Indira Gandhi

National Open University MS-3

School of Management Studies Economic and
Social Environment

Block

2
STRUCTURE OF INDIAN ECONOMY
UNIT 4
Structural Dimensions of Indian Economy 5
UNIT 5
Structure of Indian Industry 37
UNIT 6
Public Sector in India 50
UNIT 7
Private Sector in India 72
UNIT 8
Small Scale Industry in India 85
UNIT 9
Sickness in Indian Industry 103

1
Structure of Indian
Economy

2
BLOCK 2 STRUCTURE OF INDIAN
ECONOMY
In Block 1, we had discussed the Economic and Social Environment of
Business. We had also examined the changing role of the Government.
In this block we discuss the structure of the Indian Economy and its
ramifications.

This Block consists of Six Units.

Unit 4 Structural Dimensions of Indian Economy begins by explaining the

distinction between economic growth and economic development. The unit then
discusses India’s growth experience. The basic structural changes in the Indian
economy are reviewed. The trends in India’s savings and investment, and in the
monetary and price spheres are examined. The unit concludes with a brief
description about other structural dimensions and demographic trends.

Unit 5 Structure of Indian Industry presents an overview of India’s

industrial growth experience. The structural changes and ownership patterns of
Indian industry are discussed.

Unit 6 deals with Public Sector in India. The objectives, structure, growth,
working and performance of public sector are discussed and issues are
examined.

Unit 7 focuses on Private Sector in India. The nature, scope, growth,

problems and prospects of private sector in India are discussed and issues are
examined.

Unit 8 deals with Small scale Industry in India. Small Scale Industry has
always occupied an important place in India’s economic development. The unit
presents some basic definitions and data about the structure of small scale
industry. The industrial policies and programmes, institutional infrastructure,
growth, problems and prospects in relation to small scale industry are discussed.

Unit 9 deals with Sickness in Indian Industry. The various factors

responsible for sickness of Indian industry are examined and assessed. What
measures can be taken to tackle the problem of industrial sickness are also
discussed.

3
Structure of Indian
Economy

4
UNIT 4 STRUCTURAL DIMENSIONS OF
INDIAN ECONOMY
Objectives
The main purpose of this unit is to help you to:
understand the significance of economic growth and economic development
analyse India’s economic growth experience
discover and explain structural changes in the Indian economy, and
understand the current economic situation in India.

Structure
4.1 Introduction
4.2 Economic Growth and Development
4.3 Indian Economic Growth Experience
4.4 Basic Structural Changes in the Economy
4.5 India’s Saving and Investment : Trends and Components
4.6 India’s Monetary and Price Trends
4.7 Other Structural Dimensions
4.8 Demographic Trends and Structure
4.9 Summary
4.10 Key Words
4.11 Self Assessment Questions
4.12 Further Readings

4.1 INTRODUCTION
The socio-economic environment of any country can be explained in terms of
an institutional framework and a physical framework, the economic policy
statements of the government, economic plan documents, the political
constitution, economic regulations and controls, among others which define the
role and status of private sector, public sector, multinationals, corporations, small
business, etc. The critical elements which constitute the institutional framework
of an economic environment. The trends in economic variables such as income,
price, output, investment, foreign trade, labour supply and other factor
endowments and the structural relation among these variables constitute the
physical framework of an economic environment.

Describing and analysing the economic environment is a difficult task.

Discretion and personal judgement play an important part. Difficulties arise in
the context of both institutional and physical framework. Just as various
interpretations of policy statements are possible various conclusions could also
be drawn from the economic data.

The purpose of gathering (mainly from official sources) and analysing data is to
obtain a clear picture of major economic trends and structural changes in the
economy. The trends and structural coefficients together enable us to make a
quantitative assessment of the economic environnment of a business/firm and
thereby to outline strategies for macroeconomic management. A knowledge of
economic trends and structural changes thus helps the firm to plan out a
corporate strategy and policy to cope with short-run and long-run challenges of
business environment. This argument is particularly valid for a developing
country. 5
Structure of Indian This unit attempts to present the relevant economic trends, and discuss the
Economy
structural changes. It then examines the implications of growth and structural
changes that have occurrred. It also analyses the current economic trends, and
discusses the impact of environment on business management.

In this unit, you may have to refer to additional statistical materials time and
again. Of course, you are not expected to remember the details of all such
data. You should only take note of such trends which are useful to the analysis
of the system-environment of your own business.

4.2 ECONOMIC GROWTH AND DEVELOPMENT

“Growth” and “development” are sometimes used synonymously in economic
discussion. Though the two terms are used interchangeably, they have different
connotations. Economic growth means more output, while economic
development implies both more output and changes in the technical and
institutional arrangements by which it is produced and distributed.

Growth may well involve not only more output derived from greater amounts of
inputs but also greater efficiency, that is, an increase in productivity or an
increase in output per unit of input. Development goes beyond this to imply
changes in the composition of output and in the allocation of inputs by sectors.
As with human beings, to stress “growth” involves focussing on height or
weight (or national income), while to emphasize development draws attention to
changes in functional capacities — in physical coordination, for example, or
learning capacity (or ability of the economy to adapt).

Economic Growth
Economic growth may be defined as a significant and sustained rise in per
capita real income. One must distinguish the “level” from the rate of economic
growth, though these two concepts are obviously related. The level of economic
growth of a country is measured by the size of national (or per capita) real
income. The percentage change in this level over a year is the annual rate of
growth. That is, if we denote the levels of real income in two years Y1 and Y2
and g as the rate of growth (expressed in percentage terms), then per capita
Y 2 − Y1
g= × 100
Y1
real income is supposed to be the least imperfect measure of economic growth
of a country. It takes into account changes in national income, population and
price level. In this connection the following relationships are very useful:
Real national income = National income at current prices/General price
index In symbols.
Y = (Y/P) x 100

Real national income

Per capita real income = population

In symbols
y
yp =
N
Real income growth rate = Growth rate of national income at current
prices — Inflation rate
In symbols
y=Y–P

6 Bar over a symbol signifies rate of growth of that variable

 Per capita real income growth rate = real income growth rate – population Structural Dimensions
of Indian Economy
growth rate
In symbols
yp = Y − N

Inter-temporal (over a period of time) and international (over space)

comparisons of economic growth can be made. For the first (for example a
country’s growth experience over a period of time), we use time-series data.
For the second we use cross-section data relating to different countries.

When you are interested in comparison of levels of living, the per capita
income measure is to be supplemented by a few other measures like per capita
consumption of essential goods and services, per capita production, and
availability of certain items (for example electricity per capita), etc.

Labour productivity (output per worker) may be considered as an index of

growth and standard of living. If we denote real national income by y,
population by n, working force by w, then we can rewrite real per capita
income yp as

y W y
yp = = ×
N N W

This definition suggests that the level of per capita real income (yp) is the
product of ‘labour force participation rate’ (W/N) and real income per worker.
From the above equation it is obvious that given the labour force participation
rate (W/N), the change in labour productivity (Y/W) reflects the growth trend in
per capita income. An increase in labour productivity suggests economic
growth, a decline in labour productivity suggests economic deterioration, and a
constancy of labour productivity signifies stagnation of the economy.

The labour productivity measure of economic growth is of crucial significance

for management in developing economies. In capital-scarce developing countries
there is undoubtedly a need for optimum utilisation of plant and machinery.
The preceding argument suggests that there is perhaps a more urgent need for
efficient and optimum utilisation of labour in a developing country which is
labour-abundant.

The task of management in this context is to maintain an industrial relations

climate such that labour productivity can register rapid improvement. Thus
‘productivity movement’ or ‘productivity revolution’ is a key to improvement in
the economic environment of developing countries.

Economic Development
‘Economic development’ is a broader concept than ‘economic growth’. As and
when the economies grow in terms of national and per capita income levels,
certain structural changes accompany the process of growth. Conceptually, the
trends in income and the structural changes together constitute economic
development.

The structural changes which are quite fundamental in character are inherent in
the process of economic growth. The upward trend in per capita real income
(that is, economic growth) implies, given the labour force participation rate, a
rise in product per worker or labour productivity. An increase in labour
productivity cannot result without capital accumulation and fundamental changes
in the production function (functional relationship between flows of output and
7
Structure of Indian corresponding flows of inputs) of the economy. A progressive shifts in the
Economy
production function is the direct outcome of technological advancement, and
science is the base of modern technology.

As science and technology advance, innovations (new products, new production

processes and methods, new markets etc.) take place; inventions result and get
spread. Such process of growth (scientific progress, invention and innovation)
cannot be economically sustained for long unless it increases the productivity of
labour. The increase in the flow of material goods and service must also be
absorbed, otherwise the process of growth gets obstructed by market limitation.
In other words, the changes in production structure must be synchronised and
balanced with the changes in the consumption structure. The structure of
society’s wants and preferences (in short, structure of demand) must change in
such a way as to induce or assist changes in production and productivity and
thereby to accommodate the changes in science and technology. Similarly, the
progressive development through science and technology cannot come about
unless the society manages to generate capital formation (through savings and
investments) and to finance research and development of science. (The present
day developing countries can supplement their scientific research efforts with
science and technology transfer from more developed countries). Thus we find
that during the process of economic growth, an economy experiences manifold
changes in its structure: social, political and economic. For an understanding of
the changing economic environment in a developing country, we may examine
specifically the nature of some of the structural changes which are economic in
character.

Structure of National Output

Studies of economic development of many present day “more developed
countries” (a phrase suggested by Everett E. Hagen) like the U.S.A., the
United Kingdom, and Japan suggest that a change in the structure of national
output is a concomitant feature of economic growth. As an economy grows, on
the one hand the level of national income increases, and on the other,
composition of national income changes. The percentage contribution of
agriculture to gross domestic product declines and the contribution of industry
and services to gross domestic product increases. This reflects positive income
elasticity of deamnd for non-agricultural output. This means that a given
percentage increase in the income will result in higher percentage increase in
demand for non-agricultural output. As the ratio of non-agricultural to
agricultural output increases during the period of economic growth, labour
productivity increases in both agricultural and non-agricultural sectors. The rate
of growth of non-agricultural output is observed to be faster than that of non-
agricultural employment and therefore, the labour productivity (output per
worker), in mining, manufacturing and services registers improvement during the
process of economic growth.

Structure of Employment
Economic growth is also associated with a chane in the structure of
employment of people. It is generally accepted that one of the structural
changes that occur in the course of economic growth is a progressive shift of
labour from agriculture and allied activities to secondary and tertiary sectors.
Studies based on historical data of the industrialised economies of the West
have amply demonstrated the validity of this Fisher-Clark thesis. The shift in
occupational pattern runs parallel to the shift in output pattern because the
same factor — positive income elasticity of demand for non-primary goods and
services — underlies the process of economic growth.

8
Structure of Investment and Capital Formation Structural Dimensions
of Indian Economy
A change in the structure of investment and capital formation is another
development during the process of economic growth and development. With
industrialisation and consequent urbanisation, the structure of industries changes.
Capital and producer goods industries grow in importance, and comsumer goods
industries decline in relative importance. In developing countries (particularly
those with planning) in the initial stage of development, resources are
deliberately shifted from consumption goods to capital goods. Thus the
investment structure changes. The investment in human capital (education and
health) and in social overhead capital (like irrigation, transport, etc.) increases
very rapidly in the early stage of development when the infrastructure of
development is laid stronlgy. Similalry, in the early stage of development, the
dependence on foreign capital (aid, loans and grants) and foreign technology
may also be very high. This means that the ratio of gross (and net) domestic
capital formation to gross (and net) national capital formation is affected. The
point is that different capital formation proportions reflect the nature and tempo
of economic growth.

While on the subject of capital formation, we may refer to an important

determinant of the rate of economic growth. This determinant is the capital-
output ratio. We distinguish average capital-output ratio from marginal or
incremental capital output ratio. Incremental Capital-Output Ratio (ICOR) is the
additional capital required to increase output by one more unit. The following is
the basic economic growth rate (g) equation.
Rate of investment
g=
ICOR

In the above equation g is growth rate and ICOR is Incremental Capital-Output

Ratio. In macro-economic planning process as well as micro-level management
decisions, this ratio proves very useful. Consider, for example, the macro-
economic planning process. If a planning agency wants to achieve an annual
growth rate of 5% (growth rate of national income) and if the incremental
capital output ratio is 4, then what should be the annual rate of investment?
The above equation helps us in answering the question.
Rate of investment
g=
ICOR

In our above example, g = 5% and ICOR = 4.

Rate of investment Rate of investment
5% = =
ICOR 4

Rearranging terms we get

Rate of investment = 5% x 4 = 20%

Changes in the capital-output ratio is a dimension of economic growth and

development process.

Structure of Consumption
The upward trend in per capita income (economic growth in short) which
initiates and accelerates changes in production, employment, factor proportion,
skill and capital formation directly brings about a change in the structure of
consumption. As income changes, the pattern of income distribution (between
regions, between sectors and between persons) also changes. This is backed up
by changes in relative price structure of the economy, the domestic terms of
trade between agriculture and non-agriculture change. It is through the
interaction of all these factors that the structure of consumption and the 9
Structure of Indian standard of living undergoes a fundamental change reflecting changes in social
Economy
values, beliefs and consumer preferences.

Finally, with changes in the structure of employment production, income

distribution and consumption, there comes naturally a change in the structure of
foreign trade. In the initial stage of development, an economy may have to
import metals and machinery for modernisation and industrialisation. But as the
industrialisation proceeds with economic growth, the acceleration in the pattern
of exports and imports change.

Structure of foreign trade, in short, changes (a separate block in this course is

devoted to the external sector) as economy changes from primary commodity-
exporting to export of manufactures.

In the next section we give an outline of the Indian economic growth

experience. The remaining sections deal with major structural dimensions of
India’s economic development experience.
Activity 1

a) List the structural changes typical of economic development.

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b) If national income at current prices (Y) is Rs. 1,00,000 crores and general
price index (P) is 250, find out national income at constant prices or real
national income (Y).
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c) If target growth rate is 6 per cent and ICOR is 3, find out the required
rate of investment.
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Activity 2
Refer to the latest Economic Survey of the Government of India and
formulate tables about: (a) Net availability of cereals and pulses,
(b) Net availability, procurement and public distribution of foodgrains,
(c) Per Capita availability of important articles of consumption.
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10
 ..................................................................................................................... Structural Dimensions
of Indian Economy
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4.3 INDIAN ECONOMIC GROWTH EXPERIENCE

In this section we present an overview of the Indian growth experience. The
interest is to map the broad contours of the Indian growth experience for the
period of little over four decades. This is to enable you to get a perspective on
country’s economic growth which has at the root of major structural changes in
the economy.

During the period 1950-51 and 1999-2000, the Net National Product (NNP) at
factor cost at constant (1993-94) prices (real national income) recorded an
annual growth rate of 2.4 per cent and 6.2 per cent respectively, while per
capita NNP growth rate was only 1.71 per cent. The per capita NNP at
constant (1993-94) prices (real per capita income) increased from Rs. 3687 in
1950-51 to Rs. 10306 in 2000-01. Thus during the 41 years period, the per
capita income more than doubled itself approximately.

Growth Rate of NNP and NNP Per Capita

The growth rates of NNP and NNP per capita during different plan periods
give an overview of the Indian growth experience. During the First Five Year
Plan period (1951-56) the NNP in real terms grew at an annual compound
rate of 3.6 per cent, while per capital income grew at 1.8 per cent. The
performance of the economy during the Second Plan period significantly
improved over the previous Plan period. The growth rates of national income
and per capita income were 4.1 per cent and 2.0 per cent respectively, higher
than the first plan growth rates. The growth rates significantly fell during the
Third Plan Period (1961-66). While the NNP grew at an average annual rate
of 2.5 per cent, the NNP per capita grew at the rate of 0.2 per cent only.
During the three annual plans (1966-69), income and per capita income
growth rates picked up significantly. They were 3.8 per cent and 1.5 per cent
respectively. During the Fourth plan (1969-74) the growth rates fell again.
While the NNP growth rate was 3.3 per cent, the NNP per capita grew at
the rate of 1.0 per cent. The growth rates improved significantly during the
Fifth Plan period (1974-79). The NNP during the Plan period grew at an
annual compound rate of 5.0 per cent, while per capita NNP grew at 2.7 per
cent. During the annual plan 1979-80 both NNP and per capita NNP
recorded negative growth rates. The growth rates were -6.0 per cent and
-8.3 respectively. During the Sixth Plan (1980-85) period the growth rates
were significantly high. The NNP and NNP per capita grew at annual
average rates of 5.4 per cent and 3.2 per cent respectively. Growth rates
slightly increased during the subsequent Seventh Plan (1985-90) period. They
were 5.8 per cent and 3.6 per cent respectively. In 1990-92 NNP at constant
(1993-94) prices grew at 3.0 per cent, per capita income growth rate being
0.9 per cent. During the Eighth and Ninth Plan period percentage income
growth rates were 6.7 and 4.6. Thus, growth rates significantly picked up and
exceeded the average for the 1980s decade.

Income and Per Capita Rate

The above account shows that both income and per capita income growth rates
fluctuated significantly. Several factors explain fluctuations in respect of growth
experience during the last four and half decades. Fluctuations in weather
conditions (alternating droughts and floods and periodic unfavourable monsoons),
11
Structure of Indian unfavourable increase in capital-output ratio (aggergate), balance of payments
Economy
problems and the consequent foreign exchange crises, wars with China and
Pakistan dislocating the development efforts, international transmission of
inflation through foreign trade, exogenous shocks such as oil price hikes during
early part of 1970s and later, and the structural imbalances which have
developed in the economy as development proceeded were some of the major
factors to be noted in this connection.

While one can discern several dimensions of economic progress of the Indian
economy in the post-independence period, the rate of economic growth has not
been adequate enough to take care of the twin problems of unemployment and
poverty. Added to this are the problems of growing inequalities in income
distribution and in regional development. India’s per capita income is very low
relative to per capita income of more developed countries like the USA.

Despite low growth rate and low level of per capita income, India today has
one of the most diversified industrial structures in the world.

In the remaining sections of this unit we examine the structural changes in the
economy.
Activity 3

a) List the structural features of India today as a low income economy.

Collect relevant data from Table 4.1 and others (Appendix 1) to substantiate
each of your point.
Structural Features Supporting Data
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b) From Table 4.2 (Appendix-1) identify the high growth decade and
explain the reasons for high growth rates during that decade.
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4.4 BASIC STRUCTURAL CHANGES IN THE

ECONOMY
Economic growth has brought about a structural change (change in sectoral
shares of the national income) in the economy. This is evident in the form of a
shift in the sectoral composition of production (income), diversification of
activities and a gradual transformation of a feudal and Colonial economy into a
modern industrial economy. The composition of gross domestic product has
changed steadily during the planning era.

Historical Overview
While the share of agriculture and allied activities fell from 58.73 per cent to
27.69 per cent during 1950-52 to 1998-2000, the share of manufacturing
increased from 13.29 per cent to 24.71 per cent during the same period. The
share of tertiary or service sector increased from 27.98 per cent to 47.60 per cent.
12
Thus a growth has been observed where the relative share of agriculture is Structural Dimensions
of Indian Economy
declining, industry nearly constant and services rising in the GDP. The
expansion of service sector has not only been conducive for employment
generation but also for better efficiency of the system and better quality of life.

Thus significant structural changes have taken place in the Indian economy
during the period 1950-2000 when we go by sectoral distribution of national
income. Thus by income criterion structural change in the Indian economy has
been very significant.

Now let us consider structural change by employment criterion. It is generally

accepted (as we noted before) that one of the structural changes that occur in
the course of economic development is a progressive shift of labour from
agriculture and allied activities to secondary and tertiary sectors. Studies based
on historical data have amply demonstrated the validity of this Fisher-Clark
thesis.

While this broad trend in sectoral reallocation of labour as development

proceeded is thus firmly established, the interesting fact about these structural
shifts in economic activity for our purpose is not so much the ultimate decline
in the importance of agriculture (in relative terms) as the rate at which it
occurred. To quote Paul Bairoch, “the proportion of active persons in
agriculture diminished at a rate of less than 0.4 per cent a year till 1860, about
0.9 per cent from 1860 to 1950, but at 4 per cent from 1950 to 1970. The
changes in the redistribution of the active population in Western developed
countries have thus been more important in the last twenty years.”
Indian Experience
The above historical experience tells us that the sectoral redistribution of the
active population is a time-taking process. Unlike structural change based on
income criterion, structural change based on employment is a slow process.
This is demonstrated by the Indian experience also.

The share of Primary sector in total employment declined from 12.28 per cent
to 8.65 per cent during 1961-63 to 1998-2000. That is if we go by employment
criterion structural change in the Indian economy has not been significant.

The share of secondary sector (mining and quarrying, manufacturing, and

construction) declined from 36.7 per cent to 31.7 per cent during the same
period.

The share of tertiary sector (trade and commerce, transport, storage and
communications and allied services) increased from 51.03 per cent to 59.65 per
cent during 1961-63 to 1998-2000.

Two structural features of the Indian economy emerge clearly from the above
account:
1) Agriculture continues to be important in the Indian economy. A little more
than 30 per cent of national income originates in the agricultural sector.
2) There is only slight structural change in the economy if we go by the
employment criterion.

The underdeveloped nature of the Indian economy becomes evident when we

compare the employment structure of the Indian economy with that of a more
developed country U.S.A. Agriculture in USA in 1986 accounted for only 7 per
cent of total workforce. The industrial sector and tertiary sector accounted for
36 per cent and 57 per cent respectively.
13
Structure of Indian In the remaining two sections of this unit we will consider some more
Economy
structural dimensions of the Indian economy. Structure and changes in foreign
trade are separately dealt within the Block dealing with “External Sector”.
Activity 4

a) Take the latest Economic Survey and update Table 4.3 in the Appendix.
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b) List some reasons for the slow growth of non-agricultural employment in

the Indian economy.
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4.5 INDIA’S SAVING AND INVESTMENT :

TRENDS AND COMPONENTS
Given the supply of labour force and its annual rate of growth, economic
growth is primarily a matter of rate of capital accumulation and resource
productivity improvements.Capital accumulation in different sectors of a national
economy takes place through investments in those sectors. To finance
investment, saving from current income is necessary. Further a well-developed
financial system is necessary for mobilising savings from net surplus units in
order to lend to the net deficit units largely to finance their investment activity.
Financial intermediation is the core function of the financial system.
Savings Rate
In our country, the saving rate (net domestic saving as percentage of NNP at
current prices) was a mere 6.2 per cent in 1950-51. In the same year, the
household sector accounted for Rs. 441.3 crores of the total net domestic
savings of Rs. 572.2 crores or in percentage terms for 77.1 per cent of the
total net domestic saving. Of the total household saving of Rs. 441.3 crores,
about 96 per cent was held in the form of physical assets and about only 4 per
cent was held in the form of financial assets. This is one aggregative indicator
of economic underdevelopment, on the one hand, and financial
underdevelopment on the other, of the country at that time.

But during the last four decades the country has experienced significant
economic and financial development. The saving rate has been recording
significant improvements. From 6.2 per cent in 1950-51, it rose to 9.3 per cent
by 1960-61. By 1990-91 it further rose to 14 per cent. By 1993-94 it stood at
15.3 per cent.

Households, private corporate sector (inlcuding cooperatives) and public sector

are three sources of saving. Let us see what has been the trend in respect of
the relative contributions to national saving of these sources? In 1980-81,
14 household sector accounted for 75.9 per cent of the total net domestic saving.
Next in importance was the private corporate sector (including cooperatives) Structural Dimensions
of Indian Economy
which accounted for 8.0 per cent of net domestic saving and public sector
accounted for the remaining 16.2 per cent of net domestic saving. By 1990-91
the picture has changed significantly. Household sector accounted for 84.4 per
cent of the net domestic saving. The saving rate of the corporate sector fell
significantly and was at the level of about 42 per cent. Public sector saving
stood at 0.15 per cent of the net domestic saving. Thus the household sector
(which includes apart from individuals, all non-government, non-corporate
enterprises) accounts for most of the savings in the economy. The dissaving of
public sector was increasing from year to year during the period.

Table 4.5 (A) reveals that household sector saving provides the bulk of national
saving. The share of total household saving to total National saving is more
than three quarters. It does further suggest that the public sector saving rate
declined but the corporate saving rate improved. This declining trend of public
sector saving rate is due to negative saving of government administration. A
decline in public savings was attributed to poor performance of government
non-statutory corporations, mounting government employment.

Household savings take broadly two forms. One is the form of physical assets.
Savings in the form of physical assets comprise additions to ‘construction’
‘machines’ and equipment and inventories. Savings in the form of financial
assets comprises of currency, deposits with banks with corporate enterprises,
provident/pension funds, claims on government, insurance and compulsory
deposits. In 1999-00 financial assets accounted for 10.5 per cent of the gross
savings of the household sector and 10.3 per cent savings were in the form of
physical assets. By 2001-02 the saving in the form of financial assets
accounted for 11.2 per cent, 11.3 per cent being accounted for by saving in the
form of physical assets. Thus there took place significant financial development
during the three decades.

Financial-Asset Structure of the Household Sector

Let us now look at changes in the financial asset structure of the household
sector. The significant changes in the composition of assets of the household
sector indicate rapid strides made by the financial system of the country. The
currency component decreased in relative importance as its share in the total
gross saving decreased from 31.8 per cent in 1960-61 to 17.8 per cent in
1987-88. The importance of deposits in the portfolios of household sector
increased subtantially during the period from 2.4 per cent in 1960-61 to 27.9
per cent in 1987-88. The phenomenal growth of banking facilities and other
financial intermediation and spread of banking habit among households becomes
evident from this. There is still an untapped potential in respect of government
securities, investments in UTI (Unit Trust of India) and life insurance business.
Evolving an appropriate structure of interest rates and through LIC rationalising
its premium structure which helps in boosting its business, the potential can be
realised.

Savings when invested results in capital formation. The share of the

commodity sector (agriculture, forestry, fishing etc. and mining and
manufacturing, construction, electricity and water supply) in gross domestic
capital formation improved from 56 per cent in 1980-81 to about 60 per cent
in 1989-90 and that of the non-commodity sector (services) declined from
about 44 per cent to 40 per cent during the same period. Within the
commodity sector, the share of mining and manufacturing significantly rose
during the period from 37.5 per cent to 48.5 per cent. This is an indicator of
the growing importance of mining and manufacturing in gross domestic capital
formation.
15
Structure of Indian Gross Domestic Capital Formation
Economy
Gross Domestic Capital Formation (GDCF) is classified on the basis of type of
assets into two components – (a) Gross Fixed Capital Formation (GFCF) and
(b) changes in stocks or inventories. The share of the former improved from
about 84 per cent in 1950-51 to 92 per cent in 1990-91. This was a healthy
trend because it indicated that inventory accumulation was low.

Gross Domestic Capital Formation as a percentage of Gross domestic product

increased from about 81 per cent in 1960-61 to about 23 per cent in 1990-91.
This shows significant improvement in investment effort. As for the division of
GDCF between public sector and private sector, in 1960-61 GDCF in public
sector was 38.9 per cent, while that in private sector was 61.1 per cent.
By 1990-91 the percentages were 37.5 and 62.5.

The economic growth rate has not been commensurate with the rate of
investment. Among many reasons for this (such as under-utilisation of
productive capacity, inefficiency in resource use, etc.), rising capital-output ratio
has been one (Table 4.6 in the Appendix). The ICOR (Incremental Capital-
Output Ratio) rose from about 2.95 during1951-52 to 1955-56 to 4.36 during
1985-86 to 1991-92. During Eighth Plan period it declined to 3.43 and again
rose to 4.53 during Ninth Plan period.
Activity 5

a) Read again what we have discussed in this unit so far and list the growth
factors below :
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

b) From the relevant Table (in the Appendix) indicate the trend in financial
assets of the household sector.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

c) List the financial assets and indicate the differences among them from risk
and return point of trend.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

4.6 INDIA’S MONETARY AND PRICE TRENDS

A serious concern for the Indian economy since the middle of the Second Plan
period has been the upward trend in the general price level. The price trends
are related to, among others, the trends in money supply and government
budget deficits. The imbalances between demand for and supply of wage
goods, particularly food, triggered the price rise in early 1960s and several other
16 factors have made inflation a persistent feature of the Indian economy.
Money Supply Structural Dimensions
of Indian Economy
Money supply has increased rapidly and regularly. The money supply with the
public (currency plus demand deposits, plus other deposits with RBI, referred to
as M1 in RBI publications) during the 21 year period 1970-71 to 1991-92
increased at the annual average rate of 17.7 per cent. In only one year
(1977-78) it registered a fall from Rs. 15609 crores to Rs. 14388 crores. In all
other years, M1 registered positive growth rates. One interesting fact is that
while the average annual growth rate of M1 during the 19 year period 1970-71
to 1987-88 was 13.12 per cent, during the subsequent four year period from
1988-89 to 1991-92 it was 18.5 per cent. Thus, prior to the severe economic
crisis in 1991, M1 was growing at a significantly high rate, higher than the
average for the period 1970-71 to 1987-88.

M3 is defined as M1 plus time deposits. M3 grew at an average annual rate of

20.8 per cent during the period 1970-71 to 1991-92. The high growth rate
observable in respect of M3 is largely accounted for by the growth rate in time
deposits.

During 1995-2001 M1 increased from 192257 crores to 472827 crores, while M3

increased from 527596 crores to 1725222 crores during the same period.

Growth Rate : Principal Factors

Money supply growth rate has been an important factor behind the Indian
inflation experience. The three principal factors responsible for the expansion of
money supply are :

a) Bank credit to commercial sector, (b) Bank credit to government and (c) net
foreign exchange assets of the banking sector.

Inflation rate based on Wholesale Price Index (WPI) averaged 9 per cent
during the period 1970-71 to 1991-92. It reached high levels during the two
years 1973-74 (20.2 per cent) and 1974-75 (23.2 per cent).

Inflation rate based on Consumer Price Index (CPI) numbers (urban non-
manual employees) averaged about 9 per cent reaching the highest level of
22.2 per cent in 1974-75. Besides the government deficits and the consequent
money supply growth rate, several structural and institutional factors have been
at the root of inflationary rise in prices in India beginning from mid-1950s at a
slow rate, accelerating from mid-1960s and recording considerably high rates
during the first half of 1970s.

The following factors have been responsible for inflation:

The very plan strategy adopted for accelerating development and the
consequent trends in the composition of domestic output and foreign trade
with adverse influence on domestic output and foreign trade with adverse
influence on domestic price level.
Closely related to the above is the forced pace of structural change with
little regard for sectoral balance and price stability.
Role of expectations emanating from inflationary psychology.
Plethora of controls inspired by ideological fixation with no firm
economic basis and ineffectiveness in operating them leading to the
growth of parallel economy making monetary and fiscal measures almost
ineffective.
Ineffective institutional measures for redistribution of wealth and income.
17
Structure of Indian Inflationary nature of the role of distribute trade prompted by the seller’s
Economy
market conditions.
Exogenous shocks such as wars and oil price hikes.
International transmission of inflationary pressures.

The rate of change in wholesale and consumer prices suggest that the overall
trend in prices has been on decline since 1992. One striking trend noticeable is
the growing divergence between the rate of inflation based on wholesale prices
and that for consumer price index since 1993-94. Until 1993-94 the two rates
generally converged. Since 1995-96, the consumer price index based rate of
inflation has exceeded the based on wholesale prices by a wide margin. The
divergence trend in the wholesale and consumer prices has been explained in
terms of the change in the weighting scheme for the two indices.

In the Block dealing with “Economic reforms since 1991”, you will learn about
the “New Economic Policy” to tackle with the problems of Indian economy,
including the problem of inflation.

4.7 OTHER STRUCTURAL DIMENSIONS

Some of the other structural dimensions of the Indian economy are :
1) As for the tax structure, heavy reliance on indirect taxes and declining
importance of direct taxes, such as income tax, have been resulting in
adverse consequences so far as the objectives such as price stability and
reduction in inequalities in income and wealth distribution are concerned.
2) Growth in non-developmental government expenditure has been a significant
factor in several economic ills facing the economy.
3) Heavy reliance on debt financing of government expenditure has been
another feature of the Indian fiscal system.
4) Rapid population growth largely because of fast decline in death rate and
very slow decline in birth rate is another feature of the country with
adverse consequences.

Remember, from the standpoint of analysis of business environment, it is

important for you to gain mastery over the structural dimensions we have
examined in this unit.
Activity 6

a) As a student of management, how would you look at the problem of inflation.

List 3 causes.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

b) Refer to RBI Bulletin (a monthly publication) and clearly explain M1 and M3.
M1................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
18
 M3................................................................................................................ Structural Dimensions
of Indian Economy
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

c) What is the importance of consumer price index?

Answer in three to four sentences.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

4.8 DEMOGRAPHIC TRENDS AND STRUCTURE

The main problem in India is the high level of birth rates of accompanying
falling death rates. The rate of growth of population which was about 1.3 per
cent per annum during 1941-50 rose to 2.1 per cent during 1981-91. The chief
cause of the rapid growth of population was the steep fall in death rate from
49 per thousand during 1911-20 to about 11 per thousand by the end of 1980s.
But the birth rate declined from about 49 per thousand during 1911-20 to about
31 per thousand by the end of 1980s.

The fast rate of growth of population, given the rate of growth of GNP implies
lower per capita GNP growth rate. For example, if GNP growth rate is 5 per
cent per annum, and population growth rate is 2 per cent, then per capital GNP
growth rate is 3 per cent annum. To maintain a rapidly growing population, the
requirements of food, clothing, shelter, medical and educational facilities and so
on will be rising. Therefore a rapidly rising population imposes greater economic
burdens and, consequently, the society has to make greater efforts to accelerate
the process of economic growth. Moreover, rapidly rising population implies
larger additions to labour force and higher dependency ratio. In 1990, for
example, 36.9per cent belonged to 0-14 age group, while 58.7 per cent
belonged to age group of 15-64 in India’s population. The rapid growth of
labour force creates a higher supply of labour than demand for it leading to the
problem of chronic unemployment.

One heartening feature is that over the last three decades there has been
declining trend in population growth rates. During 1965-80 the average annual
population growth was 2.3 per cent. In subsequent 1980-90 period, it declined
to 2.1 per cent. With the government policies for population control and family
welfare it is expected that by the end of this century population growth rate
will come down. The annual growth rate of population declined to 1.73 by
2002-03.

As for the sex composition of population, the sex ratio (females per 1000
males) declined from 972 in 1901 to 933 in 2001. The explanation for a
declining sex ratio lies in the poverty of the Indian people. In a country where
even after more than 40 years of planned economic development nearly 35 per
cent (the poverty estimates differ widely) of the population live below the
poverty line, high infant mortality, extremely poor or non-existent medical
facilities, extremely unhygienic conditions of living and absence of pre-natal and
post-natal care, high death rate among women are all manifestations of an
object low level of living of the people. Preference for male children and
attempts to avoid female children is rather a recent phenomenon which
contributes to keeping sex ratio at the lower level.
19
Structure of Indian Age structure of population is an important demographic dimension. As noted
Economy
before, rapid population growth implies high dependency ratio. 0-14, and 60 and
above, age groups constitute dependent population. In 1911, 0-14 age group
constituted 38.8 per cent of population. In the same year 60 and above age
group constituted 1.0 per cent of population. Together they constituted 39.8 per
cent. By 2001, the first age group constituted 35.6 per cent of population and
the latter age group constituted 6.3 per cent. Thus the percentage of dependent
population increased from 39.8 per cent in 1911 to 41.9 per cent in 2001.
A high proportion of children (0-14 age group) only reflects a large proportion
of unproductive consumers. To reduce the percentage of non-productive
consumers, it is essential to bring down the birth rate.

Rural-urban composition of population is an important demographic dimension,

particularly from point of view of economic development. Along with economic
development in general and industrialisation in particular the rural-urban
composition of population has been changing in India. In 1901, 89 per cent of
Indian population was rural, the remaining 11 per cent being the urban
population. By 2001 the percentage of rural population declined to 77.2 per
cent, while that of urban population increased to 22.8 per cent.

The quality of population can be judged from life expectancy, the level of
literacy and the level of technical training attained by the people of a country.
In respect of all the three indicators India achieved significant progress although
the country is still to go a long way in achieving the standards of more affluent
countries. The literacy rate has gone up from 18.2 per cent in 1951 to 65.4 per
cent in 2001. Life expectancy at birth has gone up from 41.2 per cent in 1951
to 65.3 per cent in 2001.
Activity 7
From 2001 census data, determine.
a) Sex ratio giving the details about sex composition of population.
b) Rural-urban composition of populatioin.
c) Age distribution of population.
d) Choosing suitable diagrams (barcharts, pie diagrams etc.) represent the
demographic profile of India according to 2001 census.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

4.9 SUMMARY
In this unit, we talked about a conceptual framework to analyse and understand
economic trends. We have exposed you to the data environment of the Indian
economy. The trends and structural features indicated by way of data
environment provide a basis for describing and analysing varius economic
problems of India. In this unit we have given a macro-view. In the subsequent
units we go into the details of sectors and subsectors.
20
 Structural Dimensions
4.10 KEY WORDS of Indian Economy

Economic Growth and Economic Development : Economic growth means

more output, while economic development implies both more output and changes
in the technical and institutional arrangements by which it is produced and
distributed. The trends in income and the structural changes together constitute
economic development.

Structural Changes : Changes in the composition of national output, changes

in the occupational pattern of labour and so on are referred to as structural
changes.

4.11 SELF ASSESSMENT QUESTIONS

1. Distinguishing economic development from economic growth, explain the

major structural changes experienced by the Indian economy.
2. Keeping in mind the concept of capital intensity (capital-labour ratio), explain
why structural change by employment criterion is not significant.
3. What are the major factors in India’s inflation problem?
4. After carefully going through this unit, give a brief account of economic
environment of business in India.
5. “From the standpoint of analysis of business environment, a large size of
population is both an asset and a liability” —Explain.

4.12 FURTHER READINGS

Economic Survey, Government of India (1996 and later issue)

Report on Currency and Finance of RBI (latest issue)

Dutt, Ruddar and Sundaram, K.P.M., Indian Economy,

(latest Edition) (Chapters 1-7)

Lakshmana Rao, V. Essays on Indian Economy, New Delhi : Ashish

Publishing House, 1994 (Relevant essays about trends in money supply and
price level and India’s development and growth experience).

21
Structure of Indian Appendix 1
Economy

List of Statistical Tables

Table 4.1 : Selected Indicators, 1950-51 to 1994-95

Table 4.2 : Annual Compound Growth Rates of NNP and Per Capita NNP

Table 4.3 : Sectoral Distribution of GDP and Employment

Table 4.4 (A) : Saving Rate in India

Table 4.4 (B) : Gross Domestic Savings and Investment

Table 4.5 (A) : Gross Domestic Savings and Gross Domestic Capital Formation
(at current prices)

Table 4.5 (B) : Gross Domestic Savings and Gross Domestic Capital Formation
(as per cent of GDP at current market prices)

Table 4.6 : GDP Growth, Rate of investment and ICOR

22
 Table 4.1 : Selected Indicators 1950-51 to 2001-02

1950-51 1960-61 1970-71 1980-81 1990-91 1991-92 1995-96 1997-98 1998-99 1999-00 2000-01 2001-02
1 2 3 4 5 6 7 8 9 10 11 12 13

ECONOMIC
INDICATORS
GDP at factor cost:
(i) At current prices
(Rs. crore) 9547 16220 42222 130178 510954 589086 1073271 1390148 1598127 1761932 1917724P 2094013Q

(ii) At constant
prices (Rs. crore) 140466 206103 296278 401128 692871 701863 899563 1016594 1082748 1148442 1198685P 1265429Q

Per capita net national

product, at 1993-94
prices (Rupees) 3687 4429 5002 5352 7321 7212 8489 9244 9650 10068 10306P 10754Q

Index of industrial
production9
(Base: 1993-94 = 100) 7.9@ 15.6 28.1 43.1 91.6 92.2 123.3 139.5 145.2 154.9 162.6 167.0

Index of agricultural
production (Base:
triennium ending
1981-82) 46.2 68.8 85.9 102.1 148.4 145.5 160.7 165.3 177.9 176.8 167.3 177.1

Gross domestic
capital formation
(as per cent of GDP) 8.7 14.4 15.4 20.3 26.3 22.6 26.9 24.6 22.6 25.2 24.0P 23.7Q
(Contd...)
Structural Dimensions

23
of Indian Economy
24
Economy
Structure of Indian

Table 4.1 : Selected Indicators 1950-51 to 2001-02 — contd.

1950-51 1960-61 1970-71 1980-81 1990-91 1991-92 1995-96 1997-98 1998-99 1999-00 2000-01 2001-02
1 2 3 4 5 6 7 8 9 10 11 12 13

Gross domestic savings

(as per cent of GDP) 8.9 11.6 14.6 18.9 23.1 22.0 25.1 23.1 21.5 24.1 23.4P 24.0Q

OUTPUT
(a) Foodgrains
(million tonnes) 50.8 82.0 108.4 129.6 176.4 168.4 180.4 192.3 203.6 209.8 199.5 212.0
(b) Finished Steel
(million tonnes)$ 1.0 2.4 4.6 6.8 13.5 14.3 21.4 23.4 23.8 27.2 29.3 30.6P
(c) Cement
(million tonnes) 2.7 8.0 14.3 18.7 48.8 51.7 69.5 83.2 87.9 98.21 97.6 106.9P
(d) Coal (including
lignite) (million
tonnes) 32.3 55.2 76.3 119.0 225.5 243.8 292.3 319.0 289.9# 299.0# 309.6# 322.6#
(e) Crude oil (million
tonnes) 0.3 0.5 6.8 10.5 33.0 30.4 35.2 33.9 32.7 31.9 32.4 32.0P
(f) Electricity generated
(utilities only)
(Billion KWH) 5.1 16.9 55.8 120.8 264.3 287.0 379.9 421.7 448.5 480.7 499.5 515.2P

Wholesale price index*

(Base: 1993-94 = 100) 6.8 7.9 14.3 36.8 73.7 83.9 121.6 132.8 140.7 145.3 155.7 161.3

Consumer price index

(Base: 1982=100)@@ 17 21 38 81 193 219 313 366 414 428 444 463
(Contd...)
 Table 4.1 : Selected Indicators 1950-51 to 2001-02 — contd.

1950-51 1960-61 1970-71 1980-81 1990-91 1991-92 1995-96 1997-98 1998-99 1999-00 2000-01 2001-02
1 2 3 4 5 6 7 8 9 10 11 12 13

Plan outlay (Rs. crore) 260## 1117 2524 15023 58369 64751 107380 129757 151580 160608 185737 216349(RE)

Centre’s budgetary deficit/

Draw down of Cash balance
(Rs. crore) (-)33## (-)117 285 2576 11347 6855 9807 (-)910 (-)209 864 1197 3803(RE)

FOREIGN TRADE
(i) Exports
Rs. crore 606 642 1535 6711 32553 44041 106353 130100 139752 159561 203571 209018
US $ million 1269 1346 2031 8486 18143 17865 31797 35006 33218 36822 44560 43827
(ii) Imports
Rs. crore 608 1122 1634 12549 43198 47851 122678 154176 178332 215236 230873 245199
US $ million 1273 2353 2162 15869 24075 19411 36678 41484 42389 49671 50536 51413

Foreign exchange reserves

(excluding gold and SDRs):
Rs. crore 911 186 438 4822 4388 14578 58446 102507 125412 152924 184482 249118
US $ million 1914 390 584 5850 2236 5631 17044 25975 29522 35058 39554 51049

SOCIAL INDICATORS
Population

Population (million)b 359 434 541 679 839 856 928 964 983 1001 1019 1037
c
Birth rate (per 1000) 39.9 41.7 41.2 37.2 33.9 29.5 28.3 27.2 26.5 26.1 25.8 ...
Death rate (per 1000)c 27.4 22.8 19.0 15.0 12.5 9.8 9.0 8.9 9.0 8.7 8.5 ...
(Contd...)
Structural Dimensions

25
of Indian Economy
26
Economy
Structure of Indian

Table 4.1 : Selected Indicators 1950-51 to 2001-02 — contd.

1950-51 1960-61 1970-71 1980-81 1990-91 1991-92 1995-96 1997-98 1998-99 1999-00 2000-01 2001-02
1 2 3 4 5 6 7 8 9 10 11 12 13

Life expectancy at birth

(in years)d

(a) Male 32.5 41.9 46.4 50.9 58.6 59.0 ... 62.3a ... ... 63.87h ...

(b) Female 31.7 40.6 44.7 50.0 59.0 59.7 ... 65.3a ... ... 66.91h ...

Total 32.1 41.3 45.6 50.4 58.7 59.4 ... ... ... ... ... ...

Education Literacy rate (percentage)e

(a) Male 27.16 40.40 45.96 56.38 64.1 ... 69 73 ... ... 75.85 ...

(b) Female 8.86 15.35 21.97 29.76 39.3 ... 46 50 ... ... 54.16 ...

Total 18.33 28.30 34.45 43.57 52.2 ... 58 62 63.1 ... 65.38 ...

Health & Family Welfaref

Registered Medical
Practitioners (RMP) (Allopathic)
(thousand)
(as on 31st Dec.) 61.8 83.7 151.1 268.7 393.6 409.7 477.6P 514.8P 535.6P 555.1P 575.6P ...
RMP per 10,000
population 1.7 1.9 2.8 3.9 4.7 4.8 5.1P 5.3P 5.5P 5.6P 5.6P ...
Beds (all types)**
per 10,000 3.2 5.7 6.4 8.3 9.5 9.7 9.4P 9.3P ... ... ... ...

(Contd...)
(contd...)

P Provisional estimates.
Q Quick estimates.
@ Relates to the calender year 1950.
@@ Figures for the period up to 1988-89 derived by converting indices on earlier bases into base 1982 = 100.
## Relates to 1951-52.
* Figures for the period up to 1993-94 derived by converting the indices on earlier bases into base 1993-94.
** Includes beds in hospitals, dispensaries, P.H.Cs clinics, sanatoriums, etc.
R.E. Revised estimates.
.. Not available.
$ Including secondary producers.
+ SRS Bulletin 2002 April.
# Lignite is excluded.

Notes :
a Pertains to 1996-2001.
b Relate to mid-financial year (as on October 1) based on population figures given in the NAS, 2002 of C.S.O.
c For calendar year. Figure shows against 1990-91 is for calendar year 1990 and so on. Source : Ministry of Health and Family Welfare and Office of R.G.I.
d Data for 1950-51, 1960-61, 1970-71 and 1980-81 relate to the decades 1941-50, 1951-60, 1961-70 and 1971-80 respectively, centred at midpoints of the decade, i.e., 1946, 1956, 1966 and 1976.
The estimates for 1990-91 and 1991-92 refer to the periods 1988-92 and 1989-93 respectively.
e Data for 1950-51, 1960-61, 1970-71, 1980-81, 1990-91 and 2000-01 are as per Census of India 1951, 1961, 1971, 1981, 1991 and 2001. The figures for 1951, 1961 and 1971 relate to
population aged 5 years and above and those for 1981 and 1991 to population aged 7 years and above. All India literacy rates exclude Assam for 1981 and J&K for 1991. Data for 1995-96 and
1997-98 relate to the years 1996 and 1998 respectively and are based on NSSO survey, 53rd Round upto 1997. For 1998, data is based on National Family Health Survey (1998-99) (+6 years).
Data for 2000-01 pertains to Census 2001.
f Relate to calendar year e.g., 1950-51 pertains to 31st December 1951 and so on.
g The Index of Industrial Production has been revised since 1993-94.
h Pertains to 2001-2006.
Structural Dimensions

27
of Indian Economy
Structure of Indian Table 4.2 : Annual Average Growth Rates (%) of NNP at
Economy
Factor Cost at constant (1993-94) Prices and NNP Per Capita

Plan Period/Year NNP at Factor NNP Per Capita

Cost

First Plan (1951-56) 3.6 1.8

Second Plan (1956-61) 4.1 2.0

Third Plan (1961-66) 2.5 0.2

Three Annual (1966-69) 3.8 1.5

Plans

Fourth Plan (1969-74) 3.3 1.0

Fifth Plan (1974-79) 5.0 2.7

Annual Plan (1979-80) (-) 6.0 (-) 8.3

Sixth Plan (1980-85) 5.4 3.2

Seventh Plan (1985-90) 5.8 3.6

Two Annual
Plans (1990-92) 3.0 0.9

Eighth Plan (1992-97) 6.7 4.6

Ninth Plan (1997-2002) 5.5 3.6

Source: Economic Survey, 2002-03.

Table 4.3 : Sectoral Distribution of GDP and Employment

Primary Secondary Tertiary

Sectoral GDP/Total GDP

1950-52 58.73 13.29 27.98

1960-62 53.00 17.26 29.75

1970-72 46.56 20.38 33.06

1980-82 41.34 21.77 36.89

1990-92 34.40 24.06 41.54

1998-2000 27.69 24.71 47.60

Sectoral Employment/Total Employment

1950-52 – – –

1961-63 12.28 36.70 51.03

1970-72 9.61 35.72 54.67

1980-82 9.85 34.61 55.54

1990-92 9.50 31.92 58.58

1998-2000 8.65 31.70 59.65

Notes: GDP data is at 1993-94 prices;

Employment data relates to the organised sector.

28 Source: NAS 2002 and Economic Survey.

 Table 4.4 (A) : Volume ot Saving in India Structural Dimensions
of Indian Economy

Sector 1980-81 Percentage 1990-91 Percentage 1998-99 Percentage

Household
Saving 21848 75.9 109623 84.4 325456 82.7

Private Saving 2284 8.0 14940 11.5 67573 17.2

Public Saving 4654 16.2 5436 4.2 572 0.15

Total Saving 28786 100.0 129999 100.0 393601 100.0

Source: Economic Survey 1999-2000.

Table 4.4 (B) : Gross Domestic Saving and Investment

Item Per cent of GDP Amount in Rupees Crore

(at Current Market Prices)
2001-02* 2000-01@ 1999-00 1995-96 to 2001-02* 2000-01@ 1999-00

1 2 3 4 5 6 7 8

1. Household Saving 22.5 21.6 20.8 17.9 5,15,565 4,53,641 4,02,36

of which :

a) Financial assets 11.2 10.4 10.5 9.8 2,56,647 2,17,841 2,03,70

b) Physical assets 11.3 11.2 10.3 8.1 2,58,918 2,35,800 1,98,65

2. Private Corporate
Sector 4.0 4.1 4.4 4.3 92,060 86,142 84,32

3. Public Sector -2.5 -2.3 -1.0 1.0 -57,662 -48,022 -20,04

4. Gross Domestic
Saving 24.0 23.4 24.1 23.3 5,49,963 4,91,761 4,66,64

5. Net Capital Inflow -0.2 0.6 1.1 1.4 -4,872 12,977 21,98

6. Gross Domestic
Capital 23.7 24.0 25.2 24.7 5,45,091 5,04,738 4,88,62

Formation

7. Errors and Omissions 1.3 1.5 1.6 1.6 30,003 31,117 30,36

8. Gross Capital
Formation of which: 22.4 22.5 23.7 23.1 5,15,088 4,73,621 4,58,26

a) Public Sector 6.3 6.4 6.9 7.0 1,45,082 1,34,025 1,34,48

b) Private Corporate
Sector 4.8 4.9 6.5 8.0 1,11,088 1,03,796 1,25,12

c) Household
Sector 11.3 11.2 10.3 8.1 2,58,918 2,35,800 1,98,65

* Quick Estimates.
@ Provisional

Source: Central Statistical Organisation.

29
30
Economy
Structure of Indian

Table 4.5 (A) : Gross Domestic Savings and Gross Domestic Formation
(At Current Prices)
Gross Fixed
Gross Domestic Savings Capital Formation Gross
Change in Stocks Gross Domestic Capital Formation
Domestic
House- Private P u b l i c Total Public Private Total Public Private Total Public Private Total Errors Adjusted Product
hold Corporate Sector (2+3+4) Sector Sector (6+7) Sector S e c t o r (9+10) Sector Sector (12+13) & Total at Market Ye a r
Sector O m i s s i o n s (14+15) Prices
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
1950-51 612 93 182 887 241 643 884 35 125 160 276 768 1044 -178 866 9934 1950-51
1951-52 583 136 266 985 280 696 976 41 129 170 321 825 1146 22 1168 10566 1951-52
1952-53 637 64 160 861 299 598 897 -25 45 20 274 643 917 -90 827 10366 1952-53
1953-54 655 90 143 888 346 558 904 -35 -36 -71 311 522 833 42 875 11282 1953-54
1954-55 719 118 168 1005 415 618 1033 62 -32 30 477 586 1063 -42 1021 10678 1954-55

1955-56 1046 134 190 1370 556 743 1299 -34 96 62 522 839 1361 48 1409 10873 1955-56
1956-57 1178 155 251 1584 640 1001 1641 51 189 240 691 1190 1881 63 1944 12951 1956-57
1957-58 997 121 266 1384 669 1044 1713 190 56 246 859 1100 1959 -102 1857 13349 1957-58
1958-59 1016 140 251 1407 730 998 1728 114 -102 12 844 896 1740 43 1783 14874 1958-59
1959-60 1301 185 262 1748 916 977 1893 16 194 210 932 1171 2103 -124 1979 15675 1959-60

1960-61 1254 281 454 1989 1091 1092 2183 87 246 333 1178 1338 2516 -46 2470 17167 1960-61
1961-62 1281 320 526 2127 1147 1293 2440 40 243 283 1187 1136 2723 -251 2472 18196 1961-62
1962-63 1533 344 602 2479 1357 1341 2698 133 232 365 1490 1573 3063 -144 2919 19566 1962-63
1963-64 1618 394 751 2763 1614 1575 3189 119 169 288 1733 1744 3477 -274 3203 22482 1963-64
1964-65 1875 389 865 3129 1883 1823 3706 124 244 368 2007 2067 4074 -345 3729 26220 1964-65

1965-66 2602 405 863 3870 2112 2073 4185 170 162 332 2282 2235 4517 -48 4469 27668 1965-66
1966-67 3223 424 728 4375 2121 2538 4659 88 446 534 2209 2984 5193 105 5298 31305 1966-67
1967-68 3210 410 735 4355 2096 3051 5147 319 114 433 2415 3165 5580 -388 5192 36649 1967-68
1968-69 3349 439 933 4721 2203 3240 5443 56 83 139 2259 3323 5582 -445 5137 38823 1968-69
1969-70 4440 549 1115 6104 2292 3679 5971 69 517 586 2361 4196 6557 -212 6345 42750 1969-70

Contd...
 Table 4.5 (A) : Gross Domestic Savings and Gross Domestic Formation — contd.
(At Current Prices)
Gross Fixed
Gross Domestic Savings Capital Formation Gross
Change in Stocks Gross Domestic Capital Formation
Domestic
House- Private P u b l i c Total Public Private Total Public Private Total Public Private Total Errors Adjusted Product
hold Corporate Sector (2+3+4) Sector Sector (6+7) Sector S e c t o r (9+10) Sector Sector (12+13) & Total at Market Ye a r
Sector O m i s s i o n s (14+15) Prices
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

1970-71 4634 672 1343 6649 2505 3878 6383 414 430 844 2919 4308 7227 -184 7043 45677 1970-71
1971-72 5219 769 1379 7367 2927 4246 7173 488 622 1110 3415 4868 8283 -438 7845 48932 1971-72
1972-73 5624 806 1442 7872 3754 4479 8233 121 367 488 3875 4846 8721 -552 8169 53947 1972-73
1973-74 7985 1083 1931 10999 4162 5024 9186 742 1000 1742 4904 6024 10928 463 11391 65613 1973-74
1974-75 8080 1465 2835 12380 4468 6678 11146 1285 1761 3046 5753 8439 14192 -1159 13033 77479 1974-75

1975-76 9743 1083 3520 14346 5823 7678 13501 1983 316 2299 7806 7994 15800 -1571 14229 83269 1975-76
1976-77 11849 1181 4378 17408 7286 8213 15499 1536 109 1645 8822 8322 17144 -1045 16099 89739 1976-77
1977-78 14354 1413 4375 20142 7952 9485 17437 149 1393 1542 8101 10878 18979 -302 18677 101597 1977-78
1978-79 17015 1652 5009 23676 8658 10461 19119 1507 2184 3691 10165 12645 22810 994 23804 110133 1978-79
1979-80 16690 2398 5226 24314 10293 11292 21585 1844 2395 4239 12137 13687 25824 -930 24894 120841 1979-80

1980-81 19868 2339 4929 27136 12031 14587 26618 74 176 250 12105 14763 26868 2362 29230 143764 1980-81
1981-82 21225 2560 7570 31355 14984 16947 31931 2002 3850 5852 16986 20797 37783 -3817 33966 168600 1981-82
1982-83 23216 2980 8172 34368 19012 17226 36238 1127 3421 4548 20139 20647 40786 -3852 36934 188262 1982-83
1983-84 28165 3254 7168 38587 20928 20441 41369 337 1490 1827 21265 21931 43196 -2092 41104 219496 1983-84
1984-85 35067 4040 6956 46063 23921 24211 48132 1679 3215 4894 25600 27426 53026 -3671 49355 245515 1984-85

1985-86 39795 5426 8946 54167 28074 29237 57311 1916 6576 8492 29990 35813 65803 -5402 60401 277991 1985-86
1986-87 45072 5336 8543 58951 33884 31655 65539 888 5776 6664 34772 37431 72203 -6897 65306 311177 1986-87
1987-88 59157 5932 7819 72908 35269 40740 76009 -1512 3860 2348 33757 44600 78357 1376 79733 354343 1987-88
1988-89 70657 8486 8770 87913 40637 50624 91261 -501 9116 8615 40136 59740 99876 341 100217 421567 1988-89
1989-90 86955 11845 8179 106979 44701 64178 108879 1704 4452 6156 46405 68630 115035 4223 119258 486179 1989-90

1990-91 109897 15164 6279 131340 51124 79277 130401 1975 4478 6453 53099 83755 136854 12682 149536 568674 1990-91

Contd...
Structural Dimensions

31
of Indian Economy
32
Economy
Structure of Indian

Table 4.5 (A) : Gross Domestic Savings and Gross Domestic Formation — contd.
(At Current Prices)
Gross Fixed
Gross Domestic Savings Capital Formation Gross
Change in Stocks Gross Domestic Capital Formation
Domestic
House- Private P u b l i c Total Public Private Total Public Private Total Public Private Total Errors Adjusted Product
hold Corporate Sector (2+3+4) Sector Sector (6+7) Sector S e c t o r (9+10) Sector Sector (12+13) & Total at Market Ye a r
Sector O m i s s i o n s (14+15) Prices
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

1991-92 110736 20304 12868 143908 59833 84028 143861 -2200 1599 -601 57633 85627 143260 4025 147285 653117 1991-92
1992-93 131073 19968 11865 162906 61351 106622 167973 2646 7400 10046 63997 114022 178019 -1297 176722 748367 1992-93
1993-94 158310 29866 5445 193621 68853 115440 184293 1981 -3655 -1674 70834 111785 182619 15793 198412 859220 1993-94
1994-95 199358 35260 16845 251463 88856 133379 222235 -650 15199 14549 88206 148578 236784 26572 263356 1012770 1994-95

1995-96 216140 58542 24065 298747 91595 197814 289409 -618 26388 25770 90977 224202 315179 4348 319527 1188012 1995-96
1996-97 233252 61092 22917 317261 94306 217545 311851 1881 -15870 -13989 96187 201675 297862 37137 334999 1368208 1996-97
1997-98 268437 63486 20255 352178 97079 233340 330419 3574 9719 13293 100653 243059 343712 30768 374480 1522547 1997-98
1998-99 327074 65026 -17169 374931 112304 262031 374335 2241 -4367 -2126 114545 257664 372209 20812 393021 1740985 1998-99
1999-00 402360 84329 -20049 466640 120389 301514 421903 14095 22264 36359 134484 323778 458262 30366 488628 1936925 1999-00

2 0 0 0 - 0 1 ( P )4 5 3 6 4 1 86142 -48022 491761 127755 332032 459787 6270 7564 13934 134025 339596 473621 311117 504738 2104298 2000-01(P)

2 0 0 1 - 0 2 ( Q )5 1 5 5 6 5 92060 -57662 549963 135669 361609 497278 9413 8397 17810 145082 370006 515088 30003 545091 2296049 2001-02(Q)

P : Provisional estimates
Q : Quick estimates.
Source : Central Statistical Organisation.
 Table 4.5 (B) : Gross Domestic Savings and Gross Domestic Capital Formation
(As per cent of GDP at current market prices)
Gross Domestic Savings Gross Fixed Capital Formation Change in Stocks Gross Domestic Capital Formation
Year House- Private Public Total Public Private Total Public Private Total Public Private Total Errors & Adjusted Year
hold Corporate Sector (2+3+4) Sector Sector (6+7) Sector Sector (9+10) Sector Sector (12+13) Omissions Total
Sector (14+15)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

1950-51 6.2 0.9 1.8 8.9 2.4 6.5 8.9 0.4 1.3 1.6 2.8 7.7 10.5 -1.8 8.7 1950-51
1951-52 5.5 1.3 2.5 9.3 2.6 6.6 9.2 0.4 1.2 1.6 3.0 7.8 10.8 0.2 11.7 1951-52
1952-53 6.1 0.6 1.5 8.3 2.9 5.8 8.6 -0.2 0.4 0.2 2.6 6.2 8.8 -0.9 8.0 1952-53
1953-54 5.8 0.8 1.3 7.9 3.1 4.9 8.0 -0.3 -0.3 -0.6 2.8 4.6 7.4 0.4 7.8 1953-54
1954-55 6.7 1.1 1.6 9.4 3.9 5.8 9.7 -0.6 -0.3 0.3 4.5 5.5 10.0 -0.4 9.6 1954-55

1955-56 9.6 1.2 1.7 12.6 5.1 6.8 11.9 -0.3 0.9 0.6 4.8 7.7 12.5 0.4 13.0 1955-56
1956-57 9.1 1.2 1.9 12.2 4.9 7.7 12.7 0.4 1.5 1.9 5.3 9.2 14.5 0.5 15.0 1956-57
1957-58 7.5 0.9 2.0 10.4 5.0 7.8 12.8 1.4 0.4 1.8 6.4 8.2 14.7 -0.8 13.9 1957-58
1958-59 6.8 0.9 1.7 9.5 4.9 6.7 11.6 0.8 -0.7 0.1 5.7 6.0 11.7 0.3 12.0 1958-59
1959-60 8.3 1.2 1.7 11.2 5.8 6.2 12.1 0.1 1.2 1.3 5.9 7.5 13.4 -0.8 12.6 1959-60

1960-61 7.3 1.6 2.6 11.6 6.4 6.4 12.7 0.5 1.4 1.9 6.9 7.8 14.7 -0.3 14.4 1960-61
1961-62 7.0 1.8 2.9 11.7 6.3 7.1 13.4 0.2 1.3 1.6 6.5 8.4 15.0 -1.4 13.6 1961-62
1962-63 7.8 1.8 3.1 12.7 6.9 6.9 13.8 0.7 1.2 1.9 7.6 8.0 15.7 -0.7 14.9 1962-63
1963-64 7.2 1.8 3.3 12.3 7.2 7.0 14.2 0.5 0.8 1.3 7.7 7.8 15.5 -1.2 14.2 1963-64
1964-65 7.2 1.5 3.3 11.9 7.2 7.0 14.1 0.5 0.9 1.4 7.7 7.9 15.5 -1.3 14.2 1964-65

1965-66 9.4 1.5 3.1 14.0 7.6 7.5 15.1 0.6 1.2 1.2 8.2 8.1 16.3 -0.2 16.2 1965-66
1966-67 10.3 1.4 2.3 14.0 6.8 8.1 14.9 0.3 1.7 1.7 7.1 9.5 16.6 0.3 16.9 1966-67
1967-68 8.8 1.1 2.0 11.9 5.7 8.3 14.0 0.9 1.2 1.2 6.6 8.6 15.2 -1.1 14.2 1967-68
1968-69 8.6 1.1 2.4 12.2 5.7 8.3 14.0 0.1 0.4 0.4 5.8 8.6 14.4 -1.1 13.2 1968-69

Contd...
Structural Dimensions

33
of Indian Economy
34
Economy
Structure of Indian

Table 4.5 (B) : Gross Domestic Savings and Gross Domestic Capital Formation — contd.
(As per cent of GDP at current market prices)

Gross Domestic Savings Gross Fixed Capital Formation Change in Stocks Gross Domestic Capital Formation
Year House- Private Public Total Public Private Total Public Private Total Public Private Total Errors & Adjusted Year
hold Corporate Sector (2+3+4) Sector Sector (6+7) Sector Sector (9+10) Sector Sector (12+13) Omissions Total
Sector (14+15)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

1969-70 10.4 1.3 2.6 14.3 5.4 8.6 14.0 0.2 1.4 1.4 5.5 9.8 15.3 -0.5 14.8 1969-70

1970-71 10.1 1.5 2.9 14.6 5.5 8.5 14.0 0.9 0.9 1.8 6.4 9.4 15.8 -0.4 15.4 1970-71
1971-72 10.7 1.6 2.8 15.1 6.0 8.7 14.7 1.0 1.3 2.3 7.0 9.9 16.9 -0.9 16.0 1971-72
1972-73 10.4 1.5 2.7 14.6 7.0 8.3 15.3 0.2 0.7 0.9 7.2 9.0 16.2 -1.0 15.1 1972-73
1973-74 12.2 1.7 2.9 16.8 6.3 7.7 14.0 1.1 1.5 2.7 7.5 9.2 16.7 0.7 17.4 1973-74
1974-75 10.4 1.9 3.7 16.0 5.8 8.6 14.4 1.7 2.3 3.9 7.4 10.9 18.3 -1.5 16.8 1974-75

1975-76 11.7 1.3 4.2 17.2 7.0 9.2 16.2 2.4 0.4 2.8 9.4 9.6 19.0 -1.9 17.1 1975-76
1976-77 13.2 1.3 4.9 19.4 8.1 9.2 17.3 1.7 0.1 1.8 9.8 9.3 19.1 -1.2 17.9 1976-77
1977-78 14.1 1.4 4.3 19.8 7.8 9.3 17.2 0.1 1.4 1.5 8.0 10.7 18.7 -0.3 18.4 1977-78
1978-79 15.4 1.5 4.5 21.5 7.9 9.5 17.4 1.4 2.0 3.4 9.2 11.5 20.7 0.9 21.6 1978-79
1979-80 13.8 2.0 4.3 20.1 8.5 9.3 17.9 1.5 2.0 3.5 10.0 11.3 21.4 -0.8 20.6 1979-80

1980-81 13.8 1.6 3.4 18.9 8.4 10.1 18.5 0.1 0.1 0.2 8.4 10.3 18.7 1.6 20.3 1980-81
1981-82 12.6 1.5 4.5 18.6 8.9 10.1 18.9 1.2 2.3 3.5 10.1 12.3 22.4 -2.3 20.1 1981-82
1982-83 12.3 1.6 4.3 18.3 10.1 9.1 19.2 0.6 1.8 2.4 10.7 11.0 21.7 -2.0 19.6 1982-83
1983-84 12.8 1.5 3.3 17.6 9.5 9.3 18.8 0.2 0.7 0.8 9.7 10.0 19.7 -1.0 18.7 1983-84
1984-85 14.3 1.6 2.8 18.8 9.7 9.9 19.6 0.7 1.3 2.0 10.4 11.2 21.6 -1.5 20.1 1984-85

1985-86 14.3 2.0 3.2 19.5 10.1 10.5 20.6 0.7 2.4 3.1 10.8 12.9 23.7 -1.9 21.7 1985-86
 Table 4.5 (B) : Gross Domestic Savings and Gross Domestic Capital Formation — contd.
(As per cent of GDP at current market prices)

Gross Domestic Savings Gross Fixed Capital Formation Change in Stocks Gross Domestic Capital Formation
Year House- Private Public Total Public Private Total Public Private Total Public Private Total Errors & Adjusted Year
hold Corporate Sector (2+3+4) Sector Sector (6+7) Sector Sector (9+10) Sector Sector (12+13) Omissions Total
Sector (14+15)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

1986-87 14.5 1.7 2.7 18.9 10.9 10.2 21.1 0.3 1.9 2.1 11.2 12.0 23.2 -2.2 21.0 1986-87
1987-88 16.7 1.7 2.2 20.6 10.0 11.5 21.5 -0.4 1.1 0.7 9.5 12.6 22.1 0.4 19.6 1987-88
1988-89 16.8 2.0 2.1 20.9 9.6 12.0 21.6 0.1 2.2 2.0 9.5 14.2 23.7 0.1 18.7 1988-89
1989-90 17.9 2.4 1.7 22.0 9.2 13.2 22.4 0.4 0.9 1.3 9.5 14.1 23.7 0.9 20.1 1989-90

1990-91 19.3 2.7 1.1 23.1 9.0 13.9 22.9 0.3 0.8 1.1 9.3 14.7 24.1 2.2 26.3 1990-91
1991-92 17.0 3.1 2.0 22.0 9.2 12.9 22.0 -0.3 0.2 -0.1 8.8 13.1 21.9 0.6 22.6 1991-92
1992-93 17.5 2.7 1.6 21.8 8.2 14.2 22.4 0.4 1.0 1.3 8.6 15.2 23.8 -0.2 23.6 1992-93
1993-94 18.4 3.5 0.6 22.5 8.0 13.4 21.4 0.2 -0.4 -0.2 8.2 13.0 21.3 1.8 23.1 1993-94
1994-95 19.7 3.5 1.7 24.8 8.8 13.2 21.9 -0.1 1.5 1.4 8.7 14.7 23.4 2.6 26.0 1994-95

1995-96 18.2 4.9 2.0 25.1 7.7 16.7 24.4 -0.1 2.2 2.2 7.7 18.9 26.5 0.4 26.9 1995-96
1996-97 17.0 4.5 1.7 23.2 6.9 15.9 22.8 0.1 -1.2 -1.0 7.0 14.7 21.8 2.7 24.5 1996-97
1997-98 17.6 4.2 1.3 23.1 6.4 15.3 21.7 0.2 0.6 0.9 6.6 16.0 22.6 2.0 24.6 1997-98
1998-99 18.8 3.7 -1.0 21.5 6.5 15.1 21.5 0.1 -0.3 -0.1 6.6 14.8 21.4 1.2 22.6 1998-99
1999-00 20.8 4.4 -1.0 24.1 6.2 15.6 21.8 0.7 1.1 1.9 6.9 16.7 23.7 1.6 25.2 1999-00

2000-01 (P) 21.6 4.1 -2.3 23.4 6.1 15.8 21.8 0.3 0.4 0.7 6.4 16.1 22.5 1.5 24.0 2000-01(P)

2001-02(Q) 22.5 4.0 -2.5 24.0 5.9 15.7 21.7 0.4 0.4 0.8 6.3 16.1 22.4 1.3 23.7 2001-02(Q)

P : Provisional estimates.
Q : Quick estimates.

Note : (i) Based on data in Table 4.5 (A).

(ii) Ratios of savings and capital formation of individual sectors may not add
to totals because of rounding off.

Source : Central Statistical Organisation.

Structural Dimensions

35
of Indian Economy
Structure of Indian
Economy
Table 4.6 : GDP Growth, Rates of Investment and Incremental Capital-Output Ratio
(ICOR) in Indian Economy (1951-90)

Sl. Period Growth in Investment ICOR

No. GDP at Rate

1. 1950-51 to 1955-56 3.61 10.66 2.95

2. 1956-57 to 1960-61 4.27 14.52 3.40

3. 1961-62 to 1965-66 2.84 15.45 5.44

4. 1966-67 to 1970-71 4.66 15.99 3.43

5. 1971-72 to 1975-76 3.08 17.87 5.80

6. 1976-77 to 1980-81 3.24 21.47 6.63

7. 1981-82 to 1985-86 5.06 20.98 4.15

8. 1985-86 to 1989-90 5.81 22.70 3.91

9. 1985-86 to 1991-92 5.31 23.17 4.36

10. VIII Plan 6.54 3.43

11. IX Plan 5.35 24.23 4.53

12. X Plan 7.93 28.41 3.58

Source : Tenth Five Year Plan 2002-07, Vol. I.

36
UNIT 5 STRUCTURE OF INDIAN
INDUSTRY
Objectives
The main purpose of this unit is to help you to:
understand India’s Industrial sector
get an overview of India’s Industrial growth experience
analyse the various dimensions of the structure of Indian industry
discover and explain structural changes in the industrial sector, and
understand the ownership pattern of the industrial sector.

Structure
5.1 Introduction
5.2 Industrial Growth Experience: An Overview
5.3 Structural Changes in the Indian Industry
5.4 Ownership Pattern of the Industrial Sector
5.5 Summary
5.6 Key Words
5.7 Self Assessment Questions
5.8 Furthers Readings

5.1 INTRODUCTION
Before the rise of the modern industrial system in the world economy, Indian
producers (largely artisan classes) had a world-wide market. Indian muslim and
calicos were in great demand worldover. Indian industries not only supplied all
local needs but also enabled India to export its finished products. Indian exports
consisted chiefly of manufactures like cotton and silk fabrics, calicos, artistic
ware, silk and wollen clothing.

The impact of the British rule and the industrial revolution that took place in
Britain led to the decay of the Indian handicrafts. Instead, machine-made goods
started coming to India. The gap created by the decay of Indian handicrafts
was not filled by the rise of modern industry in India because of the british
policy of encouraging the imports of manufactured products into and export of
raw materials from India.

The British Government in India provided discriminatory protection to some

select industries since 1923. This protection was accompanied by the “most
favoured nation” clause of British goods. Despite this factor, because of the
“pioneering zeal” and “fostering care” (Prof. Lokanathan’s phrases) of the early
Indian entrepreneurs, some industries such as cotton textiles, sugar, paper,
matches, and to some extent, iron and steel did develop in the country. But
capital goods industries were not fostered during the British period. The
industrial pattern of India on the eve of planning (1950) was marked by low
capital intensity, predominance of small enterprises, limited development of
factory sector and imbalance between consumer goods and capital goods
industries. This lop-sided pattern of industry with the predominance of consumer
goods industries had to be corrected through economic planning in the
post-Independence period.
37
Structure of Indian
Economy 5.2 INDUSTRIAL GROWTH EXPERIENCE:
AN OVERVIEW
The progress of industrialisation during the four decades and more since the
beginning of the planning era has been a significant feature of the Indian
economic development. The process of industrialisation, initiated as conscious
and deliberate policy under Industrial Policy Resolutions of 1948 and 1956
involved heavy investments in basic and heavy industries besides those in
consumer goods industries. As a result of efforts for rapid industrialisation, a
firm industrial base has been achieved. Industrial production grew by about 5
times and India now is the tenth most industrial country in the world. India now
has a well-diversified industrial sector covering the entire range of consumer,
intermediate and capital goods industries. The progress the country has made in
respect of industrial sector is clearly reflected in the commodity composition of
India’s foreign trade. The share of imports of manufactured goods in foreign
trade has steadily declined, while industrial products, particularly engineering
goods have become a growing component of India’s exports. Further, the rapid
progress in industrialisation has been accompanied by a corresponding growth in
technological and managerial know-how for efficient operation of the most
modern and sophisticated industries and also for planning, designing and
construction of such industries.

India could achieve self-sufficiency in consumer goods. Growth of basic and

capital goods industries has been particularly impressive. India can now sustain
the future growth of key sectors of the economy primarily through domestic
production, with only marginal imports. Further, the infrastructure including
Research and Development capability, consultancy and design engineering
services, project organisation services and innovative capability to improve and
adapt technologies to suit the domestic factor endowment have shown an
impressive record of progress. Now we turn to industrial growth rates.

Table 5.1 gives industrial growth rates during various plan periods. The growth
rates are annual percentage changes in general index of industrial production.

During the Third Plan period, but for the concluding year of the plan period,
the annual growth rate exceeded 8 per cent. The average annual growth rate
during the period was 8.22 per cent. During the subsequent three annual plans
the growth rates fell significantly, except during 1968-69 when growth rate was
6.7 per cent.

The period was marked by low growth rates, the average growth rate for the
period being 2.83 per cent. The industrial growth recovered significantly during
the Fourth Plan period but the average growth rate during the period (4.4 per
cent) was significantly lower than that during the Third Plan period (8.22 per
cent). The industrial growth performance during the Fifth Plan was a significant
improvement over the preceding years after the Third Plan period. The average
growth rate during the Fifth Plan period was 6.24 per cent. During the period
the highest growth rate was recorded during the year 1976-77 (9.5 per cent)
Subsequent to the Fifth Plan, the growth rate recorded during the annual plan
1979-80 was negative i.e., -1.6 per cent. During the Sixth Plan period the
industrial sector not only recovered but registered an annual growth rate of 5.9
per cent. During the subsequent Seventh Plan period (1985-90) the industrial
growth proceeded at a substantial rate and the average annual growth rate
during the period was 8.5 per cent, the highest growth rate achieved since the
end of the Third Plan.

38
Table 5.2 gives trends in industrial production during the period 1998-99 to Structure of Indian
Industry
2002-03. The base year for the index numbers is 1993-94. It can be seen from
the Table that the general index of industrial production increased from 145.2 to
176.6 during the period.

The industrial production has three components in it: mining manufacturing and
electricity. The index of production in mining increased from 125.5 in 1993-94
to 139.6 in 2002-03. The index of manufacturing during the same period
increased from 148.8 to 183.1 and the index of electricity generation increased
from 138.4 to 164.3.

Now, let us look at the manufacturing sector growth record. Manufacturing is a

major segment of the industrial sector.

Tables 5.3 (A) and 5.3 (B) give data relating to growth of manufacturing
sector. At the aggregate level, the annual rate of growth of manufacturing has
fluctuated considerably in the 90s. Both the Index of Industrial Production and
National Accounts Statistics (NAS) figures on manufacturing value added show
that there was negative growth in 1991-92, the first year of reforms. Thereafter
the growth increased steadily and reached a peak of about 14 per cent in
1995-96. The rate has decreased since reaching a growth of about 3 to 4 per
cent in 1998-99. The index however shows that there has been an improvement
in 1999-2000 (7.1 per cent growth rate).

The rate of growth of gross value added by the manufacturing sector as a

whole and its registered segment is remarkably similar in the 1990s. After
registering a decline in 1991-92, the value added of the registered
manufacturing sector recovered steadily in the next few years but started
decelerating in 1995-96.

The compound annual rate of growth of gross value added by the registered
manufacturing sector was 5.91 per cent between 1990-91 to 1998-99. The
corresponding rates between 1950-51 to 1965-66, between 1980-81 to 1990-91
were 7.03 per cent and 7.66 per cent respectively.
Activity 1

a) Mention the components of the industrial sector.

b) From Table 5.2 compute the average percentage changes in indices of
mining, manufacturing and electricity during the period 1998-99 to 2002-03.
c) From Table 5.2 indentify the highest growth rates and attempt an
explanation.
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39
Structure of Indian
Economy 5.3 STRUCTURAL CHANGES IN THE INDIAN
INDUSTRY
In this section we will look at several dimensions of the structure of Indian
industry. As industrial development proceeds in an economy, several structural
changes take place in the industrial sector. Historically, industrial development
has proceeded in three stages. In the first stage, industry was concerned with
the processing of primary products. Milling grain, extracting oil, tanning leather,
spining vegetable fibres, preparing timber, and smelting ores. The second stage
in the evolution of secondary industry comprises the transformation of materials
making bread and confectionary, footwear, and metal goods, cloth, furniture and
paper. The third stage consists of the manufacture of machines and other
capital equipment to be used not for the direct satisfaction of any immediate
want but in order to facilitate the future process of production W.G. Hoffman
(The Growth of Industrial Economies, Oxford, 1958) gives operational criteria
of the degree of industrial development. He classified all industrial output into
two categories, consumer goods and capital goods and classified various stages
in terms of the ratio of consumer goods to that of capital goods output. “In the
first stage the consumer goods industries are of overwhelming importance, their
net output being on the average five times as large as that of capital goods
industries”. This ratio is 2.5:1 in the second stage and falls to 1:1 in the third
stage and still lower in the fourth stage. This classification emphasises the
increasing role of the capital and producer goods industries in the economy as
industrial development takes place.

In the post-independence period economic planning for overall development

succeeded in laying firm foundations for future economic development. The
heavy-industry strategy formulated and implemented from begining from the
Second Five Year Plan helped in creating a strong industrial base. Capacities in
substantial quantities have been created in basic, key and heavy industries.
Table 5.4 and 5.5 throw light on one dimension of structural change (changes
in the composition of output) in India’s industrial sector.

One striking feature of the period of planning was that the structure of Indian
industries had changed in favour of basic and capital goods sector. The study
of structural transformation of the Indian industries reveals that there was a
clear shift in favour of basic and capital goods sector. This group accounted for
about 50 per cent of productive capital in 1959 but in 1991-92, its share in
productive capital rose to nearly 79 per cent. In total employment, its share
rose from 25 per cent to 52 per cent between 1959 and 1991-92. Similarly, the
contribution in value added improved from 37 per cent to 56 per cent during
this period. Basic industries which include iron and steel, fertilisers, chemicals,
cement, non-ferrous metals have thus improved their position significantly under
the impact of industrialisation. Several capital goods industries hitherto unknown
have been brought into to existence and developed. On the other hand, during
the same period the share of consumer goods industries such as textiles, sugar,
paper, tobacco, etc., declined in terms of productive capital, employment and
value-added.
Activity 2
a) Refer to RBI, Report on Currency and Finance and give the composition
of each of the following categories of Industries:
1. Basic goods
2. Capital goods
3. Intermediate goods
4. Consumer goods
40
b) Explain the meaning of intermediate goods. Structure of Indian
Industry
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

Activity 3
Read carefully Table5.4 and answer the following:
a) What is the average percentage change in index of basic industries during
1981-82 to 2001-02.
b) Giving examples of consumer durables, find out the average percentage
change in the index of consumer durables during 1981-82 to 2001-02.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

Size of Industrial Units – Another Structural Dimension

The size of an industrial unit can be measured using different criteria. Output,
total assets, fixed capital, and employment are some of the major criteria to
measure size of the industrial units. Changes in the average size of the
industrial units represent an important structural change of the industrial sector
in an economy. We turn to this structural dimension in this section.

As future managers you must know about this important dimension of the
structure of industry. We may list the circumstances under which a large firm
or a small one would be more efficient. Such synthesis provides guidance for
making the proper choice of the optimum size for the firm. A large firm would
be more efficient in situations where:
a) the product is standardized and can be produced on mass scale with longer
production runs such as iron and steel, sugar, industrial chemicals and
fertilizers;
b) the product and/or machines used in its production are large in size such as
automobiles, ships and electricity generation;
c) the economies of linked processes are significant as in the case of pulp and
paper industry and steel among others;
d) the markets for the product are concentrated and/or transport costs are
considerably low in comparison to the price of the product;
e) there are occasional indivisibilities in different units or operations of the plant
which are to be belanced; and
f) research activities are essential to compete in the market such as in
chemical industries.

41
Structure of Indian A small firm would be more efficient if all these above conditions are not
Economy
satisfied, that is, where:
a) the production factors, e.g., men and machines, are “divisible” or adaptable;
b) the product is to be made an individual specification or where varieties or
product differentiation are required in the market for existence, i.e.,
standardization and mass production is an economical. Examples are
ornaments and clothing;
c) the raw materials and markets for the products are geographically dispersed
and transport costs are quite significant, e.g. bread and brick-making;
d) the demand conditions change frequently as a result of which quick
adjustments are needed to adapt to such changes, e.g., garment making;
e) the nature of work done changes frequently due to technical conditions e.g.,
agriculture and allied industries; and
f) the supplies of the raw materials and potential market for the product are small.

Complete seperation of situations for large scale and small-scale units is not
possible. There are many industries where small scale and large scale
production is carried on side by side. Examples are engineering industries,
cloth making, shoe making and several consumer products. In fact, if we go
through the industrial structure of a country, we will find such situation in
most of the industries. Small units in an industry exist along with larger ones
mainly because (i) they may be relatively new and it is normal to grow large
from small beginnings in due course of time, (ii) they may be supplying
finished products to the larger units under some type of sub-contracting, and
(iv) they may be producing a highly specific variety of products in a
differentiated product industry. All such small units may be equally efficient
as the bigger units.

5.4 OWNERSHIP PATTERN OF THE INDUSTRIAL

SECTOR
After independence India wanted to adopt planned economic development. We
have gone through several Five Year Plans. We opted for a mixed economy
with both private and public sectors, complementing each other rather than
competing. The scope of each sector was well-defined in the industrial policies
announced from time to time by the Government. Industrial Policy Resolution of
1956 was the major policy announcement. We will learn about these policies in
detail in the next two units. Here our interest is to describe the structure of
India’s industrial sector on the basis of ownership pattern.

Table 5.6 gives structure of ownership of industrial factory sector in 1997-98.

The public sector accounted for 7 per cent of total number of factories, 24 per
cent of employees, 32 per cent of net fixed capital and 28 per cent of net
value added by the industrial factory sector. Public sector includes enterprises
of the Central Government, State and local governments.

The Private sector including cooperative sector accounted for 91 per cent of
total number of factories, 69 per cent of employees, 55 per cent of net fixed
capital and 59 per cent of value added. This sector has four components:
i) Corporate enterprises, ii) Partnerships, iii) Individual proprieterships, and
iv) Cooperative enterprises.

Joint sector (enterprises owned jointly by private and public or government

interests) accounted for 1.8 per cent of total factories, 6.7 per cent of
employees, 12 per cent of net fixed capital and 12 per cent of value added.
42
Regional distribution of industrial activity and industrial concentration are two Structure of Indian
Industry
more dimensions of the structure of India’s industrial sector. You are advised to
take down notes on these two aspects by going through the publications given
under Further Readings.

We will learn about public and private sectors in detail in the next two units.
Activity 4
Refer to Table 5.6 and attempt the following:
a) List a few observations about the structure of public sector.
b) Comment on the size of: i) cooperative sector, and ii) joint sector.
c) Explain the organizational form in the private sector.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

5.5 SUMMARY
In this unit we acquainted you with several aspects of India’s industrial sector.
You have learnt about India’s industrial growth experience. We looked at the
structure of the Indian industrial sector from several dimensions: Composition of
output, size, and ownership pattern.

5.6 KEY WORDS

Industrial Sector : Industrial Sector has three components: Mining,
Manufacturing, and Electricity.

Gross Value added in Manufacturing : It is the value of output of

manufacturing minus the value of intermediate inputs. Gross value added is
gross of depreciation.

Structural Changes : Changes in average size of the industrial units, in

ownership pattern of the industrial sector and so on.

5.7 SELF-ASSESSMENT QUESTIONS

1) Explain the major structural characteristics of India’s industrial sector.

2) “As industrialisation of a country proceeds, the relative important of
consumer goods industries declines and that of capital goods industries
increases” Justify this proposition by using the relevant data.
3) Going through the Unit-carefully, Comment on the “declaration of industrial
growth thesis”.

5.8 FURTHER READINGS

Dutt Ruddar and Sundaram, K.P.M., Indian Economy.

Lakshmana Rao, V. Essays on Indian Economy, Essay No. 3,

New Delhi: Ashish Publishing House, 1994.
43
Structure of Indian Appendix 2
Economy

List of Statistical Tables

Table 5.1 : Industrial Growth Rates During Plan Periods

Table 5.2 : Trends in Index of Industrial production (Base 1993-94)

Table 5.3(A) : Annual Rate of Growth of Manufacturing Sector.

Table 5.3(B) : Annual Rate of Growth of the Registered Manufacturing

Sector

Table 5.4 : Industrial Production: Use Based Classification

Table 5.5 : Average Annual Growth Rate of Industrial Production

Table 5.6 : Ownership Pattern in Indian Industries (1997-98)

44
 Table 5.1: Industrial Growth Rates During Plan Periods Structure of Indian
Industry

Plan Year Index Growth Growth Rate

Rate during
Plan Period
(Base 1970=100)
Third Plan 1960-61 55.8
1961-62 60.4 8.2
1962-63 66.1 9.5 8.22
1963-64 72.3 9.3
1964-65 78.6 8.8
1965-66 82.8 5.3

Annual Plans 1966-67 83.3 0.6

1967-68 84.3 1.2 2.83
1968-69 89.9 6.7

Fourth Plan 1969-70 96.8 7.6

1970-71 101.3 4.7
1971-72 106.4 5.0 4.4
1972-73 110.6 3.9
1973-74 111.5 0.8

Fifth Plan 1974-75 115.1 3.2

1975-76 122.8 6.7
1976-77 134.4 9.5 6.24
1977-78 140.0 4.2
1978-79 150.7 7.6

Annual Plan 1979-80 148.2 (-) 1.6

Sixth Plan 1980-81 154.1 4.0

(Base 1980-81 = 100)

1981-82 109.3 8.6

1982-83 113.9 4.1 5.9
1983-84 120.8 6.1
1984-85 129.0 6.8

Seventh Plan@ 1985-86 142.1 8.7

1986-87 155.1 9.2
1987-88 166.4 7.3 8.5
1988-89 180.9 8.7
1989-90 196.4 8.6

Annual Plans @ 1990-91 212.8 8.3 4.45

1991-92 214.0 0.6
Eighth Plan 1992-93 218.9 2.3
1993-94 232.0 6.0

(Base 1994-94 = 100)

1994-95 108.4 8.6

1995-96 122.3 12.8
1996-97 129.1 5.6 7.0

Ninth Plan 1997-98 136.6 5.8

1998-99P 143.0 4.7

@
Base : 1980-81 = 100; from 1990-91 onwards P Provisional

Source : Centre for Industrial and Economic Research, Industrial Databook, 2000-01.
45
Structure of Indian Table 5.2 : Trends in Index of Industrial Production (Base : 1993-94 = 100)
Economy

Sector Mining & Quarrying Manufacturing Electricity General

Weight 10.47 79.36 10.17 100.00
Period Index Growth Index Growth Index Growth Index Growth
Rate Rate Rate Rate
(per cent) (per cent) (per cent) (per cent)

1 2 3 4 5 6 7 8 9

1998-99 125.4 -0.8 148.8 4.4 138.4 6.5 145.2 4.1

(-1.8) (86.9) (14.9) (100.0)

1999-2000 126.7 1.0 159.4 7.1 148.5 7.3 154.9 6.7

(1.4) (87.9) (10.7) (100.0)

2000-01 130.3 2.8 167.9 5.3 154.4 4.0 162.6 5.0

(4.9) (87.3) (7.7) (100.0)

2001-02 131.9 1.2 172.7 2.9 159.2 3.1 167.0 2.7

(3.8) (85.3) (10.9) (100.0)

2002-03 P 139.6 5.8 183.1 6.0 164.3 3.2 176.6 5.8

(8.4) (86.2) (5.4) (100.0)

P : Provisional

Note : Figures in brackets are relative contributions, computed as the ratios (in percentage terms) of
the change in the index of the respective industry group to the change in the overall index
adjusted for the weight of the relative industry group.

Source : Central Statistical Organisation.

Table 5.3 (A) : Annual Rate of Growth of Manufacturing (Per cent)

Year Index of Industrial Gross Value Added of Gross Value Added of

Production NAS Manufacturing Registered Manufacturing
(Manufacturing) at Constant Prices at Constant Prices

1990-91 9 6.1 5.0

1991-92 - 0.8 -3.7 -2.3

1992-93 2.2 4.2 3.1

1993-94 6.1 8.4 11.5

1994-95 9.1 10.7 13.2

1995-96 14.1 14.9 15.5

1996-97 7.3 7.9 8.1

1997-98 6.7 4.0 3.4

1998-99 4.4 3.6 3.9

1999-2000 7.1

Source : Economic and Political Weekly, January, 2002.

46
 Table 5.3 (B) : Annual Rate of Growth of the Registered Manufacturing Sector Structure of Indian
Industry
Gross Value Added of Registered Manufacturing
Year Sector at Constant Prices
(Per cent)
1952-53 0.5
1953-54 4.4
1954-55 11.1
1955-56 12.3
1956-57 11.1
1957-58 4.7
1958-59 2.9
1959-60 10.1
1960-61 12.4
1961-62 9.1
1962-63 9.7
1963-64 11.3
1964-65 8.3
1965-66 3.3
1966-67 0.1
1967-68 -3.3
1968-69 6.8
1969-70 17.4
1970-71 2.4
1971-72 1.8
1972-73 3.2
1973-74 4.9
1974-75 1
1975-76 1
1976-77 12.5
1977-78 6.7
1978-79 10.9
1979-80 -2.1
1980-81 -1.6
1981-82 7.7
1982-83 9.6
1983-84 14.7
1984-85 8.4
1985-86 2.3
1986-87 5.8
1987-88 7.1
1988-89 10.6
1989-90 13.9
1990-91 5.0
1991-92 -2.3
1992-93 3.1
1993-94 11.5
1994-95 13.2
1995-96 15.5
1996-97 8.1
1997-98 3.4
1998-99 3.9

Compound Annual Rate of Growth of Manufacturing

Year CARG of Gross Value Added of Registered
Manufacturing Sector at Constant Prices
(Per Cent)
1950-51 to 1965-66 7.03
1955-56 to 1965-66 7.47
1980-81 to 1990-91 7.66
1990-91 to 1998-99 5.91

Source : CSO, National Accounts Statistics (various issues). 47

Structure of Indian Table 5.4 : Industrial Production : Use Based Classification
Economy

Year Basic Capital Intermediate Consumer Consumer Consumer

Goods Goods Goods Goods Durables Non-durables

1 2 3 4 5 6 7

Base : 1980-81 = 100

Weight 39.42 16.43 20.51 23.65 2.55 21.1

1981-82 110.9 106.7 103.7 113.8 110.9 114.1

1982-83 118.7 110.6 107.7 112 121 110.9

1983-84 125.8 123.5 115 113.8 140.5 110.5

1984-85 139.8 127.2 126.2 122 178.8 116.1

1985-86 149.3 140.7 135.7 137.3 212.2 129.5

1986-87 163.2 166.3 141.2 145.7 241.3 134.1

1987-88 172.2 192.8 145 160 259.6 147.9

1988-89 189.2 206.4 161.5 166.2 317.5 148

1989-90 199.4 251.5 168.9 177 325 159.1

1990-91 213.1 291.7 176.9 189 359.7 168.3

1991-92 226.9 266.8 173.2 190.8 320.5 175.1

1992-93 232.9 266.4 182.6 194.2 318.1 179.3

1993-94 254.9 255.4 203.9 202 369.4 181.7

1994-95 269 318.8 211.4 219.6 407.2 196.9

1995-96 291.4 376 236.3 251 554.2 214.3

1996-97 315.1 398 259.5 261.3 584.4 222.2

1997-98 337.3 382.2 277.4 273.3 642 228.7

Base : 1993-94 = 100

Weight 35.57 9.26 26.51 28.66 5.36 23.3

1994-95 109.6 109.2 105.3 112.1 116.2 111.2

1995-96 121.4 115 125.7 126.5 146.2 122.1

1996-97 125 128.2 135.9 134.3 152.9 130.2

1997-98 133.6 135.6 146.8 141.7 164.9 136.5

1998-99 135.8 152.7 155.8 144.8 174.1 138.1

1999-00 143.3 163.3 169.5 153 198.7 142.5

2000-01 148.5 166.2 177.4 165.2 227.6 150.8

2001-02 152.5 160.6 180.1 175.1 253.7 157

Source : Central Statistical Organisation, Government of India.

48
 Table 5.5 : Average Annual Growth Rate of Production Structure of Indian
Industry

1974-79 1980-85 1985-90 1993-94

to
2000-01
V Plan VI Plan VII Plan

Basic industries 8.4 8.3 7.4 5.8

Capital goods 5.7 7.1 15.7 7.5

Intermediate goods 4.3 6.2 5.5 8.5

Consumer goods 5.5 6.5 6.6 7.4

(a) Durables 6.8 15.2 12.1 12.4

(b) Non-durables 5.4 5.3 5.4 6.1

Source : Government of India, Ministry of Industry, Handbook of Industrial Statistics

(1987) and RBI, Handbook of Statistics on Indian Economy, 2001.

Table 5.6 : Ownership Pattern in Indian Industries (1997-98)

Partners No. of Productive capital Employees Net value Wage per

Factories Rs. Crores (*000) added Worker (Rs.)
Rs. Crores

Public Sector 9,516 1,88,032 2,387 44,358 62,936

(7.0) (32.1) (24.0) (28.4)

Joint Sector 2,479 71,637 669 18,819 66,644

(1.8) (12.2) (6.7) (12.1)

Private Sector 1,23,106 3,25,889 6,838 92,503 32,342

(90.8) (55.5) (68.9) (59.3)

Unspecified 450 972 31 267

(0.3) (0.2) (0.3) (0.2)

Total 1,35,551 5,86,530 9,925 1,55,947

(100.0) (100.0) (100.0) (100.0)

Note : Figures in brackets are percentage of total.

Source : Annual Survey of Industries (1997-98).

49
Structure of Indian
Economy UNIT 6—PUBLIC SECTOR IN INDIA
Objectives
The main purpose of this unit is to help you:
understand the nature and importance of public sector in India
understand the objectives of public sector
analyse the structure and growth of public sector, and
understand the functioning and performance of public sector.

Structure
6.1 Introduction
6.2 Objectives and Scope of Public Sector
6.3 Structure and Growth of Public Sector
6.4 Working of Public Sector
6.5 Performance of Public Sector
6.6 Summary
6.7 Key Words
6.8 Self Assessment Questions
6.9 Further Readings

6.1 INTRODUCTION
In India’s mixed economy, public sector occupies a pivotal positioin. Public
enterprises are expected to make significant contribution to growth in national
income, creation of employment opportunities, reduction in income disparities
among regions and groups, earning of foreign exchange and generation of
surpluses for financing development efforts. Over a period of time, in the post-
Independence period, the size of the public sector has grown rapidly, and the
number of public enterprises as well as the areas of their operation have
recorded significant progress. Public sector was expected to achieve
“commanding heights” in the economy and it did so over a period of forty
years. However the quantitative growth of the public sector was not matched
by qualitative performance. Many public sector enterprises were incurring
losses. The performance of public sector in general was so discouraging that as
part of New Economic Policy announced by the Indian government in 1991 the
scope and role of the public sector was sought to be reduced drastically. An
understanding and analysis of economic environment of business in India is not
complete without an understanding and objective assessment of our public
enterprises. This unit attempts to explain the objectives of India’s public sector.
It analyses the various aspects of structure and growth of public sector, and
evaluates the performance of public sector. Finally, it discusses the
shortcomings of public sector enterprises.

6.2 OBJECTIVES AND SCOPE OF PUBLIC

SECTOR
The public sector exists in contrast to the private sector. Any activity owned,
controlled and managed by the government (Central, State and Local) comes
under public sector. After the attainment of independence and the advent of
50 planning, there has been a rapid expansion of the scope of the public sector.
The passage of Industrial Policy Resolution of 1956 and the adoption of the Public Sector in India
socialist pattern of society as our national goal further led to a deliberate
enlargement of the role of public sector. From the standpoint of organization,
structure and management, there are four types of public sector enterprises in
India:
1. Those which are departmentally managed (departmental enterprises such as
the Indian Railways).
2. Those which are managed by independent boards.
3. Those which are run as public corporations (which come into existence by
Acts of Parliament).
4. Those which are organised as companies (registered under the Companies Act).

The objectives of the public sector, can be briefly described as:

1. to accelerate the economic growth and industrialisation of the country by

creating the necessary infrastructure for development;
2. to promote fair distribution of income and wealth, interpersonal as well as
inter-regional;
3. to promote balanced regional development;
4. to promote the growth of strategic defence-oriented industries;
5. to assist the development of small and ancillary industries;
6. to create employment opportunities;
7. to achieve socialist pattern of society;
8. to avoid and circumvent the limitations and abuses of the private sector; and
9. to generate forces of economic and technological self-reliance.

Let us elaborate these objectives of the public sector which inspired its rapid
growth. In a developing country like India, some industries need to be brought
within public ownership and control in order to achieve rapid economic growth.
Public enterprises became an essential part of the economic development
programme in India. The justification for public enterprises in India is based on
the fact that the rate of economic development planned by the government is
much higher than can be achieved by the private sector along. In other words,
the public sector is essential to achieve the objective of accelerated rate of
economic development.

Heavy industry strategy initiated during the Second Plan period called for a
pattern of resource allocation which necessitated expansion of the public sector.
The Public sector proved to be a means for rapid development of heavy and
basic industries.

The objective of economic equity, inter-regional and inter-personal, also

promoted rapid growth of public sector. The anxiety for balanced regional
development found a means for it in public sector growth. Public enterprises of
the Central goverment are to be set up in those regions which are
underdeveloped and where local resources are not adequate. A revealing
example is the setting up of the three public sector steel plants at Bhilai,
Rourkela and Durgapur which were meant to help industrialise the regions
surrounding the projects.

Funds for financing development can be generated by way of surpluses from

public enterprises. The surplus of government enterprises can be reinvested in
the same industries or can be used for the establishment and expansion of
other industries. No doubt, private sector industries can also plough back whole
or substantial amounts of their profits for expansion. 51
Structure of Indian However, profits in private enterprises are declared as dividends among share-
Economy
holders. This would only create income inequalities among people. But surpluses
of public sector enterprises can be directly used for capital formation to
promote the objective of accelerated economic development.

Employment growth objective as well as the objective of promoting small and

ancillary industries to achieve several other objectives can be achieved through
the means of public sector expansion. The objective of earning/saving foreign
exchange is also fulfilled by the growth of the public sector.

Some public sector enterprises were started specifically to produce goods which
were formerly imported in order to save foreign exchange. The entry of
Hindustan Antibiotics Limited and the Indian Drugs and Pharmaceuticals
Limited into the manufacture of drugs and pharmaceuticals were meant to
remove the monopolistic stranglehood of foreign enterprises in the field and
have helped India to save foreign exchange used for importing these items.
Likewise, the Oil and Natural Gas Commission and the Indian Oil Corporation
are public enterprises which attempt directly to increase self-reliance of the
country and reduce our dependence on imports. The Bharat Electronics Limited
has saved foreign exchange by way of import substitution.

Most of the public sector enterprises were started keeping in mind the
requirements of the Indian economy in the fields of production and distribution.
However, some public enterprises have done much to promote Indian exports.
The State Trading Corporation have done a good job of export promotion in all
parts of the world. Considerable success has been achieved in pushing up the
exports of Indian handicrafts, light engineering goods and many other new items
of exports. Hindustan Steel Ltd., the Bharat Electronics Limited, the Hindustan
Machine Tools, etc. are some of the public enterprises which are exporting
increasing proportion of their output and earning foreign exchange.

Public sector growth, it was believed, contributes importantly to the

achievement of the objective of socialistic pattern of society. The socialistic
pattern of society calls for extension of public sector in two ways. Firstly,
production will have to be centrally planned as regards the type of goods to be
produced, the volume of output and the timing of their production. It may be
comparatively easy to achieve this through public sector rather than through
private sector. It is worth quoting from the Second Five Year Plan in this
connection: “The adoption of the socialistic pattern of society as the national
objective, as well as the need for planned and rapid development require that
all industries of basic and strategic importance, or in the nature of public utility
services should be in the public sector. Other industries which are essential and
require investment on a scale which only the State, in present circumstances,
could provide, have also to be in the public sector.”

Secondly, one of the objectives under the Directive Principles of State Policy in
our constitution is to bring about reduction in the inequalities of income and
wealth and to establish an egalitarian society. The Five Years Plans have taken
up this as a major objective. The public sector may be used as an instrument
for achieving this objective for the following reasons: 1. The surpluses of public
enterprises will go to the government unlike those of private enterprises which
enrich private pockets 2. There can be effective regulation of income of top
executives in public enterprises (with steps to ensure managerial efficiency in
public enterprises) 3. The public enterprises can adopt discriminatory pricing to
benefit poorer classes. 4. They make possible raising of wage income of the
low-paid workers. 5. They help to reduce income from imports for private
individuals.
52
It is worth mentioning in this connection the opinion of Prof. V.K.R.V. Rao: Public Sector in India
“sectors of economic activity which involve either monopoly conditions or
strategic economic power or possession of large resources in private hands
should be publicly owned and operated as public enterprises. It also means that
public enterprises should make themselves responsible for the building of the
economic overheads like transport, power, fuel, and basic capital goods without
which increase in the production of consumption goods and services either on
the required scale or necessary economic basis will not be possible, irrespective
of whether it is to be in the private or public sector... without public enterprise,
there can be no private enterprise. In fact, it is the former that enables the full
growth of the latter” (V.K.R.V. Rao, “The Public Sector in Indian Socialism” in
P.R. Brahmananda and Other (eds.), Indian Economic Development and
Policy (1979), pp. 26-27.

Limitations of and abuses by the private sector also necessitate public takeover
or government initiative. When initial capital requirements are large, private
sector fails to come forward in a big way. In such cases, public sector
enterprise is the answer (example, steel industry). When risks involved are
large, private sector may be reluctant to take up the activity. For development
reasons, public sector may have to fill the gap (e.g., fertilizer units). The
sickness of private sector units necessitates take over by the public sector (e.g.,
sick textile units in Private Sector formed into National Textiles Corporation
(NTC). In the interests of workers/employees, consumers or in the interest of
society in general, nationalisation may be warranted (e.g., nationalisation of life
insurance and major commercial banks).

To conclude, the establishment and expansion of public sector was aimed at the
fulfillment of our national goals such as the removal of poverty, the attainment
of self-reliance, reduction in income inequalities, expansion of employment
opportunities, removal of regional imbalances, acceleration of the pace of
economic development, reduction of concentration of economic power and of
monopolitic tendencies. By acting as an effective countervailing power (a
phrase of Professor Kenneth Galbraith, American Capitalism: The Concept of
Countervailing Power) to the private sector, it would hopefully make the
country self-reliance in modern technology and create professional, technological
and managerial cadres so as to ultimately rid the country from dependence on
foreign aid.

We have noted above the important objectives of the public sector. Now we
turn to the understanding of the role of public sector in the Indian economy. To
understand the role and importance of public sector in the economy, we have to
get quantitative idea about it. Public sector expanded rapidly only since 1960.
The size of the public sector is to be understood through several indicators such
as employment, investment, and value of output. You will learn the details about
public sector growth and structure in the later sections. Here it is sufficient to
note the importance of public sector in the Indian economy by the size of the
indicators mentioned above.

In 1992-93 public sector accounted for 6.1 per cent of total number of
factories. If we go by the employment criterion, public sector had 26.5 per cent
of total workers in the factory sector and 28.1 per cent of total employees.
Public sector accounted for 55.1 of net fixed capital, and more than 50 per
cent of fixed capital in the factory sector. As for the gross output criterion,
public sector accounted for 26.2 per cent of the gross value of output of the
factory sector. Public sector accounted for 32.1 per cent of net value added by
the factory sector. Net value added is the gross value of output minus the
value of intermediate inputs minus depreciation. These figures bring out clearly
the role and importance of public sector in the Indian economy. 53
Structure of Indian It may be noted in this connection that public sector provides many producer
Economy
and capital goods to the private sector (e.g. steel for all economic activities and
fertilizers for the agricultural sectors). Public sector has entered into a wide
spectrum of industries. Its operations involve basic and capital goods like steel,
coal, copper, zinc, and other minerals, and heavy machinery. We find public
sector important in drugs and chemicals, fertilizers, consumer goods like textiles,
hotel services, watches, bread etc. Most of these industries have strategic
importance in the Indian economy since they have high linkages.
Activity 1
In 1966, the then Prime Minister proclaimed the objectives of public sector in
India as follows: “We advocate a public sector for three reasons: to gain
control of the commanding heights of the economy; to promote critical
development in terms of social gain of strategic value rather than primarily on
considerations of profit; and to provide commercial surpluses with which to
finance further economic development.” (Quoted in Lok Udyog, June 1976)
...........................................................................................................................
...........................................................................................................................
...........................................................................................................................
...........................................................................................................................
...........................................................................................................................

Explain in about 50 words each of the objectives announced by the Prime

Minister.
Activity 2

a) Quite a few of our public enterprises have long names. We often use
abbreviations (called acronyms) to identify them. Can you spell them out?
You may like to extend the list yourself.

Acronym Full name

BHEL

BEL

CIL

DVC

HAL

FCI

HSL

HMT

IDPI

ITI

MMTC

ONGC

IOC

NIDC
54
b) Now that you know that our public enterprises produce goods (such as Public Sector in India
metals, oil, consumer goods etc.) as well as services (transport, trade,
finance etc.), can you broadly classify the enterprises listed above in (a) into
the two groups; as indicated below:
Goods Public Enterprises Services
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6.3 STRUCTURE AND GROWTH OF PUBLIC

SECTOR
During the last five decades, the share of the public sector in net domestic
product (NDP) has shown a steady improvement. Measured at current prices,
public sector accounted for 7.5 per cent of NDP in 1950-51, its share in 1999-
2000 had risen to 24.1 per cent. Public sector, therefore, accounts for about
one-fourth of national output. This is largely due to a rapid expansion of the
public sector enterprises.

There is a big increase in the share of public administration and defence from
4.5 per cent to 10.1 per cent between 1950-51 and 1999-2000. The share of
public sector enterprises, however, rose from 3 per cent in 1950-51 to 13.2 per
cent in 1999-00. Despite this fact, the private sector still occupies a dominant
position in the economy. There are some sectors such as agriculture and small-
scale sector in which the share of the state is almost zero. However, in
insurance, civil aviation, defence equipment, indigenous, crude oil production,
etc., government ownership is cent per cent. Increasingly, industries of strategic
and national importance are being brought under state ownership.

Table 6.2A gives the employment structure of the public sector.

The share of public sector in total employment reveals that in transport and
communications, electricity, gas and water supply, and construction, the share of
the public sector exceeded 90 per cent. After nationalisation of coal mines and
major banks a major part of employment in these areas is accounted for by the
public sector.

Employment in the public sector increased from 107.0 lakhs in 1971 to 191.4
lakhs in 2001 (See Table 6.2). The public sector accounted for 61.1 per cent of
total organised sector employment in 1971. This share went up to 68.9 per cent
by 2001.

Thus the private sector accounted for only 31.1 per cent of total organised
sector employment. During the period 1976-1995 the average annual growth
rate of employment in the public sector worked out to be 1.8 per cent. During
the same period the growth rate of employment in the private sector was 1.1
per cent, significantly lower than the public sector employment growth rate.
Public sector thus has been an important source of organised sector
employment.
55
Structure of Indian As you know, capital is an important factor of production. Capital formation
Economy
takes place through ivestment. Net investment during a year is an addition
made to the capital stock. In other words, capital stock in an economy
increases through net investment. Savings out of current income when invested
add to the capital stock of the economy. Let us now look at trends in savings,
capital formation and capital stock of the public sector. Table 6.3 gives
information on savings and capital formation in public and private sectors.

Gross domestic capital formation increased from 10.7 per cent of Gross
National Product (GNP) during the First Plan period to 28.4 per cent during the
Tenth Plan period. As for the capital formation in public sector, it increased
from 3.5 per cent of GNP during the First Plan period to 8.4 per cent during
the Tenth Plan period. The share of public sector in capital formation increased
from 33 per cent during the First Plan period to 47 per cent during the Seventh
Plan period. The rapid growth of public sector is evident from this.

However, the rate of savings of the public sector fell short of the rate of
capital formation. The share of the public sector savings in total gross domestic
savings decreased from 17 per cent during the First Plan period to 11 per cent
during the Seventh Plan period. The public sector has been financing its capital
formation through incurring debt. This debt financing increased substantially
during the 1980s decade.

Let us consider the share of the public sector in capital stock. The term
‘capital stock’ refers to the total stock of plant and machinery, equipment and
tools and other capital goods available at a point of time for further production.
Capital stock represents produced means of production. The term investment
(or gross capital formation) refers to annual flow of installation of goods partly
to meet the needs of depreciation of capital stock and partly to increase the
size of the total capital stock on a net basis. Data given in table 6.4 reveal that
gross fixed capital formation (GFCF) during 1950-51 to 1960-61 was of the
order of 12.1 per cent per annum. This was the natural consequence of the
enthusiasm generated in the Second Plan to undertake the massive development
of heavy and basic industries. However, this process of acquiring new plants
and undertaking investment in hither to unexplored areas did continue upto
1965-66 when GFCF shot up to the peak level of Rs. 7,870 crores, but the
drought of 1965-66 and the recession that followed in 1966-67 reversed the
trend and the annual growth rate slumped to 2 per cent during the 1960s. Later
it picked up to 6.3 per cent during Seventies and 6.1 per cent during the
Eighties. Thus public sector has made a tremendous contribution in improving
Gross Fixed Capital Formation, more especially in the capital goods sector and
thus laid the foundations of a strong industrial base in India. During 1993-94
and 1999-2000, however, GFCF growth rate was of the order of 2.5 per cent
at 1993-94 prices.

In this connection it may be noted that capital intensity (capital per unit of
output) of production in public sector is significantly higher than that of private
sector. This is largely due to the differences in the nature of investment in the
two sectors.

The important differences are listed below:

1) A good part of the investment in the public sector goes into economic
overheads such as roads, buildings and communications which are essential
for economic development but do not contribute to output in the normal
sense of the term.

56
2) The public sector has played a significant role in developing the key Public Sector in India
industries of the economy and these industries such as iron and steel and
power by their very nature are areas of high capital intensity.
3) Many projects in the public sector have longer gestation periods. Capital
outlays are large and take time to yielding results.
4) Areas of higher output-capital ratios fall mainly in the private sector.
Examples are consumer goods industries, small-scale and cottage
enterprises.

An eloquent measure of the dynamic expansion of the public sector in India is

the growth in sales of public enterprise. The sales have grown at the rate of
18.2 per cent per annum during the period 1970-71 to 1987-88. During the
period 1980-81 to 1990-91, the gross product of public sector increased from
Rs. 24,171 crores to Rs. 1,24,923 crores. In 1987-88, percentage of sales to
capital employed (CE) was 146 and this ratio declined to 123 per cent in
2001-2002. Between 1987-88 and 2001-2002, the annual average growth rate of
sales was 13.5 per cent, while that of capital employed was 14.9 per cent.

Despite many criticisms against the public sector enterprises, there is no

denying the fact that rapid industrialisation of the Indian economy in the post-
Independence period was mainly due to the growth of the public sector. A
strong and well-diversified industrial base has been laid and in many respects
Indian has achieved self-reliance.
Public Sector in the Present Scenario
Public sector which was expected to achieve “Commanding heights” of the
economy did grow very rapidly during the planning era. But inefficiencies of
various kinds have become the hallmark of the public sector. Debt financing of
public investment became quite common during 1980s decade. In 1976-77 public
saving financed 49 per cent of gross public investment. In 1981-82 the ratio
came down to four-fifths of public investment thus was financed by borrowing
from domestic private and external sectors. Public enterprises have shown very
low rate of return on the huge capital invested. This has reduced their ability to
regenerate themselves in terms of new investment and technology development.
The result is that many of the public enterprises have become a burden rather
than being an asset to the Government.

In the national economic scenario resulting from the Economic reforms of 1991
the scope of public sector is reduced and is confined only to intrastructure and
strategic industries. The priority areas for growth of public enterprises in future
will be the following:
1) Essential infrastructure goods and services.
2) Exploration and exploitation of oil and mineral resources.
3) Technology development and building of manufacturing capability in areas
which are crucial in the long term development of the economy where
private sector investment is inadequate.
4) Manufacture of products where strategic considerations predominate such as
defence equipment.

The disinvestment in the public sector units has been going on. Through the
decade of 1990s, there has been an increasing consenses on the merits of
privatisation.

57
Structure of Indian According to the data (Economic Survey, 2002-03), the aggregate balance sheet
Economy
assets of all public sector companies amounts to roughly Rs. 22 lakh crore
which suggests that relatively modest improvements in the efficiency of their
functioning would have a significant impact upon GDP growth.
Activity 3
Make use of Table 6.1 and calculate annual average percentage change in
products originating in public sector during the period 1960-61 to 2000-01.
Find the average annual change.
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...........................................................................................................................
...........................................................................................................................

6.4 WORKING OF PUBLIC SECTOR

Working of private enterprises is largely governed by the profit motive. All
managerial decision in the working of private enterprise thus are geared to earn
as much profit as possible. These decisions are, of course, constrained by the
environment within which an enterprise is to operate. The behaviour of an
enterprise working in a competitive environment differs from that operating in
(say) oligopolistic environment. But the prime motive in the case of the private
enterprise is maximization of profits.

In the case of public enterprises social good is the main goal and working of
public enterprises is governed by this goal. Higher utilization of capacity (to
produce as much output as possible given the capacity constraint), efficiency in
running the enterprise, being accountable to public and following proper pricing
policies are some of the norms public enterprises need to satisfy in their
working. We have to pay attention to two aspects of working of public
enterprises. One is public accountability. The second is pricing policies.
Public Accountability
A difficult problem faced by public enterprises is to reconcile the demands of
accountability and autonomy. Autonomy in managing and running the concern is
needed to ensure a high degree of efficiency. Without such a freedom to the
management in choosing it policies (e.g., wage policy and the like) decision
making is delayed, flexibility in management is lost, and efficiency in its diverse
aspects cannot be ensured. On the other hand, since public undertakings are
(a) using public funds and (b) are meant to work for social good, it is
necessary that the independence of the management must be subjected to the
accountability constraint. It is necessary to strike a proper balance between
autonomy and accountability.

Three major constituents of public enterprise accountability are :

Accountability to Parliament
Accountability through Audit
Accountability in Annual Reports.

Parliamentary control is essential through a number of ways such as questions,

short discussions, the work of Committees on Public Undertakings (CPU),
approvals and reporting about investment and loans, public enquiry based on the
58 recommendations of CPU etc.
Auditing (financial efficiency and propriety) is an important instrument of Public Sector in India
accountability. There are also systems of Supplementary Audit and Social Audit.
Each Audit has its own purpose and justification. However, sometimes too
many audit objections may hinder managerial initiative and efficiency and they
may come in conflict with the principle of autonomy.

Finally, there is accountability through the system of annual reports. The Bureau
of Public Enterprises (BPE) has issued guidelines about the coverage in Annual
Reports. Among other aspects, Annual Report must cover a summary of
financial results, changes in accounting methods, changes in price policy,
important events affecting production and productivity, staff welfare activities
etc. In parliamentary democracy these several instruments of public
accountability go some way in ensuring that public enterprises serve public need
in a responsible manner.
Price Policy in Public Enterprises
In public enterprises, the pricing function is “diffused over the minister, the
department and the managers”. Even when the government, through the
minister concerned, decides about the general price-profit policy, the actual
details of the price structure will have to be worked out by the management of
the undertaking. In general so far as the public enterprises are concerned, the
government decides the pricing policy while the managers of particular
enterprises decide the price structure within the general framework of the
Government’s price policy.
Activity 4
Of the following options for pricing products of public sector which one would
you consider as the best and why?
1) Marginal Cost Pricing
2) Average Cost Pricing
3) Import Parity Price
4) Mark-up Pricing
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6.5 PERFORMANCE OF PUBLIC SECTOR

Prior to 1991 when New Economic Policy was announced, while the
government has been pushing ahead with more and more public sector
undertakings, there has been considerable criticism about the poor performance,
and in some cases utter failure of government undertakings in the country.

For the reasons mentioned earlier the performance of public enterprises cannot
be judged solely on the basis of profit criteria. Some of the public enterprises
were running on profit while many others were running on losses. The over-all
picture reveals that between 1960-61 and 1977-78 percentage of profit after tax
to total paid-up capital and reserves had ranged between 0.2 to 4.6 per cent.
Thus by the criterion of “profit after tax” the performance of the public sector
has been poor.

59
Structure of Indian In Table 6.5 select profitability and performance indicators of the working
Economy
enterprises is shown. A few points may be made about the financial
performance of public enterprises.

Since 1991-92, gross profit as a ratio of capital employed (rate of return on

capital) has shown a distinct improvement. It increased from 12 per cent in
1991-92 to 16 per cent in 1995-96. In the subsequent years it has been in
the range of 13 to 15 per cent. Reviewing the situation it was mentioned:
“In absolute terms net profits (after tax) of Central government public
enterprises rose substantially from Rs. 2,400 crores in 1991-92 to Rs. 9600
crores in 1995-96. The rate of return as measured by net profits to capital
employed rose to 10 per cent in 1995-96, which is the highest in the
decade. However, as in previous years, the petroleum sector enterprises
contributed the overwhelming bulk of these profits- Rs. 2899 crores out of
the total 3789 crores in 1989-90 (76.6% of total). Thus, the 200 odd non-
petroleum enterprises contributed a meagre sum of Rs. 883 crores. While
this reflected an improvement over the net profit of Rs. 431 crores in
1988-89, the ratio of net profits to capital employed in non-petroleum sector
enterprises was barely 1.3 per cent in 1989-90.” Clearly there is substantial
scope for improving financial performance of non-petroleum Central
government enterprises.

During 1992-93 gross profit as a proportion of capital employed declined to

11 per cent. Net profit of public enterprises declined from Rs. 3789 crores in
1989-90 to Rs. 2272 crores in 1990-91. The net rate of return declined from
4.5 per cent in 1989-90 to 2.2 per cent in 1990-91, the lowest since 1984-85.
During 1991-92 it declined further to 2.1 per cent. The petroleum sector, as
in the earlier years, accounted for bulk of the net profit Rs. 1779 crores out
of the total of Rs. 2475 crores. But 1991-92 being a year of foreign
exchange crisis, resource crunch and a year of general slackening of
industrial production, the public sector also suffered the impact of overall
economic deceleration.

As noted before, it is not appropriate to treat profits as the sole criterion of

efficiency of the public sector. The gains to employees and welfare
expenditures on employees in public enterprises are to be noted in this
connection. The real emoluments per employee in the public sector went up
from Rs. 11210 in 1978-79 to Rs. 17339 in 1991-92. The annual growth rate of
real emoluments works out to 3.43 per cent during this period. Further, as
against Rs. 420 in 1968-69, the average annual expenditure per employee on
welfare activities increased to Rs. 4427 in 1988-89. A total sum of Rs. 974
crores in the form of houses, educational facilities, medical care etc., was spent
in 1988-89 for the benefit of employees.

The public sector by assuming responsibility of rehabilitation of sick units

(example, textile mills in private sector) had to bear a considerable burden in
order to save 1.6 lakh employees from the spectrum of unemployment. This
social responsibility explains to some extent the lower profitability of public
sector.

By the criterion of capacity utilization also, the public sector performance is

found to be better (relative to the private sector) by some studies. The
foreign exchange earnings of public enterprises also constitute a
performance indicator. The value of exports of central public sector
enterprises increased from Rs. 502 crores in 1972-73 to Rs. 6366 crores in
1989-90. Physical productivity measures also are to be used as perfomance
indicators.
60
Privatisation Public Sector in India

Through the decade of the 1990s, there has been an increasing consensus
on the merits of privatisation. The aggregate balance sheet assets of all
public sector companies amounts to roughly Rs. 22 lakh crore, This suggests
that relatively modest improvements in the efficiency of their functioning
would have a significant impact upon GDP growth. Hence, policies on
privatisation are an important component of policies for efficiency and
productivity.

The privatisation process began in 1991-92 with sale of minority stakes in some
PSUs. From 1999-2000 onwards, the focus shifted to strategic sales. Table 6.6
summarises the transactions which have taken place in 2002-03, which have
given proceeds of Rs. 3,342 crore.

One of the major concerns often expressed with respect to privatization is that
with a transfer of management into private hands, the interest of employees
might suffer. Government has chosen to put in requirements into the
shareholder agreements, executed as a part of strategic sales, to ensure that
there is no retrenchment of employees at least for a period of one year after
privatisation, and even thereafter, retrenchment to be possible only under the
Voluntary Retirement Scheme (VRS) as applicable under Department of Public
Enterprises (DPE) guidelines or the Voluntary Separation Scheme, which was
prevailing in the company prior to disinvestments, whichever is more beneficial
for the employee. These provisions have been included to enhance employees
welfare.

It is interesting to note that while much is made of the likely adverse impact
of disinvestments on employment, in fact, over the last 10 years, as reported
by the PSE Survey 2000-01, public sector undertakings have seen a net
reduction in employment from a level of 2,179 million employees in 1991-92 to
a level of 1,742 million in 2000-01, or a reduction of 20 per cent over this
period. Till March 31, 2001, 3.69 lakh employees had opted for VRS. In
comparison, the retrenchment of employees after disinvestment has been
marginal.

In eight disinvested PSUs and five disinvested ITDC Hotels, against an initial
employee strength of 27,967 at the time of disinvestments, only 2,119
employees were retrenched through VRS, and another 910 for other reasons.
As against a total of 3,029 post disinvestment separations, 855 fresh
appointments have been made resulting in a net reduction of 2,174 employees
or about 7.8 per cent employees, compared to the employment level at the
time of disinvestments.
Activity 5

a) Use data in Table 6.5 to compute:

i) Gross Profit-Turnover ratio, and
ii) Turnover-Capital employed ratio and comment on the trends in these
ratios.
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61
Structure of Indian b) Graph the two rates of return (Table 6.5) measuring years on X-axis and
Economy
rate of return on Y-axes, and comment on the emerging profiles.
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.....................................................................................................................

6.6 SUMMARY
The public sector in India has grown very rapidly. There are important reasons
for promoting public sector. Public sector growth has helped in achieving
infrastructural development on the one hand and a strong and well-diversified
industrial base on the other. Criteria of operational efficiency show that there is
need for improving substantially the performance of public sector enterprises.
This is a managerial challenge, given the economic environment within which
public enterprises have to function.

6.7 KEY WORDS

Public Sector : Any activity owned, controlled and managed by the
Government (Central, State, Local).

Autonomy and Accountability : Autonomy in managing and running the

concern is needed to ensure a high degree of efficiency. Without such freedom
to the management in choosing its policies, the decision-making processes, wage
determination and the like, the flexibility for management is lost and efficiency
in its diverse aspects cannot be ensured. On the other hand, since public
undertakings are using public funds and they are meant to work for social
good, it is necessary that the independence of the management must be
subjected to the accountability constraint. It is necessary to strike a proper
balance between autonomy and accountability.

6.8 SELF ASSESSMENT QUESTIONS

1) State and explain the major objectives of the public sector. In your opinion
which of them are more important.
2) Give different criteria, evaluate the performance of public enterprises.
3) Using different criteria, evaluate the performance of public enterprises.
4) Refer to recent Public Enterprises Survey and update data in Table 6.5.
5) Explain the following concepts:
a) Gross Investment
b) Net Investment
c) Capital
d) Gross value added
6) As a prospective manager in a public enterprise how would you resolve the
possible conflict between autonomy and public accountability of public
enterprises?

62
 Public Sector in India
6.9 FURTHER READINGS
Basu, Prahlad Kumar, Performance Evaluation for Performance
Improvement, Allied Publishers 1991.

Gouri, Geeta (Ed.) Privatisation and Public Enterprises,

Oxford and IBH Publishing, 1991.

Mathur, B.P., Public Enterprises Management, Macmillan, 1993.

Shrivastava, M.P., Problem of Accountability of Public Enterprises in India,

Uppal Publishing, 1987.

The following are regular annual publications of the Government of India.

Make sure that you get the latest issue of each. You may also update the
statistics given in various tables.

CSO, National Accounts Statistics, Latest Issues.

GOI, Economic Survey, Latest Issue

Bureau of Public Enterprises, Public Enterprises Survey,

Vol. 1 Latest Issue.

63
Structure of Indian Appendix 3
Economy

List of Statistical Tables

Table 6.1A : Gross Domestic Product from Public Sector by Industry of

Origin

Table 6.1B : Gross Domestic Product from Public Sector at Factor Cost

Table 6.1C : Domestic Product in Public Sector

Table 6.2 : Employment in Organised Public and Private Sectors

Table 6.2A : Employment in the Public Sector by Industry in 2001

Table 6.3 : Share of Public Sector in Gross Domestic Saving and Capital

Table 6.4 : Gross Fixed Capital Formation in Public Sector

Table 6.5 : Profitability of Central Public Enterprises.

Table 6.6 : Disinvestment Proceeds during 2002-03.

64
 Public Sector in India

Table 6.1 (A) : Gross Domestic Product from Public Sector by Industry of Origin

At Current Prices (% share in PSGDP)

1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01

Public sector gross

domestic product
(PSGDP) 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Administrative
department 30.70 31.56 33.08 33.75 36.25 38.12 40.15
Departmental
enterprises 14.63 14.19 14.55 14.35 14.11 13.55 11.60
Non-Departmental
enterprises 52.73 52.24 50.31 49.66 47.19 44.98 45.86
Agriculture, forestry
and fishing 3.35 3.35 3.43 3.18 3.10 2.86 2.83
Industry 35.82 33.75 32.06 33.24 32.04 29.04 29.30
Mining and quarrying 9.70 9.13 8.73 8.16 7.16 7.62 8.41
Manufacturing 11.96 10.80 9.27 11.01 10.17 7.79 7.06
Electricity, gas and
water supply 10.97 10.58 10.78 10.71 11.20 9.93 10.03
Construction 3.19 3.24 3.28 3.36 3.52 3.71 3.80
Services 60.83 62.90 64.51 63.58 64.86 68.09 67.87
Trade, hotels,
transport, storage
and communication 15.58 15.58 15.59 14.99 14.00 13.25 13.65
Trade, hotels and
restaurants 2.31 2.17 1.99 1.82 1.45 1.28 1.34
Trade 2.22 2.05 1.87 1.73 1.38 1.22 1.26
Hotels and
restaurants 0.09 0.12 0.12 0.09 0.07 0.07 0.08
Transport, storage
and communication 13.27 13.41 13.60 13.17 12.55 11.97 12.32
Railways 4.78 4.66 4.46 4.10 3.46 3.48 3.49
Other transport 3.61 3.65 3.56 3.44 3.30 3.07 3.15
Storage 0.11 0.13 0.11 0.10 0.10 0.11 0.12
Communication 4.76 4.98 5.47 5.54 5.69 5.31 5.56
Financing, Insurance,
real estate and
business services 15.12 16.40 16.50 15.45 15.24 16.65 14.73
Banking insurance 14.97 16.25 16.35 15.31 15.11 16.52 14.60
Real estate, ownership
of dwell, and business
services 0.14 0.15 0.15 0.14 0.13 0.13 0.14
Community and
personal services 30.14 30.92 32.43 33.13 35.62 38.19 39.49
Public administration
and defence 20.75 21.22 21.93 22.69 24.49 25.99 26.48
Other services 9.38 9.70 10.50 10.44 11.14 12.20 13.01

Source: National Income Statistics, Centre for Monitoring Indian Economy, January
2004. 65
Structure of Indian
Economy
Table 6.1 (B) : Gross Domestic Product from Public Sector at Factor Cost

At Current Price At Constant Prices

Rs. crore % change % share Rs. crore % change % share
in GDP in GDP
1970-71 5802 12.46 13.74 45805 8.98 15.46

1971-72 6482 11.72 14.43 48516 5.92 16.21

1972-73 7170 10.61 14.51 51631 6.42 17.31

1973-74 8460 17.99 13.97 56891 10.19 18.24

1974-75 10908 28.94 15.30 58184 2.27 18.44

1975-76 12936 18.59 17.09 63313 8.82 18.41

1976-77 15090 16.65 18.54 69958 10.50 20.09

1977-78 16673 10.49 17.95 73525 5.10 19.65

1978-79 18534 11.16 18.57 78888 7.29 19.98

1979-80 21344 15.16 19.59 82283 4.30 21.98

1980-81 25525 19.59 19.61 88791 7.91 22.14

1981-82 31270 22.51 20.56 93206 4.97 21.93

1982-83 37795 20.87 22.29 102535 10.01 23.41

1983-84 43907 16.17 22.10 109445 6.74 23.20

1984-85 50985 16.12 22.89 117738 7.58 23.93

1985-86 60354 18.38 24.19 127845 8.58 24.87

1986-87 70996 17.63 25.51 138862 8.62 25.89

1987-88 81679 15.05 25.85 147945 6.54 26.57

1988-89 96873 18.60 25.59 158483 7.12 25.77

1989-90 112276 15.90 25.63 171575 8.26 26.14

1990-91 128398 14.36 25.13 176720 3.00 25.51

1991-92 153632 19.65 26.08 187758 6.25 26.75

1992-93 175320 14.12 26.04 192708 2.64 26.12

1993-94 202512 15.51 25.92 202512 5.09 25.92

1994-95 234395 15.74 25.56 216995 7.15 25.89

1995-96 270129 15.25 25.17 230051 6.02 25.57

1996-97 297443 10.11 23.92 240452 4.52 24.79

1997-98 352518 18.52 25.36 269001 11.87 26.46

1998-99 406640 15.35 25.44 288939 7.41 26.69

1999-00 448894 10.39 25.48 305160 5.61 26.57

2000-01 468187 4.30 24.41 309766 1.51 25.84

Source: National Income Statistics, CMIE, January 2004.

66
 Public Sector in India

Table 6.1 (C) : Domestic Product in Public Sector

(at current prices)

Administrative Department Departmental Enterprises Non-Departmental

Enterprises
Rs. crore % change Rs. crore % change Rs. crore % change

1980-81 8940 3933 11688

1981-82 10379 16.10 4620 17.47 15163 29.73

1982-83 12431 19.77 5734 24.11 18392 21.30

1983-84 14460 16.32 6594 15.00 21453 16.64

1984-85 16765 15.94 7495 13.66 25163 17.29

1985-86 19726 17.66 9451 26.10 29458 17.07

1986-87 22827 15.72 10799 14.26 35439 20.30

1987-88 27414 20.09 12989 20.28 39116 10.38

1988-89 32198 17.45 14982 15.34 47284 20.88

1989-90 37934 17.81 16869 12.60 54815 15.93

1990-91 43670 15.12 18902 12.05 62838 14.64

1991-92 50220 15.00 21714 14.88 78221 24.48

1992-93 57702 14.90 25192 16.02 88499 13.14

1993-94 64138 11.15 29102 15.52 105097 18.76

1994-95 71965 12.20 34281 17.80 123596 17.60

1995-96 85243 18.45 38341 11.84 141107 14.17

1996-97 98405 15.44 43275 12.87 149642 6.05

1997-98 118962 20.89 50579 16.88 175063 16.99

1998-99 147424 23.93 57395 13.48 191899 9.62

1999-00 175603 19.11 60818 5.96 201894 5.21

2000-01 187993 7.06 54315 (-) 10.69 214701 6.34

Source: National Income Statistics, CMIE, January, 2004.

67
Structure of Indian Table 6.2 (A) : Employment in Organised Public and Private Sectors
Economy
(In Lakhs)
Year Public Annual Private Annual Total Public
sector Change Sector Change Sector Share
(%) (%) (2)+(4) (2) as % of (6)
(1) (2) (3) (4) (5) (6) (7)

1971 107.0 — 68.0 — 175.0 61.1

1976 133.2 4.9 68.4 0.1 201.6 66.1
1981 154.8 3.2 73.9 1.6 228.7 67.7
1986 176.8 2.8 73.7 (-) 0.2 250.5 70.6
1991 190.6 1.6 76.8 0.8 267.3 71.3
1992 192.1 0.8 78.5 2.2 270.6 71.0
1993 193.3 0.6 78.5 0.0 271.8 71.1
1994 194.5 0.6 79.3 1.0 273.8 71.0
1995 194.7 0.1 80.6 1.6 275.3 70.7
1996 194.3 (-) 0.2 85.1 5.6 279.4 69.5
1997 195.6 0.7 86.9 2.1 282.5 69.2
1998 194.2 (-) 0.7 87.5 0.7 281.7 68.9
1999 194.2 0.0 87.0 (-) 0.6 281.1 69.1
2000 193.1 (-) 0.6 86.5 (-) 0.6 279.1 69.1
2001 191.4 (-) 0.9 86.5 0.0 277.9 68.9

Note: (1) Includes all establishments in the public sector irrespective of size of
employment and non-agricultural establishments in the private sector
employing 10 or more persons.
(2) Excludes Sikkim, Arunachal Pradesh, Dadra & Nagar Haveli and
Lakshadweep.
Source: Economic Survey, Various Issues.

Table 6.2 (B) : Employment in the Public Sector by Industry in 2001

(Lakh persons as on March 31)

Industry Public Sector Private Sector Total (2) as % of (4)

(1) (2) (3) (4) (5)
1. Agriculture, hunting
forestry and finishing 5.02 9.31 14.33 35.0
2. Mining & Quarrying 8.75 0.79 9.54 91.7
3. Manufacturing 14.30 50.13 64.43 22.2
4. Electricity, gas and
water 9.35 0.52 9.87 94.7
5. Construction 10.81 0.57 11.38 95.0
6. Wholesale and retail
trade 1.63 3.39 5.02 32.5
7. Transport, storage
and communications 30.42 0.76 31.18 97.6
8. Finance, insurance,
real estate, etc. 12.81 3.70 16.51 77.6
9. Community, social
and personal services 98.30 17.34 115.64 85.0
Total 191.38 86.52 277.90

Source: Economic Survey, 2002-03.

68
 Public Sector in India
Table 6.3 : Share of Public Sector in Gross Domestic and Capital Formation
(In Crores)
Plan Periods Plan Period averages % share As % of GNP
Public Private Total Public Private Public Private Total
sector sector sector sector sector sector

Gross Domestic Savings

First Plan (1951-56) 169 874 1043 17 83 1.7 8.7 10.4

Second Plan (1956-61) 273 1368 1641 16 84 2.0 10.4 12.4

Third Plan (1961-66) 679 2185 2864 24 76 3.4 10.9 14.3

Annual Plans (1966-69) 731 3838 4569 16 84 2.4 12.5 14.9

Fourth Plan (1969-74) 1341 6579 7920 17 83 3.0 14.4 17.4

Fifth Plan (1974-79) 3830 14182 18192 21 79 4.6 17.0 21.6

Sixth Plan (1980-85) 6609 30062 36671 18 82 3.6 16.5 20.1

Seventh Plan (1985-90) 7815 62620 70435 11 89 2.3 18.1 20.4

Ninth Plan (1997-02) — — — — — -0.8 24.1 23.3

Tenth Plan (2002-07) — — — — — 0.4 26.4 26.8

Gross Domestic Capital Formation

First Plan (1951-56) 358 724 1082 33 67 3.5 7.2 10.7

Second Plan (1956-61) 871 1154 2025 43 57 6.6 8.8 15.4

Third Plan (1961-66) 1687 1662 3349 50 50 8.4 8.3 16.7

Annual Plans (1966-69) 2212 3084 5296 42 58 7.2 10.1 17.3

Fourth Plan (1969-74) 3324 4957 8281 40 60 7.2 10.9 18.1

Fifth Plan (1974-79) 7791 9799 17590 45 55 9.5 11.7 21.2

Sixth Plan (1980-85) 20122 19165 39287 51 49 11.1 10.5 21.6

Seventh Plan (1985-90) 36868 41794 78662 47 53 10.7 12.1 22.8

Ninth Plan (1997-02) — — — — — 7.2 17.1 24.3

Tenth Plan (2002-07) — — — — — 8.4 20.0 28.4

Source: CMIE, Basic Statistics Relating to the Indian Economy, Vol. I, All India, August 1991. 69
Structure of Indian Table 6.4 : Gross Fixed Capital Formation in Public Sector
Economy
at 1980-81 Prices

Value in Compound
Year Rs. Crores Annual Growth Rate
(Per cent per Annum)

1950-51 1,640

1960-61 5,160 12.1

1970-71 6,330 2.0

1980-81 11,770 6.3

1993-94* 68,853

1998-99 110,289 9.9

* At 1993-94 prices

Source: CSO, National Accounts Statistics, (1998) and (2001).

Table 6.5 : Profitability of Central Public Sector Undertakings

(Rs. in crore)
1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00

1. Number of units 237 239 240 241 239 236 236 235 232

2. Paid-up capital 53,000 59,300 63,500 65,300 67,100 69,800 72,000 76,900 82,400

3. Net Worth 60,300 70,500 79,500 90,000 99,200 1,13,900 1,35,100 1,48,100 1,61,100

4. Capital employed 1,18,000 1,40,100 1,59,800 1,62,500 1,74,000 2,31,200 2,49,900 2,65,100 3,03,400

5. Gross profits 13,700 16,000 18,600 22,600 27,600 30,900 37,200 39,700 42,400

6. Profit before tax 4,000 5,100 6,700 9,800 13,600 15,400 19,200 19,700 22,300

7. Profit after tax

(PAT) 2,400 3,300 4,600 7,200 9,600 10,200 13,700 13,200 14,600

8. Gross margin to
Capital employed
(per cent) 19 18 17 21 23 19 21 21 21

9. Gross profit to
Capital employed
(per cent) 12 11 12 14 16 13 15 15 14

10. Pre-tax profit to

Capital employed
(per cent) 3 4 4 6 8 7 8 7 7

11. PAT (Net profit) to

Net Worth (per cent) 4 5 6 8 10 9 10 9 9

Source: Economic Survey, 2002-03.

70
 Public Sector in India

Table 6.6 : Disinvestment proceeds during 2002-03

Sl. Name of PSUs Percentage of equity Proceeds realised/

No. disinvested to be realized
(Per cent) (Rs. crore)

1. Hindustan Zinc Ltd. 26 445

2. Maruti Udyog Ltd. 4.2* 1,000

3. IPCL 26 1,491

4. Modern Food Industries (India) Ltd. 26 44

5. Indian Tourism Development Corporation

(Ten hotels) 100 273

6. Hotel Corporation of India-One Hotel 100 83

7. Hindustan Zinc Ltd. 1.46 6

Total : 3342@
* 4.2 per cent reduction from 49.74 through rights offer renunciation and Control
premium. @ Till January 31, 2003.

Source: Economic Survey, 2002-2003.

71