Private sector and public sector
The private sector is made of businesses owned by individuals or groups: sole proprietors, partnerships, cooperatives and companies. The public sector is made of enterprises owned and run by the central or state government, for public welfare as well as profit. India chose a mixed economy where both work side by side. Government policy decides which areas are open to whom. Public enterprises are organised in three forms.
Departmental undertakings
A departmental undertaking is set up as a department of a ministry and is run like any other government office. Examples: Railways, Post and Telegraph, defence production units.
Features
- Funds come from the government budget; earnings go to the treasury.
- Accounts and audit are like other government departments.
- Staff are government employees under civil service rules.
- No separate legal entity: it is part of the government.
- Directly controlled by the ministry and answerable to Parliament.
Merits
- Parliament has effective control.
- High public accountability.
- Revenue goes to the treasury.
- Best for strategic areas like defence and national security.
Limitations
- Lack of flexibility: rigid rules.
- Delays due to red tape and ministerial approval.
- Political interference.
- Officials are not trained in business and may not respond to customers.
Statutory corporations
A statutory corporation is a public enterprise created by a special Act of Parliament or a state legislature. The Act fixes its powers, duties and relation with the government. Examples: Life Insurance Corporation (LIC), Food Corporation of India, Airports Authority of India, Reserve Bank of India.
Features
- Set up by a special Act; it is a separate legal entity.
- Wholly owned by the state; it can raise money by borrowing and from its earnings.
- Financially independent; not funded through the yearly budget in the usual way.
- Staff are not civil servants; the corporation makes its own service rules.
- Not under normal budget, audit and accounting rules of departments.
Merits
- Independence and flexibility in daily work.
- Quick decisions, free of red tape.
- Its powers are clear from the Act; the government cannot interfere with its money matters except as the Act allows.
- A professional, business-like approach with public service aims.
Limitations
- Actual freedom is often less: ministers still interfere.
- Rigid: any change in powers needs Parliament to amend the Act.
- Monopoly in its area can make it careless.
- Conflict can arise between commercial aims and public duty.
Government companies
Under the Companies Act, 2013, a government company is any company in which at least 51% of the paid-up share capital is held by the central government, a state government, or both together. Examples: Steel Authority of India (SAIL), Bharat Heavy Electricals (BHEL), Coal India, Hindustan Aeronautics.
Features
- Registered under the Companies Act like any company; a separate legal entity.
- Management follows the Companies Act and its own MoA and AoA.
- Staff are its own employees, not civil servants.
- Free from the government's budget, audit and accounting rules (it has its own auditors, and the CAG can also review).
- Funds come from the government and private shareholders, and it can raise money from the capital market.
Merits
- Easy to form: only the Companies Act procedure; no special law needed.
- Its own MoA and AoA can be changed easily.
- Enjoys autonomy and can take business decisions quickly.
- Can bring in private partners and control prices in the market.
Limitations
- Being a company, it can be misused to avoid the scrutiny of Parliament.
- The government is the major or only shareholder, so directors may still follow political orders.
- Management is often made up of civil servants on deputation.
Try it
List five public enterprises you have heard of (railways, post, LIC, a state bus corporation, an oil company). For each, guess its form, then check its website: "Ministry of…" (department), "established by … Act" (statutory corporation) or "Limited" (government company).
Comparison of the three forms
| Basis | Departmental undertaking | Statutory corporation | Government company |
|---|---|---|---|
| Formation | By a government order, under a ministry | By a special Act | Under the Companies Act, 2013 |
| Separate legal entity | No | Yes | Yes |
| Funds | Government budget | Own; can borrow | Government + private shareholders |
| Staff | Civil servants | Own rules, not civil servants | Own employees |
| Autonomy | Least | More | Most |
| Accountability to Parliament | Direct, through the minister | Through reports laid before Parliament | Annual report laid before Parliament/legislature |
| Example | Indian Railways | LIC | SAIL |
Key formulas and definitions
- Government company: government holding ≥ 51% of paid-up share capital
- Autonomy: departmental < statutory corporation < government company
- Statutory corporation = created by a special Act
Worked examples
1. A company has paid-up capital of ₹500 crore. The central government holds ₹200 crore and a state government ₹80 crore. Is it a government company?
Total government holding = 280 ÷ 500 = 56%. Since it is at least 51% (centre and state can be added), it is a government company.
2. The government wants a body to handle national defence production with full secrecy and direct control. Which form suits it?
A departmental undertaking: direct ministerial control and accountability suit strategic areas like defence.
3. Parliament passes an Act to set up a body that will run all airports. What form is it?
A statutory corporation (like the Airports Authority of India).
4. The government sells shares so that its holding in a government company falls from 60% to 45%. What happens?
It stops being a government company and becomes a private-sector company, because the holding is below 51%.
Common mistakes
- Saying a departmental undertaking is a separate legal entity. It is not; it is part of the government.
- Writing that a government company must be 100% owned by the government. Only 51% or more is needed.
- Calling LIC a government company. It was created by a special Act, so it is a statutory corporation.
- Thinking public enterprises aim only at profit. They also aim at public welfare and balanced development.