Understanding the Public Sector Function

Introduction and Meaning

The industrial policy of the Government of India aims to establish a socialist society and promote industrial development. To achieve this, the policy emphasizes the expansion of the public sector, which includes enterprises owned and controlled by the state and managed by the government.

According to S.S. Khera, “Public enterprises are industrial, commercial, and economic activities carried on by the central government, state government, or jointly by both.” These enterprises are fully owned and managed by the government, aiming not only to earn profit but also to enhance social welfare.

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The 1956 industrial policy reserved 17 industries exclusively for the public sector, barring private sector entry. This number was reduced to 8 in the 1991 policy, and currently, only 2 industries—nuclear energy and railways—are reserved for the public sector.

Objectives of Public Sector

• 1) Increasing Capital Formation: Capital formation involves investing a nation’s savings in productive activities. Underdeveloped countries often lack sufficient savings, which hinders capital formation and slows economic development. To stimulate the economy, the government establishes industries that boost production, support other industries, increase savings, and encourage investment.
• 2) Establishing Heavy Industries: Heavy and basic industries require substantial capital and resources, which private industrialists often cannot provide. Thus, the government takes the lead in developing these essential industries.
• 3) Promoting Economic Equality: To prevent the concentration of economic power in a few hands, it is essential for the state to control major enterprises. This helps achieve the goal of economic equality.
• 4) Preventing Monopolies: Public enterprises are crucial in curbing the monopolistic tendencies of the private sector, which might otherwise charge excessive prices from consumers.
• 5) Performing Welfare Activities: To meet the increasing needs of a welfare state, the government must actively participate in industry, trade, and business.
• 6) Setting Up Defense Industries: For national security, it is vital to develop defense-related industries within the public sector, as these cannot be left to private entrepreneurs.
• 7) Promoting Regional Equality: Industrial development in India shows significant regional disparities. States like Maharashtra, Gujarat, Tamil Nadu, and Karnataka are highly industrialized, whereas Bihar, Odisha, Jharkhand, and Rajasthan lag behind. Developing public industries in these backward states helps achieve regional equality.

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Role of Public Sector

Public sector industries play a crucial role in the economic development of a country. The significance of the public sector in the Indian economy is highlighted by the following points:

• 1) Capital Formation: Capital formation is essential for the economic development of underdeveloped countries. With low savings rates, these countries struggle to accumulate capital. By investing in the public sector, the government can boost capital formation and invest it productively in the economy.
• 2) Contribution to GDP: The public sector’s contribution to India’s GDP has been steadily increasing, from 10% in 1960-61 to 20.4% in 2012-13, reflecting its growing economic importance.
• 3) Basic Industries: The establishment of heavy and basic industries such as iron-steel factories, heavy machinery, fertilizers, and nuclear energy plants is largely attributed to the public sector, which has significantly contributed to the development of these essential industries.
• 4) Infrastructure Development: Infrastructure, including transport, communication, electricity, and basic industries, is critical for economic growth. The government has invested heavily in these areas since independence, as these are public benefits that require substantial capital and are not primarily profit-driven.
• 5) Import Substitution: To balance trade, it is vital to replace imported goods with domestically produced items. Public sector industries have played a key role in import substitution, producing goods like medicines, petrol, watches, and railway equipment, saving substantial foreign exchange.
• 6) Export Promotion: Public sector enterprises have enhanced the country’s exports, with significant contributions from products like railway engines, steel, and machinery. In 2019-20, exports worth ₹1,21,756 crore were achieved through public sector efforts.
• 7) Reducing Regional Disparities: Public sector industries help reduce regional disparities by setting up industries in backward areas, promoting balanced industrial development across states.
• 8) Establishing a Socialist Society: The industrial policy of India aims to establish a socialist society, reducing wealth inequality. Public sector enterprises support this goal by ensuring capital formation without centralizing wealth, selling goods at lower prices, and increasing salaries for low-income employees.
• 9) Resources for Economic Development: Public sector profits are reinvested into the economy, funding infrastructure and other developmental projects. In 2018-19, public sector enterprises generated a net profit of ₹1,42,966 crore, contributing significantly to economic development. In 2019-20, despite a decrease in profits to ₹93,295 crore, public sector undertakings contributed ₹3,76,425 crore to the government through taxes and other payments.
• 10) Employment Promotion: The public sector is a major employment provider, with 176.1 lakh people employed in March 2012. Public sector jobs account for 59.5% of total organized sector employment in India.
• 11) Growth of Ancillary Industrial Units: Public enterprises foster the growth of ancillary industries, providing employment and supporting the broader industrial ecosystem through the production of intermediate goods.

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Conclusion

The public sector plays an indispensable role in fostering economic development, reducing regional disparities, and promoting social equity. By driving capital formation, developing infrastructure, and ensuring essential services, public sector enterprises support the nation’s growth and stability. Their contributions to GDP, import substitution, and export promotion are vital for self-reliance and economic resilience. Moreover, by providing significant employment opportunities and supporting ancillary industries, the public sector ensures inclusive growth. Understanding these functions highlights the critical importance of public sector industries in achieving sustainable and equitable economic progress.

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FAQ on Understanding the Public Sector’s Function

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