UNIT: 2

UNIT:2
PLANNING AND ECONOMIC DEVELOPMENT AND
PROBLEMS IN INDIAN ECONOMY
The British ruled the country for nearly two centuries and
exploited its resources for their benefit leaving the country
reeling under absolute poverty.

When the British left India in 1947 there were many

problems before the Indian government.

Besides mass poverty there was the problem of food

shortage and inflation, illiteracy, lack of health care, lack
of infrastructure etc. were other serious problems facing
the country.

As a long term strategy ‘Planning’ for economic

development was the answer to solve these problems.
 MEANING OF ECONOMIC PLANNING
Economic planning is a process which involves the following
steps:

i. Preparing a list of the problems facing the economy.

ii. Rearranging the list on the basis of priority. The top

priority issue which need to be addressed immediately
should be placed at number one and so on.

iii. The next step is to identify the problems which are to be

solved in the immediate short run and the other problems
which are to be addressed over the long period.
iv. Fixing a target to achieve the desired goal.

 The target could be a specified time period within which the

problem must be solved.

 Secondly the target could be a certain quantity to be achieved.

Say in case of production, the government can fix some target
in terms of quantity.

v. Estimating the amount of resources needed for achieving

the target. Resources include financial resource, human
resource, physical resource etc.
vi. Mobilizing the resources is another important task.

 This means that the planners must know the sources of

arranging the required resources.

 For example, in case of financing the plan, the planners

must make the budget and spell out the different sources of
finding.

vii. Once the resources are arranged, implementation and

execution process starts in an organize manner to achieve
the desired goal.
 ECONOMIC PLANNING IN INDIA
India adopted a system of five yearly planning to address its
various socioeconomic problems.

Adopted in 1951 ,the idea was to make a list of important

problems to be solved keeping in view the given resources
and the capacity to arrange the resources.

Then make a review after five years of what has been done
and rectify the mistakes accordingly in the next five year
plan period and so on.
Planning Commission was established in 1950.

The major function of the Planning Commission was to

formulate plans keeping in view the resources of the
country and suggesting the best methods to utilize them
effectively and in a balanced manner.

 Planning commission prepared the first five year plan

(FYP) for the period 1951-1956.

By 2014, India has already experienced more than sixty

years of planning with eleventh five year plans being
completed are twelfth FYP continuing
 OBJECTIVES OF PLANNING IN INDIA
The various objectives of economic planning in India are drawn
keeping in view its socio-economic problems. Accordingly the
objectives as follows:
1. Economic growth

2. Increase in employment

3. Reduction in inequality of income

4. Reduction in poverty

5. Modernization of the economy

6. Ensuring social justice and equality.

 1. Economic Growth
The objective of achieving economic growth implies that the
real national income and per capita income must grow every
year at a targeted rate.

In order to achieve higher standard of living for each

individual /household and the society as a whole , both per
capita income and national income must grow in real terms.

Since income represents purchasing power, increase in income

will enhance the purchasing power of people and the country
when it will increase then individuals can buy more goods and
services to satisfy their wants.
Increase in real income also means that the output level or
quantity of output is higher than before.

Here output includes output in different sectors of the

economy such as agricultural output, industrial output and
services to satisfy the needs of India’s growing population
increase in output every year has to be achieved.

To achieve higher rate of output the economy must increase

its rate of investment to create infrastructure and capital
stock.

The planners of the country set a target for growth in each

five year plan keeping in view the growth of population and
demand for goods and services etc.
 2. Increase in Employment
Employment refers to engagement of the labour force in
gainful economic activity such as production of goods and
services

Income is generated through the production process where

the production process involves employment of factors of
production provided by the households.

These factors are owned by the households of the country as

factors are scarce resources and needed to produce goods
and services, it is important for the government to create
opportunities where in they can be properly used/utilized.
The value of the output then can be distributed among the
factors as their income in the form of wage for labour, rent
to the owner of land and building, interest to the owner of
capital and profit to the entrepreneur

The country is not able to create employment opportunities

to gainfully engage the factors of production, the required
amount of output cannot be produced and hence income
cannot be generated.

Due to increase in population the number of people in the

labour force is also increasing if there is no enough scope
to get employment then they will remain unemployed and
unutilized.
 3. Reduction in Inequality of Income
India is a country with diverse economic standard of its population.
This means that in terms of income level, India lacks uniformity.

A large section of India’s population belong to lower income group

and termed as poor where as a few are very rich with very high
level of income.

Income disparity is a major concern of the social angle, women are

the worst affected in terms of income standard irrespective of their
caste or religion.

Similarly the scheduled caste and scheduled tribe population

belong to the marginalized section of Indian society as they are at
the bottom of the pyramid of development
One of the major reasons of inequality in income is the
unequal distribution of asset holding such as per capita land
holding, possession movable and immovable property from
inheritance etc.

Rich remains rich and poor remains poor in the country due
to possession and lack of private property respectively.

The poor people are not able to support the market due to
lack of purchasing power where too much purchasing power
with the rich has caused wasteful consumption to increase.

Most of the social evils are created due to inequality, hence,

our planners aimed at reducing the inequality in income
distribution through planning.
 4. Reduction in Poverty
Another major objective of planning in India is “reduction In
poverty”. At the time of independence more than 50 % of
India’s population was poor.

Poverty is a situation where in an individual is unable to

satisfy his/her basic minimum needs of life.

Poverty is termed as a curse on human dignity and it has

seriously tarnished the image of India in the world.

It requires proper planning to remove poverty completely

from the country.
 5. Modernisation of the Economy
Because of the historical reasons Indian economy could not
rise from its traditional level of functioning, it remained an
agrarian economy and industrially backward.

There was no development in new technology and

technological up gradation.

Lack of modern technology is a major reason for Indian

economy to suffer from low productivity in agriculture and
lack of industrial development
Combined with his lack of better education and skill
development of the population, the occupational structure
has also remained biased towards agriculture.

Hence, to reverse such trend it is necessary to change the

structure of GDP of India by improving the quality of
human resources and developing industries and service
sector.

This can be done by modernization of the economy.

6. Ensuring Social Justice and Equality
Indian planning also aimed at achieving a socialistic pattern
of society, it can be achieved by ensuring its population social
justice and equity.

Sufficient condition for sustaining social justice and equitable

distribution of income is to introduce reforms in various
sectors by changing the age old systems.

So the planners thought to introduce reforms in agriculture

and economic policy so that they facilitate growth and
equitable distribution of the benefits of development.
 Tenth Five-Year Plan (2002-07) of India
The National Development Council (NDC), headed by Prime
Minister Atal Behari Vajpayee, approved unanimously in
December 2002 the Tenth Five-year Plan, envisaging an 8 %
annual GDP growth.

The NDC decided to constitute four sub-committees to

remove trade and investment barriers and improve
governance.

 First to deal with governance reforms as the “best policies

and programmes can flounder on the rocks of poor
governance and implementation”;
 Second to consider all barriers to internal trade on merits
and to decide what would be the most appropriate steps that
could be taken.

 Third to look into the wide range of controls and restriction

from the past which hindered the creation of an investor-
friendly climate and work out ways to dismantle such
barriers.

 Fourth to look into problems faced in transferring functions

and resources to the Panchayati raj institutions.
The Tenth plan has come in three volumes.

The first volume, titled ‘Dimensions and Strategies: has a

broad perspective and discusses a strategy of development,
macroeconomic and economy wide issues relating to growth,
investment and employment and makes certain general
observations on institutional design, governance and
implementation methodologies.

The Second volume titled Sectorial Policies and Programmes’,

gives details to policies and programmes that are necessary to
attain the plan objectives.

A third volumes, titled ‘State Plan Concerns and Strategies’

has been introduced for the first time. It traces the development
of key sectors and spells out strategies of the plan.
 FINANCIAL OUTLAY
(i) Total outlay; Rs. 15, 92,300 Cr.
(a) Central Plan Outlay: Rs. 9, 21,291 Cr.
(b) Outlay of States and Union Territories: Rs. 6, 71,009 Cr..

(ii) Investments per year 28.4 per cent of GDP:

(a) National Savings: 26.8 (23.3 per cent during the 9th plan)
(b) Foreign resourcing (FDI): 1.6 (0.9 % in the 9th plan)

(iii) Estimated budgetary Support: Rs. 7, 06,000 Cr..

(iv) Disinvestments in PSU, expected to provide Rs. 78,000 Cr.

in five years.
 Projected Macro Economic Parameters for the 10th Plan
and the Actuals for the 9th Plan
Ninth Tenth plan % Change
Plan Projections
Actuals
GDP Growth Rate (%) p.a. 5.4 8.0 48.15
Gross investment Rate (%) of
GDP 23.9 32.6 36.29
Implicit ICOR (incremental
capital output ratio) 4.4 4.1 -7.89
Current Account Deficit (% of
GDP) -0.7 2.8 -478.38
Gross Domestic Savings (% of
GDP) “ 23.0 29.8 29.79
Inflation Rate (%) 4.9 5.0 2.46
Revenue Receipts of the Centre
(% of GDP)
9.1 10.2 12.09
Revenue expenditure of the 12.5 10.7 -14.40
Centre (% of GDP)
Revenue Deficit of the Centre
(% of GDP) 3.4 4.5 -85.29
Total Expenditure of the Centre
(% of GDP) 15.4 14.0 -9.09
Plan Expenditure of the Centre
(% of GDP) 3.9 4.5 15.38
Non plan expenditure of the
Centre 11.5 9.5 -17.39
(% of GDP)
Non-Debt Capital Receipts of
the Centre 0.8 1.2 50.00
(% of GDP)
Fiscal Deficit of the Centre
(% of GDP) 5 2.6 -48.00
 MAIN TARGETS
i. Growth rate of GDP: 7.92 % per annum (the prime minister
announced that this should be 8 %: 5.4 % achieved in the 9th
plan) Growth rate of agriculture and allied sectors: 3.97 %
(2.06 % achieved in the 9th plan)
 Manufacturing sector growth rate: 9.82 % (3.68 % achieved in
the 9th plan).
 Growth rate of export: (2.3 % per year.) (5.8 % achieved during
the 9th plan).

ii. Creating of 50 million jobs in five years 1 Cr. jobs a year.

iii. Literacy rate to increase to 75 % by 2007 (it was 65 per cent

in 2001 and 52 % in 1991)
iv. 5 % reduction of poverty target to 21 % by 2007 from the present
26%.

v. Doubling of per-capita income in 10 years from the present.

vi. Portable drinking water in all villages.

vii. Infant mortality rate to be reduced from 72 (in 1,000 births) in

1999 2000 to 45 in 2007.

viii. Increase in forest/tree cover to 25 % of land area by 2007.

ix. At least five years of schooling to all children by 2007.

x. Increasing literacy rate to 75 % from 65 %; gender gap in literacy

to be halved.
 Objective of the 10th Five Year Plan
i. The Tenth Five Year Plan proposes schooling to be
compulsory for children, by the year 2003.

ii. The mortality rate of children must be reduced to 45 per 1000

living births and 28 per 1000 living births by 2007 and 2012
respectively.

iii. All main rivers should be cleaned up between 2007 and

2012.

iv. Reducing the poverty ratio by at least five %age points, by

2007.
vi. According to the Plan, it is mandatory that all children to
complete 5 years of schooling by 2007.

vii. By 2007, there should be a decrease in gender discrimination

in the spheres of wage rate and literacy, by a minimum of 50%.

viii. Taking up of extensive Afforestation measures, by planting

more trees and enhance the forest and tree areas to 25% by 2007
and 33% by 2012.

ix. Ensuring persistent availability of pure drinking water in the

rural areas of India, even in the remote arts.

x. The alarming rate at which the Indian population is growing

must be checked and fixed to 16.2%, between a time frame of
xi. The rate of literacy must be increased by at least 75%, within
the tenure of the Tenth Five Year Plan.

xii. There should be a decrease in the Maternal Mortality Ratio

(MMR) to 2 per 1000 live births by 2007. The Plan also intended to
bring down the Maternal Mortality Ratio to 1 per 1000 live birth by
the year 2012.
 ASSESSMENT
 The primary aim of the 10th Five Year Plan is to renovate the
nation extensively, making it competent enough with some of the
fastest growing economies across the globe.

 The 7% growth in the Indian GDP is considered to be considerably

higher that the average growth rate of GDP in the world.

 Preference given to completion of existing projects than to new

projects. Identification to be done by joint team from States, central
ministries and Planning Commission.

 Privatisation/closure of non-strategic PSUs at both Centre and

States in a time-bound manner & reduction in subsidies in a time-
bound manner to provide more resources for public investment
NEW INDUSTRIAL POLICY
1991.
The industrial policy means the procedures, principles,
policies rules and regulations which control the industrial
undertaking of the country and pattern of industrialization.

It explains the approach of Government in context to the

development of industrial sector.

The industrial policy in the pre-reform period i.e. before1991

put greater emphasis on the state intervention in the field of
industrial development.
These policies have resulted into the creation of diversified
industrial structure but caused a number of inefficiencies,
distortions and rigidities in the system.

Thus during late 70’s and 80’s, Government initiated

liberalization measures in the industrial policy framework.

The drastic liberalization measures were however, carried out

in 1991.
 WHY DO WE NEED IP

To create a high-wage, high productivity, high-

innovation, high investment economy based on
diversity of ownership and enterprise type with
many different industry sectors.
 Industrial Policies Prior to 1991
Industrial Policy Resolution of 1948

Industrial Policy Resolution of 1956

Industrial Policy Resolution of 1973

Industrial Policy Resolution of 1977

Industrial Policy Resolution of 1980

The New Industrial Policy of 1991

 INDUSTRIAL POLICY 1991
 In order to accelerate Industrial Development in India, and in
accordance with the changing circumstances, various industrial
policies were declared in the years 1948, 1956, 1977, 1980 and 1985,

 But in spite of all efforts, the pace and as well as the level of
Industrial Development in India, could not reached according to its
need.

 Therefore, in order to lift unnecessary restrictions on Industries,

under the licensing policy, and to increase their efficiency,
development and technological level, in order to make Indian goods
usable in the competitive global market,

 On 24th July, 1991, in Lok-Sabha the Minister of States for

industries, Mr. P. J. Kurian declared the Industrial Policy, 1991.
 OBJECTIVES OF NEW INDUSTRIAL POLICY
To liberalise the economy

To increase employment opportunities

To encourage foreign assistance and co-partnership

To make the Public Sector more competitive

To increase the production and productivity, give

encouragement to industries

To liberate the economy from various government restrictions.

Industrial development of backward areas

To give liberty to private sector to work independently

To make development for modem competitive economy

To give encouragement for expansion of production

capacity

To increase exports and liberalize (facilitate) imports

 SALIENT FEATURES OF NEW
INDUSTRIAL POLICY
 Liberalized Industrial Licensing Policy

 Under this policy, with the exception of 18 industries,

licensing
system has been removed for all other industries.

 Some of those 18 industries, where the licensing system is

still mandatory are; Army and Defence, Forest Conservation,
Industries engaged in manufacturing goods which are harmful
to the Environment and industries, which are manufacturing
luxury goods, for the affluent (very rich) class, etc.
 Localisation Policy

 Those industries which are situated in cities, where the

population is
less than 1 million, industrial permission from the government,
to start any industry is not required.

 In cities having population of more than 1 million, with the

exception of electronics and other pollution free industries, all
industrial units may be 25 kilo meters away from the city’s
boundary.
 Foreign Investment

 Provision has been made to invest up to 51 per cent by

foreign investors in the equity shares of Indian Companies.

 Earlier, this limit was limited up to 40% only. This will

increase the flow of foreign capital into India and make
possible technical exchange from developed countries.
 Workers’ Participation in Management

 Under this industrial policy, emphasis has been laid on

safeguarding the workers’ interest.

 Provision has been made for workers’ participation in

management, in order to manage sick units, provision has
been made to form co-operative societies of workers, to run
them.
 Role of Public Sector

 Those public sector undertakings which are not doing well at

present, but in which there are enough chances of improvement,
shall
be re-constituted.

 Public sector undertakings, which are facing constant

financial crisis, shall be kept under observation by ‘Board of
Industrial and Financial Reconstruction’ or by any other
institution, which is fixed by the government.
 Change in the MRTP Act

In the industrial policy 1991, major changes have been

made in the Monopolistic and Restrictive Trade Practice
Act.

Companies having investment of Rs.100 Cr., will not be

required to take prior Government permission, for opening
new subdivisions, or to expand the present industry or for
amalgamation of companies.

This industrial policy has also eliminated the investment

limit, which was fixed by MRTP Act.
 Creation of Productive Capacity

 In order to increase the productive capacity of new

industries, all administrative controls have been removed.

 Industrialists will only have to inform the government of

opening of new units or increasing their production capacity.
 Foreign Technology

 No prior permission from government will be required in

importing foreign technology, up to the limit of One Cr.
rupees.

 Indian companies, will be free to negotiate their terms and

conditions, with their foreign collaborators, in matters of
technology transfers (exchange of ‘technical know-how).
 Promotion of Industries in Rural Areas

 In order to remove the regional imbalances, under this

industrial policy, various provisions have been made to
encourage industries in rural areas.

 Reservation of Small Scale Industries

 This policy has stated that the government shall keep giving
assistance to small scale industries. The limit for small scale
industries has been reduced from Rs 3 Cr. to Rs. 1 Cr., since
24 December, 1999.
 Impact Of Industrial Policy, 1991
The all-round changes introduced in the industrial policy
framework have given a new direction to the future
industrialization of the country.

Industrial growth was 1.7 per cent in 1991-92 that has

increased to 9.2 per cent in 2007-08.

The industrial structure is much more balanced.

The impact of industrial reforms is reflected in multiple

increases in investment envisaged, both domestic and
foreign. This is due to encouraging response from the private
sector.
There has been dramatic increase in FDI since 1991. The
foreign investment as a percentage of total GDP has
increased from 0.5 percent in 1990-91 to 5.7 percent in 2006.

Investments in infrastructure sector such as power generation

have surged from players of various sizes in different states.

The capital goods have grown at an accelerated pace, over a

high base attained in the previous years, which augurs well
for the required industrial capacity addition.
 CONCLUSION

The Government policies and procedures in the pre-1991

period aimed at industrial development of the country.

IDR Act, procedures laid down for obtaining industrial

licensing and various rules acted as a great deterrent to the
growth of industries in the country.

The bureaucracy acquired unprecedented powers and

authority over all kinds of industrial activities.
NIP encouraged foreign investment in the economy and
opened it to greater domestic and international competition.

The NIP announced in July 1991, unshackle the industries

from the cobweb of bureaucratic control to allow it to
achieve international competitiveness.
DISINVESTMENT OF PUBLIC
SECTOR ENTERPRISES
After independence when economic planning was introduced
India adopted the mixed economic system.

The main feature of the mixed economic system is the co-

existence of public sector and private sector.

Objectives was building infrastructure for economic

development to generating investable resources for development
by earning suitable returns.

Public sector enterprises are now spread over from coal, steel
and oil at one end to hotel and bread making at the other.

It was earlier thought that by the progressive expansion of the

public sector, the country would be able to move towards the
socialistic pattern of society which was sought to be achieved as a
 Definition of “Disinvestment”
The term “Disinvestment‟ is the opposite of the term
“Investment‟.

Investment is acquisition of earning asset with the help of

money. For example if bonds are purchased or shares of
companies are purchased by spending money it is known as
investment.

In the case of investment money is converted into earning asset

to earn income.

On the other hand in the case of disinvestment an earning

asset is converted into liquid cash.
By disinvestment we mean the sale of shares of public
sector undertakings by the government, the shares of
government companies held by the government are
earning assets at the disposal of the government and if
these shares are sold to get cash, then earning assets are
converted into cash so, it is referred to as disinvestment
 OBJECTIVES OF DISINVESTMENT
The new economic policy initiated in July 1991 clearly
indicated that PSUs had shown a very negative rate of return
on capital employed.

Inefficient PSUs had become and were continuing to be a

drag on the Government’s resources turning to be more of
liabilities to the Government than being assets.

The national gross domestic product and gross national

savings were also getting adversely affected by low returns
from PSU’s about 10 to 15 % of the total gross domestic
savings were getting reduced on account of low savings
from PSUs
Government adopted the 'Disinvestment Policy‘ and was identified
as an active tool to reduce the burden of financing the PSUs.
The following main objectives of disinvestment were outlined:

 To reduce the financial burden on the Government

 To improve public finances

 To introduce, competition and market discipline

 To fund growth

 To encourage wider share of ownership

 To depoliticise non-essential services

 IMPORTANCE OF DISINVESTMENT
The importance of disinvestment lies in utilisation of funds for:

Financing the increasing fiscal deficit

Financing large-scale infrastructure development

For investing in the economy to encourage spending

For retiring Government debt-almost 40-45% of the Centre’s

revenue receipts go towards public debt/interest

For social programs like health and education

DIFFERENCE BETWEEN DISINVESTMENT
AND PRIVATIZATION
Privatization implies a change in ownership resulting in a
change in management.

But disinvestment need not always imply change in

management. Disinvestment is dilution of the stake of the
government in a public enterprise.

If the dilution is less than 50% the government retains

management even though disinvestment takes place it is not
privatized.

But if the dilution is more than 50 % there is transfer of

ownership and management. It will be called privatization.
Disinvestment is wider than privatization.

Privatization implies disinvestment but disinvestment does

not necessarily imply privatization.

Only when disinvestment goes beyond 51% it implies

privatization.

The extent of dilution of the government`s stake is

determined as part of the policy of disinvestment.
 CHANGE IN GOVERNMENT POLICY
TOWARDS PUBLIC SECTOR
Radical change in government`s policy towards the public
sector in 1991 when the new industrial policy was adopted.

Only eight industries have been reserved for the public

sector. These eight industries include defence production,
atomic energy, coal and lignite, mineral oils, iron ore,
manganese, gold and diamond, atomic minerals and
railways.

In the new policy it has been stated that the government
will run the public sector on sound commercial principles.
 Chronically sick public sector units will be referred to Board for
Industrial and Financial Re-construction (BIFR) for examining their
viability and the unviable public sector units will be closed down.

 Another feature of the new policy on public sector is disinvestment of

some selected public sector units.

 It has been decided that 20% of the shares of selected profit making
public sector units will be sold to financial institutions, mutual funds
etc.

 These institutions will hold the shares for a specified period of time
after which they will be permitted to sell the shares in the share market.

 In the new policy it is also stated that the government will provide
more autonomy to public sector units and government will not interfere
in the day to day functioning of the public sector units
 PERFORMANCE OF PUBLIC SECTOR
Financial performance of public sector units is mixed in
2001-02, 119 profit making enterprises earned a total net
profit of about Rs. 36432 Cr. and 109 loss making units
incurred a loss of Rs. 10387 Cr.

Major part of the profits was contributed by the petroleum

sector enterprises ,the share of the petroleum sector was 49%
(2001-02)

PSU’s cannot be judged by its financial performance because

such enterprises are not always guided by the profit motive
rather they are guided by broader socio-economic
considerations.
 Apart from financial performance one can judge the public sector
enterprises in terms of technical efficiency, allocative efficiency
and dynamic efficiency.

 Technical efficiency is related to input- output ratio or

productivity of inputs.

 Allocative efficiency is related to the correction of market

failure leading to better allocation of resources than what
will be decided by the price mechanism.

 Dynamic efficiency relates to innovations and technological

development.

 Even in relation to these criteria, the results in relation to public

enterprises are mixed.
Disinvestment of Public Sector Enterprises in India
For the year 2001-2002, the Government set the target of Rs.
12, 000 Cr. regarding public sector disinvestment, but equity
worth Rs. 5,632 Cr. was sold to the private sector.

100 % equity of Modem Food (a non-strategic public sector

undertaking) has been sold to Hindustan Lever.

51% of Government equity holding of BALCO (Bharat

Aluminium Company Ltd.) has been sold to private sector firm
Sterlite Industries at 826.5Cr. rupees
This table also gives which private company has purchased the
equity of Government and at what price and what % of Govt.
equity sold and the money received from its sale:
 Disinvestment Process and Valuation
Disinvestment of public enterprises can be made in a
number of ways:
1. The entire public enterprise can be sold to a private
sector
 Firm which is the highest bidder or otherwise

 In this case both the ownership and control or management is

transferred to the private firm.

Example: when ‘Modem Food’, a public company, was sold to

Hindustan Lever and Centaur Hotel in Bombay was sold to a
private company.
2. Selling a part of the Government stake to a strategic
private company.

 A strategic company is one which has a strategic interest in

the public enterprise and has a capability to run it efficiently.

 The strategic buyer can be chosen by inviting tenders from

the private companies.

3. Government can offer for sale its shares of a public

enterprise to the general public through the stock-
market intermediaries.
4. Sale of a certain number of Government shares in a
public enterprise can be made through auction of
shares among a selected number of private firms.

 The reserve price of shares of a company for auction can

be determined with the help of merchant bankers.
The main elements of Government policy towards Public
Sector Enterprises (PSU) are:

1. Disinvestment of Government equity in all non-strategic

Public Sector Undertakings (PSU) to 26% or lower if necessary.

2. Those public sector enterprises which are potentially viable

have to be restructured and revived.

3. Those Public Sector Undertakings (PSU) which cannot be

revived would be closed down.

There is a need for evolving a fair, transparent and equitable

procedure for disinvestment in selected public sector enterprises.
 ARGUMENTS AGAINST DISINVESTMENT AND
PRIVATISATION

1. Disinvestment of public enterprises is criticised by left-

oriented economists on the ground that it amounts to selling
‘family silver’.

2. It will lead to the emergence of private monopolies under

which resources are misallocated.

 As a result, consumer welfare will be reduced.

 Besides, adoption of monopolistic practices will lead to higher

prices and lower levels of output and employment.
3. It is argued that mere change of ownership, from public to
private, does not ensure higher efficiency and productivity
of industrial enterprises.

 In the modern corporate form of business organisation,

management has been separated from ownership.

 In case of both public and private enterprises professional

managers can be employed to manage the industrial enterprises
to ensure efficiency in working.

 Thus, it is argued that for professionalization of management,

privatisation of public enterprises is not needed.
4. It will lead to the concentration of economic power in a
few private hands.

 This economic power can be used to exploit the consumers

on the one hand and workers on the other.

 Further, greater concentration of economic power in private

hands will also lead to increase in inequalities of income
and wealth.

 Thus, disinvestment and privatisation is a negation of the

objective of promoting equality.
5. It will lead to retrenchment of workers who will be
deprived of the means of their livelihood.
 Further, private sector, governed as they are by profit motive, has a
tendency to use capital-intensive techniques in production.

 This will not lead to generation of many employment

opportunities. As a result, unemployment problem in India will
worsen.

6. It is no solution for loss-making sick public sector

undertakings.
 It is pointed out that about 50% of loss-making public enterprises,
especially in the field of textiles,

 These sick units which were taken over by the Government from
the private sector to protect the jobs and interests of the workers.
7. It is argued that public enterprises should not be privatized
because, though they may not be yielding enough profits,
they are socially profitable

 They have made important contribution to build up a strong

base for industrial development of the country.

 For the growth of public enterprises in the industries such

as machine making, heavy chemicals, fertilizers, steel and
power, and communication, these industries would not have
been developed as has been actually the case.
THE END
 ASSINGNMENT
Q1: What do you mean by economic planning ? Explain its
relevance and objectives in India.

Q2: What are the major highlights of tenth five year plan(2002-07) ?

Q3: What changes “The New Industrial policy 1991” brought in

India ?

Q4: What do you mean by term “ Disinvestment”, why it is done

and what are its importance.

Q5: How the government policy changes towards public sector?

especially after new industrial policy
(Write answer in your own words )