The entry of the public sector in a big way in the economic sphere is a post-independence development. Prior to 1947, public sector investment was limited to the railways, the post and telegraphs department, the ordnance factories and a few state managed factories like the quinine factories, salt factories etc.
It was the Industrial Policy Resolution of the Government of India in 1948 which brought the public sector into limelight. It declares that a dynamic national policy must be directed to a continuous increase in production by all possible means, side by side with measures to secure its equitable distribution.
The problem of State participation in industry and the conditions in which private enterprise should be allowed to operate must be judged in this context. Since then the expansion of the public sector has been very rapid.
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The idea that in the economic development of the country the State enterprises would play a predominant role took root with the adoption of a socialist pattern of society in the second Plan.
The growth of public enterprises in India has taken place in two ways: (a) by nationalising existing enterprises and (b) by starting new enterprises. The State Bank of India, LIC, the Air India, nationalisation of 20 banks etc. are included in the first category, while the Hindustan Steel Ltd., the Fertilizer Corporation of India etc. fall in the second category.
The enormous growth of public sector investments has taken place against a political and ideological background which is peculiar to Indian political development.
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The Indian National Congress had traditionally expressed its socio-economic aspirations in radical terms.
The 1929 Lahore Resolution had declared that in order to remove the poverty and misery of the Indian people and to ameliorate the conditions of the masses, it was essential to make revolutionary changes in the present economic and social structure of society and to remove gross inequalities.
The subsequent Karachi Resolution declared that the State shall own or control key industries and services, mineral resources, railways, waterways, shipping and other means of public transport.
The objectives of establishing new enterprises and reasons for nationalising some existing ones are varied and often different from case to case and from time to time.
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Perhaps the only generalisation possible in this regard is that public enterprise for us is more a matter of necessity than of choice. It is not so much the ideology as the compulsion of the situation which has led to the growth of public enterprise in India.
A brief statement about the need and role of public enterprise in India is contained in the statement of former Prime Minister Indira Gandhi that we advocate a public sector for three reasons: to gain control of the commanding heights of the economy: to promote critical development in terms of social gain or strategic value rather than primarily on considerations of profit; and to provide commercial surpluses with which to finance further economic development.