NCERT Solutions for Class 11 Business Studies Chapter 3

List the name of some enterprises under the public sector and classify them.

• Departmental undertakings: Posts and Telegraphs, Indian Railways
• Statutory corporations: Food Corporation of India (FCI), Life Insurance Corporation of India (LIC)
• Government companies: ONGC, Bharat Heavy Electricals Ltd
• Government Banks: Indian Overseas Bank, State Bank of India

Describe the industrial policy 1991, towards the public sector?

The following are the major points that describe the industrial policy of 1991.
(a) Fall in the number of industries reserved for the public sector.
Number of industries reserved for the public sector 17 in 1956 and 8 in 1991.
From the above, it can be seen that the number of industries reserved for the public sector fell from 17 in 1956 to eight in 1991. This implies that in 1991, there were more industries in which the private sector could play a role, compared with 1956. In this way, the industrial policy of 1991 aimed at
(i) increasing competition (as the public sector had to compete with the private sector)
(ii) enhancing the efficiency of public sector enterprises (PSEs), by facilitating stiff competition from the private sector.
(b) Disinvestment of shares of the selected public sector enterprises (PSEs): For disinvestment from PSEs, the government reduced its stakes in these enterprises and aimed at encouraging greater participation of the private sector and the general public in industrial sectors. The following were the main rationale behind disinvestment.
(i) Divert resources to social priority areas: By disinvesting from PSEs (the less important ones), the government aimed at diverting funds from the less important PSEs to social priority areas, such as health and education, for improving the people’s welfare.
(ii) Transfer risk: Often, the funds allocated to PSEs had not been optimally utilised. This misutilisation of funds, together with bureaucratic corruption, led PSEs to incur heavy losses, which exerted an acute financial burden on the government. Therefore, by disinvesting from PSEs, the government aimed at shifting this commercial risk to the private sector, which would invest their funds only in feasible projects.
(iii) Reduce public debt: As the government did not have to allocate funds to PSEs where disinvestment had taken place, the need for incurring fresh public debts was reduced.
(iv) Introduction of corporate governance: Disinvestment helped the government to reduce its role in PSEs and encouraged the introduction of corporate governance. This made these enterprises work in a more disciplined and professional manner.
(c) Policies for sick PSEs: The Board of Industrial and Financial Reconstruction was assigned the task to evaluate the sick PSEs and decide whether they could be revived or should be shut down. The decision to shut down sick PSEs freed the government from intense financial pressure, as it no longer needed to financially support these units.
(d) Memorandum of Understanding (MoU): Under an MoU with sick PSEs, their managements were given greater freedom to operate and achieve specified targets. This led to the PSEs operating freely and efficiently.

What was the role of the public sector industries before 1991?

The public sector had a major role in the development of industries in India during the period of initial years of economic planning. The following points highlight the role of the public sector in industrial development in the pre-1991 period.

• (a) Infrastructure development: Infrastructure facilities such as communication, transport, energy supply and banking are the basic requirement for industrial development. But infrastructure requires heavy initial capital investment and long gestation periods to recover returns on such investment. The private sector had a shortfall and only the public sector could mobilise the huge amount of investment required. Hence, this sector was assigned the role of developing infrastructure.
• (b) Maintaining regional balance: During the early development period, India faced hurdles in equal development. Some regions were comparatively much better developed than other regions leading to regional disparities which impacted the nation’s growth and development. Public sector enterprises (PSEs) were set up in backward and rural areas to create equality and narrow the regional differences. These PSEs not only provided employment but also supported industrial development in these areas.
• (c) Economies of scale: Large-scale industries, such as natural gas and petroleum, enjoy economies of scale. In the development phase, the private sector was not big enough to operate these large-scale industries because they required huge capital investments and operating on a small-scale was not a feasible option as this would have caused losses. Hence, the public sector was required to start and operate these industries.
• (d) Import substitution and exports: Attaining self-sufficiency was one of the important objectives of India’s economic planning and the main aim was to restrict imports and at the same time maximise exports. PSE’s were established with the motive restricting imports by manufacturing heavy machinery and engineering goods domestically.

Can the public sector companies compete with the private sector in terms of profit and efficiency? Give reasons for your answer.

No, the public sector companies cannot compete with the private sector in terms of profit and efficiency because the private sector is usually focused towards being more efficient and the main purpose/aim of private sector is earning more profit. The following points make the argument clear:

• Profit motive: Profit is the core objective of private sector industries. Private companies choose various combinations of capital, labour and other inputs that minimise the business costs and maximise profit. Further, these companies have various research and development centres which come up with new technologies to keep up with the market competition. In the case of the public sector, profit is not the only important objective. Public sector is focused on welfare of the society and its citizens by producing and supplying goods and services at reasonable rates.
• Efficiency: An organisation automatically becomes more efficient when it profit driven and goal oriented. Optimum amount of inputs at low costs to produce a given amount of output also gives added advantage. Private sector industries have to compete with the market, therefore they need to ensure quick decision making. In public sector industries, on the other hand, the decision-making process is slow and rigid. This is because of the hierarchy and numerous procedures that employees have to follow, which slow down decision making and affect the overall efficiency of the industries. Moreover, public sector industries are slower to adopt new and efficient technologies, and consequently, they lag behind private sector industries.

Why are global enterprises considered superior to other business organisations?

Multinational corporations (MNCs) are operational in more than one country and have a huge industrial base. MNC’s are backed up by large investments, wide variety of products and use of advanced technologies. They rely on best marketing strategies and expert decision making. All the above resources help MNC’s to capture a bigger share of market compared with other enterprises. The following features make MNCs superior to other business organisations.

1. Huge capital resources: MNC’s have huge resources as they accumulate capital from all over the world. As they have goodwill, they can also borrow from international banks and from a large number of investors who are willing to invest in them for huge returns. These investments help them buy everything it requires for growth.
2. Foreign collaborations: MNC’s are generally backed up by local private companies. They enjoy certain leisure in the market and get support from brand image of the Indian company.
3. Advanced technology: These companies have huge investments in research and development of technology to keep themselves ahead in the market. New technology helps them to increase their efficiency and capture more customers, maintaining superior position in the market. Technology also gives the MNC’s an upper hand in acquiring new customer base.
4. Product innovation: Multinational corporations have separate refined research and development centres for the innovation of new products along with top development personnel. They are not shy of spending money on research and it helps them to sustain in the market and retain their large consumer base

What are the benefits of entering into a joint venture?

A joint venture is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Organisations come together for mutual benefits and gains. Business organisations in a joint venture share not only the physical, financial and human resources available but also the risks and profits of the business. The following are some of the benefits for a company entering into a joint venture.

1. Increased resources and capacity: In a joint venture, the resources and operational capacities are almost doubled as two organisations work in tandem by pooling all the resources. A joint venture is able to expand and grow better than an individual business enterprise.
2. Access to new markets and distribution networks: Entering into a joint venture opens up expansion opportunities with a new customer base and new regional market. New distribution network provides new suppliers with better credit terms and refined raw material.
3. Access to technology: Through a joint venture, a company can acquire new and modern technology more easily with less investment and less time and effort compared with the technology that individual enterprises may be able to acquire working independently.
4. Innovation: A joint venture gives access to sharing of new ideas and technology which help in the innovation of new products and cost effectiveness. These new product is able to gain edge in the market, enabling businesses to sustain in today’s complex and competitive market.
5. Low cost of production: Costs effectiveness is achieved with better access to raw material and cheap labour which is low in India compared to other countries. Thus, international corporations that enter into joint ventures with Indian companies reap huge benefits.