5 Main Arguments for the Expansion of the Public Sector in India

To this basic argument for the expansion of the public sector, the government added various reasons over time.

(a) To increase the growth of the core sectors of the economy, thereby creating a solid foundation in industrial growth.

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(b) To serve the equipment and financial needs, of strategically important sectors like Railways, Telecommunications, Nuclear Power, Defence etc. Many technical engineering, consultancy and construction industries were created.

(c) To exercise countervailing power on the operation of private monopolies and multinationals in selected area this would be detrimental to the interest of common people and contrary to the principles of establishing a socialistic pattern of society.

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(d) To ensure easier availability of articles of mass-consumption socially desirable consumable commodities, to check production of unimportant luxury articles and the rationale behind setting up consumer-oriented industries.

(e) To protect production and employment, the government had to take over many sick industries.


As on March 31, 2001 there are 242 central undertakings, excluding banks, financial institutions and departmental undertakings like the Railway Ports etc. The growth of investment is central government undertakings.

It will be clear as the number of industrial and commercial undertakings of the central government had increased from 5 in 1950-1951 to 242 units in 1999-2000 and the capital investment had increased from Rs. 29 crores to Rs. 2, 74,114 crores on 31st of March 2001.

The investment is in the form of equity capital and long-term loans. Such a massive growth and monolithic structure of public sector were due to larger socio-economic perspective and a long term interest of the economy.

Share of the public sector in savings and capital formation:

Gross domestic capital formation has increased from 10.7% of GNP during the first plan to 24.6% during the 8th plan. However, the share of the public sector improved from 3.5% during the first plan to 9.2% during the 8th plan.


This growth is far below the rate of national average. The share of the public sector which accounted for one-third of capital formation during the 1st plan gradually increased to about one-half during the 6th Plan and has thereafter declined to about 30% in 1997-1998.

Three basic causes for the decline of the share of the public sector in total savings:

(i) The inefficiency of the government and the public sector enterprises and their consequent failure to generate internal surplus commensurate with the increase in their capital stock.

(ii) Rapid increase in state expenditure at a rate higher than increase in state revenues.

(iii) The self defeating efforts of the government to make up the shortfall in resources through excesses borrowings from the banking sector by means of deficit financing.

(iv) A higher capital output ratio and lack of professional out look to create more surplus.

(v) Failure to establish surplus generation in the entire value chain.


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