The role of state-owned enterprises (SOEs) in India has to be seen in the historical context. They have played an important role in the country’s development. The Memorandum of Understanding (MoU) system introduced in these enterprises has gone beyond the original objective of grant of greater autonomy. While it has become a tool in strategic management today, it is riddled with some inadequacies that need to be removed. The article argues that a reformed MoU system will go a long way in enhancing the contribution of these enterprises to India’s GDP.

Introduction

The role of state-owned enterprises (SOEs) in India needs to be seen in the historical context. Industrial development under colonial India was ‘a history of slow and arrested progress’ (Lokanathan, 1943). Lord Morley, Secretary of State for India (1905–۱۹۱۱) is reported to have ‘set his face against any attempt on the part of the [g]overnment to assist industrial development’ (ibid.). The First World War (1914–۱۹۱۸), however, exposed the short-sightedness of such an approach as supplies of essential commodities from abroad to India were cut off, either wholly or partially. In the face of such a crisis, the iron and steel plant of JRD Tata, set up in 1911 in Jamshedpur, was an exception and ‘stood the country in good stead during the war’ (ibid.). The subsequent period between the First World War (1914–۱۹۱۸) and Second World War (1939–۱۹۴۵) saw some increase in the output of coal, cement, cotton textile and sugar, but that was also way behind the country’s requirements. Indian industries continued to be heavily dependent ‘on foreign sources for machinery, capital equipment and even for spare parts’ (ibid.). Moreover, since the private corporate sector was dominated by the ‘managing agency system’ characterised by safe ventures, such as importers of machinery, traders and insurance agents, very little could be expected from them for industrialising the country. It was this legacy of an industrially backward India that the rulers of free India inherited at the time of Independence. The Government of India, therefore, adopted the Industrial Policy Resolution in 1948. It also enacted the Industries (Development and Regulation Act) in 1951, which provided for ‘industrial licensing’ to ensure optimum utilisation of scarce capital. Those who got the licences were assured of government support by way of grant of land, easy approvals, long-term loans and tariff protection. The Industrial Policy Resolution, adopted subsequently in 1956, made it further clear that ‘the need for planned and rapid development requires that all industries of basic and strategic importance, or in the nature of public utility services, should be in the public sector’. ‘The new public sector projects were given a corporate form with their own [b]oard of [d]irectors including people with business experience in the private sector as well as government officials’ (Jha, 1986).