 An economic plan is simply a set of specific economic targets to be achieved in a given

period of time with a stated strategy. Economic plans may be either comprehensive or
partial. A comprehensive plan sets targets to cover all major aspects of the economy,
while a partial plan may go for setting such targets for a part of the economy (i.e.,
agriculture, industry, public sector, etc.).
 3 major features of planning:
1. Planning is a process.
2. Planning must have well-defined goals.
3. Optimum utilization of the available resources.
 OBJECTIVES OF PLANNING:
1. Economic Growth:
2. Poverty Alleviation: Several programmes have been launched for the cause of
poverty alleviation ( the National Rural Employment Guarantee Programme—
NREGP—being launched by the UPA Government in 2006 by passing an Act in the
Parliament—the matter has started attracting such high political concern).
3. Employment Generation: eg: the national Scheme of Training Rural Youth for Self
Employment (TRYSEM) and various other components of the Minimum Needs
Programme.
4. Controlling Economic Inequality: There were visible economic inequalities in India at
the inter-personal as well as at the intra-personal levels. Economic planning as a tool
of checking all kinds of economic disparities and inequalities was an accepted idea by
the time India started planning. Though Indian was made a part of the planning
process.
5. Self-reliance: During the 1930s and 1940s, there was an ardent desire among the
nationalists, capitalists and the NPC for making the economy self-reliant in all
economic sphere. Self-reliance was defined not as autarchy, but as an effort to strike
against a subordinate position in the world economy. As Jawaharlal Nehru asserted:
self-reliance, “does not exclude international trade, which should be encouraged but
with a view to avoid economic imperialism.”
6. Modernization: Modernizing in the the agriculture sector of the
economy needed an immediate inclusion of modern methods and
 techniques of farming dairying, etc. Similarly, in education too, India
needs to go for inclusion of modern education system.

 TARGETS AND STRATEGY OF ECONOMIC PLANNING:

-In order to achieve the long-term and short-term objectives set in the each five year,
specific strategies are required.
- It involves allocation resources across different sectors of the economy in tandem with
the specified objectives. It involves selection choices like development of agricultural
sector or industrial sector, public sector or private sector involvement, closed economy or
open economy model.
-Indian planning strategies can be split into two phases: pre-1991 phase and post – 1991
phase
PRE 1991 PHASE OR PRE-REFORM PHASE

During pre – 1991 phase (1951 to 1990), India followed the strategy of planning with greater
reliance on the public sector along with a regulated private sector. Following strategies are
followed during 1951-91 phase:
Heavy Reliance on Public Sector

 Greater reliance was placed on public sector compared to private sector. As private sector
was not able to invest in large amount for development of heavy industries, government
turned towards public sector for provision of essential and basic needs for the people. At
the same time private sector was not willing to provide the services in backward regions
of the country.

Regulated Expansion of Private Sector

 Private sector was restricted to few areas of activities. New legislations were created for
the restriction for the restriction of private sector.

Development of Heavy Industries

 Government invested heavily in development of Heavy industry like iron industry.

Protection of Small Scale Industry

 Small scale industry was protected by means of establishment of boards for different
small scale industries and reserving few areas of production exclusively for the small
scale industry.

Inward Looking Trade Strategy

 Domestic industry was protected from competition in the international market. Heavy
import duty was imposed to curb competitive imports, while domestic industries were
encouraged to produce domestic substitutes of essential imports.

Thrust on Savings and Investment

 Promotion of savings and investment was the undisputed objective of monetary and fiscal
policies of the government. Savings are induced through high rate of interest. Tax
concessions were to mobilise savings.

Restriction on Foreign Capital

 Several types of restrictions were imposed on foreign direct investment. To control and
regulate it, Foreign Exchange Regulation Act (FERA) was enforced.

Adherence to Centralised Planning

 State level plans were aligned in sync with the over all objectives and strategy of growth
as specified in Five Year Plans.

Post 1991 Phase (Post-reform Phase)

Strategy of planning in India witnessed a marked shift in the year 1991. Following are main
changes observed under NEP (new economic policy):

 Fiscal policy and monetary policy have been reoriented to facilitate the free play of
market forces.

 Foreign capital in the form of FDI (Foreign direct investment) and FII (Foreign
Institutional Investment) are encouraged.
  Import restrictions are restricted to the minimum, while export promotion has been
accorded a high priority.

 Competition rather than controls have become the fulcrum of growth process.

 Direct participation of the government is significantly tempered and confined only to

strategic industries such as atomic energy, minerals and railways.

 Partial convertibility of Indian Rupee.

Recently, the concept of Sustainable development is included as main feature of the strategy of
planning in India. Sustainable development refers to the development of present generation by
taking into consideration of the future generations.

Following are some notable reasons for change in economic policy:

1. Mounting Fiscal Deficit and revenue deficit: Fiscal deficit and revenue deficit of the
country are increased due to the policies followed before the 1990’s governments.

2. Balance of Payments (BoP) Crisis: Heavy dependence on imports resulted in a BoP

crisis.

3. Gulf Crisis: On account of Iraq war in 1990-91, prices of petrol started increasing.
Remittances from gulf countries are also stopped.

4. Fall in Foreign Exchange Reserves: In 1990-91, India’s foreign exchange reserves

lowered to such a level that these were not enough even to pay for an import bill of 10
days.

5. Rise in Prices: In India prices happened to rise rapidly. Expansion in money supply was
the principal cause of inflationary pressures. In turn, this was related to deficit financing.
Country has experienced the situation of stagflation.

6. Dismal Performance of Public Sector Undertakings (PSUs):Public sector undertakings

were showed dismal performance.

On account of all these factors, the government shifted to New Economic Policy.
Three Principal Components of New Economic Policy

Liberalisation, Privatisation and Globalisation are the three principal components of New
Economic Policy. Liberalisation of the economy means freedom of the economy from
restrictions of the Government. Liberalisation was expected to break the deadlock of low
investment by exposing the economy to the forces of supply and demand. Privatisation refers to
allowing private sector to enter in those areas of production which were previously reserved for
the public sector. Also, existing public enterprises are either wholly or partially sold to private
sector. It was considered to be the fittest option to stave off problems of public sector enterprises.
Globalisation means integrating domestic economy with rest of the world under conditions of
free flow of trade and factors of production across borders. Globalisation results in flow of
capital and technology from developed countries into the Indian economy.

 NITI AAYOG:

NITI Aayog (Policy Commission) or National Institution for Transforming India was established
via a Union Cabinet resolution on January 1, 2015 as a premier Policy Think Tank of the Union
Government. It’s an extra-constitutional, non-statutory and advisory body.

Why NITI AAYOG replaced planning commission?

-Planning commission set goals and targets to be achieved in a 5 year plan. Not successful.
Hence nitiaayog acts as a think tank .
-The committee has representatives from 29 states with pm as chairman unlike the planning
commission that lacked proper representation.{greater involvement of states}

Aims and Functions of Niti Aayog

The key objectives to establish NITI Aayog were as follows:

 To work as an advisory body to give directional and strategic inputs to Union

Government and also State governments on request.
  Put an end to the slow and tardy implementation of the policyby fostering inter-ministry,
inter-state and centre-state coordination.

 To foster cooperative federalism on the principle of Strong states make a strong nation.

 To replace the top-down development approach with bottom-top development approach.

 To design policy framework for weaker section of society that may not have benefited
from economic progress.

 To create a knowledge, innovation and entrepreneurial support systemvia a community of

national and international experts, practitioners and partners.

 To serve as a platform for resolution of inter-sectoral and inter-departmental issuesin

order to accelerate the implementation of the development agenda.

 To monitor and evaluate the implementation of programmes, and focus on technology

upgradation and capacity building.

On the basis of above, functions of NITI Aayog can be divided into four categories viz.

(1) To act as a Resource Centre & Knowledge Hub

(2) Design Policy & Programme Framework

(3) Foster Cooperative Federalism

(4) Monitoring and Evaluation.

Current Key Officers of NITI Aayog

 Chairperson: Prime Minister Narendra Modi

 Vice Chairperson: Dr. Rajiv Kumar

 Full-Time Members: Dr. Bibek Debroy; V.K. Saraswat; Prof. Ramesh Chand and Dr. V.
K. Paul

 Chief Executive Officer: Amitabh Kant

Two Hubs of NITI Aayog

At the core of NITI Aayog’s creation are two hubs viz. Team India Hub (TIH) and
the Knowledge and Innovation Hub (KIH). These two components were created by an order in
August, 2015. Further, the Task force under Sindhushree Khullar had proposed to restructure
NITI aayog into three components viz. TIH, KIH and a Flexi pool. The third component is
currently under progress as the recruitment rules were not finalised.

Offices Attached To the NITI Aayog

At present, the offices attached to NITI Aayog are as follows:

DMEO

Development Monitoring and Evaluation Office (DMEO) has been constituted on 18th
September, 2015 by merging the erstwhile Programme Evaluation Organization (PEO) and the
Independent Evaluation Office (IEO).
NILERD

Government of India established the National Institute of Labour Economics Research and
Development (NILERD) in 1962. It is a Central Autonomous Organization, now attached to
NITI Aayog, Ministry of Planning.

 12th FIVE YEAR PLAN:

12th Five Year Plan 2012-17 as per the draft document released by the Planning Commission
aims at a growth rate of 8%. This is the revised rate when compared to the initial approach paper.
Other targets of the Twelfth Five Year Plan in different sectors are listed below.

Vision of 12th Five Year Plan (2012-17)

Twelfth Five Year Plan focuses on Growth – Growth which is

 Faster
 Inclusive
 Sustainable

25 Core Monitorable Targets of the 12th Five Year Plan (2012-17)

Economic Growth
 Real GDP growth at 8%.

 Agriculture growth at 4%.

 Manufacturing growth at 10%.
 Every state must attain higher growth rate than the rate achieved during 11th plan.

Poverty and Employment

 Poverty rate to be reduced by 10% than the rate at the end of 11th plan.
 5 Crore new work opportunities and skill certifications in non-farm sector.

Education
 Mean years of schooling to increase to 7 years.
 20 lakh seats for each age bracket in higher education.
 End gender gap and social gap in school enrollment.

Health
 Reduce : IMR to 25; MMR to 1. Increase Child Sex Ratio to 950.
 Reduce Total Fertility Rate to 2.1
 Reduce under nutrition of children in age group 0-3 to half of NFHS-3 levels.

Infrastructure
 Investment in Infrastructure at 9% of GDP
 Gross Irrigated Area 103 million hectare (from 90 million hectare)
 Electricity to all villages; Reduce AT&C losses by 20%.
 Connect Villages with All Weather Roads
 National and State high ways to a minimum of 2 lane standard.
 Complete Eastern and Western Dedicated Freight Corridors.
 Rural Tele-Density to 70%.
 40 Litres Per Capita Per Day Drinking Water to 50% of rural population; Nirmal Gram Status
to 50% of all Gram Panchayats.

Environment and Sustainability

 Increase green cover by 1 million hectare every year.
 30,000 MW renewable energy during Five Year Period.
 Emission intensity of GDP to be reduced to 20-25% of 2005 levels by 2020.

Service Delivery
 Banking Services to 90% of Indian Households.
 Subsidies and Welfare related payment to be routed through Aadhar based Direct Cash
Transfer Scheme

INDIA’S HDI

India slipped down one place from 130 to 131 among the 188 countries ranked in terms of
human development, says the 2016 Human Development Report (HDR) released by the United
Nations Development Programme (UNDP) on Tuesday.
India’s human development index (HDI) value of 0.624 puts it in the “medium human
development” category, alongside countries such as Congo, Namibia and Pakistan. It is ranked
third among the SAARC countries, behind Sri Lanka (73) and the Maldives (105), both of which
figure in the “high human development” category.
The world’s top three countries in HDI are Norway (0.949), Australia (0.939) and Switzerland
(0.939).
The HDI is a measure for assessing progress in three basic dimensions of human development: a
long and healthy life, access to knowledge, and access to a decent standard of living.
Public health spending

The report says 1.5 billion people worldwide still live in multidimensional poverty, 54% of them
concentrated in South Asia. While poverty fell significantly from 1990 to 2015, inequalities
sharpened in the region.
South Asia also had the highest levels of malnutrition in the world, at 38%, and the lowest public
health expenditure as a percentage of the GDP (1.6%, 2014). India’s public health expenditure
was even lower, at 1.4% of the GDP. However, it did make some gains between 1990 and 2015,
improving life expectancy by 10.4 years in this period. Child malnutrition also declined by 10
percentage points from 2015, and there was a modest gain in infant and under-five mortality
rates.
The report praised India’s reservation policy, observing that even though it “has not remedied
caste-based exclusions”, it has “had substantial positive effects”. It pointed out that “in 1965, for
example, Dalits held fewer than 2% of senior civil service positions, but the share had grown to
11% by 2001”. The HDR also hailed the national rural employment guarantee programme as a
“prime example” of “combining social protection with appropriate employment strategies”.
The report noted with approval India’s progressive laws, especially the Right to Information,
National Food Security, and Right to Education Acts.
It commended the Indian grassroots group Mazdoor Kisan Shakti Sanghatan for popularising
social audits of government schemes.

Gender disparity

Noting that women, on an average, have lower HDI than men across the world, the report
pointed out that the largest gender disparity in development was in South Asia, where the female
HDI value is 20% lower than the male value.
In South Asia, gender gaps in entrepreneurship and labour force participation caused an
estimated income loss of 19%. “Between their first and fifth birthdays, girls in India and Pakistan
have a 30% to 50% greater chance of dying than boys,” the report noted.
While India’s HDI value increased from 0.428 in 1990 to 0.624 in 2015, it still had the lowest
rank among BRIC nations. However, its average annual growth in HDI (1990-2015) was higher
than that of other medium HD countries.
SECTORS :

Performance of key sectors:

 Agriculture and food management:

 The growth rate for the agriculture and allied sectors is estimated to be 4.1 per cent for
2016-17.

Industries, corporate and infrastructure sector:

 Growth rate of industrial sector is estimated to moderate to 5.2 per cent in 2016-
17 from 7.4 per cent last fiscal.

 Services sector:

 The services sector is projected to grow at 8.8 per cent in 2016-17, similar to
2015-16.

Agriculture and allied sectors estimated to grow by 4.1 per cent in 2016–17
with the kharif foodgrains production reaching 135.0 million tonnes (from
124.1 million tonnes in 2015–16). Area sown (upto 14th October, 2016)
under all kharif crops taken together was 1075.7 lakh hectares (3.5 per cent
higher compared to the corresponding period of 2015–16)—with arhar
showing the highest increase of 40.24 per cent. The rabi crops’ sowing was in
progress—the area coverage under rabi crops (by 13th January 2017) was
2016–17 at 616.21 lakh hectares (5.9 per cent higher than the corresponding
week of last year). The area coverage under wheat was 7.1 per cent higher;
under gram 10.6 per cent higher than that in the corresponding week of last
year.
Monsoon: Country as a whole received 97 per cent rainfall during south west
monsoon (long period average)—with wide regional variations—95 per cent
in northwest, 106 per cent in central, 89 per cent in northeast and 92 per cent
in south. Out of the total 36 meteorological subdivisions, 4 subdivisions
received excess rainfall, 23 subdivisions received normal rainfall and the
remaining 9 subdivisions received deficient rainfall.
Agri prices: The price policy of Government for major agricultural
commodities seeks to ensure remunerative prices to the farmers to encourage
higher investment and production, and to safeguard the interest of consumers
by making available supplies at reasonable prices. On account of the
volatility of prices of pulses, a Committee on Incentivising Pulses Production
www.freeupscmaterials.org
Through Minimum Support Price (MSP) and Related Policies was set up
(headed by Arvind Subramanian, Chief Economic Adviser). To increase
productivity of pulses, a new extra early maturing, high yielding variety of
Arhar (Pusa Arhar-16) has been developed to be made available for farmers
in the next Kharif season. During 2016–17, MSPs were raised substantially
mainly for pulses to incentivize farmers.
Foodgrain stocks & procurement: The food-grain management involves
procurement of rice and wheat following the norms for buffer stocks. The
stocks of food-grains (rice and wheat) was 43.5 million tonnes on 1st
December, 2016 (compared to 50.5 million tonnes as on 1st December, 2015)
against the buffer stock norm of 30.77 million tonnes as on 1st October 2015.
Procurement of rice as on 6th January 2017 was 23.2 million tonnes during
kharif marketing season 2016–17 whereas procurement of wheat was 22.9
million tonnes during rabi marketing season 2016–17. As part of the price
policy to protect consumers, the Central Issue Prices of rice and wheat have
remained unchanged since 1st July 2002.
Agriculture credit: Credit is an important input to improve agricultural
output and productivity. To improve agricultural credit flow, the credit target
for 2016–17 was fixed at Rs. 9 lakh crore against Rs. 8.5 lakh crore for 2015–
16. As against the target, the achievement for 2016–17 (upto September
2016), was 84 percent of the target, higher than the corresponding figure of
59 per cent upto September 2015.
INDUSTRY AND INFRASTUTURE
Growth rate of the industrial sector (comprising mining & quarrying,
manufacturing, electricity and construction) is projected to decline to 5.2 per
cent in 2016–17 (from 7.4 per cent in 2015–16). A modest growth of 0.4 per
cent was seen during April-November 2016–17. This was the ‘composite
effect’ of a strong growth in electricity generation and moderation in mining
and manufacturing. In terms of ‘use-based classification’, basic goods,
intermediate goods and consumer durable goods attained moderate growth.
Conversely, the production of capital goods declined steeply and consumer
nondurable goods sectors suffered a modest contraction during this period.
www.freeupscmaterials.org
Infrastructure industries: The eight core infrastructure supportive
industries (coal, crude oil, natural gas, refinery products, fertilizers, steel,
cement and electricity) that have a total weight of nearly 38 per cent in the
IIP registered a cumulative growth of 4.9 per cent during April-November,
2016–17 (compared to 2.5 per cent during April-November, 2015–16). The
production of refinery products, fertilizers, steel, electricity and cement
increased substantially while production of coal, crude oil and natural gas fell
during the period. Most indicators of infrastructure related activities showed
expansion—thermal power grew with 6.9 per cent while hydro and nuclear
power generation contracted marginally.
Corporate sector: Corporate sector (as per RBI, January 2017) had a sales
growth of 1.9 per cent (2nd quarter of 2016–17) as compared to near stagnant
growth of 0.1 per cent in 1st quarter. The growth of operating profits
decelerated to 5.5 per cent in 2nd quarter of 2016–17 from 9.6 per cent in the
previous quarter. Growth in net profits registered a remarkable growth of
16.0 per cent in 2nd quarter of 2016–17, as compared to 11.2 per cent in 1st
quarter.
SERVICES SECTOR
Services sector is estimated to grow by 8.8 per cent, almost the same as in
2015–16 with the following major features:
• As per WTO data, India’s commercial services exports increased from
US$ 51.9 billion in 2005 to US$ 155.3 billion in 2015. The share of
India’s commercial services to global services exports increased to 3.3
per cent in 2015 from 3.1 per cent in 2014 despite negative growth of
0.2 per cent in 2015 as compared to 5.0 per cent growth in 2014. This
was due to the relatively greater fall in world services exports by 6.1
per cent in 2015.
• As per RBI’s BoP data, India’s services exports declined by 2.4 per
cent in 2015–16 as a result of slowdown in global output and trade.
However, in the 1st half of 2016–17, services exports increased by 4.0
per cent compared to 0.3 per cent growth in the same period of previous
year. Growth of net services, which has been a major source of
www.freeupscmaterials.org
financing India’s trade deficit in recent years, was (–) 9.0 per cent in
2015–16 and (–) 10.0 per cent in 1st half of 2016–17 due to relatively
higher growth in imports of services. Growth of software exports which
accounted for 48.1 per cent share in services exports was 1.4 per cent in
2015–16 and 0.1 per cent in the 1st half of 2016–17.
• Tourism sector witnessed a growth of 4.5 per cent in terms of foreign
tourist arrivals (FTA) with 8.2 million arrivals in 2015, and a growth of
4.1 per cent in foreign exchange earnings (FEE) of US$ 21.1 billion. In
2016 (January-December), FTAs were 8.9 million with growth of 10.7
per cent and FEE (US$ terms) were at US$ 23.1 billion with a growth
of 9.8 per cent.
• The Nikkei/Markit Services PMI for India was at a high of 57.5 in
January of 2013. It fell to 46.7 in November 2016 from 54.5 in October
2016. However, it increased marginally to 46.8 in December 2016.
• The Baltic dry index (BDI), an indicator of both merchandise trade and
shipping services, which showed some improvement up to 18
November 2016 declined to around 910 on 13 January 2017.

HUMAN DEVELOPMENT

Expenditure on social services by Centre and States, as a proportion of GDP

was 7.0 per cent during 2016–17 (BE), with education and health sectors
accounting for 2.9 per cent and 1.4 per cent respectively (as per the RBI). The
year 2014–15
in respect of which latest actual figures are available showed a significant
decline following a large decrease in actual social sector expenditure of the
states.
Employment: The results of the quarterly quick employment surveys in
select labour intensive and export-oriented sectors by the Labour Bureau for
the period December, 2015 over December, 2014 show that the overall
employment increased by 135 thousand. The sectors that contributed to this
increase include—IT/BPOs sector, textiles including apparels and metals.
Employment, however, declined in gems & jewellery sector,
handloom/power-loom sector, leather, automobiles sectors and transport
www.freeupscmaterials.org
sector during the same period. Major features regarding employment were as
given follows:
• The Labour Force Participation Rate (LFPR) at the all India level based
on usual principal status approach was estimated at 50.3 per cent with
the LFPR of females being lower than that for males. There are wide
interstate variations in the female LFPR as well. The North Eastern and
Southern States, in general, display high female LFPR as compared to
low levels in Northern States. As per EUS (employment and
unemployment surveys), 2015–16, the unemployment rate for females
was higher than that of males across rural and urban areas.
• As per EUS Surveys, employment growth has been sluggish. Further,
States that show low unemployment rates also generally rank high in
the share of manufacturing. While States compete to seek investment
offering incentives, linking incentives to the number of jobs created,
sustained efforts need to be considered as a tool to increase
employment.
• There is a clear shift in employment to secondary and tertiary sectors
from the primary sector—the data between 2011–12 and 2015–16 show
the following trend—
Employed persons in the primary sector fell from 52.9 per cent to 46.1
per cent.
(ii) Employed persons in the secondary sector increased from 19.3 per
cent to 21.8 per cent.
(iii) Employed persons increased from 27.8 per cent to 32 per cent.
The growth in employment by category reflects increase in both casual
labour and contract workers. This has adverse implications on the level
of wages, stability of employment, social security of employees owing
to the ‘temporary’ nature of employment. It also indicates preference
by employers away from regular/formal employment to circumvent
labour laws.
The multiplicity of labour laws and the difficulty in their compliance have
been an impediment to the industrial development and employment
generation. At present, there are 39 Central labour laws which have been
www.freeupscmaterials.org
broadly proposed to be grouped into four or five Labour Codes on functional
basis with the enactment of special laws for small manufacturing units. In a
major initiative for bringing compliance in the system, catalysing the need of
job creation and to ensure ease of doing business while ensuring safety,
health and social security of every worker, the Government has put forth a set
of labour reform measures.
Education: Low learning outcomes has been a major concern of school
education in the country—also pointed out in several studies including
ASER, 2014. While there have been improvements in access and retention,
the learning outcomes for a majority of children is still a cause of serious
concern.
Some of the underlying causes contributing to low quality of education in
the primary sector are ‘teacher absenteeism’ and the ‘shortage of
professionally qualified teachers’. Though the share of teacher component in
total Sarva Shiksha Abhiyan (SSA) budget has been increasing over the years
from 35 per cent in 2011–12 to 59 per cent in 2014–15, teacher absenteeism
and the shortage of professionally qualified teachers remain an issue to be
addressed.
An option to address teacher absenteeism that can be explored is ‘biometric
attendance’ of all teachers in primary. Apart from the biometric attendance
being regularly monitored by local communities and parents, it should also be
put in public domain. This should be backed by adequate teaching aids,
recorded lectures, etc. to fill in for absentee teachers.
Health: India’s health policy aims at an integrated approach to provide
accessible, affordable and equitable quality health care to the marginalized
and vulnerable sections. The aim of good health and well-being for all as
envisaged in the Sustainable Development Goal (SDG) Ensure healthy lives
and promote well being for all at all ages should be synchronized with
India’s domestic targets to reap the benefits of the ‘demographic dividend’.
The high levels of anaemia prevalent among women in the age group 15–
49 have a direct correlation with high levels of MMR (maternal mortality
rate). In Haryana and West Bengal more than 60 per cent of women suffer
from anaemia. Under the National Health Mission, Government of India has
programmes to address the issue of anaemia through health and nutrition
www.freeupscmaterials.org
education to promote dietary diversification, inclusion of iron foliate rich
food as well as food items that promote iron absorption.
Inclusive growth: It is the vision of the Government to have an inclusive
society in which equal opportunities are provided for the growth and
development of all sections of the population including the marginalised,
 vulnerable and weaker sections to lead productive, safe and dignified lives.
Accordingly, programmes have been initiated by the government towards
attaining the objective of inclusive society like the Accessible India
Campaign.
The government has various schemes meant for the “economic and social
empowerment” of people belonging to the minority communities—the Nai
Roshni scheme for leadership development of minority women; Padho
Pardesh, a scheme of interest subsidy on educational loans for overseas
studies for the students belonging to the minority communities; for skill
development and economic empowerment of minorities, schemes like Seekho
Aur Kamao (Learn & Earn), Upgrading Skill and Training in Traditional
Arts/Crafts for Development (USTTAD) and to provide education and skill

training to the youth from minority communities the Nai Manzil

Disinvestment is a process of selling government equities in public sector

enterprises. Disinvestment in India is seen connected to three major interrelated
areas, namely—
(i) A tool of public sector reforms40
(ii) A part of the economic reforms started in mid-1991. It has to be done as
www.freeupscmaterials.org
a complementary part of the ‘de-reservation of industries’.41
(iii) Initially motivated by the need to raise resources for budgetary
allocations.42
The approach towards public sector reforms in India has been much more
cautious than that of the other developing countries. India did not follow the
radical solution to it—under which outright privatisation of commercially
viable PSUs is done and the unviable ones are completely closed.43 There
was an emphasis on increasing functional autonomy of public sector
organisations to improve their efficiency in the 1980s in India as part of the
public sector reforms. Once the process of economic reforms started in the
early 1990s, disinvestment became a part of the public sector reforms. The C.
Rangarajan Commission on Disinvestment of the Public sector Enterprises
(1991) went on to suggest the government on the issue in a highly
commendable and systematic way, taking empirical notes from the
experiences of disinvestment around the world. The government started the
process of disinvestment in 1991 itself. In 1997 the goverment did set up a
Disinvestment Commission to advice upon the various aspects of the
disinvestment process. The financial year 1999–2000 saw a serious attempt
by the government to make disinvestment a political process to expedite the
process of disinvestment in the country—first a Disinvestment Department
and later a full-fledged Ministry of Disinvestment was set up.44 The new
government (UPA) dismantled the Ministry of Disinvestment and today only
the Department of Disinvestment is taking care of the matter, working under
the Ministry of Finance.
Types of Disinvestment __________________
Since the process of disinvestment was started in India (1991), its consisted
of two official types. A brief discussion on them is given below:
1. Token Disinvestment
Disinvestment started in India with a high political caution—in a symbolic
way known as the ‘token’ disinvestment (presently being called as ‘minority
state sale’). The general policy was to sell the shares of the PSUs maximum
www.freeupscmaterials.org
upto the 49 per cent (i.e., maintaining government ownership of the
companies). But in practice, shares were sold to the tune of 5–10 per cent
only. This phase of disinvestment though brought some extra funds to the
government (which were used to fill up the fiscal deficit considering the
proceeds as the ‘capital receipts’) it could not initiate any new element to the
PSUs, which could enhance their efficiency. It remained the major criticism
of this type of disinvestment, and experts around the world started suggesting
the government to go for it in the way that the ownership could be transferred
from the government to the private sector. The other hot issue raised by the
experts was related to the question of using the proceeds of disinvestment.
2. Strategic Disinvestment
In order to make disinvestment a process by which efficiency of the PSUs
could be enhanced and the government could de-burden itself of the activities
in which the private sector has developed better efficiency (so that the
government could concentrate on the areas which have no attraction for the
private sector such as social sector support for the poor masses), the
government initiated the process of strategic disinvestment. The government
classifying the PSUs into ‘strategic’ and ‘non strategic’ announced in March
1999 that it will generally reduce its stake (share holding) in the ‘nonstrategic’
public sector enterprises (PSEs) to 26 per cent or below if
necessary and in the ‘strategic’ PSEs (i.e., arms and ammunition; atomic
energy and related activities; and railways) it will retain its majority
holding.45 There was a major shift in the disinvestment policy from selling
small lots of share in the profit-making PSUs (i.e., token disinvestment) to
the strategic sale with change in management control both in profit and lossmaking
enterprises. The essence of the strategic disinvestment was—
(i) The minimum shares to be divested will be 51 per cent, and
(ii) the wholesale sale of shares will be done to a ‘strategic partner’ having
international class experience and expertise in the sector.
This form of disinvestment commenced with the Modern Food Industries
Ltd. (MFIL). The second PSUs was the BALCO which invited every kind of
criticism from the opposition political parties, the Government of Chattisgarh
and experts, alike. The other PSUs were CMC Ltd, HTL, IBPL, VSNL,
www.freeupscmaterials.org
ITDC (13 hotels), Hotel Corporation of India Ltd. (3 hotels), Paradeep
Phosphate Ltd (PPL), HZL, IPCL, MUL and Lagan Jute Manufacturing
Company Ltd. (LJMC)—a total number of 13 public sector enterprises, were
part of the ‘strategic sale’ or ‘strategic disinvestment’ of the PSEs.46 The
new government at the Centre did put this policy of strategic disinvestment
on the hold practically and came up with a new policy in place.
Current Disinvestment Policy __________________
India’s disinvestment policy®47 has evolved over time since it commenced in
1991. It has two major features— ‘ideology’ behind the policy and the
‘policy’ itself. The ideology behind the policy is:
(i) Public ownership of PSUs to be promoted as they are wealth of nation;
(ii) Government to hold minimum 51 per cent shares in case of ‘minority
stake sale’; and
(iii) Upto 50 per cent or more shares might be sold off under ‘strategic
disinvestment’.
The current policy of disinvestment followed by the government is as given
below:
(i) Minority stake sale (the policy of November 2009 continues):
• Listed PSUs to be taken first to comply to minimum 25 per cent norm;
• New PSUs to be listed which have earned net profit in three preceding
consecutive years;
• ‘Follow-on’ public offers on case by case basis once capital investment
needed; and
• DIPAM (Department of Investment and Public Asset Management) to
identify PSUs and suggest disinvestment in consultation with respective
ministries.
(ii) Strategic Disinvestment i.e., selling 50 per cent or more shares of the
PSUs (announced in February 2016):
• To be done through consultation among Ministries/Departments and
NITI Aayog;
www.freeupscmaterials.org
• NITI Aayog to identify PSUs and advice on its different aspects; and
• CGD (Core Group of Secretaries on Disinvestment) to consider the
recommendations of NITI Aayog to facilitate a decision by the CCEA
(Cabinet Committee on Economic Affairs) and to supervise/monitor the
implementation process.
The disinvestment policy is today seen as a part of the Government’s
comprehensive management of its investment in the PSUs. Under this, the
Government considers its investment in PSUs as an important asset for
accelerating economic growth and is committed to their efficient use to
achieve optimum return through the following measures:
• Leveraging of assets, capital and financial restructuring;
• Raising fresh investments by improving investors’ confidence; and
• Efficient management through rationalization of decision making
process.

Industrial Sickness in India: Meaning, Causes and Suggested Remedies

Article Shared by <="">

ADVERTISEMENTS:

Industrial Sickness in India: Meaning, Causes and Suggested Remedies!

Meaning:

One of the adverse trends observable in the corporate private sector of India is the growing
incidence of sickness. It is causing considerable concern to planners and policymakers. It is also
putting a severe strain on the economic system, particularly on the banks.

There are various criteria of sickness. According to the criteria accepted by the Reserve Bank of
India “a sick unit is one which has reported cash loss for the year of its operation and in the
judgment of the financing bank is likely to incur cash loss for the current year as also in the
following year.”

ADVERTISEMENTS:

A major symptom of sickness is a steady fall in debt-equity ratio and an imbalance in the
financial position of the unit. Simply put, a sick unit is one which is unable to support itself
through the operation of internal resources (that is, earnings plough-back). As a general rule, the
sick units continue to operate below the break-even point (at which total revenue = total cost)
and are, thus, forced to depend on external sources for funds of their long-term survival.

Industrial sickness creates various socio-economic problems. When an industrial unit falls sick
those who depend on it have to face an uncertain future. They fear loss of jobs. Even if they do
not lose jobs they do not get their wages and compensation in time and are, thus, forced to live in
extreme hardship.

Of course, sickness is not a special problem of India. It is, undoubtedly, a global phenomenon.
Even in industrially advanced countries there are numerous cases of bankruptcy or liquidation.
These sick units are nursed back to health through mergers, amalgamations, takeovers, purchase
of assets, or outright nationalisation. When the-problem becomes really alarming or
unmanageable, the unit is permitted to die its natural death.

Causes:

Industrial sickness has become a major problem of the India’s corporate private sector. Of late, it
has assumed serious proportions. A close look reveals that there are, at least, five major causes of
industrial sickness, viz., promotional, managerial, technical, financial and political.

ADVERTISEMENTS:

An industrial unit may become sick at its nascent stage or after working for quite some time. For
instance, two major traditional industries of India, viz., cotton textiles and sugar, have fallen sick
largely due to short-sighted financial and depreciation policies. Heavy capital cost escalation
arising out of price inflation accentuates the problem. The historical method of cost depreciation
is highly inadequate when assets are to be replaced at current cost during inflation.

Moreover, since the depreciation funds are often used to meet working capital needs, it does not
become readily available for replacement of worn-out plant and equipment. The end result is that
the industrial unit is constrained to operate with old and obsolete equipment, its profitability is
eroded and, sooner or later, the unit is driven out of the market by the forces of competition.
External vs. Internal Causes:

The factors leading to sickness can be due to reasons of finance, technical issues, mismanage-
ment, non-availability of raw materials, power or natural calamities or disasters such, as fire or
earthquake or a combination of such factors.

The causes of industrial sickness may be divided into two broad categories:

(i) external and

(ii) internal.

External causes are those which are beyond the control of its management and seen to be rela-
tively more important than internal causes.

The causes which have been identified so far include:

(a) Delay in land acquisition and building construction

ADVERTISEMENTS:

(b) Delay in obtaining financial assistance from public financial institutions

(c) Delayed supply of machinery by the manufacturers

(d) Problems related to recruitment of technical and managerial staff

(e) Delay on the part of the Government in sanctioning licences, permits, etc.

(f) Shortages of basic inputs like power and coal. Other causes include

(g) Cost over-runs due to factors beyond the control of management

(h) Lack of demand for products or shift of demand to products of rival firms due to delays in
project implementation
(i) Unsatisfactory performance by collaborators—financial and technical

(j) Large changes in the scale of operation and optimum product mix in the long run and, last but
not the least

(k) Changes in the policy of the Government relating to movement of goods from one place to
another within the country

The primary cause seems to be:

(i) “Lack of experience of the promoters in a specific line of activity”.

The other causes are:

(ii) Differences among various persons associated with the promotion and management of the
enterprise

(iii) Mechanical defects and breakdown

(iv) Inability to purchase raw materials at an economic price and at the right time

(v) Failure to make controls effective in time, in case of deficiencies in workings

(vi) Deteriorating labour-management relations and the consequent fall in capacity utilisation

(vii) Faulty financial planning and lack of balance in the financial (capital) structure.

It is often observed that many projects are started without proper feasibility study. Hardly any
long-term view of the future is taken. Instead, a project is sought to be managed on the basis of
myopic vision, inadequate analysis and improper approach. Often industrial projects are started
on an ad hoc basis without gathering much information about the expertise and competence
needed for the purpose.

Moreover, once the construction work is started on the basis of a project report, there is no
periodic assessment (or review) of the economic viability of the project. Often major changes in
the political and economic environment (such as change in the party in power or change in
Government) make the basic assumptions underlying the project unrealistic or inappropriate. Yet
the project is made to remain operational without considering the after-effects.

So, there are various reasons that make industries sick. The prime among this is market-related.
Market obsolescence is one of the prime reasons for units turning sick. A striking example is that
of the jute industry, where “the non-avail- ability of raw materials and constant power shortages
have made many units sick. And bankers are not normally very responsive in helping a company
that has gone sick.

Incidence:

In Dec. 1980 the total number of sick units was 24,550, involving outstanding bank credit of Rs.
1,809 crores. As at the end of March 2000, the total number of sick units stood at 307,399
involving an outstanding bank credit of about Rs. 23,656 crores. Of these 14,793 were po-
tentially viable, 278,423 were non-viable and the viability of the remaining 14,183 has not been
decided.

Three major industries affected by industrial sickness are jute, engineering goods and textiles.
Some of the industries such as the real estate, light consumer goods, automobile, diamonds and
many others are reeling under the impact of steep fall in demand, inadequate supply of finance,
large proportion of non-performing assets and constraints of finance due to huge amounts of
funds getting blocked in ageing receivables

Government Policy:

A number of measures have been taken to tackle the problem of industrial sickness. The
importance of detection of sickness at the incipient stage has been emphasised by the RBI. The
policy framework in respect of measures to deal with the problem of industrial sickness has been
laid down in the guidelines issued on October 1981 (which were subsequently modified in
February 1982) for guidance of administrative ministries of the Central Government, State
Governments and financial institutions.
The salient features of these guidelines are the following:

(a) The administrative ministries in the Government will have specific responsibility for pre-
vention and remedial action in relation to sickness in industrial sector within their respective
charges. They will have a central role in monitoring sickness and coordinating action for revival
and rehabilitation of sick units. In suitable cases, they will also establish standing committees for
major industrial sectors where sickness is widespread;

(b) The financial institutions will strengthen the monitoring system so that it is possible to take
timely corrective action to prevent incipient sickness. They will obtain periodical returns from
the assisted units and from the Directors nominated by them on the Boards of such units. These
will be analysed by the Industrial Development Bank of India and results of such analyses
conveyed to the financial institutions concerned and the Government.

(c) The financial institutions and banks will initiate necessary corrective action for sick or in-
cipient sick unit based on a diagnostic study. In case of growing sickness, the financial
institutions will also consider taking of management responsibility where they are confident of
restoring a unit to health. The Ministry of Finance will have to issue suitable guidelines for
management;

(d) Where the banks and financial institutions are unable to prevent sickness or ensure revival of
a sick unit, they will deal with their outstanding dues to the unit in accordance with the normal
banking procedures. However, before doing so, they will report the matter to the Government
which will decide whether the unit should be nationalised or whether any other alternative-
including workers’ participation in management— can revive the undertaking.

(e) Where it is decided to nationalise the undertaking, its management may be taken over under
the provisions of the Industries (Development and Regulation) Act, 1951, for a period of six
months to enable the Government to take necessary steps for nationalisation.

(f) Finally the industrial undertakings presently being managed under the provisions of the
Industries (Development and Regulation) Act, 1951, will also be dealt with in accordance with
the above principles.
Concessions:

The Government has also provided certain concessions to assist revival of sick units without
direct intervention. For example, the Government has amended the Income-tax Act in 1977 by
addition of Section 72A by which tax benefit can be given to healthy units when they take over
the sick units by amalgamation, with a view to reviving them.

The tax benefit is in the form of carry forward of the accumulated business losses and un-
provided depreciation of the sick companies by the healthy companies after amalgamation. A
scheme for provisions 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 has been introduced from January 1, 1982.

Moreover, financial assistance in the form of long-term equity up to Rs. 15 lakh to units with a
project cost not exceeding Rs. 10 lakhs at a nominal service charge of 1% is available to poten-
tially viable sick SSI from the National Equity Fund.

Establishment of BIFR:

The Central Government has set up a Board for Industrial and Financial Re-construction (BIFR)
with effect from 12 January 1987 in pursuance of enactment of the Sick Industrial Companies
(Special Provision) Act, 1985. This is a major step for intervening at an early stage and
detecting, preventing, as well as taking ameliorative, remedial and such other measures which to
be taken with respect to sick and potentially viable companies.

The role of the Board for Industrial and Financial Reconstruction (BIFR) needs a re-look in the
face of a steep rise in the number of industries turning sick. BIFR was constituted to facilitate the
revival of industries deemed sick. When an industry turns sick, BIFR acts as an operating agency
(generally the lead financial institution having the largest loan exposure among the creditors) to
devise a revival strategy proposal.

Progress in the right disposal of sick company cases registered with BIFR has been slow on
account of the conflicting interests between the companies and the creditors (banks and financial
institutions, government bodies/agencies) and certain lacunae in the SIC A Act. The
rehabilitation schemes met with 40-45% failure, as a result of which many of the cases had to be
reopened.

The rate of registration/sickness increased substantially during 1997-98 due to (a) the
recessionary trends prevalent in industry, (b) poor financial market conditions, and (c) the tough
stance taken by banks/financial institutions (FIs) towards defaulters/potentially sick companies
under their non-performing assets (NPA) accounts for rescheduling of repayments, etc.

The problem appears even more acute if we take note of potentially sick BIFR companies, as
also the NPAs of FIs and banks. In fact, the NPAs of banks and others have continued to rise.

Upto 1997-98 the outstanding bank credit against sick companies has reached an abnormal’
proportion of over Rs. 23,658 crores, in March’ 2000. Over 15 lakh workers have been affected
by companies turning sick.

IRBI (IIBI):

The Industrial Reconstruction Bank of India (IRBI) set up in 1985 has initiated various steps for
checking the growth of industrial sickness and helping in industrial revival. From April 1997 the
name of IRBI has been changed to Industrial Investment Bank of India (IIBI). By March 2000,
cumulative financial assistance sanctioned and disbursed by it stood at Rs. 10.090 crores and Rs.
7,353 crores, respectively.

A significant measure taken during 1986 was the setting up of Small Industries Development
Fund (SIDF) in the IDBI. This is meant to provide special financial assistance to the small-scale
sector. The Fund would be used for providing refinancing assistance not only for development,
expansion and modernisation, but also for the rehabilitation of the small-scale sick industries.

Modernisation Fund:

The Government has set up two funds, namely the Textile Modernisation Fund and the Jute
Modernisation Fund, for modernisation of the textiles and jute sector. Under these two funds,
assistance is provided not only to the healthy units for modernisation at 11.5% rate of interest;
but also’ to sick but potentially viable units. Special loans are given to the weak units for meeting
a part of the promoters’ contribution.

Goswami Committee Report:

The Committee on Industrial Sickness and Corporate Restructuring under chairpersonship of Dr.
Omkar Goswami submitted its report in July 1993.

The main recommendations of the Committee with respect to sick companies are:

(a) For early detection of sickness the definition of sickness should be changed to:-

(i) Default of 180 days or more on repayment to term lending institutions, and

(ii) irregularities in cash credits or working capital for 180 days or more.

(b) Amendment of the Urban Land (Ceiling & Regulation) Act, 1976 to improve generation of
internal resources of sick companies.

(c) Empower the BIFR for speedier restructuring, winding-up and sale of assets of companies;
and

(d) A sick company’s own reference of BIFR should be voluntary, not mandatory.

SICA Amendment Act, 1994:

The modifications brought in the Sick Industrial Companies (Special Provisions) Act, 1985 by
the 1994 Amendment Act pertain to the changes in the definition of SICA, expansion of the term
operating agency, clarification that an enquiry as to sickness shall be deemed to have
commenced on receipt of a reference by the BIFR complete in all respects, scope for reverse
merger, “deemed consent” after the lapse of 120 days, “single window concept” for release of
funds by banks/financial institutions to the sick company, monitoring implementation of
sanctioned revival schemes by BIFR, holding on operations by financial institutions/banks/State
Governments, empowering the Central Government, State Government, banks, institutions, etc.,
to report cases of potential sickness, etc.
In the definition of sickness the period for the registration of an industrial company as sick has
been reduced from seven to five years. Furthermore, the condition of incurring cash losses during
the preceding two years has been waived. This means that an industrial company would be
considered a sick industrial company once its net worth is completely eroded and has been regis-
tered for not less than five years.

Suggested Remedies:

Some of the effective measures which may be taken for revival of sick units are technical help,
professional counselling and improved management. Also, the role of professionals and experi-
enced management becomes more important in times of sickness.

In addition to technical and professional consultants, no sick industry will ever be able to recu-
perate without sufficient, timely and soft finance. Bankers are the key to the problem. The role of
the bankers needs to be redefined and a new direction needs to be given to support aid and lift
sick industrial units from the situations that befall them. It is also the level of service and support
in terms of financial advice, assistance in related matters of insurance, release of hypothecated
assets and timely finance.

The Sick Industrial Companies (Special Provisions) Bill, 1997, passed by Lok Sabha, introduced
encouraging changes. It suggested that a time-bound procedure was to be adopted within which
the scheme has to be sanctioned and BIFR would play the role of a mediator and not a court.

Technical obsolescence and financial mismanagement are also important factors that lead to
industrial sickness. As per the new provisions, an opportunity will be given to get an unanimous
consent to a scheme from all concerned, failing which secured creditors will attempt to form a
scheme and, if all this fails, the undertaking would be sold off. Only if it is not possible to do
that, the BIFR may order winding up of the company.

PUBLIC SECTOR IN INDIA

 At the time of independence, India was backward and underdeveloped – basically an agrarian
economy with weak industrial base, high rate of unemployment, low level of savings and
investment and near absence of infrastructural facilities. Indian economy needed a big push. This
push could not come from the private sector because of the lack of funds and their inability to
take risk with large long-gestation investments. As such, government intervention through public
sector was necessary for self-reliant economic growth, to diversify the economy and to overcome
economic and social backwardness.

OBJECTIVES: The public sector aims at achieving the following objectives:

i. To promote rapid economic development through creation and expansion of infrastructure

ii. To generate financial resources for development
iii. To promote redistribution of income and wealth
iv. To create employment opportunities
v. To promote balanced regional growth
vi. To encourage the development of small-scale and ancillary industries, and
vii. To promote exports on the one side and import substitution, on the other.

Role of Public Sector: The public sector has been playing a vital role in the economic
development of the country. Public sector is considered a powerful engine of economic
development and an important instrument of self-reliance. The main contributions of public
enterprises to the country's economy may be described as follows:

1. Filling the Gaps in Capital Goods: At the time of independence, there existed serious gaps in
the industrial structure of the country, particularly in the fields of heavy industries such as steel,
heavy machine tools, exploration and refining of oil, heavy Electrical and equipment, chemicals
and fertilizers, defense equipment, etc. Public sector has helped to fill up these gaps. The basic
infrastructure required for rapid industrialisation has been built up, through the production of
strategic capital goods. In this way the public sector has considerably widened the industrial base
of the country.

2. Employment: Public sector has created millions of jobs to tackle the unemployment problem
in the country. Public sector accounts for about two-thirds of the total employment in the
organised industrial sector in India. By taking over many sick units, the public sector has
protected the employment of millions. Public sector has also contributed a lot towards the
improvement of working and living conditions of workers by serving as a model employer.

3. Balanced Regional Development: Public sector undertakings have located their plants in
backward and untrodden parts of the county. These areas lacked basic industrial and civic
facilities like electricity, water supply, township and manpower. Public enterprises have
developed these facilities thereby bringing about complete transformation in the socio-economic
life of the people in these regions. Steel plants of Bhilai, Rourkela and Durgapur; fertilizer
factory at Sindri, are few examples of the development of backward regions by the public sector.

4. Contribution to Public Exchequer: Apart from generation of internal resources and payment of
dividend, public enterprises have been making substantial contribution to the Government
exchequer through payment of corporate taxes, excise duty, custom duty etc. In this way they
help in mobilizing funds for financing the needs for the planned development of the country. In
recent years, the total contribution from the public enterprises has increased considerably,
between the periods 2002-03 to 2004-05 the contribution increased by Rs 81,438 crores on the
average.

5. Export Promotion and Foreign Exchange Earnings: Some public enterprises have done much
to promote India’s export. The State Trading Corporation (STC), the Minerals and Metals
Trading Corporation (MMTC), Hindustan Steel Ltd., the Bharat Electronics Ltd., the Hindustan
Machine Tools, etc., have done very well in export promotion. The foreign exchange earnings of
the public sector enterprises have been rising from Rs 35 crores in 1965-66 to Rs 42,264 crores
in 2004-05.

6. Import Substitution: Some public sector enterprises were started specifically to produce goods
which were formerly imported and thus to save foreign exchange. The Hindustan Antibiotics
Ltd., the Indian Drugs and Pharmaceuticals Ltd. (IDPL), the Oil and Natural Gas Commission
(ONGC), the Indian Oil Corporation Ltd., the Bharat Electronics Ltd., etc., have saved foreign
exchange by way of import substitution.
7. Research and Development: As most of the public enterprises are engaged in high technology
and heavy industries, they have undertaken research and development programmes in a big way.
Public sector has laid strong and wide base for self-reliance in the field of technical know-how,
maintenance and repair of sophisticated industrial plants, machinery and equipment in the
country. Through the development of technological skill, public enterprises have reduced
dependence on foreign knowhow. With the help of the technological capability, public sector
undertakings have successfully competed in the international market.

In addition to the above, the public sector has played an important role in the achievement of
constitutional goals like reducing concentration of economic power in private hands, increasing
public control over the national economy, creating a socialistic pattern of society, etc. With all its
linkages the public sector has made solid contributions to national self-reliance.

Limitations: Despite their impressive role, Public enterprises in India suffer from several
problems and shortcomings. Some of these are described below:

1. Poor Project Planning: Investment decisions in many public enterprises are not based upon
proper evaluation of demand and supply, cost benefit analysis and technical feasibility. Lack of a
precise criterion and flaws in planning have caused undue delays and inflated costs in the
commissioning of projects. Many projects in the public sector have not been finished according
to the time schedule.

2. Over-capitalization: Due to inefficient financial planning, lack of effective financial control

and easy availability of money from the government, several public enterprises suffer from over-
capitalization The Administrative Reforms Commission found that Hindustan Aeronautics,
Heavy Engineering Corporation and Indian Drugs and Pharmaceuticals Ltd were over-
capitalized. Such over-capitalization resulted in high capital-output ratio and wastage of scare
capital resources.

3. Excessive Overheads: Public enterprises incur heavy expenditure on social overheads like
townships, schools, hospitals, etc. In many cases such establishment expenditure amounted to 10
percent of the total project cost. Recurring expenditure is required for the maintenance of such
overhead and welfare facilities. Hindustan Steel alone incurred an outlay of Rs. 78.2 crore on
townships. Such amenities may be desirable but the expenditure on them should not be
unreasonably high.

4. Overstaffing: Manpower planning is not effective due to which several public enterprises like
Bhilai Steel have excess manpower. Recruitment is not based on sound labour projections. On
the other hand, posts of Chief Executives remain unfilled for years despite the availability of
required personnel.

5. Under-utilisation of Capacity: One serious problem of the public sector has been low
utilisation of installed capacity. In the absence of definite targets of production, effective
production planning and control and proper assessment of future needs many undertakings have
failed to make full use of their fixed assets. There is considerable idle capacity. In some cases
productivity is low on account of poor materials management or ineffective inventory control.

6. Lack of a Proper Price Policy: There is no clear-cut price policy for public enterprises and the
Government has not laid down guidelines for the rate of return to be earned by different
undertakings. Public enterprises are expected to achieve various socio-economic objectives and
in the absence of a clear directive, pricing decisions are not always based on rational analysis. In
addition to dogmatic price policy, there is lack of cost-consciousness, quality consciousness, and
effective control on waste and efficiency.

7. Inefficient Management : The management of public enterprises in our country leaves much to
be desired. Managerial efficiency and effectiveness have been low due to inept management,
uninspiring leadership, too much centralisation, frequent transfers and lack of personal stake.
Civil servants who are deputed to manage the enterprises often lack proper training and use
bureaucratic practices. Political interference in day-to-day affairs, rigid bureaucratic control and
ineffective delegation of authority hamper initiative, flexibility and quick decisions. Motivations
and morale of both executives and workers are low due to the lack of appropriate incentives.

Causes for the expansion of public enterprise

At the time of independence, India was backward and underdeveloped – basically an agrarian
economy with weak industrial base, high rate of unemployment, low level of savings and
investment and near absence of infrastructural facilities. Indian economy needed a big push. This
push could not come from the private sector because of the lack of funds and their inability to
take risk with large long-gestation investments. As such, government intervention through public
sector was necessary for self-reliant economic growth, to diversify the economy and to overcome
economic and social backwardness.

Let us discuss the rationale or causes for the expansion of public sector enterprises in India.

1. Rate of Economic Development and Public Enterprises: The justification for public enterprises
in India was based on the fact that the targeted rate of economic growth planned by the
government was much higher than could be achieved by the private sector alone. In other words,
the public sector was essential to realize the target of high growth rate deliberately fixed by the
government.

2. Pattern of Resource Allocation and Public Enterprises: Another reason for the expansion of
the public sector lies in the pattern of resources allocation decided upon under the plans. In the
Second Plan the emphasis was shifted to industries and mining, mainly basic capital goods
industries to be developed under the aegis of the public sector. Thus more resources for
industrialization were funneled through the public sector.

3. Removal of Regional Disparities through Public Enterprises: Another important reason for the
expansion of the public sector was the need for balanced development in different parts of the
country and to see that there were no serious regional disparities. Public enterprises were set up
in those regions which were underdeveloped and where local resources were not adequate. Good
examples are the setting up of the three steel plants of Bhillai, Rourkela and Durgapur and the
Neyveli Project in Madras which were meant to help industrialise the regions surrounding the
projects.

4. Sources of Funds for Economic Development: Initially, state was an important source of funds
for development. The surplus of government enterprises could be re-invested in the same
industries or used for the establishment and expansion of other industries. Profits of public sector
industries can be directly used for capital formation which is necessary for the rapid development
of the country.

5. Socialistic Pattern of Society: The socialistic pattern of society envisaged in the Constitution
calls for expansion of public sector. For one thing, production will have to be centrally planned
as regards the type of goods to be produced, the volume of output and the timing of their
production. Besides, one of the objectives of the directive principles of the Indian Constitution is
to bring about reduction of the inequalities of income and wealth and to establish an egalitarian
society. The Five Year Plans have taken this up as a major objective of planning. The public
enterprises were used as major instruments for the reduction of inequalities of income and to
bring about a more equitable distribution of income in several ways.

6. Limitations and Abuses of the Private Sector: The behavior and attitude of the private sector
itself was an important factor responsible for the expansion of the public sector in the country. In
many cases the private sector could not take initiatives because of the lack of funds and their
inability to take risk with large long-gestation investments. In a number of cases, the government
was forced to take over a private sector industry or industrial units either in the interest of
workers or to prevent excessive exploitation of consumers. Very often the private sector did not
function as it should and did not carry out its social responsibilities. Accordingly, the
government was forced to take over or nationalize the private sector units.

To sum up, the expansion of the public sector was aimed at the fulfillment of our national goals,
viz., the removal of poverty, the attainment of self-reliance, reduction in inequalities of income,
expansion of employment opportunities, removal of regional imbalances, acceleration of the
pace of agricultural and industrial development, to reduce concentration of ownership and
prevent growth of monopolistic tendencies by acting as effective countervailing power to the
private sector, to make the country self-reliant in modern technology and create professional,
technological and managerial cadres so as to ultimately rid the country from dependence on
foreign aid.