UNIT ROLE DEVELOPMENT

CORPORATIONS
Structure a

28.0 Objectives
28.1 Introduction
28.2 Concept of Development Corporation
28.3 Functions of Development Corporations
28.4 Development Banks
28.5 Role of Development Corporations and a Critical Evaluation
28.6 Let Us Sum Up
28.7 Key Words
28.8 References
28.9 Answers to Check Your Progress Exercises

1 28.0 OBJECTIVES
L
After studying this unit, you should be able to :
explain the concept of development corporation and developmeqt bank
describe their functions
evaluate the overall role of development corporations i~ promotional and
developmental activities; and
highlight some of the administrative problems being faced by the
development corporations.

28.1 INTRODUCTION
In India, industrial development for a long time has been hampered due to lack
of adequate capital. As we have discussed in Unit 26 about the evolution of
public sector and its gradual expansion after Independence, in the initial years it
had become a stupendous task for the government, to set up and develop
industries in the large and medium scale sectors. The, problem was not only of
financing them, but also providing technical help. Hence, a need arose to set up
specialised institutions known as development corporations in different areas, to
initiate, promote and operate financial and other promotional activities in the
economy. These institutions serve as development agencies, in not only carrying
on lending operations, but also developmental activities including promotion of
projects, guiding and advising the entrepreneur.
in this unit, we will discuss the concept and functions of development
corporations,,,and the role of development banks. A critical evaluation of the
development corporations will also be dealt with in the unit.

28.2 CONCEPT OF DEVELOPMENT CORPORATION

It is difficult to define a development corporation in exact terms. In most of the
developing countries the term is used to signify an autonomous agency
established in the public sector mainly to promote, rather than operate
economic activities through some system of assistance; An important feature of
such a corporation is that it aims at achieving some external returns and benefits
against its own profit. As far as fostering promotional activities is concerned, the
development corporations are useful as they (1) promote an activity which ,:
otherwise may not be supported by the private sector or where the private
initiative is lacking, (2) accelerate those activities which may materialise but at a
slow pace, in a small size and that too, in a sectorally unbalanced manner,
(3) promote a desired economic activity as envisaged by the government.
 The development corporation connotes the expansion of desired sector of
activity, promotion of nnits, effecting reforms in the structure of ownership and
management of some economic activities, attaining the desired balance of
payments and development of economic activities in certain backward regions
or areas. Thus, the central focus of the development corporation is a planned
and deliberate promotional initiative in the public sector which 'is desirable but
'may not take place through the initiative of the private sector. The initiative of
the, government through the development corporation provides initial boost to
the economic activities. At timks these corporations may promote an activity
jointly witb the private sector so as to provide necessary confidence to the
private sector. Desired development activities are promoted by the
development corporations and its promotional benefits do not go to the
undeserving beneficiaries. .
These development corporations are established in the public sector, firstly
because the private sector is not interested in such activities as the projects
involve huge amounts of investment, long gestation period or the return on
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investment is negligible. Secondly, most of the developing countries have the
chronic shortage of finances due to reduced amount of savings, low rate of
capital formation and these corporations are designed to fill the gap between
savings and investment. Thirdly, it may act as an instrument of government
policy in bringing about planned economic growth and industrialisation.
Development corporations are provided sufficipt autonomy as is normally
given to a statutory corporation. We have already discussed the characteristic
features'and advantages of statutory corporation in Unit 27. These development
corporations owing to internal autonomy are able to perform such promotional,
developmental and commercial activities which otherwise may not be possible
under a departmental form of organisation. It is due to this autonomy, that they
are able to offer financial, technical and managerial assistance to the
beneficiaries. And they can take decisions suited to the circumstances of each
case, like for instance whether to participate in the form of equity or loans or to
operate activities by itself or to give some subsidies or to sell the entire enterprise
to the private sector.

28.3 FUNCTIONS OF DEVELOPMENT

CORPORATIONS
In most of the developing countries, development corporations perform a
number of functions. These functions can be broadly classified under four
different categories : (1) ina an cia!, (2) Promotional, (3) Technical and
(4) Operative functions.
1) Financial Functions
Development Corporations provide loans to industry, trade or agriculture. They
may also participate in the equity of an enterprise whereby they are able to
promote an enterprise. They may also engage in the activities that have the
effect of promoting an active capital market by underwriting the capital issues of
the company. In India, the development corporations or development banks
like the Industrial. Finance Corporation of India, National Industrial
Development Corporation, Industrial Credit and Investment Corporation of
India, the Industrial Development Bank of India discharge these financial
functions. Similarly, various financial and development corporations have been
created by the respective state governments since 1952 to provide financial
asshtance to small and medium-scale industries. We will be discussing in detail
about these in Section 28.4.

2) Promotional Functions
The promotional functions take different forms. In some cases, the development
corporations may undertake pre-investment studies of the viability of the project
and help the entrepreneurs and investors to pick up a feasible project. In most of
the developing countries where- the skills of the project appraisal and market
snalysis is not adequately available this promotional aspect of the development
corporations helps the entrepreneurs. In some of the cases, these corporations Rde olDevelopnnnt Cormtiom
set up industrial estates in which the promoters are given incentives to locate
their establishment. In these industrial estates, land is provided at a concessional
rate. Inputs required by the industrial units like power, water etc., are given at
subsidised rates. Marketing, warehousing, communication fgcilities are also
provided in these industrial estates. Various state governments in India have set
up a large number of such industrial estates.
In many development corporations, actual pfomotion may take place by
initiating steps including procurement of capital arrangements for foreign
collaboration and equipment. The State Trading Corporation of India Limited
(STC) is a classical example of such promotional activities. The principal
business of the STC includes organising and undertaking trade with other
trading countries and promotion of export of both traditional and new
commodities with a view to diversifying trade and maximising foreign exchange
earnings.
Some development corporations are set up, either exclusively or partly, to
develop a backward region. For example, the IDBI and other financial
institutions have started consultancy organisations like the North Eastern
Industrial and Technical Consultancy Organisation (NEITCO), Kerala
Industrial and Technical Consultancy Organisation (KITCO) etc, for providing
technical advice to entrepreneurs who are desirous of setting up industries in
backward regions.
The Industrial Policy Resolutions of 1956 and 1977 entrusted the public sector
with the responsibility of encouraging and developing a- wide range of ancillary
industries and contributing to the growth of decentralised production by making
available its expertise in technology and management through small scale and
cottage industries. Balanced regional development, extension of the benefits of
economic progress to the backward regions and a widespread expansion of
industries have been -themajor objectives of the. development corporations in
India.

3) Technical Functions
Research and development of new technology is one of the major objectives of
the development corporations. For example, the National Research
Development Corporation of India was established with a view to promote
technical research. The development corporations discharge the function of
arranging technical knowhow for the enterprises which may be available either
indigenously or from other countries. This to a large extent helps small scale
industries in modemising their technology. In India, the National Industrial
Development Corporation, is one such development corporation whose major
and a continuous function consists of providing consultancy in project
engineering, preparation of detailed project reports, drawings as well as
assistance and site supervision. The Engineering India Limited is another
example whose development function consists of processing, deslwing and
supervising the engineering work of the proposed units. Some of the
development corporations provide managerial advice and expertise to the
entrepreneurs. They also provide training facilities to their technical and
managerial personnel. A development corporation may also offer assistance in
the marketing of producls of certain categories of industrial enterprises. For this
purpose, a large number of marketing units for the sale of agricultural as wkll as
industrial products have been set up by the state governments in our country.

4) Operative functions
A development corporation may promote and operate the activities, of any
enterprise under its own control o r before transferring it into private sector.
Hence, a number of joint sector uni!s have been promoted by the state
governments. In the devebping countries, owing to the non-availability of
desired co-operation either'by the govermnent or private sector, the role of the
development corporations has not been fully realised. However, there is great
pptenfial in co-operative ventures for operating diverse activities. Throughout
the world, there has arisen a tendencv to priv'atise the existing units set up in the
public sector. Thisds being regarded as a better alternative fdr fast
industrialisations, in a developing country.
A development corporation, therefore, is set up not exclusively for one
particular function, but may have divergent functions as discussed above. Many
of the financial corporations like the Industrial Finance Corporation of India,
Industrial Credit and Investment Corporation of India, Industrial Bank o f India
are also assigned non-financial functions.
Check Your Prqress 1
Note : i) Use the space given below for your answers
ii) Check your answers with those given at the end of the unit.
1) Explain the meaning of development corporation. What purpose do they
serve in developing countries like India?
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2) Point out the reasons fo
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3) Describe any two functions of development corporations.
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28.4 DEVELOPMENT BANKS

We have discussed in Section 28.3 that one of the functions of development
corporations is to provide financial assistance to industries. Those development
corporations entrusted with financial functions are also known as development
banks. The evolution of these specialised financial institutions has been a post
World War-I1 phenomenon. In most of the developing countries one of the'
major reasons for la'ck of development has been the inadequacy of finance.
Consequently, in the post-war period many of the developing countries have
established special institutions to supply finance for the purpose of
industrialisation. These financial institutions are known as development banks.
These banks were first set up in Europe and Japan. The important function of a
development bank is to mobilise resources and then utilise them for industrial
growth.
In -India, the Industrial Finance Corporation of India (IFCI) was the first
all-India lending institution set up in 1948, entrusted with the function of
 had also set up state level institutions known as State Financial Corporations. In Rde of~ e v e l o p ncormwm
~t

1964, the Industrial Development Bank of India (IDBI) was set up as an apex
organisation in the field of development banking. It was assigned the functions
of co-ordinating the activities. of other financial institutions, supplement their
resources, plan and promote industries of major importance and adopt
priorities, promote industrial growth.
Like other development corporations, these development banks are playing a
very important role in filling the gap in the capital market and providing finances
to those industrial enterprises which may not be able to raise funds from the
normal channels existing in the country. One of the greatest barriers to
development, namely finances, has been removed to a large extent. Their
I/ renclering of financial assistance is confined not only to new enterprises, but
small and medium firms. enterprises in the backward region and non-traditional
enterprises. Such. assistance is provided for expansion, diversification and
modernisation of the enterprise.
Most of these development banks along with providing finances, discharge
promotional activities also. Some of these activities are :
1) Identification of projects from an overall economic study of the country
through area and sector surveys.
2) Identifying entrepreneurs to manage the projects.
3) Undertaking full feasible studies of the project either through their own
efforts or through appointed consultants.
4) Appraising the feasible studies and assisting in the implementation and
execution of these projects.
I These development banks are now occupying a position of dominance in the
field of finance. The technical help coupled with the financial help have helped
in reducing regional imbalances, developing backward regions, encouraging
structural changes and bringing about diversification in the industrialisation of
the country. Through the efforts of these financial institutions, infrastructure for
development has been created. Small and medium scale industries have been
encouraged which in turn has accelerated the industrial development in our
country.

i 28.5 ROLE OF DEVELOPMENT CORPORATIONS

i AND A CRITICAL EVALUATION

!
In India, we have a large number of development corporations both at the
Central as well as the State level. As we have discussed earlier, some of these
apart from the development banks, include the National Research
Development Corporation, National Small Scale Industries Corporation,
Central Warehousing Corporation, State Trading Corporation, Rehabilitation
Industries Corporation, National Seeds Corporation, Indian Tourism
Development Corporation, Film Finance Corporation etc. Similarly a large
number of state governments have also set up development corporations for the
purpose of meeting the needs of agro-bast4 industries, small-scale industries,
for the export, marketing and tourism sectors. There has been a gradual
tendency in India to establish development corporations with specific purposes
rather than in an omnibus manner. The dominant area in our country has been in
the field of finances. But some of these corporations in fields of tourism, expqrt,
research and development have been very effective.
The National Industrial Development Corporation has been functioning
effectively as an instrument of government for securing a balanced and
integrated development of industries both in public and private sectors. It has
been setting up new industries and developing new lines of production. It has
also taken up the study and investigation of industrial schemes, ensuring the
maximum possible use of industrial equipment, and also rhe available skill and
experience in the country. The industries which have been set up in turn
encourage the growth of ancillary industries.
h b l i e Sector md Devekpment
The promotional activities undertaken by development corporations in the area
of agro-based industries, fisheries, textiles, jute and similar other activities have
boosted the overall production and the marketing of these products. On a wider
scale the development corporations have also been effective in bringing about
sdcial transformation especially for the scheduled castes and tribes and in the
tribal areas. They have inculcated the spirit of self help and provided sources of
employment to the large number of vulnerable sections of the society. The
warehousing facilities provided by these corporations has provided adequate
protection to our small scale manufacturers and growers. Tourism in most of the
states has become an important industry and in this context the contribution by
the Tourist Development Corporations has been quite significant. Substantial
foreign exchange is also being earned through this sector.
The development corporation has no doubt contributed to the cause of overall
development, strengthening the economy by .providing economic and social
infrastructure, removal of regional imbalances and encouraged
entrepreneurship among different sections of our society. But a serious problem
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facing most of these corporations have been one relating to its autonomy.
Though it is in the form of statutory corporation which enjoys more operational
autonomy, being an instrument of government policy and promotional
intentions, these corporations have not been able to come out of the government
influence in any major way. Unless sufficient autonomy to these institutions is
granted it will not be possible for them to operate as commercial enterprises.
Since. most of these development corporations are undertaking developmental
and promotional activities, the influence by the government cannot be
undermined especially when they have some social implications. It is expected
that a clear understanding especially with the help of memorandum of
understanding needs to be built up to have an effective working relationship
with the government and the corporations. Once the objectives are clarified and
the targets fixed, these corporations should be provided sufficient autonomy so
that they are able to discharge their functions. 1
The priorities laid down for the development corporations many a time are
broad in nature. This hinders the effective functioning of the corporations. For
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example, the Industrial Financial Corporation of India has been making i
frequent changes in the priorities of its financial operations consistent with the
directives received from the Government of India. Unless the directives are
clear, positive and issued timely, the development corporations cannot
i
discharge their functions effectively.
' To enable the development corporations make a significant impact, their
organisation should be so constituted that they are ensured of autonomy in their
I
day to day matters consistent with their overall objectives. There is need for
proper delegation of administrative and financial powers to. the Board of
Directors and lower authorities in the organisation. Professionalism needs to be
developed in these corporations through imparting training to the managerial
and technical personnel.
Modern techniques of financial management, electronic data processing and
better office management techniques should be introduced to improve the
overall effectiveness and efficiency of the corporations. This may bring in 'better
system of planning, decision-making monitoring and evaluation.

Check Your Progress 2

Note : i) Use the space given below for your answers
ii) Check your answers with those given at the end of the unit.
1) Point out the important functions of development banks.
 Role of Development Corpomfions
2) Highlight the contribution made by development corporations in our
country.

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3) Discuss the administrative problems faced by development corporations in

India.
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4) What steps can be taken to impove the effectiveness of the corporations?

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28.6 LET US SUM UP

In most of the developing countries there exists a large number of development
corporations to promote and initiate such activities which mav indirectlv help in
the-process of sbcio-economic development of the respective-countries: ~ h k s e
corporations are created to help the private entrepreneurs in financial and
technical matters. In this unit, we have discussed the concept of development
corporations and their functions. Generally, those development corporations
which provide financial assistance to industries are known as development
banks. We have highlighted the functions of these banks like the Industrial
Development Bank of India, Industrial Finance Corporation. The development
corporations have made a remarkable impact on the'economy in various sectors
like tourism, marketing, warehousing facilities etc. But a critical analysis of their
role brings out that most of these corporations have overlapping
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functiogs, they
do not enjoy sufficient autonomy and i r e not able to bring about
among their, technical and managerial personnel. To make the corporations
effective, there is a need to modernise and improve their adminjstrative set up.

28.7 KEY WORDS

Capital Market : It refers to various institutiqns, arrangements concerned with
the purchase, sale and transfer of stock;. bonds etc.
Electronic Data Processing : Use of Computers for the purpose of storage and
processing of information for managing an. organisation.-
h b k Scetor and Development
External Returns : The advantages and benefits of investment reaching other
organisations which. secure assistance from the promoters.
Feasibility : Practicability; activitiesltasks capable of being executed or
managed.
Joint Sector : Those forms of organisation which are managed and operated by
public and private sectors together.
Mprket Analysis : Measurement of market potential .and its characteristics.
Operative Functions : Functions and activities related to the direct running of an
organisation.
Underwriting of capital issues : It means contracting with or without condition,
to subscribe for the stocks, shares, bonds or debentures of any company'or
industrial concern with a view to the resale of the whole or any part thereof.

28.8 REFERENCES
Administrative Reforms Commission, 1967. Report on Public Sector
Undertakings. The Manager of Publications : Delhi.
Das Gupta, A & N.K. Sengupta, 1987. Government & Business. Vikas
Publishing House : New Delhi.
Government of India, 1990. Public Enterprises Survey 1989-90, Vol. I,Bureau
of Public Enterprises : New Delhi.
Khanna, K.K., 1988. Management of Public Sector Enterprises in India.
Himalaya Publishing House : Bombay.
Nayar, Baldev Raj, 1989. India's Mixed Economy - the Role of Ideology and
Interest in its [Link] Prakashan : Bombay.
United Nations, 1974. Organization, Management and Supervision of Public
Enterprises in Developing Countries, United Nations : New York.

28.9 ANSWERS TO CHECK YOUR PROGRESS

EXERCISES
Check Your Progress 1
1) Your answer should include the following points :
Development Corporation refers to an autonomous agency
established in the public sector with the purpose of mainly promoting,
rather than operating economic activities through some system of
assistance.
In developing countries like India, they are useful as they
promote such type of activities which may not be supported by the
private sector or where the private initiative is lacking.
accelerate those activities which take place at a slow pace, in a small
size and in a sectorally unbalanced manner.
promotes a desired economic activity as envisaged by the government.
2) Your answer should include the following points :
The reasons for setting up of development corporations in the public sector
are to
take up those projects which the private sector is unwilling to take as
they involve huge amounts of investment, long gestation period or the
return on investmept is negligible.
meet the financial requirements of industries in developing countries.
act as an instrument of government policy in bringing about planned
economic growth, industrialisation.

3) Your answer should include the following points :

The development corporations discharge financial functions through
provision of loans to industry, trade or agriculture. They may also
 engage in activities which promote an effective capital market by Role of Development Corpomtiom

underwriting the capital issues of the company.

The development corporations take up promotional functions in
undertaking pre-investment studies of the viability of the project,
helping the entrepreneurs in taking up feasible projects. Industrial
estates are set up in which the promoters are given incentives to locate
their establishment, other facilities like power, wslter, marketing,
warehousing are given. Promotional functions can take the form of
procurement of capital arrangements for foreign collaboration and
equipment.
Some of the development corporations are entrusted technical
functions which take the form of arranging technical know-how for
the enterprises which may be available either indigenous13 or from
! other countries. It includes providing consultancy in project
engineering, preparation of detailed project reports, drawings, site
supervision etc. Provision of managerial advice and expertise to
entrepreneurs, training facilities, assistance in marketing of products,
etc., are some of the technical functions discharged by the
corporations.

I
Operative functions take the form of joint sector units promoted by
many state governments. A development corporation may promote
and operate activities of any enterprise under its own control or
before transferring it into private sector.
Check Your Progress 2
1) Your answer should include the following points :
The functions of development banks include :
providing medium arid long-term credit to industry;
co-ordinating the activities of other financial institutions; supplement
their resources, plan and promote industries of major importance and
adopt priorities to promote industrial growth;
identification of projects;
identifying entrepreneurs to manage the projects;
undertaking full feasible studies of the project either through their
own efforts or through appointed consultants;
appraising the feasible studies and assisting in the implementation and
execution of these projects.
2) Your answer should include the following points :
The contribution made by various development corporations in
bringing about a balanced and integrated development of industries
both in public and private sectors;
setting up new industries, study and investigation of industrial
schemes, ensuring maximum possible use of industrial equipment;
undertaking promotional activities in the fields of agro-based
industries, fisheries, textiles, jute, small-scale industries, export,
marketing, tourism sectors;
inculcating the spirit of self-help and providing sources d
employment to'a large number of vulnerable sections of the society.
3) Your answer should include the following points :
The administrative problems of development corporations relate t o :
inadequate operational autonomy;
the priorities fixed for the corporations are broad in nature and are
not specific;
lack of clear, positive. timely directives by the government;
4) Your answer should include the foilowing points :
Proper constitution of the organisation of the development
corporations with sufficient autonomy in their day to day matters
consistent with their overall objectives.
Proper delegation of administrative and financial powers to the Board
of Directors and lower authurities in the organisation.
Development of professionalism in the corporations through
imparting training to the managerial and technical personnel.