At the time of independence, Indian economic conditions were very poor and weak. There was neither much private capital nor did India have international investment credibility so as to attract foreign investment. Moreover, Indian planners did not want to be dependent on foreign capital for economic development. In such a situation, it was only logical that the public sector should take the initiative.
During the planning period, the public sector was given a leading role in industrial development because of the following reasons:
i. Lack of Capital with the Private Entrepreneurs: At the time of Independence, the requirement of capital for diversified industrial growth far exceeded its availability with private entrepreneurs. Accordingly, it became essential for the state to foster industrial growth through public sector undertakings.
ii. Lack of Incentive among the Private Entrepreneurs: The Indian market was comparatively small which discouraged Indian industrialists to invest in major projects (even though they had sufficient capital to invest). Thus, the government promoted the industrial sector.
iii. Socialistic Pattern of Society: Indian planners wanted to develop the Indian economy on a socialist base, so they focused on government-funded major projects.
iv. Social welfare: In India, there were certain projects in which the profit margin was negligible. Thus, the private sector was not interested in such projects, and it was only the public sector which could bring the balanced regional growth with the establishment of government units in the backward areas. This move could increase the employment and income of the people.