Role of Public Sector in Industrial Development

There was a need for a leading role in the Public Sector due to the following reasons:

  • Shortage of Capital in Private Sector: Private entrepreneurs did not have the capital to undertake investment in industrial ventures, required for the development of the Indian economy. At the time of independence, Tatas and Birlas were the only well-known Private entrepreneurs. As a result, the Government had to make an industrial investment through Public Sector Undertakings (PSUs).
  • Lack of Incentive for the Private Sector: The Indian market was not big enough to encourage private industrialists to undertake major projects, even if they had the capital to do so. Due to the limited size of the market, there was a low level of demand for industrial goods.
  • Objective of Social Welfare: The objective of equity and social welfare of the Government could be achieved only through direct participation of the state in the process of industrialization As a result; the state had complete control over those industries that were vital for the economy.

Industrial Policy Resolution 1956

Industrial Policy is a comprehensive package of policy measures, which covers various issues, and connects with different industrial enterprises of the country.

  • Industrial Policy is essential for devising various procedures, principles, rules and regulations for controlling the industrial enterprise of the country.
  • After the Industrial Policy, of 1948, the Indian economy had to face a series of economic and political changes, which necessitated the need for a fresh industrial policy for the country. So, on 30 April 1956, a second Industrial Policy Resolution was adopted in India.

Classification of Industries

According to Industrial Policy Resolution 1956, the industries were reclassified into three categories, viz., Schedule A, Schedule B and Schedule C:

  • Schedule A: This first category comprised industries that would be exclusively owned by the state. In this schedule, 17 industries were included, like arms and ammunitions; atomic energy; heavy and core industries; aircraft, oil; railways, shipping, etc.
  • Schedule B: In this schedule, 12 industries were placed, which would be progressively state-owned. The state would take the initiative of setting up industries and the private sector will supplement the efforts of the state. This schedule includes industries like aluminum, other mining industries, machine tools, fertilizers, etc.
  • Schedule C: This schedule consisted of the remaining industries which were to be in the private sector. The state would facilitate and encourage the development of all these industries These industries were controlled by the state through a system of licenses, enforced under the Industries (Development and Regulation) Act, 1951.

Industrial Licensing

Definition: An industrial license is written permission from the government, to an industrial unit to manufacture goods. The government can issue licenses for:

  • Setting up of new industries;
  • Expansion of existing ones; and
  • Diversification of products.
  • According to Industrial Licensing, No new industry was allowed unless a license is obtained from the government.
  • It was easier to obtain a license if the industrial unit was established in an economically backward area. In addition, such units were given certain concessions, such as tax benefits and electricity at a lower tariff. The purpose of this policy was to promote regional quality.
  • License was needed even if an existing industry wants to expand output or diversify production. License to expand production was given only if the government was convinced that there is a need for a larger quantity of goods in the economy.

Small-Scale Industry (SSI)

Definition: A small-scale industry is defined with reference to the maximum investment allowed on the assets of a unit. This limit has changed from rupees five lakh in 1950 to the present limit of rupees one crore.

  • Employment Generation: Small-scale industries are more labor-intensive, i.e., they use more labor than large-scale industries and, therefore, generate more employment. After agriculture, small-scale industries provide employment to the largest number of people in India.
  • Need for Protection from Big Firms: Small-scale industries cannot compete with big industrial firms. They can flourish only when they are protected from large firms. Therefore, the government for their growth took various steps.
    • Reservation of Products: Government reserved production of a number of products for the small-scale industry. The criterion for reserving the products depended on the ability of these units to manufacture the goods.
    • Various Concessions: Small-scale industries were also given concessions, such as lower excise duty and bank loans at lower interest rates.

CRITICAL APPRAISAL OF INDUSTRIAL DEVELOPMENT

  1. The proportion of GDP contributed by the industrial sector increased in the period from 11.8% in 1950-51 to 24.6% in 1990-91. This rise in the industry's share of GDP is an important indicator of development. The 6% annual growth rate of the industrial sector during the period is also admirable.
  2. Indian industry was no longer restricted to cotton textiles and jute. It also included engineering goods and a wide range of consumer goods. The industrial sector became well-diversified by 1990, largely due to the public sector.
  3. The promotion of small-scale industries gave opportunities to people with small capital to get into business. New investment opportunities helped in generating more employment It promoted growth with equity.
  4. Protection from foreign competition (through Import Substitution) enabled the development of indigenous industries in the areas of electronics and automobile sectors, which otherwise could not have developed. However, this protection had two drawbacks:
    • Inward Looking Trade Strategy: Our policies were 'inward oriented' and so we failed to develop a strong export sector.
    • Lack of Competition: Due to restrictions on imports, some domestic producers made sincere efforts to improve the quality of their goods and it forced the Indian consumer to purchase, whatever they produce. The domestic industry failed to achieve international standards of product quality.
  5. Licensing Policy helped the government to monitor and control the industrial production However, excessive regulation by the government created two difficulties:
    • Misuse: It was misused by industrial houses. Some big industrialists would get a license, not for starting a new firm, but to prevent competitors from starting new firms.
    • Time-Consuming: The cumbersome and complex procedure for obtaining a license was very time-consuming. Industrialists in trying to obtain a license spent a lot of time.
  6. Public sector made a remarkable contribution by creating a strong industrial base, developing infrastructure and promoting development of backward areas.
    • However, the public sector continued to monopolize (that too ineffectively) in certain non-essential areas, which could be well handled by the private sector. For Examples, telecommunication, hotel industry, production of goods (like Modern Bread).
    • As a result, precious funds of public sector were channelized into areas, where private sector could have been easily engaged.
    •  Many public sector firms also incurred huge losses but continued to function because of difficulty in closing a government undertaking.
    • Many scholars criticized the monopoly of public sector in such non-essential areas. According to them, the role of public sector should be limited to strategic other non-essential areas. Areas (like national defense) and private sector should be given the opportunity for other non-essential areas.