Expansion of the state sector

The essentials

Independent India chose a mixed economy, in which both the public sector and the private sector operate. The state was expected to control the “commanding heights” of the economy, such as heavy industry, power, mining and transport, while the private sector worked under rules set by the government. The Industrial Policy Resolutions of 1948 and especially 1956 set out which industries would be reserved for the state.

Key points

• Large public sector steel plants were built with foreign collaboration, for example at Bhilai (with Soviet help), Rourkela and Durgapur.
• Life insurance was nationalised in 1956, creating the Life Insurance Corporation (LIC).
• In 1969, fourteen major private banks were nationalised. General insurance and the coal industry were nationalised in the early 1970s.
• The private sector needed licences to set up or expand industries; this system is often called the licence-permit system.
• Supporters argued that the state sector built industrial capacity, created jobs and helped backward regions. Critics argued that it became inefficient, that controls encouraged corruption and that the private sector was held back.
• From 1991 the New Economic Policy reduced the role of the state and opened the economy, reversing part of this approach.

Exam tips

• Remember the nationalisation sequence: life insurance (1956), banks (1969), general insurance and coal (early 1970s).
• Be ready to give arguments both for and against the large public sector.

Common mistakes

• Thinking India adopted a fully socialist economy; it was a mixed economy.
• Mixing up the year of bank nationalisation (1969) with the year of LIC (1956).