Public Sector

2.5.6. The Role of the Public Sector in India

The public sector is a component of the economy found in nearly every country worldwide, and India is no exception. Since India’s independence, its development strategy has aimed to blend growth with equitable distribution, necessitating the establishment of public enterprises that prioritize social development over profit. Public sector enterprises are those owned and managed by the government.

The public sector encompasses all industrial and commercial enterprises owned by the government, managed either by the government itself or on behalf of the government by other agencies. Jawaharlal Nehru once referred to public enterprises as “temples” of modern India, crucial to the nation’s prosperity and well-being. The period since 1950 has witnessed the tremendous growth of India’s public sector, primarily providing critical infrastructural facilities like defense, energy, iron and steel, coal, airlines, and more. Post-independence, India evolved into a mixed economy, allowing roles for both the public and private sectors.

Objectives of the Public Sector

The primary objectives of the public sector are as follows:

  • Attainment of Commanding Heights of the Economy: The public sector seeks to participate in and control sectors critical to the economy.
  • Generation of Commercial Surplus: Public sector enterprises aim to generate profits to finance economic development.
  • Promotion of Rapid Economic Development: By filling gaps in the industrial structure and developing essential infrastructure, the public sector contributes to rapid economic development.
  • Provision of Basic Infrastructural Facilities: The public sector focuses on supplying fundamental infrastructure, such as defense, energy, banking, and insurance, among others.
  • Balanced Regional Development: To promote balanced regional development and disperse economic activity.
  • Reduction of Income Disparities: To minimize income inequalities and avoid the concentration of economic power.
  • Social Control and Financial Regulation: The public sector enables social control and the regulation of long-term finances through government financial institutions.
  • Achievement of Self-Reliance: To achieve self-sufficiency in critical sectors.
  • Generation of Employment: The public sector creates employment opportunities on a large scale.
  • Enhancement of Foreign Exchange Earnings: Public sector enterprises contribute to improving foreign exchange earnings.

            Role of Public Sector

The public sector has played a significant role in India’s economic development. Notable   contributions include:

  • Creation of a Strong Industrial Base: Public sector enterprises filled structural demand-supply gaps by establishing and developing basic, heavy, and capital-intensive industries. This provided India with a robust industrial foundation.
  • Development of Infrastructure: Public sector initiatives addressed the lack of infrastructural facilities, such as irrigation, power, energy, and transportation. They also invested in basic and heavy industries, fuel and energy, banking and insurance, enhancing the industrialization process.
  • Development of Backward Areas: The public sector established industries in economically underdeveloped regions, such as steel plants, fertilizer units, and more, to promote regional development.
  • Mobilization of Savings and Foreign Exchange Earnings: Public sector enterprises have contributed to foreign exchange savings through exports and have harnessed savings for economic development.
  • Prevention of Economic Power Concentration: Public sector participation prevents the undue concentration of economic power in the hands of a few and reduces income and wealth inequalities.
  • Equality of Income and Wealth Distribution: Profits generated by public sector enterprises are channeled into welfare programs, benefitting lower-income segments of the population and promoting equality.
  • Employment Generation: The public sector has created significant employment opportunities in a country plagued by unemployment and poverty.
  • Promotion of Import Substitution: Public sector production has substituted imported goods, reducing the dependence on foreign products and saving foreign exchange.

Problems of the Public Sector

Despite its contributions, the public sector faces several challenges, including:

  • Unprofitable Pricing: Public sectors often maintain unprofitable pricing due to social welfare considerations, subsidies, and compensations, which impact their financial performance.
  • Overstaffing: Public sector entities are frequently overstaffed, leading to higher labor costs and reduced productivity.
  • Management Issues: Many public sectors experience management challenges, such as delays in filling top positions, which can hinder progress.
  • Underutilization of Capacity: Public sector units often operate below their optimal production capacity, primarily due to mismanagement.
  • Lack of Autonomy: Many public sectors lack financial and managerial autonomy, which limits their decision-making capabilities.
  • Losses: Several public sector enterprises incur substantial losses, tarnishing their reputation as inefficient and mismanaged.
  • Sick Units: Public sectors are often tasked with reviving struggling units, creating a financial burden.
  • Poor Project Planning and Control: Public sector projects tend to face delays and cost overruns due to inadequate planning and control.
  • Bureaucratic Delays: Public sector initiatives may suffer from slow-paced work, procedural delays, and a lack of innovation and initiative.
  • Pessimistic Atmosphere: The public sector can exhibit a lack of commitment, discipline, and low concern for the nation among its employees.

2.5.7 Small Scale Industry (SSI)

The investment threshold for small-scale industries (SSI) and ancillary units is set at 1 crore rupees. However, in order to promote technological advancement and increase competitiveness, the investment limit for plant and machinery has been raised from 1 crore rupees to 5 crores rupees for 69 specific items reserved for manufacturing in the small-scale sector, as well as for all items in the drugs and pharmaceuticals sector.

The significance of small-scale industries (SSIs) can be traced back to the Mahalanobis model, which served as the theoretical foundation for India’s second and subsequent five-year plans. This model emphasized the development of capital-intensive large-scale basic and heavy industries and highlighted the role of SSIs in addressing unemployment.

The roles of SSIs and cottage industries are evident in the following points:

  • Labor-Intensive: SSIs are known for their labor-intensive nature, meaning they require a larger workforce and are well-suited to address unemployment issues.
  • Self-Employment Opportunities: SSIs offer opportunities for self-employment, enabling individuals to start and manage their businesses.
  • Lower Capital Requirements: SSIs are less capital-intensive, requiring relatively smaller investments to produce goods. In a country like India with limited capital resources, SSIs play a crucial role in fostering industrial development.
  • Low Import Dependency: SSIs have a lower import intensity in their capital structure, reducing the need for foreign capital.
  • Export Potential: SSIs provide significant opportunities for export promotion, as their products are in demand in advanced countries.
  • Income Redistribution: SSIs contribute to a more equitable distribution of income and wealth compared to large-scale industries.
  • Decentralization of Industries: SSIs contribute to the decentralization of industries, supporting regional development objectives.
  • Suppliers to Large-Scale Industries: SSIs supply essential raw materials to large-scale industries, facilitating their growth and development.
  • Agricultural Development Support: SSIs can help divert labor from agriculture to industries, promoting a more desirable occupational structure and relieving pressure on the agricultural sector. They can also contribute to agricultural development through agro-based industries, such as agricultural machinery, repair services, and more.

Performance and Contributions of SSIs

SSIs have made remarkable progress over the past five decades, as evidenced by their performance and contributions to the Indian economy:

  • Dominance in Sophisticated Manufacturing: SSIs have established a dominant position in the manufacturing of sophisticated products.
  • Increased Employment Opportunities: SSIs have significantly increased employment opportunities.
  • Diverse Goods Production: SSIs produce a wide range of producer, consumer, and complementary goods, raising people’s standards of living and improving their quality of life. These goods include items like paper and ready-made garments.
  • Preservation of Indian Heritage: SSIs and cottage industries create craft and art products that preserve India’s rich cultural heritage.
  • Contribution to Exports: SSIs account for approximately 35% of direct exports from the country.

Challenges and Shortcomings of SSIs

Despite their contributions, SSIs face various challenges and shortcomings:

  • Financial Difficulties: Small entrepreneurs often struggle to access affordable credit facilities and may resort to borrowing from moneylenders and traders at high-interest rates.
  • Raw Material Shortages: SSIs face difficulties in securing quality raw materials, often obtaining them at high prices from moneylenders, traders, or commission agents.
  • Marketing Challenges: Static production methods can hinder market access for SSIs. Issues like inadequate holding capacity, limited market intelligence, and competition from more efficient large-scale units can pose problems.
  • Outdated Technology: Technological obsolescence is common in SSIs, as outdated methods of production result in lower productivity, lower product quality, and higher production costs. These businesses often lack information about modern technologies and have limited research and development capabilities.
  • Underutilized Export Potential: The export potential of SSIs remains largely untapped due to a lack of modernization and comprehensive assistance programs.
  • Bureaucratic Hurdles: Complex laws and procedures related to SSIs need simplification.
  • Limited Geographic Dispersion: A significant portion of SSIs is concentrated in a few states, such as West Bengal, Madhya Pradesh, and Uttar Pradesh.
  • Competition from Large-Scale Industries: SSIs face stiff competition from large-scale industries that operate with modern technology and extensive facilities, making it challenging for small producers to compete effectively.

Additionally, other challenges include a lack of technical knowhow, access to the latest research, education, efficient production methods, and standardization facilities, which collectively hinder the progress of cottage and small-scale industries.

Objective Type Questions

1. What is the investment limit for small-scale industries (SSI) and ancillary units in India?

A) 5 crores

B) 10 crores

C) 1 crore

D) 50 lakhs

Answer: C) 1 crore

2. Which theoretical model formed the basis for the promotion of small-scale industries in India?

A) Mahatma Gandhi’s model

B) Nehruvian model

C) Mahalanobis model

D) Ambedkar model

Answer: C) Mahalanobis model

3. Which of the following is a characteristic of small-scale industries (SSIs)?

A) High capital intensity

B) Low labor dependency

C) Import-intensive capital structure

D) Labor-intensive nature

Answer: D) Labor-intensive nature

4. What is one of the key roles of SSIs in India?

A) Promoting large-scale heavy industries

B) Focusing on export-intensive production

C) Solving the problem of unemployment

D) Increasing capital intensity

Answer: C) Solving the problem of unemployment

5. What is the primary objective of raising the investment limit for certain items in the small-scale sector and drugs and pharmaceuticals sector?

A) To reduce competitiveness

B) To discourage technology upgradation

C) To promote technological advancement

D) To increase import dependence

Answer: C) To promote technological advancement

6. Which sector is known for having more favorable international trade terms compared to agricultural products?

A) Agriculture

B) Services

C) Industrial

D) Natural resources

Answer: C) Industrial

7. Which factor is NOT one of the roles of SSIs in India?

A) Sustaining agricultural development

B) Increasing regional imbalances

C) Equal distribution of income

D) Promoting export opportunities

Answer: B) Increasing regional imbalances

8. What percentage of direct exports from India is contributed by SSIs?

A) 10%

B) 20%

C) 35%

D) 50%

Answer: C) 35%

9. What challenge is often faced by small entrepreneurs in SSIs in terms of finance?

A) Access to cheap credit facilities

B) Overabundance of available funds

C) Low interest rates

D) Lack of need for borrowing

Answer: A) Access to cheap credit facilities

10. What is a problem of SSIs with regards to raw material procurement?

A) Abundant supply of quality raw materials

B) Easy access to sources of supply

C) Ignorance about sources of supply

D) High-cost raw materials

Answer: C) Ignorance about sources of supply

11. In which year did India introduce significant policy changes, including liberalization, privatization, and globalization in the industrial sector?

A) 1947

B) 1969

C) 1991

D) 2000

Answer: C) 1991

12. What is the primary objective of the 1956 Industrial Policy Resolution in India?

A) Encouraging monopolies

B) Promoting wealth concentration

C) Accelerating economic growth

D) Reducing social welfare

Answer: C) Accelerating economic growth

13. Under the 1956 Industrial Policy Resolution, what classification was introduced for industries in India?

A) Three categories: public, private, and cooperative

B) Four categories: agriculture, industry, services, and technology

C) Three schedules based on government responsibility

D) Two categories: primary and secondary industries

Answer: C) Three schedules based on government responsibility

14. What significant change was introduced in India’s Industrial Licensing Policy of 1991?

A) Expansion of public sector control

B) Abolishment of industrial licensing for most industries

C) Introduction of stricter regulations

D) Exclusively private sector control

Answer: B) Abolishment of industrial licensing for most industries

15. What is the primary purpose of the public sector in India’s economic development?

A) Maximizing profit

B) Promoting income and wealth disparities

C) Achieving commanding heights of the economy

D) Supporting foreign monopolies

Answer: C) Achieving commanding heights of the economy

16. What key role does the public sector play in India’s development?

A) Creating regional imbalances

B) Promoting income disparities

C) Enhancing foreign exchange earnings

D) Preventing income concentration

Answer: D) Preventing income concentration

17. What is a common criticism of the public sector in India?

A) Efficient utilization of resources

B) Overstaffing

C) Autonomy in decision-making

D) Rapid project planning and control

Answer: B) Overstaffing

18. What term is used to describe the financial and managerial control of large business conglomerates in India’s public sector?

A) Efficiency

B) Autonomy

C) Concentration of power

D) Monopoly

Answer: C) Concentration of power

19. Which of the following is NOT a challenge faced by public sector enterprises in India?

A) Losses

B) Overstaffing

C) Rapid project planning and control

D) Bureaucratic delays

Answer: C) Rapid project planning and control

20. What change was introduced in India’s Industrial Licensing Policy of 1991 regarding foreign exchange earnings?

A) Promotion of foreign exchange earnings

B) Inhibition of foreign exchange earnings

C) Irrelevance of foreign exchange earnings

D) No change in foreign exchange earnings

Answer: A) Promotion of foreign exchange earnings

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