Geography Reference
In-Depth Information
Chandra Baba Naidu, who has traveled abroad and courted foreign
businesspeople in India to sell his state's investment potential.
Despite all of the undoubted reform momentum of the 1990s, several areas
have been largely untouched. These include agriculture and land reform, labour
reform, the elimination of the still substantial barriers to an internal market, and
public sector reform and privatization. The latter two in particular have proven to
be especially susceptible to political derailing. I address these issues in the
remainder of the essay, by discussing first the rise of public enterprise before
turning to the recent attempts to shrink the public sector.
THE PUBLIC SECTOR AND PRIVATIZATION
Expansion of the Indian Public Sector
The Indian public sector dates back to the days just after independence in 1947.
Like Nehru, the majority of Indian leaders were committed from the start to a
socialist plan of development and industrialization. In some developing countries
there was a sense among leaders that the state was intervening on a temporary
basis to protect infant industries, and forming enterprises that would later be
turned over to the private sector. In contrast, state-owned enterprises (SOEs) in
India were considered viable long-term operations.
The Industrial Policy Resolution of 1948 reserved the manufacture of arms,
production of atomic energy, and railway networks for state monopoly, and further
identified six basic industries (iron and steel, coal, aircraft manufacture,
shipbuilding, mineral oils, and telecommunications) that would be developed by
the state. All other sectors were left open to private development.
The Industrial Policy Resolution of 1956 further extended the purview of the
public sector and subdivided all sectors into three categories. Seventeen sectors
were to be reserved for the public domain, 12 would be occupied by both public
and private enterprises, and a third category of industrial activity was considered
to be solely the domain of the private sector. Initially, the first and second
categories were primarily composed of basic and heavy industries.
The Indian government gave five principal justifications for the creation and
expansion of public sector enterprise.
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First, at the time of the First Five Year
Plan, there was a global consensus that spanned the divide between developed
and developing countries in favor of state enterprises as a means of achieving
economic growth. Second, there was a dearth of capital available in the market to
finance large new enterprises. The government was able to maintain high tax
rates and engage in deficit spending to marshal the necessary capital to invest in
new enterprises. Third, the Indian government used the public sector to protect
labour in the private sector, largely by establishing a policy of absorbing 'sick'
