Commanding heights

Also called: Commanding heights of the economy · Topic: Industrial Policy, Public Sector, MSMEs and Disinvestment · NCERT: Class 11, Ch 2 "Indian Economy 1950-1990"

Meaning

Commanding heights is the Second Plan idea that the state should own and fully control the industries that are vital to the economy, such as steel, heavy machinery, energy and mining. Under this idea, the public sector (enterprises owned and run by the government) leads, and the private sector (firms owned by private individuals and run for profit) plays a supporting role.

It matters because this idea shaped India's economy from IPR 1956 to 1991. It explains why the state built steel plants, nationalised banks and licensed private industry. It also explains why the 1991 reforms and disinvestment (the government selling its shares in public-sector firms) were needed later.

Explanation

What sits at the "heights"

• The image. A "height" is a hilltop that overlooks the land below. Whoever holds the hilltop controls the land beneath it.
• In the economy, the heights are the few basic industries that every other industry depends on:
• steel and heavy machinery, which supply the machines and material for all other factories
• energy and mining, which supply power, coal and minerals

• credit and insurance savings, which supply the money for investment (added through nationalisation later)

• The logic runs like this:

• The state controls steel, power and credit.
• It can then decide what gets built, where, and at what speed.

• So it can steer the whole economy towards Plan goals without owning every shop and farm.

• Division of roles:

• Public sector: leads, and holds the vital industries
• Private sector: supports, mostly in consumer goods, and works under licensing controls (it needs government permission to open, expand or change a product)

Why the state took the heights: economic reasons

• The industrial base in 1947 was narrow.
• Most factories made cotton textiles and jute, which are light consumer industries.
• There were only two well-managed steel firms, one at Jamshedpur and one at Kolkata.

• There was almost no capital goods industry. Capital goods are goods used to make other goods, such as machine tools, turbines and heavy machinery. So India had to import machines before it could build any new factory.

• Reason 1: Indian industrialists lacked capital. A steel plant or a dam needs a huge amount of money at the start. Private savings were small.

• Reason 2: the market was too small.
• Most Indians were poor, so demand for industrial goods was low.

• A giant plant has high fixed costs. These are costs that stay the same whatever the output, so the plant makes a profit only if it sells a lot.

• Worked example (illustrative, from our notes):

• Fixed cost = ₹1,000 crore. Variable cost = ₹50 per unit. Price = ₹60 per unit.
• Break-even output = Fixed cost ÷ (Price − Variable cost) = 1,000 crore ÷ (60 − 50) = 100 crore units
• If the market buys only 40 crore units, the plant makes a loss, so no private investor will enter.
• The state can accept this loss for a while for long-term national goals. So the state had to take the heights itself.

Why the state took the heights: ideology

• Avadi session of Congress (1955): it adopted the goal of a "socialist pattern of society". This means the state guides the economy to reduce inequality and to stop private wealth from gathering in a few hands.
• The link to commanding heights:
• If private groups owned steel, power and banks, wealth would gather in a few hands.
• If the state owns them, the profits and the power stay with the public.

• Control of the heights was the means. A socialist pattern of society was the goal.

• The Mahalanobis strategy, the model behind the Second Plan, put heavy industry and capital goods first. Heavy industry was exactly the "heights", so the state became its owner.

How the state held the heights, and how it let go

• Tool 1: reserving industries (IPR 1956). An Industrial Policy Resolution (IPR) is a formal government statement that sorts industries by who may own and run them.
• Schedule A: 17 industries, owned only by the state
• Schedule B: 12 industries, progressively state-owned. The state starts new units and private firms supplement them.

• Schedule C: all the rest, private but licensed

• Tool 2: licensing (IDRA 1951). The state used licences to decide how much private firms produced, where and by whom [4].

• Tool 3: nationalisation (the government takes over private firms and pays their owners compensation):
• The state wanted to direct credit, insurance savings and energy towards Plan priorities.

• This is why banks, insurance and coal were taken over (see "In India").

• Letting go. Public-sector reservation (keeping specified industries only for state enterprises) shrank over time:

• 17 (1956) → 8 (New Industrial Policy, 1991) → 2 today: atomic energy (specified activities) and railway operations
• The state moved from owner of the heights to regulator and facilitator.

In India

• IPR 1948, the first step. It kept arms and ammunition, atomic energy and railways as a state monopoly. In six basic industries, only the state could start new units: coal, iron & steel, aircraft, shipbuilding, telecom equipment and mineral oils.
• IPR 1956, the full form. Schedule A (17 industries) put the commanding heights in state hands. IPR 1956 formed the basis of the Second Plan (1956–61) and is often called the "economic constitution" of the planning era.
• IDRA 1951, the legal backbone. The Industries (Development and Regulation) Act, 1951 is Act No. 65 of 1951, dated 31 October 1951 [4]. It gave industrial licensing its legal basis. Firms in industries listed in its First Schedule needed a licence.
• Nationalisation extended the heights to finance and energy:

Year	Action
1955	Imperial Bank → State Bank of India
1956	Life insurance → LIC
1969	14 major banks, each with deposits of over ₹50 crore, on 19 July 1969 [2]
1971–73	Coal mines
1972	General insurance → GIC
1980	6 more private banks on 15 April 1980 [2]

• What remains today: atomic energy. Atomic energy has been kept for the Government alone since the first industrial policy in 1948. Only the Central Government and its PSUs may explore, mine and process atomic minerals [3]. This is the clearest example of a "height" the state has never given up.

Don't confuse with

• Socialist pattern of society: the goal adopted at the Avadi session of Congress (1955). Commanding heights is the means, meaning state control of vital industries, and is linked to the Second Plan and IPR 1956.
• Mahalanobis strategy: a growth model that decides which industries come first (heavy industry and capital goods). Commanding heights decides who owns them (the state).
• Public-sector reservation: the legal list of industries kept only for the state (17 → 8 → 2). Commanding heights is the broader idea behind that list, and it also covered finance through nationalisation.
• Nationalisation: a tool, the takeover of existing private firms. Commanding heights is the policy aim. Also, some takeovers had nothing to do with the heights. Loss-making private firms were taken over only to protect workers' jobs, which left "sick units" in the public sector.

Prelims Hooks

• "Commanding heights" is linked to the Second Plan and IPR 1956. The public sector leads and the private sector supports.
• IPR 1956 had three schedules: A (17 industries, state only), B (12, progressively state-owned) and C (the rest, private but licensed). IPR 1948 had four categories.
• Trap: the "socialist pattern of society" was adopted at Avadi (1955), not in IPR 1948.
• IDRA is Act No. 65 of 1951 and gave industrial licensing its legal basis [4].
• Public-sector reservation: 17 (1956) → 8 (1991) → 2 today, namely atomic energy (specified activities) and railway operations.
• Chronology trap: SBI (1955) and LIC (1956) came before the 1969 bank nationalisation. Coal mines (1971–73) and GIC (1972) came after it. Then 6 banks were nationalised on 15 April 1980 [2].

Mains Points

• It was a rational answer to market failure in 1950, not ideology alone.
• Private capital was scarce, the market was small and there was no capital goods base.
• Big projects with high fixed costs and long waits before any profit were needed.

• Only the state could carry these risks. So holding the commanding heights filled a real gap in the 1950s.

• Its hidden costs set up the 1991 reforms:

• Capital-intensive heavy industry, where growth relies mainly on machines and uses little labour, created few jobs. This is the root of India's jobs problem.
• IDRA licensing bred delays and rent-seeking (the "licence raj").

• Taking over loss-making firms loaded the public sector with sick units. These later became candidates for disinvestment.

• Role of the state (GS-III): India moved from the state as owner of the heights (17 reserved industries, 1956) to the state as regulator and facilitator (2 reserved today). Strategic areas like atomic energy still stay with the Central Government and its PSUs [3]. The bank nationalisations of 1969 and 1980 [2] show both sides of state control:

• They pushed credit towards agriculture, small industry and rural areas.
• They also tied banks to state priorities, which later showed up as governance and bad-loan problems.

Related concepts

• Industrial policy
• Capital goods industry
• Capital-intensive industrialisation
• Private sector
• Public sector reservation
• Nationalisation

Read more

• Why the state led: the industrial base at Independence, IPR 1948 and IPR 1956