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Indian Economic Policy

Notes the share of the state is almost zero. However, in insurance, defence equipment, indigenous crude oil
production, etc., government ownership is cent per cent. Increasingly, industries of strategic and
national importance are being brought under state ownership.
18.2.2 Causes for the Expansion of Public Enterprises
In a developing economy like India, some industries had to be brought within public ownership and
control, for otherwise rapid growth of the economy was thought to be impossible. Nationalising
some of the industrial, banking and insurance units and starting new units was expected to help in
speeding up the rate of economic growth. Therefore, public enterprises became an essential part of
the economic development programme of India. In this section, we shall study the need for or the
rationable of public enterprises in the context of economic planning in India.
(i) Rate of Economic Development and Public Enterprises : The justification for public enterprises
in India was based on the fact that the rate of economic development be planned by the
government was much faster than could achieved by the private sector alone. In other words,
the public sector was essential to realise the target of the high rate of development deliberately
fixed by the government.
To fulfil this ambitious plan target, the government had to resort to compulsory saving through
taxation. In the words of Professor Ramanadham, ”Having gathered the resources, the
government and other important policy making bodies like the Planning Commission are under
the normal human temptation to use the funds under the government’s own aegis and it appears
to be an avoidable botheration for the administration to offer the money to private enterprises
in the first instance and then go about instituting the necessary checks and balances for the
sake of ensuring the safety and proper use of funds. Instead it appeals as preferable to Parliament
as well as the administrative bodies to launch industrial enterprises in the public sector.
(ii) Pattern of Resource Allocation and Public Enterprises : In Professor Ramanadham’s words,
“The main reason for the expansion of the public sector lies in the pattern of resources allocation
decided upon under the plans.” In the Second Plan the emphasis was shifted to industries and
mining, mainly basic and capital goods industries to be developed under the aegis of the public
sector. Thus more resources for industrialisation were funnelled through the public sector. Under
these circumstances, “It is inevitable. that the public sector must grow not only absolutely but
also relatively to the private sector.”
(iii) Removal of Regional Disparities through Public Enterprises : Another important reason for
the extension of the public sector was the anxiety for balanced development in different parts of
the country and to see that there were no serious regional disparities. Public enterprises of the
Central Government were set up in those regions which were underdeveloped and where local
resources were not adequate. Good examples are the setting up of the three steel plants at
Bhilai, Rourkela and Durgapur and the Neyveli Project in Chennai which were meant to help
industrialise the regions surrounding the projects. In certain cases, the State Governments were
unable to raise adequate resources for development of their regions. The only alternative available
was the setting up of projects by the Central Government or to start enterprises which were
financed by the Centre.
(iv) Sources of Funds for Economic Development : Initially, state was an important source of
funds for development. The surplus of government enterprises could be re-invested in the same
industries or used for the establishment and expansion of other industries. It may be noted that
private sector industries can also plough back whole or substantial amounts of their profits for
expansion. However, profits in private enterprises are declared as dividends among
shareholders. This would only create inequalities among people. But profits of public sector
industries can be directly used for capital formation.
(v) Socialistic Pattern of Society : The socialistic pattern of society calls for extension of public
sector in two ways. For one thing, production will have to be centrally planned as regards the
type of goods to be produced, the volume of output and the timing of their production. It may
be comparatively easy to achieve this through the public sector rather than through private

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