrial policy in 1991, private sector has been assigned the dominant role in industrial development.

iv) Globalization Globalization has many meanings depending on the context and on the person, who is talking about. Brainbant says that the process of globalization not only includes opening up of world trade, development of advanced means of communication internationalization of financial markets, growing importance of MNC’s population migration and more generally increased mobility of persons, goods, capital, data and ideas but also infections, diseases and population. In context to India, this implies opening up the economy to foreign direct investment by providing facility to foreign companies to invest different fields of economic activities in India, removing constraints and obstacles to the entry of MNC’s in India, allowing Indian companies to enter into foreign collaborations. When Indian economy way in deep crisis in 1991, Foreign currency reserves had plummeted to almost 1 billion, inflation had roared to an annual rate of 17 percent, fiscal deficit was very high, foreign investors and NRI’s had lost confidence in Indian economy then globalization strategy applied and included the followings. Enter into foreign collaborations. When Indian economy way in deep crisis in 1991, Foreign currency reserves had plummeted to almost 1 billion, inflation had roared to an annual rate of 17 percent, fiscal deficit was very high, foreign investors and NRI’s had lost confidence in Indian economy then globalization strategy applied and included the followings.

Devaluation The first step towards globalization way taken with the announcement of the devaluation of Indian currency by 18-19 percent against major currencies in the international foreign exchange market.

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Disinvestment In under to make the process of globalization smooth, privatization and liberalization policies are moving along as well. Most of the public sector undertakings have been sold to private sector.

Liberalization of Imports A number of items of imports were removed from the restricted list and have been permitted free for imports. 20 items were removed from this list in 1997. Similarly 42 items were removed form the restricted list in 1996-97.

Reduction in Tariff The tariff rates were slashed from 255 percent to 150 percent ad volurem on 35 import items. After sometime a few exceptions were reduced form 110 percent to 85 percent ad volurem. India has made commitment to the WTO to ceiling limit of tariff rates to 40 percent in use of finished goods and 25 percent in case of intermediate goods, machinery and equipment. The union budget 2002-03 announced a reduction in customs duty form 35 percent to 30 percent.

Foreign Capital A very essential element of globalization in India has been to facilitate an easy inflow of foreign capital in the economy. The government specified a list of high priority industries in which equity participation of foreign investors even to the percent of 51 percent could be permitted without prior approval of the government.

Table shows that the annual growth rate of export which was -1.1 percent in 1990-91 touched the peak level of 19.6% in 2000-01. The growth rate of imports stood 14.4% in 1990-91. The import required 24.1% in 2000-01. The FDI stood at $ 129 million in 1991-92 and reached the peak level of $ 3904 million. The ratio of external debt to GDP declined from 30.4 percent in 1991 to 20.9 percent in 2002. The self-reliance as measured by the coverage of imports by exports from 66.2% in 1990-91 to 78 percent in 2001-02 Globalization’s impact on India During the 11-year period 1995-2006 India’s merchandise exports increased at the rate of 13.3 percent per annum (from $ 30.63 billion to $ 120. 25 billion). India’s share in world merchandise exports improved only marginally from 0.59 percent in 1195 to 0.99 percent in 2006. India’s performance in service sector exports was relatively much better service exports 41

increased from $ 10.0 billion in 1995 to $ 63.0 billion in 2006, indicating on annual average growth rate of 18.2 percent during the period. If we pool together merchandise and service sector exports, it becomes evident that India’s exports of goods and service from $40.9 billion in 2008, indicating an annual average growth rate of 16.0 percent. As a consequence, India’s share in world exports of goods and services improved from 0.63 percent in 1995 to 1.41 percent in 2008. So, there is no doubt that India has gained as a consequence of globalization in improving its share of world exports of goods and services.

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Challenges Faced by Private Organization in Development of India Development Challenges Different IFIs focus on various development challenges, such as promotion of growth and job creation, poverty reduction, improved health and education and insurance systems, greater food security, climate change mitigation, and transitioning toward well-functioning markets. This section provides an overview of some of these challenges.

Broad Development Challenges IFIs have different ways of expressing the key challenges they try to address.

Presented below is a brief review of some of the major development themes expressed

by IFIs: Improving People’s Lives. Improving people’s lives is at the core of the mandate of many IFIs. This development objective often includes advances in overall growth and productivity, increased jobs and incomes, poverty reduction, provision of safety nets, and improvements in availability of essential goods and services, such as housing, infrastructure, health, and education. Inclusive Growth. A related development concept for IFIs is inclusive growth. Inclusive growth refers to a focus on economic growth in a country that is both broad-based across sectors and inclusive of the large part of the country’s labour force. This concept includes attention to the welfare of the poor but also to opportunities for the majority of the labour force, poor and middle class alike. The inclusive growth approach looks to productive employment as an important means of increasing incomes of excluded groups.

Poverty Reduction. Many IFIs view poverty reduction as the core of their mission.

Poverty reduction is associated not only with raising incomes of the poor but also with providing the poor with greater opportunities for jobs and access to essential services, such as health, education, housing, infrastructure, financial services, and safety nets.

Food Security. There is increasing recognition that the era of cheap food is gone and that a food price crisis may be one of the biggest challenges now facing most developing countries. According to the Food and Agriculture Organization of the United Nations (FAO), food production (net of food used for biofuels) will need to increase by 70 percent in order to meet demand from a global population of 9 billion people by 2050.In mid-2008, international food prices reached their highest level in 30 years, which, when added to the global economic crisis, contributed to push an additional 115 million people into poverty and hunger. After a brief respite in 2009, the FAO Food Price Index surpassed its 2008 peak again in December 2010. Climate Change. Climate change could affect many important development goals, such as those related to water, food, health, and poverty, and its impacts could disproportionately affect the poorest countries. The greatest mitigation opportunities, especially energy efficiency, remain in middle-income countries. At the United Nations Framework Convention on Climate Change summit in Cancun in December 2010, developed countries reaffirmed their Copenhagen Accord pledge to provide $30 43

billion up to 2012 as “fast-track” climate financing and to help catalyse $100 billion per year by 2020 to address climate change challenges in developing countries.

Market Development. A number of IFIs include in their missions helping countries make the transition toward well-functioning markets, with competitive and innovative businesses, rising productivity and incomes, and where environmental and social conditions reflect people’s needs Global and Regional Integration. Some IFIs also put particular importance on creating global and regional integration to boost productivity and growth and help bring less developed countries into an enhanced growth process. Global and regional integration can be advanced via, for example, improved trade, promotion of regional infrastructure networks, and creation of integrated production chains. The emphasis that different IFIs place on the various development challenges is an important element of IFI strategies. An example of how one IFI tries to balance activities to address some of the important development challenges, and how those approaches affect the poor, is shown in figure 1.

Millennium Development Goals In addition to the broad development challenges discussed above, a number of IFIs consider progress on a set of development goals, called the Millennium Development Goals, or MDGs, as one important way of looking at the challenges of development. Many of the MDGs have measurable targets for achievement by 2015 (over a baseline of 1990) and nonpoverty, employment, hunger, health, education, gender equality, and environmental sustainability. They were agreed to in September 2000 by leaders from 189 nations.

The first MDG aims to eradicate extreme poverty and hunger and achieve full and productive employment and decent work for all. This MDG is particularly relevant to many private sector operations.

•Figure 2 shows progress toward the target of reducing the proportion of people living in extreme poverty by half over the period 1990 to 2015. Even though the global crisis has slowed progress, the world is generally on track to meet this target, with extreme poverty rates ($1.25/day) declining from 46 percent in 1990 to 27 percent in 2005.

Poverty rates have declined significantly in most regions, particularly in East Asia.

Although this progress represents an impressive accomplishment, much poverty remains, and many countries are still likely to fall short of meeting their poverty reduction targets.

•The first MDG also includes achieving full and productive employment. Within developing markets, unemployment varies

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by population segment, most notably with higher youth unemployment in all regions.

Youth unemployment in the Middle East and North Africa is the highest at 25.1 percent and 23.6 percent, respectively; in Central and South-eastern Europe and the CIS more than 18 percent of youth are unemployed. Women have also fared poorly, especially in the Middle East and North Africa, where female unemployment is above 45

15 percent. In the Middle East, North Africa, and South Asia, the percentage of women in the workplace also remains particularly low.

•The third target in the first MDG is to cut in half the proportion of people who suffer from hunger. Progress has been made on this target as well, but not as much as for overall poverty: the percentage of the undernourished population declined from 20 percent in 1990–92 to 16 percent in 2005–07.However, the level of undernourished population is estimated to have risen to 19 percent in 2009 following significant increases in food prices.

Other development challenges captured in the MDGs relate to health, education, gender equality, and environmental sustainability. In general, improvement in most of these areas has been quite uneven, and much remains to be done. Good progress has taken place in gender parity in education and reliable access to water, but progress in child and maternal mortality, primary school completion, and sanitation have lagged.

For example: •Major advances have been made in getting children into schools in many of the poorest countries, but the progress is probably insufficient to achieve the goal of universal primary school enrolment by 2015 •Gender parity in primary and secondary education will likely be achieved by 2015.

•For reduction of child mortality, while mortality rates for children under five have improved significantly since 1990, only about one-fourth of developing countries are expected to reach the targets by 2015, and reduction in maternal mortality has also been inadequate.

•Some progress has been made with respect to combating diseases including HIV/AIDS and malaria, such as the halting of the rapid spread of HIV and related deaths, great increases in antiretroviral therapy, and better delivery of malaria interventions. Few countries, however, are likely to meet the target of universal access to HIV/AIDS treatment by 2015.

•Regarding environmental sustainability (Goal 7), most regions are on track for expanding access to safe drinking water, but the global target for improving access to sanitation will likely be missed. Slum improvements, although considerable, are failing to keep pace with the growth of urban poor.

Overall, there has been significant progress in development as reflected in some of the MDGs. Nevertheless, substantial challenges clearly remain in most areas.

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Role of the Private Sector in Addressing the Challenges The private sector is a critical component in addressing the development challenges discussed above through its contributions in many areas, including growth, jobs, poverty reduction, service delivery, food security, climate change mitigation, environmental sustainability, and contributions to taxes. These roles are discussed below.

Growth the Commission on Growth and Development, which included a broad group of eminent economists and policy makers that spent two years reviewing research and experience on economic growth, found in their 2008 report five common characteristics of countries with high, sustained growth (figure 3). While many of these characteristics relate to actions that governments need to take (see section ahead on the “Role of Government”), also prominent among these is market allocation of resources, led by the private sector. As the report states, there is no known, effective substitute for relying on markets to allocate resources efficiently. A key mechanism for economic growth is higher productivity and knowledge transfer, and the private sector can be a critical facilitator of this process. Private firms and entrepreneurs invest in new ideas and new production facilities. As shown in figure 4, higher private investment is associated with faster-growing economies.

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Jobs In most countries, the private sector is the major component of national income and the major employer and creator of jobs. Over 90 percent of jobs in developing countries are in the private sector. The pace of job growth and the quality of employment in the private sector are thus central to development. Poor people recognize the importance of jobs as they see employment as their best prospect for escaping poverty (figure 5).

Poverty Reduction and Inclusive Growth According to extensive research, economic growth contributes significantly to poverty reduction and to higher living standards for poor people (figures 6 and 7).In general, growth raises the incomes of the poor at about the same rate as for the overall economy and significantly reduces poverty. Government transfer programs, such as conditional cash transfers, can help, as they have in Brazil, but for most low-income countries and many middle-income countries, the tax rates that would be required to significantly alleviate even extreme poverty ($1.25/day) would be prohibitive. Growth is also required to continue to help improve people’s lives well beyond levels of extreme poverty and is also associated with better attainment of MDGs related to education, health, and environment. While growth on average has significant benefits for the poor, how fast poverty declines for a given rate of growth, particularly over the short to medium term, varies considerably among countries. For instance, one study covering many countries found that when average household incomes rise by 2 percent per year, poverty rates fall by about twice as much on average, but the range among countries can be significant, for example, 1.2– 48

7 percent. Accordingly, in recent years development researchers have made a major effort to identify the characteristics that might affect the rate of poverty reduction for a given rate of economic growth. A number of factors have been found •Inequality of income, opportunities, assets, and access to services, such as health, education, infrastructure, and finance, can hinder the ability of poor people to benefit from economic growth. This factor highlights the role of policies and institutions that can help ameliorate some of these inequalities.

•The geographical and sectoral patterns of growth, such as growth where poor people live and sectors where they work, can affect the rate of poverty reduction. For example, the expansion of smallholder farming, increase in labour-intensive manufacturing, and growth in services have been particularly effective in raising incomes of the poor in certain countries.

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Moreover, successful growth experience usually involves many poor people moving to places or sectors where there are jobs, often in urban settings. Policy agendas thus need to address migration, urbanization, and skill development to enable the poor to move to good-paying jobs.

Complementing these trends in development thinking, a number of private companies and government institutions have been considering how private businesses can play a more active role in providing the products, services, and economic opportunities that particularly benefit poor populations. These programs have a number of names such as inclusive business models, base of the pyramid, or opportunities for the majority.

The programs can, for example, include a focus on businesses that broaden access to services such as finance, education, and infrastructure; firms that employ many poor people or are active in certain sectors such as agriculture or microfinance; or companies that focus on low-income regions of countries or target the urban poor. The role IFIs can play in helping the private sector engage in inclusive business activities is discussed in chapter

Service Delivery Besides directly contributing to economic growth, poverty reduction, and jobs, the private sector also provides essential services such as infrastructure (transport, telecommunications, water, power), health, education, and finance that are important to growth and to improving people’s lives (see figures 8 and 9). Private sector participation in infrastructure and other services has become more important over the past 20 years, as governments have sought alternatives to public funding and looked for more efficient ways to deliver services. Estimates for global infrastructure investment needs in developing countries range as high as $1 trillion per year, over 5 50

percent of GDP.19 In some countries, private participation in infrastructure now accounts for as much as half of infrastructure spending.

During the 1990s, the private sector began increasing its participation in the delivery of essential services partly because of the heavy fiscal burdens of state-owned enterprises and partly because of the increased commercial opportunities in emerging markets for private investors. While governments maintained their role of managing policy and regulatory frameworks, they allowed more private sector provision of services. The shift from public to private provision of infrastructure was rapid— by the end of 2001 more than $755 billion of investment flows and nearly 2,500 private infrastructure projects had been undertaken in developing countries.Results, however, were mixed, and investment flows steadily declined from their peak in 1997.

Investors’ expectations sometimes failed to be met because of pricing issues, for example, problems in sustaining price increases for existing customers.

The implementation of new public-private partnership models has initiated a second phase of private participation in infrastructure programs. These models incorporate the advantages of the fully state-owned and fully privatized models while managing their shortcomings. The benefits of these programs include productivity gains, improved quality of service, and increased coverage. These benefits can be enhanced with better project design and implementation and an appropriate institutional capacity and legal and regulatory framework. With a pressing need to restore fiscal space and some restrictions on borrowing, many developing countries must look toward private sector solutions to finance the scale-up in infrastructure. Fiscal austerity among donors also makes it likely that official development assistance for infrastructure will be less available in the future.

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Addressing Food Security, Climate Change, and Environmental Sustainability Critical public issues related to food security, climate change, and environmental sustainability also depend on successful operations of private sector firms—as they are major operators of the businesses that produce food, generate greenhouse gas emissions, and affect the environment. Thus meeting the food challenge depends on improving the operations and productivity of agricultural firms; addressing climate change requires energy efficiency in businesses and firms that can develop technologies for low carbon power; and environmental sustainability requires firms that both use and supply appropriate environmental technologies. Taxes Finally, the private sector and private sector employees are the providers of most of the taxes that support government operations. This leads to a natural synergy between the public and private sectors, which is discussed further in the next section.

When government and the private sector are effective, an essential complementarity can evolve, with the public sector enabling a stronger private sector through appropriate regulation, rule of law, institutions, public investment, and security, while the private sector generates innovation, wealth and taxes, and additional services that can help the public sector better fulfil its mission (figure 10). The private sector can be most effective and achieve more equitable results when accompanied by good government and transparency

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Conclusion India’s private sector has been the major engine of growth and employment generation during the 1990s and 2000s. Its contribution to gross domestic product (GDP) growth has increased from around 66% in the 1980s and 1990s to more than 80% in the 2000s. Its share in overall employment has been consistently more than 90% since the 1980s. It has also been the main driver of investment in India and contributes more than 75% of domestic capital formation. 2. India’s private sector includes agriculture, which is entirely dependent on private farmers, most of whom have modest land holdings; small and medium-sized entrepreneurs in industry and services; and larger domestic corporate entities, many of which have become major global entities. The continued dynamism of the private sector and its ability to seize economic opportunities is vital for inclusive growth, as the bulk of future jobs will be created in this sector.

The private sector is also constrained by the multiple regulations governing the entry, exit, and operations of firms.4 These pose an enormous compliance burden— especially on MSMEs that have limited resources—and discourage entrepreneurial talent and reduce jobs. Moreover, regulations such as price preference and mandatory purchases have distorted incentives to scale up and improve productivity. Multiple land acquisition policies, and variations in rules on how land can be acquired and compensation paid to the land seller have added to the complexity of doing business.

Securing environmental clearances for new projects has also been a key roadblock for investors. Similarly, in agriculture and related activities, stock controls and export restrictions deter private participation in many crops. Limited progress on reforming the Agriculture Produce Marketing Committee Act has delayed establishment of private market yards, direct buying and selling, and contract farming in high-value agriculture, making it difficult for private companies to strategize procurement and storage.

With the advent of the economic liberalization in India, private initiative for various economic activities has been unshackled. The two key ways in which private sector in India contributes to economic diplomacy is by leading outward foreign direct investments and by attracting inward foreign direct investments.

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