Class XI
Economics
Indian Economic Development
Chapter – 4
Q1. Why was public
sector given a leading role in industrial development during the planning
period?
Answer :
At the time of
independence, Indian economic conditions were very poor and weak. There were
neither sufficient foreign reserve nor did India have international investment
credibility. In the facet of such poor economic condition, it was only the
public sectors that need to take the initiative. The following are the reasons
that explains the driving role of the public sector in the industrial
development:
1. Need of Heavy
Investment: There was a need of heavy investment for industrial
development. It was very difficult for the private sector to invest such a big
amount. Further, the risks involved in these projects were also very high and
also these projects had long gestation period. Thus, the government played the
leading role to provide the basic framework of heavy industries.
2. Low Level of
Demand:
At the time of independence, the majority of population was poor and had low
level of income. Consequently, there was low level of demand and so there was
no impetus for any private sector to undertake investment in order to fulfill
these demands. Thus, India was trapped into a vicious circle of low demand. The
only way to encourage demand was by public sector investments.
3. Socialist Pattern
of the Society: The govt. realized that the objective of growth with equity
could be achieved only through direct participation by the State in the process
of industrialization because only state can target maximization social welfare
rather than maximization of profits only.
Q2. Though public sector
is very essential for industries, many public sector undertakings incur huge
losses and are a drain on the economy's resources. Discuss the usefulness of
public sector undertakings in the light of this fact.
Answer :
Although, the
mismanagement and wrong planning in PSUs may lead to misallocation and,
consequently, to wastage of the scarce resources and finance but PSUs do have
some positive and useful advantages.
1. Enhancing
Nation's Welfare: The main motive of the PSU was to provide goods and
services that add to the welfare of the country as a whole. For example,
schools, hospitals, electricity, etc. These services not only enhance welfare
of country's population but also enhance the future prospects of economic
growth and development.
2. Long Gestation
Projects: It was not feasible and economically viable for the private
sectors to invest in the big and wide projects like basic industries and
electricity, railways, roads, etc. This is because these projects need a very
huge initial investment and have long gestation period. Hence, PSU is the most
appropriate to invest in these projects.
3. Basic Framework:
An important ideology that was inherited in the initial five year plans was
that the public sector should lay down the basic framework for industrialization
that would encourage the private sector at the latter stage of industrialization.
4. Socialist Track:
In the initial years after independence, Indian planners and thinkers were more
inclined towards socialist pattern. It was justified on the rational ground
that if the government controls the productive resources and production, then
it won't mislead the country's economic growth. This was the basic rationale to
set up PSUs. These PSUs produce goods not according to the price signals but
according to the social needs and economic welfare growth of the country.
5. Reduce
Inequality of Income and Generate Employment Opportunities: It was
assumed that in order to reduce inequalities of income, generate employment
opportunities, eradicate poverty and to raise the standard of living,
government sector should invest in the economy via PSUs.
Q3. Explain how import
substitution can protect domestic industry.
Answer :
In the initial seven
five year plans, India opted for import substitution strategy which implies
discouraging the imports of those goods that could be produced domestically.
Import Substitution Strategy not only reduces an economy’s dependence on the
foreign goods but also provides impetus to the domestic firms.
Government provides
various financial encouragements, incentives, licenses to the domestic
producers to produce domestically the import substituted goods. This would not
only allow the domestic producers to sustain but also enables them to grow as
they enjoy the protective environment.
They need not to fear
from any competition and also not to worry about their market share as license
gives them the monopoly status in the domestic market. Being monopolist, they
earn more profits and invest continuously in R&D and always look for new
and innovative techniques. This gradually improves their competitiveness and
when they are exposed to the international market they can survive and compete
with their foreign counterparts.
Q4. Why and how was
private sector regulated under the IPR 1956?
Answer :
IPR 1956 was adopted in
order to accomplish the aim of state controlling the commanding heights of economy.
This policy was aligned with the Indian economy’s inclination towards socialist
pattern of system of Soviet Union.
Principal elements of
IPR – 1956 are as follows :-
1.
Three-fold Classification of Industries: According to this
resolution, industries were classified into following three categories:
Category 1: Those industries that are established and owned exclusively by
the public sector.
Category 2: Those industries in which public sector will perform the
primary role while the private sector will play the secondary role. That is,
the private sector supplements the public sector in these industries.
Category 3: Those industries that are not included in Category 1 and
Category 2 are left to the private sector.
2.
Industrial Licensing: These industries that were left to the
private sector, the government owns an indirect control by the way of license.
In order to initiate a new industry, private entrepreneurs should obtain
license (or permit) from the government.
Further, in order to expand the scale of
production, private sector needs to obtain license from government. This was
supposed to keep a check on the production of goods that are socially
undesirable and unwanted.
3.
Industrial Concessions: By licensing system, tax holidays and subsidies
government can promote industries in a backward region that will ,in turn,
promote the welfare and development of that region. This was supposed to reduce
regional disparities.
Hence, the state fully
controlled the private sector either directly or indirectly.
Q5. To promote equity in
the economy, explain how protection to Small Scale Industries (SSI) was
provided in the industrial policy pursued up to 1990 in India.
Answer:
Small Scale Industries
(SSI) is presently defined as one whose investment does not exceed Rs. 5 cr. The features of SSI are
as follows :-
1.
SSI is Labour-intensive and therefore Employment Friendly:
SSI is generally considered to be labour-intensive i.e. uses
more labour than capital to generate output. Thus, in a labour-surplus country
like India, SSI are viewed as tool to achieve the goal of employment
generation.
2.
SSI leads to inter-regional equality:
As raw material requirement of large-scale industries is huge,
therefore these are setup close to the source of raw material like Bhilai
Steels or Rourkela Steels to avoid huge transport cost. On the other hand, SSI
can be established at distinct places, thereby contributing to growth in all
regions.
3.
SSI leads to inter-personal equality:
SSI needs smaller investment as compared to large-scale
industry. Thus, it does not cause concentration of economic power in fewer rich
hands. As a result, SSI promotes equity in the economy.
(Note- Read
the chapter thoroughly and prepare following also:
Q.6. What were the good & bad effects of strategy of
Industrial growth pursued during period 1950-1990.
Q.7. Highlight the points of importance of Industrial development
in an economy.)
