When India gained independence in 1947, it inherited a largely agrarian economy with a skeletal industrial base. The private sector lacked both the capital and the risk appetite to invest in the heavy industries that nation-building demanded. It was in this context that the public sector stepped in – not merely as a commercial entity, but as the primary architect of India’s industrial and economic transformation. Decades later, even as private enterprises dominate headlines, public sector undertakings (PSUs) continue to hold up critical pillars of the Indian economy.
Table of Contents
- The foundational framework: policy that shaped an economy
- Generating income and building capital
- Building India’s industrial backbone
- Heavy industries and technology transfer
- Infrastructure: the foundation of all growth
- Employment generation and social equity
- Checking the concentration of wealth
- Regional development: spreading growth beyond metros
- Contribution to the public exchequer and foreign exchange
- Post-liberalisation: the public sector’s continued relevance
- A complementary relationship with the private sector
The foundational framework: policy that shaped an economy
India’s public sector story begins with deliberate policy choices. The Industrial Policy Resolution (IPR) of 1956 is widely regarded as the “Economic Constitution of India” or the “Bible of State Capitalism.” It classified industries into three schedules – Schedule A reserved 17 strategically critical industries exclusively for the state, including atomic energy, arms and ammunition, iron and steel, heavy machinery, coal mining, and mineral oils. Schedule B opened 12 industries to joint participation by both public and private sectors. Everything else went to the private sector.
This framework emphatically expanded the role of the state in economic life. The IPR 1956 aligned with the Second Five-Year Plan (1956-1961), which allocated over 20% of total plan outlay to large-scale industries dominated by PSUs. The resolution was clear in its intent: to secure the “commanding heights” of the economy through state ownership, investing in sectors where private capital could not go due to scale, risk, or national security concerns.
The resolution led to the establishment of several major Central Public Sector Undertakings (CPSUs), such as Bharat Heavy Electricals Limited (BHEL), Steel Authority of India Limited (SAIL), and Indian Oil Corporation. These enterprises didn’t just produce goods – they built the country’s industrial DNA.
Generating income and building capital
One of the most direct contributions of the public sector has been to national income. The share of public sector in net domestic product (NDP) at current prices increased from just 7.5% in 1950-51 to 21.7% in 2003-04. The share of public sector enterprises alone – excluding public administration and defence – rose from 3.5% in 1950-51 to 11.12% in 2005-06.
Capital formation tells a similarly striking story. The share of the public sector in gross domestic capital formation increased from 3.5% during the First Plan to 9.2% during the Eighth Plan. The comparative share of public sector in gross capital formation also moved from 33.67% during the First Plan to 50% during the Sixth Plan. In other words, at the height of planned development, every second rupee being invested in the Indian economy was flowing through the public sector.
Building India’s industrial backbone
Perhaps the most enduring contribution of the public sector has been in constructing a robust industrial base – one that the private sector could neither finance nor sustain independently in the early decades after independence.
The establishment of large-scale industries like steel through SAIL and heavy machinery through BHEL post-independence was crucial for building an industrial base, as the private sector lacked the necessary capital and risk appetite. These were not just factories – they were foundational investments that made downstream industries across the private sector possible.
The industrial base of the economy was strengthened considerably with the development of public sector industries in fields like iron and steel, coal, heavy engineering, heavy electrical machinery, petroleum and natural gas, fertilizers, chemicals, and drugs. Private sector industries also depend on these industries. The public sector, in effect, subsidised India’s private industrial growth by providing it with affordable raw materials, power, and infrastructure.
Heavy industries and technology transfer
In sectors demanding advanced technology and massive capital, the public sector filled a gap that markets could not. BHEL manufactures heavy engineering products like turbines and generators. ONGC is India’s largest oil and gas exploration and production company. NTPC generates electricity to meet India’s growing energy demands. These enterprises didn’t just serve domestic needs – they helped build indigenous technological capacity, reducing India’s dependence on expensive foreign imports.
Public sector enterprises like BHEL, Bharat Electronics Ltd. (BEL), Indian Oil Corporation (IOC), and ONGC paved the way for import substitution, conserving the country’s valuable foreign exchange. The ability to manufacture domestically what India once had to import at a premium was a significant economic achievement, especially during decades when foreign exchange reserves were scarce.
Infrastructure: the foundation of all growth
Economic development cannot happen without roads, power, ports, and communication networks. The public sector understood this early. Public sector investment in infrastructure – power, transportation, communication, basic and heavy industries, irrigation, education, and technical training – paved the way for agricultural and industrial development, leading to overall economic growth. Private sector investments also depend on these infrastructural facilities.
This logic continues to hold today. The Union Government’s capital expenditure on key infrastructure sectors has grown at a rate of 38.8% from FY20 to FY24. Under the railway network, 2,031 km of railway line was commissioned between April and November 2024, and 17 new pairs of Vande Bharat trains were introduced between April and October 2024. Under the road network, 5,853 km of National Highways was constructed in FY25 (April-December). Public investment continues to be the dominant driver of infrastructure expansion.
Employment generation and social equity
Beyond economics, the public sector has carried a social mandate – to create employment at scale and reduce inequality. In 1971, the public sector offered employment to about 11 million persons; by 2003, that number rose to 18.6 million, showing about a 69% increase during this period.
The employment generated wasn’t just in quantity – it was also structured to serve equity goals. The IPR 1956 proposed establishing new industrial centres in underdeveloped regions, providing special incentives for industries in backward areas, and creating necessary infrastructure in less developed regions, aiming to decentralise industrial development and spread its benefits nationwide.
Checking the concentration of wealth
One of the less-discussed contributions of the public sector is its role in preventing a monopolistic concentration of economic power. Without state-owned enterprises in critical sectors, a handful of private conglomerates could have controlled India’s energy, steel, and telecommunications industries in the post-independence era. The expansion of public sector enterprises in India has successfully checked the concentration of economic power into the hands of a few, addressing the problem of inequalities of income and wealth. The public sector can reduce inequality through diversion of profits for the welfare of the poor, undertaking labour welfare measures, and producing commodities for mass consumption.
Regional development: spreading growth beyond metros
Before independence, and well into the early decades after it, industrial activity was heavily concentrated in port cities like Mumbai, Kolkata, and Chennai. The public sector deliberately countered this tendency.
In order to remove regional disparities, the public sector tried to disperse various industrial units towards backward states like Bihar, Odisha, and Madhya Pradesh. Steel plants in Bhilai, Rourkela, and Bokaro – all public sector establishments – were not random choices. They were calculated interventions to industrialise regions that the private sector would have overlooked because of lower profitability.
The IPR 1956 gave priority to industrial development in the backward regions of the country to spur balanced growth, recognising the role of cottage and small-scale industries in employment generation and balanced regional development, and providing them with tax concessions and subsidies.
Contribution to the public exchequer and foreign exchange
A common misconception is that public enterprises are always a drain on government finances. While loss-making PSUs do exist, the profitable ones contribute enormously to national revenue. The contribution of public sector enterprises towards the government exchequer through dividend, corporate tax, excise duties, customs duties, and other levies increased from ₹7,985 crore during the Fourth Plan to ₹85,445 crore during the Tenth Plan.
More recent data is even more revealing. As per data published by the Department of Public Enterprises (DPE) for FY24, total net profit by profitable Central PSUs stood at ₹3.22 lakh crore. Of the 272 Central PSUs, 212 were profit-making. Total value addition by all CPSUs reached ₹9.33 lakh crore. These are not trivial contributions – they represent a substantial fiscal resource that funds public services, welfare programmes, and further infrastructure investment.
On the foreign exchange front, foreign exchange earnings of all CPSEs increased from ₹45,954 crore to ₹65,620 crore in 2006-07, showing an increase of 42.8%. The contribution to the exchequer from all CPSEs increased from ₹1,25,456 crore in 2005-06 to ₹1,47,635 crore in 2006-07, marking an increase of 17.7% over the previous year.
Post-liberalisation: the public sector’s continued relevance
The 1991 economic reforms shifted India’s orientation significantly. The New Industrial Policy of 1991 dismantled the licensing regime, liberalised the economy, and opened sectors to private and foreign investment. Many predicted that this would render PSUs obsolete. That has not happened.
The Industrial Policy Resolution of 1991 reduced PSUs’ focus to six strategic sectors: atomic energy, defence, energy, railways, oil, and coal. Measures were introduced to divest non-strategic public sector industries and promote private sector participation. Rather than disappearing, PSUs were restructured and rationalised.
Today, enterprises like ONGC, BHEL, and SAIL continue to be central players in India’s economy. As of 2025, there are 272 central PSUs, including 14 Maharatnas, 26 Navratnas, and 62 Miniratnas. The Maharatna category – which includes enterprises like ONGC, IOCL, and NTPC – allows these companies to make strategic decisions and undertake large investments independently, bringing a degree of commercial agility to public ownership.
While PSUs paid dividends of ₹74,017 crore to the government in FY25, their contribution to public finances remains indispensable even as debates around further privatisation continue.
A complementary relationship with the private sector
The relationship between the public and private sector in India is not adversarial – it is complementary. Public enterprises continue to dominate in areas where the private sector either cannot or will not invest sufficiently: defence manufacturing, atomic energy, large-scale infrastructure, and rural banking. The public sector of an economy provides infrastructure, public transportation, public education, health care, police, and military services – areas that markets alone do not adequately serve.
India’s aspiration to become a developed nation by 2047 – Viksit Bharat – will require both sectors working in concert. To become a developed nation by 2047, India would require sustained economic growth of around 8% every year for at least a decade, with sustained investments, improvement in consumer confidence, and structural reforms. Public enterprises, with their scale, reach, and social mandate, will remain central to that journey – particularly in energy transition, digital infrastructure, and defence self-reliance.
What do you think? As India pushes toward economic self-reliance, should strategic public sector enterprises be further insulated from privatisation – or would greater private participation make them more efficient without compromising national interests? And given the public sector’s historic role in reducing regional inequality, what responsibility should PSUs carry in ensuring that India’s growth story reaches its most underdeveloped districts?
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