Model Answer
0 min readIntroduction
The pre-liberalisation era in India, spanning from independence in 1947 to the economic reforms of 1991, was characterized by a distinct economic philosophy that placed the public sector at the helm of industrial development. Faced with the daunting task of nation-building, poverty alleviation, and establishing a self-reliant economy, India adopted a 'mixed economy' model, where the state played a dominant and strategic role. This approach was deeply influenced by socialist ideals and the imperative to rapidly industrialize a predominantly agrarian economy, ensuring equitable growth and reducing dependence on foreign capital and technology. The Industrial Policy Resolution of 1956 significantly institutionalized this state-led development paradigm.
India's decision to assign a leading role to the public sector in industrial development during the pre-liberalisation era was a deliberate strategy rooted in a complex interplay of historical, economic, social, and political factors. This approach was formalized through various policy documents, most notably the Industrial Policy Resolution (IPR) of 1956.
Key Reasons for Public Sector Dominance (Pre-1991)
- Lack of Private Capital and Entrepreneurship: At independence, India's private sector lacked the necessary capital, technological know-how, and risk-taking capacity for establishing large-scale, capital-intensive basic and heavy industries. The public sector stepped in to fill this critical void.
- Foundation for Heavy Industries: The Second Five-Year Plan (1956-1961), based on the Mahalanobis Model, prioritized the development of heavy industries (like steel, machinery, power generation) as the bedrock for long-term industrialization and self-reliance. These industries required massive investments and had long gestation periods, making them unattractive to private players. Public Sector Undertakings (PSUs) like Steel Authority of India Limited (SAIL) and Bharat Heavy Electricals Limited (BHEL) were established to fulfill this role.
- Balanced Regional Development: A key objective was to reduce regional disparities by setting up industries in underdeveloped areas. Public sector enterprises were strategically located across different states, promoting employment and economic activity in backward regions where private investment was scarce.
- Socialist Pattern of Society and Equity: Influenced by socialist ideologies and the directive principles of state policy, the government aimed to establish a "socialist pattern of society." This meant controlling the means of production to prevent the concentration of economic power in a few hands and ensure a more equitable distribution of income and wealth. Public ownership was seen as a tool for social justice.
- Strategic Control and National Security: Industries vital for national security (e.g., defense, atomic energy) and strategic sectors (e.g., railways, telecommunications, banking, insurance) were placed under government control to safeguard national interests and ensure uninterrupted provision of essential services.
- Creation of Infrastructure: The public sector was responsible for building critical infrastructure like roads, railways, ports, power plants, and communication networks, which are essential for industrial growth but typically have high capital requirements and low immediate returns, deterring private investment.
- Import Substitution and Self-Reliance: To reduce dependence on foreign countries for essential goods and technology, India pursued an import substitution industrialization strategy. The public sector was instrumental in developing indigenous capabilities and producing goods previously imported, fostering economic independence.
- Employment Generation: Public sector enterprises were expected to be significant employers, contributing to poverty alleviation and providing stable job opportunities, especially in organized sectors.
Industrial Policy Resolution of 1956 (IPR 1956)
The IPR 1956 formalized the leading role of the public sector. It classified industries into three schedules:
| Schedule | Description | Examples |
|---|---|---|
| Schedule A (17 industries) | Exclusive responsibility of the State. | Arms & Ammunition, Atomic Energy, Railways, Air Transport, Iron & Steel, Heavy Plant & Machinery, Coal, Mineral Oils. |
| Schedule B (12 industries) | Open to both public and private sectors, but the public sector would progressively expand its role. | Aluminium, Machine Tools, Ferro-Alloys, Basic & Intermediate Products for Chemical Industries, Road & Sea Transport. |
| Schedule C | Remaining industries, primarily for the private sector, but subject to state regulation and licensing. | Consumer goods, textiles, light engineering. |
This framework, often termed the 'License Raj,' gave the government extensive control over industrial activity, regulating private investment through licenses for establishing, expanding, or diversifying industrial units.
Influence of Planning Commission and Five-Year Plans
The Planning Commission, established in 1950, played a central role in India's planned economy. The Five-Year Plans meticulously allocated resources, with a significant portion directed towards public sector investments in line with national priorities. The Second Five-Year Plan, in particular, emphasized state-led industrialization and rapid expansion of the public sector.
Conclusion
In essence, the pre-liberalisation era saw the public sector as the primary engine of industrial growth in India, driven by the imperatives of rapid industrialization, self-reliance, equitable development, and national sovereignty. Faced with a nascent private sector and immense developmental challenges, the state consciously assumed the role of an entrepreneur and investor, particularly in heavy industries and critical infrastructure. While this strategy laid a strong foundation for industrialization and achieved significant social objectives, it also led to certain inefficiencies and resource constraints, eventually paving the way for the economic reforms of 1991 that sought a greater role for the private sector and market forces.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.