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UNIT -V
THE ROLE OF PUBLIC, PRIVATE AND JOINT SECTORS
Almost every country of the world, whether capitalist or socialist, has public sector in its economy India is no
exception. But public sector has been given a strategic position in the Indian economy. A public sector
enterprise is that enterprise which is owned and managed by Government.

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Before independence, due to the imperialistic policies of the British Government, India's status in the field of
industry was negligible. Barring a few industries (textile Industry, cement and steel plants) there was little to
mentioning the industrial felt. It was realized that in order to have highest rate development in the shortest
possible time, State intervention in the Economic process would be inevitable. Expansion of public sector in
industry, trade and service is one of the major forms of state intervention. Public sector was to accelerator of
Economic development, the usherer of socialistic pattern of society, the champion of social justice and
industrial democracy.
Objective of Public Sector

The broad objectives of public sector are as follows :

(i)
To gain control of the commanding heights of the economy.
(ii)
To provide commercial surpluses to Economic development.
(iii)
To promote rapid Economic development by filling critical gaps in the industrial structure.
(iv)
To provide basic infrastructural facilities.
(v)
To ensure balanced regional development and dispersal of Economic activity.
(vi)
To reduce sharp disparities of income and prevent concentration of Economic poser in few hands.
(vii)
To effect social control and regulation of long-term finances through public financial institutions.
(viii) To achieve self-reliance critical areas.
(ix)
To create employment opportunities on an increasing scale.
(x)
To help improve foreign exchange earnings.

Role of Public sector in India: Public sector has been playing a significant role in the Economic
development of India. This will be clear from the following points:
(i) Filling of Critical Gaps and Development of Strong Industrial Base - After independence.
Serious gaps were felt in the field of heavy industries Public sector has helped us filling the
structural demand, supply gaps and achieving a strong industrial base. There has been a
significant growth in the state run defence industries and industrial of strategic importance such
as iron an steel, heavy engineering and heavy electrical, petroleum and natural gas drugs and
chemicals, fertilizers, etc, these industries require considerable investment and have low
profitability potential in the short run, Naturally, private entrepreneurs hesitate entering these
fields of production. But these industries provide a strong base for further development of

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several other industries which depend on theme for raw materials, intermediate goods and as
markets by establishing and developing these industries the public sector has created as strong
India. Base for the economy.
(ii) Development of infrastructure - one of the prerequisites of rapid industrialization is development
of a strong and modern infrastructure. Without proper infrastructural facilities in the form of
irrigation, power energy transportation, etc., the agricultural sector cannot properly grow. In the
absence of adequate development of transport and communication facilities, basic and heavy
industries, fuel and energy, banking and insurances facilities. The process of industrialization
cannot be sustained. Since private sector lacked the motivation and adequate financial
resources to invest in infrastructure, it was essential for the public sector to take up the job of
developing it. The result is, today we have a reasonably will-developed infrastructure in the
economy.

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(iii) Capital Formation - Public sector pays a positive role in capital formation and investing savings. In
almost all plans (except the seventh and the right plans) the share of public sector in the total
investment has been more than 50 per cent. The public sector banks and term financing
financial institution like industrial Development Bank of India, Industrial Finance Corporation of
India. Life Insurance Corporation and Unit Trust of India etc., have played an important role in
collecting and investing savings.
(iv) Development of backward Areas - The government has consciously adoptee the objective of
development of industrially backward states and regions, by setting up giant public industrial
undertaking. It was believed that setting up of public sector project in the other backward areas
would trigger Economic development in such areas. Thus steel plants have been located in
Madhya Pradesh, Orissa, West Bengal and Bihar, fertilizers plants have been locate in Bihar,
Orissa, Assam, U.P. Panjab and Kerala and machine tools plant in Rajasthan in order to develop
either these states of backward areas of these states.
(v) Saving Mobilization and Earnings - Many public sector enterprise have helped us in saving and
earning foreign exchange. For example, Bharat Heavy Electricals Limited, Bharat Electronics
Limited, Hindustan antibiotics limited, Indian Oil Corporation Oil Corporation. Oil and Natural
Gas Commission, etc., due to their import substitution efforts have helped the economy in
saving foreign exchange. One the other hand. Hindustan Steel Limited, Hindustan Machine
Tools Limited, Bharat Electronics Limited, state trading Corporation and Metal and Mineral
Trading Corporation, etc., have made important contribution to our export earrings.

(vi) Control over Concentration of Economic power - Public sector helps in checking the
concentration of Economic power in a few private hands and reduction inequalities of income
and wealth, public sector may do this by (i) using a part of its profits on welfare programmes of
the weakes section of the Society goods.
(vii)

Skill Development - One of the major aspects of the public sector has been its spread
throughout the length and breadth of the country. besides; quantitative and geographical
spread, the development of technological skills at various levels has laid string and broad based
foundation for sell-reliance in know-how, research and development maintenance of highly
sophisticated industrial plants and machinery in the county without such sills. India would
continue to depend on foreign assistance.

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Performance of Public Sector - Generally the performance of private sector enterprises if judged by the
profits or losses they earn. This is because of their commercial nature the main motive of which is to
maximize profits. But in the Indian context, public sector enterprises are not to be regarded as mere money
making machines. Hs is because such enterprises are usually started in those areas where profitability is
low and gestation period is long. For example, the nature of basic and infrastructure industries is such that
they are not going to yield early returns and it very likely that profit in them are very low or even negative at
least in the beginning. But since these investments are crucial for the economy as they lay foundation for
future development of industry and the economy. It is very essential to develop them. Moreover, there are
certain product of which public sector deliberately keeps the process low so that the private sector could get
those products at reasonable prices it is not difficult for the public sector to raise the prices and earn profits.
However, their raising the prices would adversely affect the industrial activity in the economy because of
such considerations, it is often agued that the performance of public sector should be judged not on the
basis of profits but on het basis of there contribution to the economy in various forms.

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(1) Growth of Public Sector - At the beginning of the First Plan there were only 5 central public sector
enterprises having a meager investment of Rs. 29 crore. Since then, there has been a
tremendous growth and expansion of public sector. At the end of March 2002, he number had
increased to 233 with investment worth Rs. 2, 74114 crore.
(2) Range of Public Sector Activities - Massive investments in public sector enterprise have resulted
in a wide spectrum of industrial and commercial activity these activity range from ship-building,
thermal hydro and nuclear power, electronics, steel, non-ferrous metals, machine tools, mining
and metallurgical, petroleum products, heavy machine building, cement fertilizers, watches,
commercial vehicles, road rail transport, airlines, defence equipment, electronic goods, oil
refining, technological and consultancy services, bread, footwear and drugs, etc. thus we find
that public sector enterprises exist in every industry or Economic activity whether it is extraction
industry, basic and heavy industry. Consumer goods industry or trade and service sector it
dominated that leading sector of he economy which comprise of railways, iron and steel, cost
power oil exploration and refining, etc, in the fact, the public sector has by providing, basic and
key inputs and infrastructural facilities to the private sector helped the private sector to grow the
expand. Thus, the public sector has laid a strong foundation for industrial development to India.
(3) Economic Contribution - The public sector makes valuable contribution to national products the
country. it share in the net domestic product has increased products has increased from about
7.5 per cent in 1950-51 to abut 25 per cent 2001-02. its hare in the capital formation, at the end
of Seventh Plan stood at 45 per cent. The Eight Plan envisaged its share in capital formation, as
45 per cent. But actual share was just 35 per cent. The Ninth Plan further expected the share of
public sector to decline to 33 per cent, in the Tenth Plan, However, the public sector investment
is expected to rise by 3 percentage points. Thus increasing importance that is being given to the
private sector. However, the Public sector has helped us in increasing our national income,
improving out balance of payments, improving distribution of wealth and income, income,
transforming our industrial structure form traditional our industrial structure form traditional one
to a modern one, improving productivity of labour, Meeting the technology and skilled
manpower requirements of the private sector and so on.
(4) Profit- Generation - Through profits are not he appropriate yardstick for judging he performance of
public sector enterprises, due to high investment in these units judging their performance in
terms of profit generated and been a common practice. Gross profits of central public sector

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units rose from 15 crore in 1970-71 to around Rs. 48.768 crore in 2000-01. Profits after tax
which was negative 1980-81.became around 16,000 crore in 2001-01. There has been a rise in
profitability (Gross profits percentage of capital employed) of central public sector enterprises
from around 8 per cent in 1980-81 to 11 per cent in 1990-91 and further to 14 per cent in
200001. the after tax as percentage of net worth has increased form (-) 1.6 in 1980-81 to 3 in
1990-91 and further to 9 in 2000-01 thus the performance of public sector enterprises in
improving in recent years suggesting a better resource utilisation.
However it so to be noted that only a few sector - Petroleum, power, engineering, minerals and
metals have been able to generate reasonable profits, other sectors like coal, chemicals,
fertilizers, pharmaceuticals, consumer goods, etc have made marginal profits or negative
profits. In fact, looses of loss-making public enterprises have been increasing. Moreover,
certain sectors making profits not because their efficiency in resource utilisation has been
improving but because their prices, which are administered by the Government, have increased
form time to time.

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(5) Employment and Labour Welfare - On employment front, the pUblic has done exceedingly well. It
has helped in improving the overall employment situating in the country. the number for per sons
employed in public sector enterprises was 191.38 lakh as on March, 2001. as against this the
just 86.52 lakh. Thus out of he total employment in the organised sector as much as 70 per cent
employment is in the public sector. apart from this, by providing better wages and facilities to its
employees, it has acted as a model employer for the private sector. Public sector enterprises_
also helped in developing neighborhood areas in the form of schools, hospitals, shopping
complexes, transportation and communication system, banking system etc., around them.
(6) Foreign Exchange Earnings - Another positive contribution made by the public undertaking to be
country's economy is by way of foreign exchange savings an earnings. Foreign exchange
savings has been possible due to import substitution efforts made by public sector enterprises,
Capital goods, machines, equipment etc., which were earlier imported are now being
manufactured in the country itself. The chief foreign exchanger savers are Oil and Natural Gas
Corporation and Indian Oil Corporation. Public sector enterprises have also contributed in
earning foreign exchange. This has been done either by direct export by them or through their
services rendered to the private sector. Besides this, they have also provided trading and
marketing services to the undertakings whose exports are canalized. In fact, the share of
foreign exchange earning by the public sector in India's total export earning is round 20 per cent.
Problems of the public sector - While public sector has diversified and strengthened national economy,
certain deficiencies and shortcomings have also become conspicuous in their functioning in their
functioning. These are explained below:

(i) Price Policy Sector Enterprises - Public sector enterprises, unlike private sector enterprise, do not
operate with the sole aim of maximizing profits. There fore, their price policies are not governed by this aim
but for fulfilling the objectives for which they are started. These objective are varies. For example, the
objective could be to provide goods to certain sections of the society (say fertilizers to farmers) at
subsidised rates, or to provide inputs to the private sector at reasonable rate or to provide infrastructural
facilities at reasonable rate to develop backward areas etc. Under such circumstances, the prices are
deliberately kept low. But such policy of under-pricing has two bad effects (i) It may distort the choice of
technique by these industries. For example, for office furniture instead of choosing other material, steel

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maybe used, as it is under-priced. (ii) Since there is generally no price-control on the products of private
sector, it implied that profits foregone by the public sector enterprise end up with the private sector who may
not pass on the benefit to the final consumers. Moreover, incurring continuous losses adversely affect the
morale of employees. Furthermore, since huge investments have been made in public sector, it is
necessary that they should at least be self-supporting and profit-making. If this does not happen, the
process of Economic development will suffer badly.
(ii)
Under-Utilization of Capacity - The overall capacity utilization of all public sector units is around
50 per cent of their installed capacity. There are several reasons for under-utilization of capacity in the
public sector important among them (i) in certain cases capacities were created not because such as
production mass consumption goods, using not because there was a need for them but in order to meet
certain adnoc demands such as producing mass consumption goods, using locally available raw-material,
stimulating growth in backward areas, etc. (ii) stagnant demand for industrial goods between 1965 - 80.

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(iii)
Problems Relating to Planning and Construction of Projects - There have been several
problems relating to construction and completion of projects. These are: (i) in many cases, the choice of
project location was not appropriate of these were other serious lapses in several elements of projects. (2)
in certain case, the actual costs of projects were avoidably higher than estimated, (3) several projects took
longer time in constructing than originally estimate sue to defects in planning and delay in sanction. (4) in
many project even product mix was not appropriate.
Problems Relating to Management - Unlike private enterprises, they have neither a strong competitive
commercial and entrepreneurial spirit nor are they endowed with professionally strong management. The
top and other functionaries have tended to develop inertia and indifference in their decision and action over
period of times, which have eroded and corroded the productivity and efficiency of public enterprises, a
strong business sense is missing in public enterprises because they are not under great pressure to show
high performance an profits. The official normally remain trapped in bureaucratic rules, regulating,
procedures, file work and red-tapism and fail to deliver proper goods. It is also observed that even
professionally and technically qualified managers hardly made nay effort to be non-bureaucratic. They
even find some solace and security in bureaucratic jungle of procedures, processes, rigid rule and
precedents.
Political Interference - The division of responsibilities between the Government and the public
undertaking as not sufficiently clear cut and this tends to erode the autonomy of he public undertakings. In
other works, the line between 'control' and 'autonomy' has not been properly spelt out. Since public sector
enterprises are run with public money, it is essential that the public should know whether these enterprises
are being run efficiently or not. This control is exercises by the parent Ministry and Parliament. But many a
times, the former instead of concentrating on the policy maters interferes in the day-to-day working of these
enterprises.
The effects the economy of the management and demoralizes it besides creating impediments for her
growth of the public enterprise. Thus for efficient and smooth functioning of he public enterprise, it is
imperative that the line of demarcation between control and autonomy should be clear-cut.
It is sad but true that the top management of several public enterprises are not serious in insisting on and
safeguarding the autonomy of public enterprises. This is because autonomy and accountability of together.
They are afraid of accountability for performance and accordingly are not much find of autonomy; no
autonomy means no accountability.

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(iv)
Problems Relating to personnel - Public enterprises are generally notorious for their lose
functioning and reckless spending habits. In many enterprises, the number of employees and workers is
much higher than is required at any point of time. Salaries and wages and other benefits of personnel as
cost component eat quite a chunk of revenue of publiC enterprises. The construction cost of public
enterprises including townships for the staff as also the operational costs get inflated beyond all cannons of
economy and probity. Enormous leakages in revenue coupled with profligacy in expenditure are quite
common in public enterprises.
(v)
Even in the sphere of industrial relations - the record of public enterprises is no very good. It was
assumed that the very act of public ownership would bring in a new era of industrial relations. Besides it was
thought that the state by adopting enlightened practices would act as model for the private sector. Neither of
these has materialized. Strikes and lockouts have become as frequent in public enterprises as in private
enterprise.

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(vi)
Over-Capitalization - Several public sector units are over-capitalised due to high capital intensive
nature of their project excessive construction time and cost, provision of infrastructural facilities, like
townships for staff, excess machine capacity, high cost of imported machinery and so on.
(vii) Other Problems - Among other shortcomings, mention may be made the following:
(a)
Overstocking of inventories
(b)
Permissive atmosphere
(c)
Flight of managerial talent
(d)
Burden of sick units

New Industrial Policy 1991 and Public Sector - As explained earlier, the adoption of the socialistic
pattern of society as the national objective in early 50's (which has been abandoned since 1980) as well as
the need for planned and rapid develop required that all industries of basic and strategic importance, or in
the public service be handed over to the public sector.
Other industries which were essential and require investment on a scale which only the state could, in the
then present circumstances, provide were also made the domain of the public sector. Thus public sector
was made to occupy an important and unchallengeable place in the Economic life of the country. After the
initial exuberance, and number of problems (as explained above) began to erupt on many of he public
enterprises. The result was that these enterprises were looked with suspicion and there was great demand
not only from inside the-country but from outside also, for privatization and opening of the economy to
foreign competition. Moreover, it was also felt that the original concept of the public sector had also
undergone considerable changes' best example is the sick private units which were taken over by the
public sector. these sick units are responsible for almost one-third of the total loses of central public sector
enterprises. Also public enterprises which are in consumer goods and service sector do not fit not into the
original idea of the public sector being at the commanding heights of the economy. It was, therefore, though
that the right time had come when a new approach should be adopted toward public enterprises. steps
should be taken to make these enterprises more growth-oriented and technically dynamic. As a result, far
reaching changes were made in New Industrial Policy. 1991 and public sector role was diluted, very few
(only 4) industry groups are now reserved for this sector, the areas in which public sector will be allowed to
grow are (i) essential infrastructure goods and services, (ii) exploration and exploitation of oil and mineral
resources, (iii) technology development and building of manufacturing capabilities in areas which are
crucial in the long term development of economy and where strategic considerations predominate such as

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defence equipments. Arms etc.

Beside the above, other change relate to referring of sick public units to BIFR greater reliance on
memorandum of Understanding, more powers to boards of public sector companies and offering public
sectors shares to general public, banks and mutual funds.
The Private Sector in India
The Private Sector is broadly given the right to develop consumer goods industries. It embraces the whole
of agriculture and allied activities, plantations, mining, internal trade, both retail and wholesale, road freight
traffic etc. In the planning era, the Govt. of India has setup a network of development banking and financial
institutions to finance and support the private sector. In this category we can mention the NABARD, the
Industrial Finance Corporation (IFCI), the State Financial Corporation, the Industrial Credit and Investment
Corporation of India (ICICI), the Industrial Development Bank (lDBI), the EXIM Bank etc.

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These institutions have stimulated development of new industrial activities, new centres of industry and
new entrepreneurs. The govt. has liberalized considerably the control-regulatory apparatus under which
the private sector has been function for so long. Agriculture, dairying, animal husbandry, poultry etc.
completely managed by private enterprise contributes 25% of the domestic GNP and provides employment
nearly 60% of working population in 2000-01. But, under the conditions of scarcity, the private businessmen
have the tendency to resort to hoarding and exploitation of the consumers. So, the govt. has to control and
regulate on price, on the movement of goods between regions, on storage etc.
Small and cottage industries in India are in the private sector and they have an important role to play in
industrial development.
Limitations of Private Sector 1.
Emphasis on non-priority industries
2.
Emergence of monopoly power and concentration
3.
Industrial disputes
4.
Industrial sickness.
Role of Joint Sector

(i)
Joint Sector: The Joint sector represents a new ideology of industrial management. The concept of
the joint sector is a compromise between the alternatives of total nationalization and free enterprise
economy. The Industrial Licensing Policy Inquiry Committee popularly known as
Dutt Committee (1969) recommended the creating of the joint sector on the basis of the Industrial Policy
Resolution of 1956. The Joint sector is a form of partnership between the private sector and the
Government and its ownership and control are effectively shared between public sector agencies
ownership and control are effectively shared between public sector agencies on the one hand and a private
group on the other. The Dutt Committee (1969) envisaged the concept of joint sector as an important
means of curbing the increasing concentration of Economic power. the Committee confined the joint sector
to the core sector only. Thus, today, the concept of joint sector refers to an 'new undertaking' in which the
State also holds the equity and controls the management of the company along with the private
collaborator.
Broadly speaking joint sector enterprises may be brought into being through anyone of the following ways:

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(a)
The Central Government through any of the administrative ministries may set up new companies
jointly with private partners involving substantial equity participation by both partners.
(b)
The State Government or their Industrial Development Corporations may set up new enterprises
Jointly with private partners involving equity participation by both parties.
(c)
Public financial institutions may through equity participation or conversion of debt into equity
transform enterprises promoted by private entrepreneurs into joint sector companies.
(d)
The existing public sector companies may be transformed into joint sector enterprises
through the sale of equity shares to private entrepreneurs or to the general public.
(ii)

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Role of the Joint Sector: The rationale for the development of joint sector projects is as follows:

(a) Curbing the concentration of Economic power - Government participation in the ownership and
management of enterprises jointly with the private entrepreneurs could be an effective means
for controlling monopoly, concentration of Economic power and business malpractices.
(b) Social control over Industry - Joint sector is a tool for social control over industry, without resort to
outright nationalisation. Joint sector can be used to promote socio-Economic objectives of the
Government such as maintenance of reasonable prices, regional dispersal of industries
investment in research to improve further technological capabilities development of exports,
etc.
(c) Acceleration of Industrial/Growth - By providing public support and patronage, the joint sector
may encourage small and medium entrepreneurs, help them to mobilise resources to procure
machinery and equipment and build up confidence to face the uncertainties of modern business
this is the only way to ensure that medium sized public sector companies contribute
increasingly to industrial growth.
(d) Balanced Regional Development - By a process of spreading projects to different regions with
due regard to the resources endowment pattern and with linkages and spread effect, joint
Sector projects have been expected to promote a balanced development of the various regions
in a State.
(e) Mobilization of, Resources - The State investment in joint sector projects encourage the private
entrepreneurs as well as local and other institutional savers to invest and thus mobilize local
savings of a sizable magnitude.

(f) Broad-basing Entrepreneurship - If the joint sector enterprises are permitted into a wide range of
industries, many small entrepreneurs will be able to come forward and take advantage of
Government support and facilitating role.
(g) State-sponsored industrialisation - The joint sector may be regarded as a part of the strategy of
State sponsored industrialisation.
(h) Extension of public control - The joint sector will enable the Government to enter the highly

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profitable lines of industrial activity, reduce the dominant Economic power of the large industrial
houses.
(i) Alternative to public and private sectors - The main advantage of the joint sector is that it
combines the favorable points found in the public as well as the private sector and seeks to
eliminate the negative points in both.
Thus, the rationale for setting up joint sector was mainly for developing backward areas, reducing
concentration of Economic power and to accelerate industrial development.
(iii)
Problems of the Joint Sector: The following three problems are specific to the joint sector in
addition to other problems common to all industrial activity, be it in the public, private or the joint sector:

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(a)
(b)
(c)

There is a problem of management and control domination of the Government and private
partners;
The Joint sector enables private entrepreneurs to promote large projects with less of equity
participation;
The Government tries to commit for public accountability and auditing whereas the private
entrepreneurs try to motivate to be commercial profitability and this controversy leads for
problems.

Pattern of Ownership and Management of Joint Sector in India: As regards ownership, there is no hard
and fast rule of the share of equity of the Government to 51 per cent the ownership will be with the
government and if the share is les than 51 per cent, the board of directors of the undertaking will have h
domination.
There are three types of board of directors in the existing joint sector undertakings:
(i)

enterprises with a majority of non-official directors;

(ii)

enterprises with majority of Government nominated directors;

(iii)

Enterprise with directors in proportion to the equity ownership of the participation.

Those who believe in the efficiency and dynamism of private sector management advocate that the board
of directors would consist of nominees in proportion to the equity ownership of he participation. Further,
they would like the Government to exercise its influence on the policy-marking role of management and
leave the operational management to the private partner.
Magnitude of Joint Sector in India: Precise data about the joint sector are not available. Still it is infant stage.
The share of joint sector has 10.4 per cent of the total productive capital invested in the corporate sector.
The share of the joint sector in total corporate employment workers out to be 7 per cent.
The share of individuals (resident and non-resident) was of the order of about 36 per cent and that of joint
stock companies and charitable trusts was of the order of about 16 per cent. In other words, the share
holding of the private sector amounted to 52 per cent. As against it, the share of the public sector
represented by, the Central and State Governments and financial institutes
was of the order of 48 per cent.
Government Policy Relating to Joint Sector: Government policy relating to the joint sector is incorporated in

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Government industrial licensing policy 1970 and 1973. The guidelines are:
(a)
(b)
(c)
(d)
(e)

Joint sector units would be created, but they have to conform to Government's social and Economic
objectives;
The joint sector will be allowed in areas from which the private sector is excluded under the existing
policy;
The joint sector would be a promotional instrument in the case of new and medium entrepreneurs;
In all the different kinds of joint sector units, the Government will ensure for itself an effective role in
guiding policies, management and operations.
In all the different kinds of joint sector units, the Government will endure for itself an
effective role in guiding policies, management and operations.

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As regards those joint projects in which state Government and the stake development corporations
collaborate with private entrepreneurs; the Central Government has 1aid down certain guidelines;
(a) Permission of the Central Government is required if the private concern belongs to one
of the big houses or a foreign majority company.

(b)
In case there is foreign participation 25 per cent for state Government of State Corporation, 20 per
cent for Indian entrepreneurs, 20 per cent for foreign investors and 35 per cent for the investment public.

(c)
In case there is no foreign participation 26 cent equity ownership for State Government or State
Industrial Development Corporation; 25 cent of the private entrepreneurs and 49 cent 25 per cent for the
private entrepreneurs and 49 per cent for the investing public and financial institutions.
(d)
No single party is allowed to hold more than 25 per cent of the paid -up capital without
the prior permission of the Central Government.

Since the Dutt Committee Report appeared in 1969, a number of State Government and State Industrial
Development Corporations have preceded licences for industrial projects from a wide range of products
and have promoted companies with privet participation in ownership and management Many of them are
medium-sized enterprises and have been set up in collaboration with lesser known private firms or
entrepreneurs. They have been promoted with the idea of industrial growth.
There is an element of shift in the policy of the Government from complete take over the certain industries to
permitting joint sector undertakings.

Large, Medium & Small Industries

There are six large-scale industries in India namely Iron and Steel, Cotton Textiles, Jute, Sugar, Cement
and paper and one new industry viz Petro-chemicals. These industries occupy an important position in the
country. The growth of these industries provides a fair understanding of industrial growth on the one hand
and the relationship between govt. policies and their growth on the other.
Steel is used as a basic material in the manufacture of metal products, electrical machinery, transport
equipment, textile and other machinery. The Steel Authority of India Limited (Sail) was created in 1974 and
was made responsible for the development of the steel industry and also for the major inputs for the
industry, e.g. coking coal and iron-ore.

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The organized cotton textile industry is one of our oldest and most firmly established major industries.
There are about 1,100 mills in the country with 28 million spindles and 2 lakh looms. India is a leading
exporter of cotton fabrics and cotton apparel (ready made garments).
The jute industry was started in 1885. Its importance to the economy lies in its capacity to earn foreign
exchange. Production of jute industry was stagnant for many years. Now, it is modernizing its post-spinning
equipments by new high speed machines and the installation of broadlooms for the manufacture of carpet
backing. Some of (the other specialties which are manufactured now are cotton bagging, jute tarpaulins,
jute carpets and jute webbing. The govt. of India is implementing a package of revitalization programme
with the help of UNDP to cater to the needs of the jute sector from production to export stage.
The Sugar Industry-India was the fourth major sugar producing country in the world and now emerged as
the largest sugar producing, country in the world. It employs nearly 3.25 lakhs workers. There are now 506
sugar factories in India with a total installed capacity of 17 million tones.

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The Cement Industry-The foundation of a stable Indian cement industry was laid in 1914 when the Indian
cement company ltd. manufactured cement at Porbandar in Gujrat. In recent years, the govt. of India has
given both direct and indirect encouragement to the cement industry. The tenth plan projects additional
capacity of 62 million tones at a total investment of Rs. 17,600 crores.
The Paper Industry-The first paper mill was set up in India more than 100 years ago. There are at present
515 registered paper mills producing paper and paper board, in the private sector. India is now selfsufficient in the production of most varieties of paper and paperboard.
Petrochemical Industry- The development of petrochemical industry in India had its origin in petroleum
development. The initial efforts were made through the naptha crackers of National Organic Chemical
Industries Ltd. (NOCll) and Union Carbide of India Ltd. in the sixties. The large size unit of Indian
Petrochemicals Corporation Ltd (IPCl) at Baroda came in the late seventies in the Public Sector. Plastics is
the main component of this industry. It is one of the fastest growing industries of the Indian economy. This
industry has a potential in crucial areas like agriculture, clothing, building and construction, transportation
etc. (use of polymers, synthetic fibre, synthetic rubber and plastics).

SMALL SCALE AND COTTAGE INDUSTRY

Generally the size, capital resources and labour force of the individual unit is the basis of distinction
between the large-scale, medium-scale and small-scale industries. According to the five year plan, the
differences between the small-scale and cottage and industries are basically two while small scale
industries mainly located in urban centers as separate establishments the cottage industries are generally
associated with agriculture and provide subsidiary employment in rural areas. While small-scale industries
produce goods with partially or wholly mechanisd equipment employing outside labour, the cottage
industries involve operations mostly by hand which are carried on primarily with the help of the members of
the family. A small-scale industry on theother hand is one which is operated mainly with hired labour, usually
10 to 50 hands.
Growth and Role of Small-Scale IndustriesImmediately after independence the importance of small-scale and cottage industries was felt and
emphasis was given in this direction by the Govt. studies show that there has been a substantial growth of
SSI units.

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The role of small-Scale and village industries was emphasized in the second five year plan on the following
five grounds:
1.
Employment generation
2.
equitable distribution of national income
3.
Mobilisation of capital
4.
MobilisaUon of entrepreneurial skills
5.
Regional dispersal of industries.
1)
Employment Generation - After agriculture, small-scale and cottage industries provide
employment to the largest number of people in India. In 1991-92 the SSI units employed 129.8 lakh people
and in 2002-03 around 199 lakh. With in the manufacturing sector itself, the small and decentralized sector
contribute about one half of the value added and four-fifths of manufacturing employment in India, creation
of employment opportunities will depend crucially on the development of small-scale and cottage
industries.

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2)
Equitable distribution of National Income - One of the main arguments put forward in support of
the small-scale and cottage industries is that they ensure more equitable distribution of the national income
and wealth. This is accomplished because of the following two consideration.
The ownership of small-scale industries is more wide spread than that of large-scale industries.
They possess a much larger employment potential as compared to the large-scale industries.

3)
Mobilisation of Capital and Entrepreneurial skills - A number of enterpreneual are spread over
small towns and villages of the country and large scale industries obviously cannot utilize them as efficiently
as the small-scale and village industries can, since the latter are distributed the country. Similarly largescale industries cannot mobilize savings of the people in areas far away from the urban centres but, this
task can be effectively accomplished by setting up a network of small-scale and cottage industries in
addition to this a large number of other resources spread over the country can put to an effective use by the
small-scale and cottage industries.
4)
Regional dispersal of Industries - In the process of Industrial development in India there has
been a tendency towards massive concentration of large-scale industries in the states of Maharastra, West
Bengal, Gujarat and Tamil Nadu. This has increased the regional disparities in industrial development in the
country. As against this, the small-scale industries are mostly set-up to satisfy local demand and they can
be dispersed over all the states very easily. They can also affect a qualitative change in the economy of a
state. The most striking example of this phenomenon is the economy of Punjab which has more small-scale
industrial units that even the industrially develop state of Maharastra. Problem of 551.
Problem of SSI
Industrial sickness naturally has an adverse effect on the economy of the country. a company to be
considered for' sickness' must have been registered for at least five years. A company which has eroded
50% or more of its peak net worth during any of the preceding five financial years in termed 'incipiently sick.'
External causes of Industrial Sickness
a.
Power cut's
b.
Erratic supply of inputs
c.
Demands and credit strains

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d.

Sudden changes in the govt. policy.

Internal Causes
a.
Faults at the planning and construction stage
b.
Defective plant and machinery
c.
Financial problems
d.
Entrepreneual incompetence
e.
Management problems and labour problems.
Remedies for Revival
In India industrial sickness is regarded as a "social problem." Therefore various concessions and
incentives, are handed out to sick units in the hope that these will enable them to regain 'health' and stand
on their feet once again.

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Steps taken by Banks

The commercial banks grant various concessions to sick units in an attempt to rehabilitee them. Some of
these concessions are1.
2.
3.
4.

Grant of additional working capital facilities to over come the short age of working capital.
Recovery of interest of reduces rates.
Suitable moratorium on payment of interest.
Freezing a portion of the outstanding in the accounts etc.

Govt. Policy: The policy framework in respect 0 measures to deal with the problem of industrial sickness
was laid down in guidelines of Oct, 1981 (Modified in Feb, 1982) for guidance of administrative ministries of
the central govt., state govts. and financial institutions
1.
Govt. Concessions: A scheme for provision of margin money to sick units in the small-scale sector
at soft terms to enable them to obtain necessary funds from banks and financial institutions to implement
their revival scheme introduced in Jan 1982.
2.
Liberalised Margin Money Scheme: Under the scheme the state govts. are to make a matching
contribution on a 50:50 basis in providing assistance to sick small-scale units in their rehabilitation. The
maximum quantum of assistance has been enhanced from Rs. 20,0001- to Rs. 50,000 per unit.

3.
Industrial Investment Bank of India : With a view to reviving and rehabitating sick units the govt.
establishing the Industrial Reconstruction Corporation of India (IRCI) with an authorized capital and paid up
capital of Rs. 25 crore and Res. 2.5 crore respectively. Its share capital was subscribed by lDBI, IFCI, ICICI,
L1C And SBI and other commercial banks. It was also given a free interest loan of Rs. 10 crore by the govt.
its functions were to provide financial assistance to sick units provide managerial and technical assistance
to sick units, provide them merchant banking services for a amalgamation and merger etc. provide
consultancy services to banks to help sick industrial units.
4.
Excise Loans to Sick Units: Under this scheme, selected sick units are eligible for excise l o a n
not exceeding 50% of the excise duty actually paid for 5 years.
/
5.
Board for Industrial and Financial Reconstruction (BIFR): The Govt. of India set up the BIFR in
Jan 1987, for determining the preventive, remedial and other measures which are required to be taken in

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inspect of sick industrial companies. The BIFR is required to first ascertain whether the company is indeed
sick within the definition under the Act. If it is satisfied on this score it may allow the company time on its now,
as per the scheme already initiated by a bank, to make its net worth positive within a reasonable period.
Otherwise, it is required to appoint an operating agency (OA) to draft a rehabilitation package. The BIFR
may also decide to wind up a sick company. The BIFR has powers to appoint special director on the sick
company incase of mismanagement. It has also the power to debar the company management from the
organized sector for a period of 10 years. The Govt. appointed a committee on industrial sickness and
corporate restructuring in May 1993 under the Chairmanship of Onkar Goswami. The purpose was to
examine the bottlenecks in industrial and corporate restructuring and recommend a measure for early
closure of unviable units and quick revival of is variable units. The report of the committee, submitted in July,
1993 made the following suggestions:-

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a.
Change in definition of sickness: If a company defaults for 180 days or more on term loans, working
capital or cash credit, it should be labelled sick.

b.
The sick industrial companies Act (SICA) should override the foreign exchange regulation Act which
will permit foreigners to buy sick companies.
c.
SICA should override the urban land (ceiling and Regulation) Act so that creditors are able to sell a
sick company's assets, including land, to recover their dues.
Raise retrenched workers, compensation from 15 days to 30 days wages per year of completed service.

CAPITAL FORMATION
Capital is defined as a produced means of production. It is man-made and its supply can be increased by
human effort. Capital stock of a country consists of machinery, tools, factory, building and all kinds of
industrial plant, raw-materials partly finished goods and means of transport. Since the development of a
economy crucially depends upon the availability of these things. We can see that capital is an essential
factor of development. The exact definition of capital formation can be given in the words of Ragnar Nurkse
as follows. "The meaning of capital formation is that society does not apply the whole of its current
productive activity to the needs and desires of immediate consumption but directs a part of it to the making
of capital a goods. The term is sometimes used to cover human as well as material capital. It can be made to
include investment in skills education and health-a very important form of investment."
Characteristics of Capital
1.
Capital is man-made or is a produced agent of production
2.
Capital is perishable
3.
Capital is mobile
4.
The amount of capital cab be increased or decreased.
5.
Income is derived from capital. Kinds of Capital
Kinds of Capital
1.
Fixed Capital
2.
Circulating Capital

Factors in the form of machines, tools and factory buildings are considered a fixed capital. Raw material,
fuel and semi finished goods are considered as circulating capital or variable capital. It can be further
classified 'as social capital'. e.g., roads etc and 'private capital' Lonnies etc.

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Importance of Capital or Function of Capital

1.
Capital plays a vital role in the production system. Because of its power in raising productivity,
capital occupies a central position in the process of Economic development.
2.
Capital plays an important role in the creation of employment opportunities in the country. To
produce capital goods and later to use these machines for producing further goods more men have to be
employed.
3.
With the use of capital, goods are produced with less cost. With the large scale of production, goods
are available at low prices and there will be wide market.

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The Domestic Capital Formation

The process of capital formation involves three distinct stages:

1. The stage of saving - Saving plays the most important role in the process of capital formation. As
per capita income grows the level of saving increases more than proportionately. As the level of
saving increases the rate of capital formation also increase leading to arise in the rate of
Economic growth. The level of savings depends upon the power to save and willingness to
save.
2. Stage of Mobilization of saving- The difficulty in the developing countries that while the activity of
saving is widely diffused throughout the community and carried on by the persons who
generally lack the skill and personal characteristics for active investment, access to outlets for
investment is confined largely to specific groups of business men who command the requisite
as a via-media between the number technical and market information to use it. On account of
this reason, number of financial institutions area created by the govt. to serve as a via-media
between the savers and the investors. The basic purposes of these institutions are to spread
information, to limit obligations, to create liquidity and to transform the relatively safe assets
which are the only kind that savers usually can afford to hold.1 As a result of these activities of
the financial institutions, the real cost to business of financing its investment is reduced. The
other advantage is that savings of the community are rendered highly mobile both
geographically and industrially But, the financial institution are still in a 'developing stage' in the
underdeveloped countries with the result that a lot remains to be done. On account of this
reason, the govt. of these countries have taken up themselves the responsibility of promoting
the financial institutions on the one hand and on the other, are mobilizing the savings of the
community through their own institutions like the post officer.
3. The stage of Investment- Once when savings have been mobilized, they are made available to the
businessmen who invest them. This is the third and final stage of capital formation. Investment
raises the productive capacity of the economy and should, in normal circumstances, lead to an
increase in the total production of the economy. However, because of a lack of investment
opportunities aim the developing countries, a large part of the savings are utilized for
speculative purposes like purchase of real estate, jewellery, stocks of goods etc., which do not
add to the productive capacity of the economy. The lack of investment opportunities in the
developing countries arises due to small domestic markets, incapable of supporting the scale of
modern establishments, transportation facilities and power are lacking or expensive, the price
of capital equipment is high and skilled workers, technicians and managers are scarce. Even

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where investment opportunities are available the rate of return on them might be considerably
lower as compared to the rate of return of speculative activities.
Source of Capital
As far as the sources of capital are concerned, they are basically two domestic and foreign.
Domestic Sources
1. Voluntary Savings. All developed and developing countries of the world, the vast mass of the
people does little saving. It is generally rich section of population that has the capacity to save.
Since there are extreme inequalities of income and wealth in developing countries the capacity
to save in these countries is not low as generally believed. As noted by W.A. Lewis, "No nation is
so poor that it could not save 12 percent of its national income if it wanted. The level of savings
depends upon the power to save and willingness so save. The promotion of savings among
small and middle income groups can be accomplished by developing post office savings
schemes, co-operative credit society's insurance policies etc. as emphasized by Lewis, to be
successful these facilities should be wide-spread. An important role can be played by
persuasion. For instance, people can be persuaded to save in their family interest for
education, for old age. In our country, people spend a substantial amount of its earnings on
conspicuous consumption and the only way is to levy higher taxes on it and then use this money
for investment purposes.

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2. Taxation - Most underdeveloped countries have low taxation potential which may be defined as
"the maximum proportion of the national income that can be diverted for public purpose by
means of taxation.2 This potential, in turn depends on a variety of conditions
(i)
Level of per capital real income
(ii)
The degree of inequality
(iii)
The relative importance of different sectors in the economy (cash crops,
subsistence agriculture, mining, foreign trade).
(iv)
The potential leadership
(v)
Administrative powers of the govt.
In a number of Asian and Latin American countries a large share of total aincome accrues to a minority of
wealthy individuals (mostly derived from the ownership of property including land). In most of the
underdeveloped countries, taxes imposed on the agricultural sector are very much less than its actual
ability or potential. This is due to a a number of political and administrative reasons. Taxation for agriculture
can playa vital role in accelerating development of the non-agricultural sectors of the economy.
3.
Profits of Public Enterprises - In socialistic and mixed economy countries profits a of public
enterprises constitute an important source of capital But, in developing countries, they have setup a
number of in industries in the public sector during the recent year but these industries have failed to
generate satisfactory resources.
4.
Curbing the International Demonstration Effect - When the people in the underdeveloped
countries come into contact with the higher living standards prevailing in the developed countries, they try
to emulate them. This is known as demonstration effect. In the words of Ragnar Nurkse, "When people
come into contact with new articles or new ways of meeting old wants, they are apt to feel after a while
certain restlessness and dissatisfaction. Their knowledge is extended, their imagination stimulated, new

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desires aroused, the propensity to consume is shifted upward."l3 The demonstration effect is determined
by two factors
The size of the disparities real income and consumption levels (i.e. the awareness of the people of these
disparities. With increasing communication among countries, the awareness of the people of the
developing countries about the high consumption patterns of the people of the developed countries has
grown rapidly. This leads to a virtual craze for imported consumer goods pushing up the consumption
expenditure and affecting adversely the level of saving. Another adverse effect that has not received
serious attention of the economists so far. The entrepreneurs of the developing countries are attracted
toward producing luxury and semi-luxury goods in the economy itself to cater to the demands of the rich
elite. This leads to a diversion of resources from mass consumption goods to luxury consumer durables.
Human Capital (Economic of Education )- Human capital in the form of education and skills is another
form of productive asset ownership. The quality of human resources has a more powerful effect on
production. Formal schooling, vocational and on the job training programme, adult and other types of
'informal' education may all be made more effective in augmenting human skills and resources.- As per
prof. Schultz," money may be invested in human capital in the form of :
I.
Health facilities and services
II.
On job training
III.
Formal education at school and higher level
IV
Study programmes
V.
Migration for job opportunities.

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Education and Economic Growth: The expansion of educational opportunities at all levels has probably
contributed to aggregate Economic growth by:
I.
Creating a more productive labour force and enduring it with increasing knowledge and
skills
II.
Providing wide spread employment and income-earning opportunities
III.
Changing altitudes
IV
Creating a class of educated leaders.
Education and Poverty - The govt. of under developed countries so as to make progress in the
educational system, subdize the education of the poor, broadening employment opportunities for all,
making the rich bear the full cost of their education by paying taxes.
Education and Fertility Population - With the spread of education of women there will be fall in the fertility
rate and the population explosion can be arrested.
Education and Migration - Existing empirical evidence reveals that education influence labour mobility
from rural to urban through its impact on higher income expectations and this lead f or the reduction of
disguised unemployment of agricultural sector.
Education and Rural Development - Educated rural population by implementation of new techniques in
product of agricultural lands increase their income and this enables them to save and at the same time
increase in consumption expenditure which leads for acceleration of industries.
Factories hampering Capital formation in developing countries
I.
Many of the people live in rural areas with low per capita income.
II.
The absence of network of banks and financial institutions in rural areas.
III.
People prefer to spend their income on social and religious functions or invest item in gold

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IV
V.
VI.
VII.

and such other unproductive assets.

The high level of taxations has also been producing adverse effects on capital formation.
Inflationary conditions come as hurdles for capital formation.
Failure to impose agricultural taxes on higher agricultural incomes has encouraged
wasteful spending on the part of big landlords.
Failure of govt. in investing the revenue raised by additional taxation in public sector
enterprises.

Measures to promote domestic capital formationI. Attempts must be made to push up the rate of voluntary savings by household and corporate
sectors. To tap the rural savings, banks should be established in rural areas.
II. Special measures should be undertaken to cut down conspicuous consumption in all sections of the
community as also at the govt. level institutional savings in the form of insurance, provident
fund, social security schemes, etc. should be encouraged.
III. Public sector undertakings should try to mobilize as much internal resources as possible for
reinvestment in their enterprises.
IV. The vast unemployed and under employed labour force should be utilized.
V. Inflation should be put under control.
VI. Govt. should avoid all wasteful expenditure.

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Foreign Capital - Capital formation in a country can also take place with the help of foreign savings.
Foreign capital can take n the form of:
a)
Direct private investment
b)
Loans or grants by foreign govt.
c)
Loans by international agencies like the world Bank and IMF Case for Foreign Capital
Case for Foreign Capital
1.
In the absence of adequate domestic savings foreign capital indispensable for accelerating the
process of development.
2.
The foreign capital is required to import capital from developing countries to fill the deficits in the
balance of payments.
3.
Without foreign capital, it would be practically impossible for many developing countries to start
projects such as oil-exploration, post construction, steel forgings etc.
4.
Technical know how and managerial and organizational ability are required for domestic capital
formation. They have to be imported along with capital.
5.
Without foreign capital the vast natural resources of developing countries remain unexploited for
long.
6.
Foreign capital can help developing countries in breaking the vicious circle of poverty.
Dangers Associated with Foreign Capital
1.
Foreign capital results in great dependence of developing countries on for foreign companies.
2.
It is observed that foreign capital in its wake brings in developing country's Economic and political
domination.
3.
It is seen that historically, foreign capital instead of helping the backward countries to industrialize
generally tried to exploit raw materials for export purpose to help the development of industries in
their own countries.
It is found that foreign companies in developing countries reserve higher managerial and technical posts for

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their own nationals thus denying adequate opportunities of training to people in developing countries.
Money for the accumulation of capital attained by paying interest.
IMPORTANT QUESTION
Q.1.

Discuss the role of Public Sector in the Indian economy. Is it desirable in recent times? If, so, why?
Give reasons.

Q.2.

What is the importance of small-scale industries in India? State the steps taken so far to
develop small scale industries in India. Are they sufficient?

Q.3.

Discuss the role of liberalization in the Indian economy. Is it desirable in India?

Q.4.

What are the problems of capital formation in India?

Q.5.

Examine the role of small industries in India Economy. Briefly analyse the problems faced by these
industries.

Q.6.

What is joint sector? Discuss its importance for the Economic development of India.

Q.7.

Discuss the role of banks in the capital formation in India.

Q.8.

What is Globalisation? Explain it in the context of Indian Economy.

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SUGGESTED READING
1.
Economics General Principle, Dr. S.R. Myneni, Allahabad Law Agency, 16/2, Mathura Road,
Faridabad
2.
Micro Economics, I.C. Dhingra, Sultan Chand & Sons, New Delhi
3.
Indian Economy, K.P.M. Sunderam, S. Chand & Company Ltd., New Delhi
4.
Modern Micro Economics, H.L. Ahuja, S. Chand & Company, New Delhi
5.
Micro Economics, M.L. Jhingan, Vrinda Publication (P) Ltd.
References :
1.
"International Differences in Capital Formation and Financing - Kuznets (P: 5-6)
2.
Nicholas Calder, "The Taxation Potential" Leading issues in Economic Development (Oxford
University Press),Seconds Edition (P: 195)
3.
Ragnar Nurkse, (P: 58, 59)

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