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 the public sector that could take the initiative.
The following are the reasons that explain the driving role of the public sector in the industrial development :
(i) Lack of Capital with the Private Enterpreneurs —Industrial development in India needed a big push. At the time of independence, the requirement of capital for diversified industrial growth far exceeded its availability with private enterpreneurs (Tata and Birla). Accordingly, it became essential for the state to.foster industrial growth through public sector undertakings.
(ii) Lack of Incentive among the Private Enterpreneurs—The private investors lacked incentives as well. Owing limited size of the market, there was no inducement to invest. Only a big push of public investment could break this vicious circle of low inducement to investment.
(iii) Socialistic Pattern of Society—The government realised that, this objective could be achieved only through direct participation of the state in the process of industrialisation, because it requires investment that generates employment rather than investment that maximises profit. Concentration of wealth
was to be discouraged and public investment was considered as the best means to achieve it.