The public sector and the mixed economy

Independent India chose a mixed economy: private enterprise would continue, but the state would own and run the commanding heights — heavy industry, mining, banking, insurance and infrastructure. The Industrial Policy Resolution of 1948 reserved certain industries for the state, and the 1956 resolution widened that list and divided industries into three schedules: those reserved for the state, those where the state would increasingly dominate, and the rest left to private enterprise. The idea was that private capital was too scarce and too risk-averse to build steel plants, power stations and machine-building capacity on its own.

The public sector expanded rapidly. Steel plants at Bhilai, Rourkela and Durgapur, the oil and coal companies, heavy engineering firms and, after bank nationalisation, most of commercial banking came under state ownership. Fourteen major banks were nationalised in July 1969 and six more in 1980, with the stated aims of directing credit to agriculture and small industry and breaking the concentration of banking in a few business houses. Insurance had been nationalised earlier, life insurance in 1956 and general insurance in 1972.

By the 1980s the record was mixed. Public enterprises had built industrial capacity and technical skills, but many lost money, were overstaffed and slow to innovate, and their losses were covered from the budget. The 1991 reforms cut the list of industries reserved for the public sector to a handful — atomic energy, defence and railways among them — and opened most sectors to private and foreign investment. Disinvestment, selling part of government equity, became a regular budget tool, and better-performing firms were given greater autonomy under the Navratna and Maharatna schemes.

The debate continues. Supporters of a strong public sector point to its role in remote areas, strategic industries and counter-cyclical investment; critics point to inefficiency and the fiscal cost of loss-making units. The practical question today is less about ownership in principle than about governance: which enterprises serve a public purpose, and which would do better in private hands with regulation?