Disinvestment and Privatisation in IndiaAssessment and
Options*
R Nagaraj
Ownership reform in public sector enterprises (PSEs) initiated
since 1991 has as yet been quantitatively modest. It is perhaps too
early to judge the effects of these initiatives on their financial
performance. While the slow pace of the reform can be perceived as
an opportunity, there is perhaps merit in carefully reviewing the
policy in light of economic theory, and comparative experience. As
the bulk of the public investments are in industries with economies
of scale and scope (with externalities that in principle invite
considerable regulation), this study suggests an alternative
institutional arrangement for improving PSEs financial performance:
mutual stock holding among complementary enterprises tied around a
public sector bank to minimise problems of soft budget constraint,
dysfunctional legislative and bureaucratic interference, and to
encourage close interaction between banks and firms to promote long
term economic development.
Indira Gandhi Institute of Development Research Gen. Vaidya
Marg, Goregaon East Mumbai 400 065 Email: [email protected] March
26, 2005*
This study is prepared for the ADB Policy Networking Project,
coordinated by Chiranjib Sen, Indian Institute of Management
Bangalore. I am grateful to T C A Anant, K L Krishna and many
participants of the two workshops held in New Delhi and Bangalore,
for their comments and suggestions on the earlier drafts of the
paper. Usual disclaimers apply.
Disinvestment and Privatisation in IndiaAssessment and OptionsR
Nagaraj Introduction: Employing about 19 million persons, public
sector currently contributes about a quarter of Indias measured
domestic output. Administrative departments (including defense)
account for about 2/5th of it, the rest comes from a few
departmental enterprises (like railways and postal services), and a
large number of varied non-departmental enterprises producing a
range of goods and services. These include, close to 250 public
sector enterprises (PSEs) owned and managed by the central
government, mostly in industry and services (excluding the
commercial banks and financial institutions). At the state level,
production and distribution of electricity, and provision of
passenger road transport form the principal activities under public
sector, run mostly by autonomous boards and statutory corporations.
Though public investment in irrigation would perhaps rank next only
to electricity in most states, it is generally viewed as public
service, hence counted as part of public administration. Besides,
there are about 1,100 state level public enterprises (SLPEs) that
are relatively small in size. While the contribution of all these
varied publicly owned and managed entities to national development
is widely acknowledged, their poor financial return has been a
matter of enduring concern especially since the mid-1980s when, for
the first time, the central governments revenue account turned
negative an imbalance that has persisted ever since. In 1991, a
small fraction of the equity in selected central PSEs was sold to
raise resources to bridge the fiscal deficit.1 Though
quantitatively modest (as will be seen later), the disinvestment
signaled a major departure in Indias economic policy2. While there
have been instances of sale of publicly owned enterprises as
running concerns on pragmatic considerations, it is only in the
last decade that such sales (and sale of limited equity) acquired
the status of public policy. Table 1 summarises what successive
union finance ministers have said about the policy intent in their
budgetary speeches, how they wished to pursue it, and what they
planned to use the proceeds for. Such a shift in policy is in tune
with the widespread move away from public ownership since it was
initiated in the late 1970s in the UK, and in the early 1980s in
Chile a change that has swept the world since then. Structural
adjustment lending that was initiated around the same time by the
Bretton Woods institutions included privatisation as an integral
component of the policy based lending for the economies in
financial1
Besides disinvestment, the reforms also decided refer
chronically loss-making PSEs to BIFR (as with the private sector
firms), national renewal fund was set up to finance voluntary
retirement scheme for public sector employees, introduced
memorandum of understanding (MOU) to be signed between PSEs and
their operating ministry, as a means of imparting managerial
freedom and performance appraisal. See Appendix 1 for relevant
excerpt from Industrial Policy Statement, 1991
2
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distress. Such an initiative was buttressed by the World Banks
influential official publication, Bureaucrats in Business (1995),
which was a serious indictment of how the extension of the state in
provision of private goods and services resulted in serious loss of
efficiency, waste and lost growth opportunities for many less
developed economies.3 In macroeconomics, especially after the Latin
American debt and inflationary crisis in the 1980s, privatisation
was widely advocated as a quick and sure means of restoring
budgetary balance, to revive growth on a sustainable basis
(Dornbusch, 1991). At the micro level, the change in ownership is
often advocated to increase domestic competition, hence efficiency;
and encourage public participation in domestic stock market all of
which is believed to promote popular capitalism that rewards risk
taking and private initiative, that is expected to yield superior
economic outcomes.4 Thus, these changes are part a wider reversal
in perception and policy in the recent times. Without attempting a
detailed appraisal of the analytics and evidence of privatisation,
this report briefly reviews the Indian experience in Part I, and
examines the policy options in Part II.5 The study is largely
restricted manufacturing and non-financial enterprises owned and
managed by the central government. Part I Review of Disinvestment
and Privatisation Disinvestment was initiated by selling
undisclosed bundles of equity shares of selected central PSEs to
public investment institutions (like the UTI), which were free to
dispose off these shares in the booming secondary stock market. The
process however came to an abrupt halt when the market collapsed in
the aftermath of Harshad Mehta led scam, as the asking prices
plummeted below the reserve prices.6 Since the stock market
remained subdued for much of the 1990s, the disinvestment targets
remained largely unmet. The change of government at the Centre in
1996 led to some rethinking about the policy, but not a reversal. A
Disinvestment Commission was constituted to advise the government
on whether to disinvest in a particular enterprise, its modalities
and the utilization of the proceeds. The commission, among other
things, recommended (Disinvestment Commission, 1997):3
For a symposium of five papers on this study from different
perspectives, see World Development, January 1999. It is perhaps
useful to draw a distinction between privatization and deregulation
or liberalization. While the former strictly deals with change in
ownership, the latter is concerned broadly with change in rules of
entry and exit of firms and on their conduct. In this study we are
concerned strictly with privatization, and not with deregulation or
liberalization. There are many comprehensive reviews of literature
on this issue, for instance, Megginson and Netter (2001), Rammohan
(2001), Tandon (1997), Cook and Kirkpatrick (2000). Though
disinvestment was not part of the scandal, the process got some
what discredited as some officials associated with the policy
reforms were found have had an association with Harshad Mehta.
4
5
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Restructuring and reorganization of PSEs before disinvestment,
Strengthening of the well-functioning enterprises, and To utilize
the disinvestment proceeds to create a fund for restructuring of
PSEs.
In response to the public debate, and to the commissions
recommendations, some large and well-functioning PSEs were declared
jewels (Navaratnas) in the governments crown, and were granted
greater managerial and financial autonomy. However, disinvestment
did not pick up as the share prices remained subdued because of the
scandals that rocked the financial markets.7 But, by the turn of
the decade, there was some improvement mainly in response to the
stock boom engineered by Ketan Parikh. Apparently some PSEs stocks
were part of the scandal, which this time also involved the UTI.8
The new government that came to power in 1998 preferred to sell
large chunks of equity in selected enterprises to strategic
partners a euphemism for transfer of managerial control to private
enterprises. A separate ministry was created to speed up the
process, as it was widely believed that the operating ministries
are often reluctant to part with PSEs for disinvestments as it
means loss of power for the concerned ministers and civil servants.
The sales were organised through auctions or by inviting bids,
bypassing the stock market (which continued to be sluggish),
justified on the grounds of better price realisation.
Notwithstanding the serious discussion on the utilization of
disinvestment proceeds, they continued to be used only to bridge
the fiscal deficit. Strategic sale in many countries have been
controversial as it is said to give rise to a lot of corruption,
discrediting the policy process. Aware of such pitfalls, efforts
were made to be transparent in all the stages of the process:
selection of consultants to advice on the sale, invitation of bids,
opening of tenders and so on. Between 1999 and 2003, much greater
quantum of public assets were sold in this manner, compared to the
earlier process, though the realised amounts were consistently less
than the targets except in 2003 (Table 2 and 3). Nonetheless, there
are series of allegations of corruption and malpractice in many of
these deals that have been widely discussed in the press and the
parliament. Instances of under pricing of assets, favouring
preferred buyers, non-compliance of agreement with respect to
employment and retrenchment, and many incomplete contracts with
respect to sale of land, and assets have been widely
reported.97
It is perhaps worth reminding ourselves that the 1990s witnessed
a series of frauds in the financial sector that seriously dented
the credibility of the stock market, which is yet to recover in
terms of participation of domestic small investors. After the
Harshad Mehta scam, there was, MS Shoe scam, collapse of NBFCs,
vanishing companies scam, teakwood plantation scam, collapse of CRB
group of financial companies, collapse of housing bubble in 1996,
and finally the Ketan Parikh scam in 2000. A credible and careful
account of the reasons of the collapse of UTI (and along with it,
publics trust in the stock market) is yet to be written. One could
hypothesize that the governments directive to buy PSEs stocks
probably contributed to the beginning of the end of UTI. As
official agencies and courts are investigating many of these
issues, we do not consider it prudent on our part to go into them
at this stage.
8
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Thus, during the last 13 years Rs. 29,520 crores were realised
by sale of equity in selected central government PSEs, (in some
cases) relinquishing managerial control as well (Table 4). This
formed less than one per cent of central governments cumulative
fiscal deficit in this period. Amid disinvestment and
privatisation, some new PSEs are also created. For instance, many
departmental activities were being corporatised (setting up of BSNL
for instance) with a view to disinvestment. New PSEs are also
formed to take up newer activities like road development
corporations (promoted by state governments to execute highways and
irrigation projects). Legal issues in the D-P process: Legality of
the disinvestment process has been challenged on a variety of
grounds that slowed the sale of public assets. However, there were
two significant judicial rulings that broadly set the boundaries of
the D-P process. These are: 1. Privatisation is a policy decision,
prerogative of the executive branch of the state; courts would not
interfere in it. 2. Privatisation of the PSE created by an act of
parliament would have to get the parliamentary approval. While the
first ruling gave impetus for strategic sale of many enterprises
like Hindustan Zinc, Maruti, and VSNL etc. since 2000, the second
ruling stalled the privatisation of the petroleum companies, as
government was unsure of getting the laws amended in the
parliament. Privatisation at the state level: A sizable proportion
of the state level enterprises are welfare corporations largely
intended to meet social welfare objectives, and to secure resources
from public sector banks and development financial institutions.
However, many SLPEs are also involved in manufacturing and mining
activities to utilize local resources and to cater to the regional
markets. SLPEs as a whole make sizable financial losses.10
Privatisation at the state level began somewhat earlier than at the
Centre. Sale of the state governments equity holding in Allwyn
Nissan Limited in Andhra Pradesh in 1989, UP State Cement
Corporation to Dalmia Group, and Auto Tractors in 1991 were
precursors to the national level policy changes (Bajaj, 1994)11. By
2003, 35 such SLPEs have been
10
Apparently, these corporations serve an important political
function. Legislators who are denied ministerial positions are
usually appointed as their chairpersons of such enterprises. Allwyn
Nissan was a state level joint venture set up in 1985 to produce
light commercial vehicles in collaboration with Nissan of
Japan.
11
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privatized. But, interestingly, over five times as many
enterprises (180) were shut down during this period (Table 5).
Employment in PSEs: As Figure 1 shows, employment in the central
PSEs has declined from about 2.2 million in 1991-92 to about 1.7
million a decade later. A marginal rise in 2001-02 is on account of
the shift of employment from department of telecommunication to
incorporation of BSNL as a corporate entity. If one traces
employment in a set of same enterprises over the 1990s, perhaps the
decline would be greater. The fall in employment is clearly the
result of voluntary retirement scheme (VRS) initiated using the
National Renewal Fund, as part of the structural adjustment
programme. What has happened to employment after privatisation?
Perhaps it is too early to get firm evidence since substantial
privatisation occurred only during the last four years. However,
popular reports suggest some retrenchments and compulsory
retirement of workers. Reportedly some private firms have violated
their contract in this regard (Modern Foods, for instance). There
are also reports of employment generation at BALCO on account of
capacity expansion. Performance of PSEs after disinvestment and
privatisation: In principle, disinvestment is unlikely to affect
economic performance since the state continues to be the dominant
shareholder, whose conduct is unlikely to be influenced by share
prices movements (or return on equity). Privatisation can be
expected to influence economic outcome provided the firm operates
in a competitive environment; if not, it would be difficult to
attribute changes performance sole or mainly to the change in
ownership. Assessing the principles, premises and performance of
the D-P process: Right from the beginning in the UK, privatisation
has been a policy in search of an economic rationale to borrow the
title of Kay and Thompsons (1986) well-known contribution.
Mainstream economics is largely agnostic about the role of
ownership, focusing mainly on how market structure affects
performance of firms (Vickers and Yarrow, 1991). If privatisation
is seen as a means of raising resources for the budget, it can be
analytically shown to be cheaper to sell public bonds than public
assets (Yarrow, 1986). Instead of seeking the reasons for
privatization, one could instead ask why a certain firm should
remain in public sector. Some would contend that with rapid
technological change, natural monopoly, as a powerful argument for
public ownership has simply disappeared. Such an argument would
surely hold for telecommunications, not but for the rest of public
monopolies. Based on studies of privatisation of natural
monopolies, Ravi Ramamurthi (1999) contended:
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Sectors such as railways, however, are harder to regulate after
privatization (see Ramamurthi, 1997). The regulatory task can be
especially difficult in sectors such as highways, or water or
sewage, where competition is weak or totally absent, investments
are lumpier, externalities are much more important, and pay back
periods run 8-10 years or more, thereby increasing uncertainty and
risk for contracting parties. Renegotiations are likely to be the
rule, brought on by unanticipated developments or simply
opportunism on the part of investors or governments. History is
full of examples in which such arrangements have fallen apart a few
years after they were signed (Ramamurthi, 1999: 149).
In fact, it is mainly the property right theorists who have
underlined the role of ownership on economic performance (Fama,
1980). But in the twentieth century, with the separation of
ownership from control in modern industry, there is a serious
agency problem regardless of its ownership. The view that the
secondary capital market and the market for managers provide
adequate discipline on a firms performance is at variance with
evidence, especially the US experience (more about it later). What
is the evidence on the efficiency effects of privatisation? It is
highly mixed, to put it mildly. Florio (2004), perhaps the most
recent and definitive quantitative account covering the longest
time period of the UK experience, does not show any measurable
efficiency gains on account of the changes in ownership. World
Banks official study (Ghalal et al, 1995), perhaps the most careful
exercise at making pair-wise comparisons of comparable firms in
many countries, was extremely cautious in suggesting welfare gains.
In fact, one of the authors of the study, Pankaj Tandon, in an
independent paper was more categorical in rejecting the hypothesis
of efficiency gains from privatisation in less developed countries
(Tandon 1997). If this selective review of evidence is anything to
go by, then one should have a modest expectation from whatever
privatisation that has happened in India.12 Britain, the cradle of
modern capitalism, has witnesses the public policy pendulum swing
from nationalisation to privatisation (or denationalization) many
times over, in the 20th century. While the US has a model of
private ownership, and control with public regulation, continental
Europe and Japan have, by and large, stayed steady with greater
public ownership in such industries. Although there have been some
privatisation in these economies, such attempts have remained
relatively modest with limited changes in ownership and control of
national assets. Thus, there seems to be no unique model that is
universally sound for promoting efficiency of resource use. Perhaps
it has a lesson for us: we have to search for a solution suited for
our conditions that are broadly consistent with economic reasoning.
Before seeking evidence on the effects of the D-P in India, perhaps
it would be useful to ask how valid were the premises of the
disinvestment policy to begin with. It is widely believed, as large
and growing share of the fiscal deficit was on account of PSEs
financial losses getting rid of them would restore the fisc back to
health. How valid was such a diagnosis? Nagaraj (1993) had shown,
using a widely accepted a methodology that PSEs financial losses
were not the principal cause of the growing fiscal deficit in
the12
For a different reading of the evidence, with a greater focus on
the financial aspects of the reform, see Megginson (2005).
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1980s, and in fact PSEs share in the fiscal deficit had steadily
declined in the decade. In other words, the government per se was
largely responsible for the growing fiscal deficit, not the
enterprises owned by it. Updating these estimates for the 1990s
using a more refined method, the estimated deficits of the general
government confirmed our previous findings (Figure 2).13
Governments share (in terms of equity and debt) as a proportion of
PSEs total fixed investment shows a steady decline since the
mid-1970s, suggesting a gradual tightening of their budget
constraint (Figure 3). The decline in governments contribution is
being met increasingly by a rise in internal resources (Figure 4).
These long-term trends indicate, contrary to the widely held views,
the growing fiscal deficit since the 1980s is not on account of
financial losses of the enterprises. The above evidence suggests
that the popularly used indicator of net profit as a proportion of
total equity does not adequately reflect PSEs financial
performance. While such a measure may be useful for a private
shareholder, it has many shortcomings to gauge the return on public
investment. For many reasons, PSEs tend to be over capitalized.
First, while these enterprise are expected to develop
infrastructure on their own using budgetary resources (adding to
their capital costs), state government agencies usually vie with
each other to provide larger and better infrastructure for private
firms, thus reducing their capital cost. Therefore, depreciation
charges for PSEs tend to be much larger. Second, capital structure
of PSEs is seldom designed to maximise returns for the shareholder,
namely the government. Usually PSEs are granted large loans in the
initial year; when they are unable to service the loans, these are
often converted into equity to reduce their debt repayment burden.
Thus, many PSEs have high equity, not by design but by default,
adversely affecting the net profitability ratio. Moreover, from an
economic viewpoint, capital structure of an enterprise is of
secondary importance compared to return on capital employed. It is
widely believed that PSEs respectable profitability ratio (gross
profits to capital employed) is mainly on account of the surpluses
of the petroleum sector enterprises whose pricing includes an
element of taxation. Interestingly, as shown in Figure 5, the
profitability ratio has improved since the 1980s even excluding the
petroleum sector enterprises a clear evidence on improvements in
PSEs financial performance. But could it be merely due a faster
rise in administered prices of PSEs output (on account of their
monopolist position in the domestic market)? This is not so, as
evident from the fact that the ratio of deflators of public sector
output and GDP has declined since the mid-1980s (Figure 6). If PSEs
financial performance has improved as shown above, what then
accounts for the growing deficits? The problem seems to lay in poor
financial returns in electricity boards, road transport
corporations and railways, which are probably not adequately
reflected in the above measures. For instance, revenue-to-cost
ratio in SEBs has remained less than one for much of the 1990s, a
decade of much talked about reforms, despite a steady rise13
For methodological details of the results reported in this
section, refer to Appendix 2.
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in physical efficiency of thermal power plants (as measured by
plant load factor) (Figure7). If the above reasoning and evidence
is persuasive, then they suggest that the empirical premises for
the ownership reforms were rather thin. While undoubtedly public
sectors financial performance needed an improvement, they were not,
in the main, on account of the central PSEs that were the targets
of the D-P. They mainly lay in (i) the growing expenditure and
subsidies of the government, and (ii) poor return on investment in
electricity, irrigation and road transport. In all these cases, the
real problem is not so much public ownership, but pricing of public
utilities and government s inability to collect user charges, for a
variety of political and social reasons. To sum up, as the sale of
equity has been quantitatively a modest, in relation to the size of
public sector in India, it is hard to judge the efficacy of the
reform effort. Moreover, it is perhaps too early to be definitive
about the outcomes. Analytical bases of the policy reform were
fragile to begin with, and comparative experience does not give
much optimism for measurable efficiency gains from these changes in
ownership of industrial assets. Above all, if the evidence reported
is anything to go by, the premises of the D-P policy were rather
weak. II Policy Options With over a decade of sustained efforts to
redraw the boundaries of the ownership of public industrial assets,
there has hardly been any political or professional consensus on
the need for, and the modalities of, privatisation. This can be
interpreted to mean either of the two possibilities: that there is
a great potential for the sale of public equity, or, that there are
practical difficulties of doing it. Realistically speaking, if
ownership reform is a policy imperative then the options before us
seem limited to the following: 1. Rule out large-scale
privatization, considering (a) the shallow domestic stock market,14
(b) relatively small size of the private corporate sector,15 and
(c) the wide spread political opposition to transfer of managerial
control to foreign owned firms, and (d) social costs of such
transfers. 2. In principle, disinvestment without a change in
management is unlikely to make much difference to efficiency. It
may help raise limited resources from the capital market, mainly
reflecting the government monopoly in the industry. But this is
a14
Despite considerable modernisation of institutions and
procedures of securities markets in the last decade, they are many
shortcomings: one, the market is still very shallow with a few
scripts accounting for the bulk of the trade; two, volatility in
the Indian market is still one of highest in the world; three,
despite NSEs phenomenal growth, it is small coterie of BSE brokers
that call the shots in the entire market. Thus, the India market
continues to be what Vijay Joshi and I M D Little appreciatingly
called it the snake pit. It is perhaps worth reiterating that size
of Indias private corporate sector is relatively small, estimated
to be between 10 to 12 per cent of domestic output. Barring a few,
most private sector firms are small compared to PSEs that are
targets of privatisation.
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costly source of finance with high transaction costs. Given
excess liquidity currently in the financial system it would be
cheaper to sell bonds domestically to raise the required finances.
3. Financially unviable (loss making) PSEs need to be drastically
restructured or closed down. However, these enterprises are
invariably located on valuable real estate, as most of these
industrial enterprises were the locus of urban and regional
industrial development. Empowered committees consisting of all the
stakeholders could be created to shut down such enterprises,
dismantle the plant and machinery, and sell the real estate in a
transparent manner; and/or develop the real estate jointly with
institutions like the LIC or state housing boards. Workers are
unlikely to object to such proposals if they are assured of a fair
share of the sale proceeds either in cash or part of the housing to
be built using the land. 4. In consumer goods industries like
hotels etc, where PSEs may have quality assets in prime locations
but lack sound management, long term leases or management contracts
could be a viable option. However, efficacy of this option lies in
the design of contracts. If they were highly loaded against
government it would vitiate the purpose. 5. Need for the
institutional mechanism of disinvestment commission with
representatives from different stakeholders to deliberate on all
the above matters in a transparent manner. Doing it
administratively by a ministry would perhaps discredit the D-P
policy. If we admit that there are genuine limitations of selling
off of PSEs core of which belong to energy, infrastructure, and
industries of strategic interest in national development then there
is perhaps no credible alternative but to improve the functioning
of these enterprises.16 We, then, are back to the old question: how
to improve PSEs performance where a change in ownership is unlikely
to make much difference.17 There is a large (administrative)
literature (including many valuable official reports) addressing
such a question; much of it dwells on the autonomy and
accountability of enterprises posed mainly in terms of
administrative controls of the government as the ultimate owner,
and procedural accountability of the managers. One of the widely
advocated suggestions is to create industry wise holding companies
for instance, Arjun Sengupta Committees main suggestion (Government
of India, 1984) as an institutional buffer between an enterprise
and the government. But the evidence on this organizational form is
perhaps not encouraging, as it often implies creation of another
tier of bureaucracy, undermining the autonomy of the firm or
factory level managers.1816
For instance, In 1991, 14 largest PSEs constituted 55 per cent
of value added and capital employed. The enterprises included in
decenig order in terms of gross block are: ONGC, NTPC, SAIL,
Rashtriya Ispat Nigam Ltd., NALCO, Indian Oil, Neyveli Lignite,
MTNL, Indian Airlines, Shipping corporation, IPCL, Air India, and
South Eastern Coal Fields. PSEs need not necessarily have to be
large and monolithic organization. There is considerable scope for
rationalization of these enterprises. It is worth remembering that
PSEs like SAIL and Coal India were conceived and functioned
initially like a holding company.
17
18
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Economic analyses of public sector performance, however, seem to
have largely ignored the institutional black box, by focusing
mainly on the macroeconomic effects of public investment and
planning for growth. Many studies critical of Indias growth and its
distribution have identified political economic reasons for poor
performance of PSEs. More recently, in line with the current
orthodoxy, some have advocated ownership reform, which we have
argued to be of limited value. Problem of corporate governance: In
the evolution of modern capitalism, with separation of ownership
from control as firms grow in size and complexity, agency problem
arises: how to ensure that the managers (promoter in Indian
parlance) work to maximise return on shareholders capital. Given
the information asymmetry, managers could pursue their private goal
disregarding the shareholders interests. This is at the heart of
the problem of modern literature on corporate governance. Various
institutional and contractual mechanisms have evolved in the last
century to grapple with this problem. In the context of efficiency
of resource use in a socialist economy, Oskar Lange sought to solve
the problem of how to ensure that managers of public firms
maximized efficiency consistent with the goals set by the central
planners. However, looking at the microeconomics of firms in a
socialist economy, Jonas Kornai argued that they were unlikely to
be efficient because of the soft budget constraint: that is, firms
do not go bankrupt or managers do not loose their jobs for their
poor performance. Firms can always renegotiate their contracts with
the planners to hide their inefficiency. In India public sector
firms are often face with multiple objectives, and multiple owners
or monitors central government, state governments, legislators,
public auditors and so on. Managers may not necessarily maximise
profits as they could always highlight a particular achievement to
suit their convenience. Managers may be risk averse as they face
constitutionally mandated procedural audit by the CAG if an
enterprise is majority government owned. Managers efficiency
objectives may come in conflict with dysfunctional political
interference in operational matters (at the expense of policy
issues) to meet narrow political goals. However, at the same time,
poor performance by managers does not involve any punishment as
they can re-negotiate the output prices, budgetary support, or have
access to soft and/or government guaranteed loans; in other wards
they do not face a hard budget constraint. Thus, the agency problem
is endemic to all economic systems. Moreover, problem of soft
budget constraint is not restricted to socialist economies but
evident in market economies as well when the firm is question is
large and considered of strategic importance for the economy,
though perhaps to much lesser extent. Rescue of Chrysler
Corporation the third largest automotive firm in the US in the late
1970s and United Airlines after 9/11 in the US are clear instances
of state support for failing companies. Such support is more common
in financial sector, where failure of firms can have significant
systemic risk.
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Comparative experience: Experience of the last century shows
that different economic systems have sought to solve this problem
in a variety of ways, with varying degrees of success. The Soviet
system was perhaps quite capable of solving the problem in the
initial phases of extensive growth with a clear objective of
maximisation of national output. However the system began to
falter, as the economy got more complex, in the phase of intensive
growth when objective was to increase productivity of resources
(Bhaduri, 1998). The command economy was unable to resolve the
agency and incentive problems at the micro level because of the
soft budget constraint. As noted earlier, in the Anglo Saxon
economies, the secondary stock market acted as the disciplining
device on corporate performance and as market for managers. In
principle, stock prices that summarise all publicly available
information on the firm performance should provide adequate signals
for managers to act optimally. The system is also seems capable of
providing risk capital to spur rapid technological progress, as
witnessed in the role that venture capital funds played in
promoting the Internet revolution. However, given the agency
problem, there is enormous scope for abuse of the system, adversely
affecting the shareholders interests and possibly hurting economic
efficiency in the aggregate. Hostile takeovers and leveraged
buyouts have exposed the inefficiency of such a disciplining
mechanism (Dore, 2000). The recent implosion of some of the worlds
biggest companies, astronomical rise in managerial remuneration
disproportionate to performance of firms, and widespread abuse of
stock options by top managements in firms like Enron and Tyco by
the turn of the last century have seriously dented the credibility
of the stock market based principles of corporate governance
(Stiglitz, 2003). Follower industrializing economies of continental
Europe and Japan evolved a bank centric mechanism of financing of
industrialization and corporate governance to overcome some of the
well known shortcomings of the stock market heeding to Keyness
advise, and Greschenkrons (1962) historical insights (Zysman,
1983). In this system, banks not only provide loans but equity as
well, hence closely monitor the performance of firms. Japanese
system of interlocking equity ownership centered around a main
bank, called Keiretsu, with mutual stock holding leading to
accountability and risk sharing, has been able to overcome some of
the widely observed informational deficiencies in the stock market
based system, hence improved efficiency and growth over a sustained
period (Aoki, 1996). Admittedly, bank centric systems have had
their share of problems. While such a system was perhaps capable of
engineering a rapid capital accumulation and technological catch up
with the US, it was probably not nimble enough to finance risk
taking to extend the technological frontier as evident from the
experience of the 1990s. Many blame the close and opaque nexus
between firms, banks and the bureaucracy for the Japanese debacle
in the 1990s that has persisted for more than a decade now.
Similarly, state sponsored industrialistion is believed to be
responsible for the East Asian crisis in 1997.
R Nagaraj
12
Disinvestment and Privatisation
Although there is some rethinking on the basis of the above
mentioned instances in Japan and continental Europe about their
institutional mechanism, it is hard to deny the superiority of the
bank centric systems in promoting the post-war experience
(19452000). Variants of the Japanese model of financing and
governance have contributed in no less measure to the unprecedented
success of late industrialising economies of East Asia as
represented by the rise of the rest, to use Alice Amsdens phrase
(Amsden, 2001). Thus, on balance, history and theory seem to favour
a bank centric system at least in the early phase of
industrialisation. Evolution of the Indian system: In light of
above, how does one chrecterise India? Over the first three decade
of the planned economic development, a bank centric system was
broadly put in place with an elaborate network of public sector
banks, development finance and investment institutions. Though
banks, especially the DFIs had representation on company boards by
virtue of their large debt and equity holding (both public and
private), there was no attempt to nationalise private corporate
firms, or to interfere with managerial control of existing
promoters unless the firms were mismanaged. Thus, the system was
broadly supportive of development of private enterprise consistent
with the national objectives. Moreover, as Indian enterprises are
predominantly family-managed, public financial institutions sought
modernize corporate governance (like introduction of professional
managers in the boards) and financial practices, without
questioning the rights of management of the promoters. But, the
role of the financial institutions was largely subordinated to the
implementation of quotas and licenses. Financial system, thus,
could not adequately develop expertise in screening investment
projects, market and technologies, and assessing market risk. They
had little role disciplining corporate managers with financial
carrots and sticks. In other words, banks and financial
institutional were not encouraged to develop their reputational
capital, that is perhaps central to a sound financial system. A
close reading of the early studies by R K Hazari (1986) on
licensing, and later Narasimham Committee report on shifting from
physical to financial controls (Ministry of Finance, 1985) seem to
suggest that they proposed to nudge the institutions towards a bank
centric system of financing and corporate governance. Although
development banks increasingly financed PSEs investments, they had
limited role in governance of these enterprises, was largely in the
hands of the operating ministries and were subjected to
parliamentary controls. Parliament constituted Committee on public
undertakings (COPU) that looked into the functioning of selected
PSEs. Similarly, CAG is constitutionally mandated to audit PSEs in
which the central government held more than 50 per cent of equity
shares. While such measures of public accountability are in
principle desirable in a democracy, in practice, the parliamentary
committees had little role in ensuring efficacy of resource use in
these publicly owned firms. As measures of enforcing sound
corporate governance, these methods were not effective.
R Nagaraj
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Disinvestment and Privatisation
However, overlooking the hard task of institutional design to
suit the specificities of large, heterogeneous, democratic
industrializing economy of India, the reforms initiated in the
1990s have sought to improve PSEs financial performance by
transferring ownership and control to private sector, and resort to
stock market based discipline. As the above discussion clearly
demonstrates, regardless of ownership agency problem exists is
ubiquitous, and problems of soft budget persist in varying degree
when the firms involved are large and strategic. Further, private
ownership would not guarantee improvement in efficiency if the
market structure remained the same; on the other hand a private
monopoly, could be worse than a public one.19 A suggestion for
reform: On the basis of the above, if we accept that the real
problems facing PSEs are, (i) dysfunctional political interference,
(ii) constitutionally mandated procedural audit and (iii) soft
budget constraint, then following measures can be suggested: Reduce
the government holding in PSEs to less than 50 per cent by
transferring share to mutually complementary firms by creating
Japanese style keiretsu, tied around a public sector bank or
financial institution. For instance interlocking of equity holding
among steel, coal and electricity firms; or petroleum exploration,
refining and petrochemical complexes. Such a measure would
eliminate the procedural audit as well as political interference on
the day-to-day operational matters. However, to ensure public
accountability managers may be asked to make presentations to the
parliamentary sub-committees on efficiency of resource use. At the
same time, managers should have clearly defined security of tenure
for say 3 or 5 years to ensure continuity and to show measurable
performance. Harden the budget constraint for PSEs by a clear
sunset clause on budgetary support or government guarantee for
loans, except for specific public purpose oriented investments.
Given that banks provide substantial equity and loans, they would,
in principle, have incentive to monitor PSEs performance to retain
their reputatational capital. However, question would still remain
who will monitor the banks? There are no easy answers to it. Given
the increasing independence of the Reserve Bank, it is conceivable
to device a system to where the central bank and other regulatory
authorities are given the responsibility of appointing top managers
of banks. Such a scheme of delegated monitoring is in principle is
better for efficiency. Such a monitoring could focus on long-term
corporate goals such as productivity growth market shares, and
R&D outcomes. To ensure that PSEs do not abuse their
oligopolistic position in the domestic market, reasonably open
trade and investment regime could impart the discipline of the
world market.
19
In a political democracy, a public monopoly would be more
answerable to political representatives than a private
monopoly.
R Nagaraj
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Disinvestment and Privatisation
Pranab Bardhan (1991 and 1993) has argued in favour of such a
system for India to overcome the problem of soft budget constraint
and a way to acquire dynamic comparative advantage. Applying the
recent advances in information economics and drawing from the
recent experience, Stiglitz and his associates caution developing
economies against moving from financial repression to financial
liberalization (Hellman, Murdock and Stiglitz, 1996). Such attempts
have more often than not, led to many financial crises. Arguing
against such polar extremes, these scholars have advocated Japanese
style relationship banking system or Korean style hard budget
constraint banking as desirable forms of financial system, which
they define as financial restraint. Conclusions While public sector
enterprises contribution to national development is widely
acknowledged, their poor financial return has been a matter of deep
and enduring concern, especially since the mid-1980s when, for the
first time, the central governments current revenues were found
inadequate to meet its current expenditure. Though firm and
industry level studies of PSEs have often highlighted gross
inefficiencies and poor profitability, many of them have also
suggested their unquantifiable (or difficult to quantify)
non-economic benefits. However, macroeconomic discourse in India
has largely focused on the crowding-in effects of public
investment, and the need for institutional structures to insulate
the PSEs from political and bureaucratic interference to improve
their financial returns. Deeper analyses have sought to offer
political economic explanations for continuation of such a state of
affairs. As a means to restore budgetary balance, after the crisis
in 1991, government sold a small fraction of its equity shares in
selected public sector enterprises to public investment
institutions. Though quantitatively modest, it signaled a major
departure in public policy; it was the thin end of the wedge that
led to transfer of managerial control in a few PSEs about a decade
later. The policy shift was also significant, as it deflected the
contours of the discourse on public sector reform from
institutional design and corporate governance to a change in
ownership in favour of private sector as a means to overcome the
inefficiencies. The shift in debate was consistent with the changes
in the discussions on economic policies worldwide. Quantitatively,
the disinvestment and privatisation have been modest so far, as
proportions of the targets, revenues realised, or as a proportion
of the fiscal deficit. Disinvestment did not secure much revenue,
as the stock market was subdued during much of the 1990s on account
of a series of scandals that repeatedly rocked the financial
markets. Sale of substantial chunks of equity with transfer of
managements that took place in the last 3-4 years has yielded
sizable revenues. But most of these sales have been contentious
with a series of legal cases pending in the courts, and enormous
adverse commentary on them in press and the parliament. Should we
persist with the policy of ownership reform? Realistically
speaking, prospects for the D-P appear limited, as the bulk of the
public investments (in terms of capital employed) are in
infrastructure and industries of strategic importance, where
market
R Nagaraj
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Disinvestment and Privatisation
failures and national interests seem too significant to be left
unattended by public policy. There is little that is credible in
economic theory that argues ownership as the principal basis for
economic outcomes. Moreover, accumulating evidence on privatisation
across the world does not give any prospect of this policy making a
genuine difference to firm level performance on a sustainable
basis. If the above assessment is reasonably persuasive, then we
are back to the earlier question: how to design an institutional
mechanism that limits (if not overcomes) the agency problem that is
at the heart of modern capitalism with the separation of ownership
and control of large firms, that puts hard budget constraint on
firms, and reduces dysfunctional political bureaucratic
interference. Solution to this problem seems closely tied to
financing of investment, and financial system that provides
resources for development and performs the function of a
disciplining device on firms. While disinvestment and privatisation
necessarily lead towards stock market based discipline, we have
argued that history and theory do not seem to support it to be the
superior alternative. We are inclined to favour the Japanese and
German style interlocking of ownership of complementary PSEs tied
together with a bank that enforces greater managerial
accountability, and encourages long term outlook of output growth
and acquisition of technological capabilities. Admittedly, there
are a numerous enterprises with modest investments that are in the
public sector fold that operate in competitive markets or do not
serve ant strategic purpose. Among these, loss making ones can be
disposed off by selling the real estate of these enterprises by
creating empowered committees of all stakeholders in these
enterprises. Workers are unlikely to oppose such moves if there is
a reasonable and transparent sharing of proceeds of such sales. The
remaining PSEs operating broadly in competitive environment can be
granted greater autonomy, or give out to private parties on
management contracts or on lease. To undertake these tasks, there
is a need for a body like the disinvestments commission with
representation from all stakeholders to workout the modalities of
undertaking these changes.
References Amsden, Alice H (2001): The Rise of "The Rest":
Challenges to the West from LateIndustrialising Economies. Oxford
University Press, New York.
R Nagaraj
16
Disinvestment and Privatisation
Aoki, Masahiko (1996): Unintended Fit: Organisational Evolution
and Government Design of Institutions in Japan, in Masahiko Aoki et
al, edited, Role of Government in East Asian Economic Development:
Comparative Institutional Analysis, Clarendon Press, Oxford. Bajaj,
J L (1994): Divesting State Ownership: A Tale of Two Companies,
Economic and Political Weekly, Vol., No. August 27. Bardhan, Pranab
(1991): The State and Dynamic Comparative Advantage, Exim Bank
Commencement Day Annual Lecture, Export-Import Bank of India,
Mumbai. _______ (1993): Economics of Market Socialism and the Issue
of Public Enterprise Reform in India, in Kaushik Basu et al
(edited): Capital, Investment and Development, Blackwell, London.
Bhaduri, Amit (1998): Some Lessons from the Two Economic Systems,
in Deepak Nayyar edited, Economics as Ideology and Experience,
Frank Cass, London. Cook, Paul and Kirkpatrick, Colin (2000) (ed):
Privatisation in Developing Countries, Edward Elger, and UK.
Disinvestment Commission (1997): Report of the Disinvestment
Commission (Chairman: G V Ramakrishna), Author, New Delhi. Dore,
Ronald (2000): Stock Market Capitalism: Welfare Capitalism Japan
and Germany versus the Anglo-Saxons, Oxford University Press,
Oxford. Dornbusch, Rudiger (1991): Policies to Move from
Stabilisation to Growth, Proceedings of the Annual Conference on
Development Economics, 1990. World Bank, Washington D C. Fama, E
(1980): Agency Problems and the Theory of the Firm Journal of
Political Economy, Vol. 88. Florio, Massimo (2004): The Great
Divestiture: Evaluating the Welfare Impact of the British
Privatisations 1979-1997, MIT Press, Cambridge, Mass. Galal, Ahmed,
et al (1994): Welfare Consequences of Selling Public Enterprises:
An Empirical Analysis, Oxford University Press for the World Bank,
Washtinton D C. Gerschenkron, Alexander (1962): Economic
Backwardness in Historical Perspective, Harvard University Press,
Cambridge, Mass. Government of India (1984): Report of the
Committee to Review the Policy for Public Enterprises (Chairman:
Ajun Sengupta), Government of India, New Delhi.
R Nagaraj
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Disinvestment and Privatisation
Goyal, S K (2000):Privatisation in India, in Gopal Joshi edited,
Privatisation in South Asia: Minimising the Negative Social Effects
Through Restructuring, SAAT-ILO, New Delhi. Gupta, Anand P (1993):
"Reforming Deficit Measurement: The Indian Case", Economic and
Political Weekly, Vol. 28, Nos. 8-9, February 20-27. Hazari, R.K
(1986): Essays on industrial policy, Concept Publication House,
Delhi. Hellman, Thomas, Murdock, Kevin and Stiglitz, Joseph (1996):
Financial Restraint: Toward a New Paradigm, in Masahiko Aoki et al,
edited, Role of Government in East Asian Economic Development:
Comparative Institutional Analysis, Clarendon Press, Oxford. Kay,
John and Thompson, D J (1986): Privatisation: A Policy in Search of
a Rationale, Economic Journal, Vol. 96, No. 1. Megginson, William L
(2005): The Financial Economics of Privatisation, Oxford University
Press, New York. Megginson, William and Netter, Jeffery (2001):
From State to Market: A Survey of Empirical Studies on
Privatisation, Journal of Economic Literature, Vol. 39, No. 2,
June. Ministry of Finance (1985): Report of the Committee to
Examine Principles of Possible shift from Physical to Finance
Controls (Chairman: M Narasimham), Government of India, New Delhi.
Mishra, R K (2004): Privatisation Challenges for Good Governance: A
Case of India, Institute of Public Enterprise, WP No. 25. Naib,
Sudhir (2004): Disinvestment in India: Policies, Procedures and
Practices, Sage India, Delhi. Nagaraj, R (1999): How are Public
Sector Enterprises doing in the 1990s? A Brief Assessment, paper is
presented at a seminar in University of Mumbai, March 1999 (mimeo).
_______ (1993): "Macroeconomic Impact of Public Sector Enterprises:
Some Further Results", Economic and Political Weekly, Vol. 28, No.
3-4, January 14. Ramamurthi, Ravi (1999): Why Havent Developing
Countries Privatised Deeper and Faster/, World Development, Vol.
27, No. 1, January.
R Nagaraj
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Disinvestment and Privatisation
__________ (1997): Testing the Limits of Privatisation:
Argentine Railroads, World Development, Vol. 25, No. 12, December.
Ram Mohan T T (2001): Privatisation: Theory and Evidence, Economic
and Political Weekly, Vol. 36, No. 52, December 29. Sarma, E A S
(2004): Disinvestment: What FMs Have Said since 1991, Economic and
Political Weekly, Vol. 34, No. 22, May 29-June 4. Stiglitz, Joseph
(2003): The Roaring Nineties: Seeds of Destruction, Allen Lane, New
York. Tandon, Pankaj (1997): Efficiency of Privatised Firms:
Evidence and Implications, Economic and Political Weekly, Vol. 32,
No. 50. Vickers, John and Yarrow, George (1991): Economic
Perspectives on Privatisation, Journal of Economic Perspectives,
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The Economics and Politics of Government Ownership, Oxford
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Theory and Practice, Economic Policy, No. 2, April. Zysman, John
(1983): Governments, Markets and Growth: Financial Systems and
Politics of Industrial Change, Cornell University Press,
Ithaca.
Table 1: What successive Finance Ministers have said about D-P
in their budget speechesYear Finance Minister Why disinvstment?R
Nagaraj
Key phrases used in the Budget speech
19
Disinvestment and Privatisation
1991-92 1997-98 1999-2000
Yashwant Sinha Manmohan Singh P Chidambaram Yashwant Sinha
2003-04 Jaswant Singh Which PSUs to disinvest? 1991-92 Yashwant
Sinha Manmohan Singh 1997-98 P Chidambaram 1999-2000 Yashwant Sinha
2000-01 Yashwant Sinha How to Disinvest and to whom? 1991-92
Yashwant Sinha 1991-92 1997-98 1998-99 1999-2000 2000-01 2001-02
2003-04 Manmohan Singh Chidambaram Yashwant Sinha Yashwant Sinha
Yashwant Sinha Yashwant Sinha Jaswant Singh
For broad-based equity Improve management Raising resources for
the PSUs Long-term disinvestments policy for enhancing budgetary
receipts For improving productivity and profitability of
enterprises Developing capital markets To unlock production
potential of undertakings Selected PSUs Silent Non-strategic PSUs
Non-strategic PSUs Up to 20 per centequity to MFs/investment
institutions in public sector Do Government to retain majority
equity in strategic PSUs Do Though gradual disinvestments or
strategic sale Bring down government equity to 26 per cent or less
Not in small lots Asset management Co. to hold residual shares post
disinvestments
How disinvestments proceed be used? 1992-93 Manmohan Singh NRF
for assistance to workers (specially women)in unorganized sector;
Also, for special employment schemes in backward areas After meting
VRS needs, create a Restructuring fund for PSUs. 1999-2000 Yashwant
Sinha To fund social and infrastructure sectors 2001-02 Yashwant
Sinha PSU restructuring For creating workers safety net Public debt
reduction Social and infrastructure sector 2003-04 Jaswant Singh
Create Disinvestment Fund to direct proceeds for specific uses.
Source: Sarma (2004): 2195
Table 1: What successive Finance Ministers have said about D-P
in their budget speechesYear Finance Minister Why disinvstment? Key
phrases used in the Budget speech
R Nagaraj
20
Disinvestment and Privatisation
1991-92 1997-98 1999-2000
Yashwant Sinha Manmohan Singh P Chidambaram Yashwant Sinha
2003-04 Jaswant Singh Which PSUs to disinvest? 1991-92 Yashwant
Sinha Manmohan Singh 1997-98 P Chidambaram 1999-2000 Yashwant Sinha
2000-01 Yashwant Sinha How to Disinvest and to whom? 1991-92
Yashwant Sinha 1991-92 1997-98 1998-99 1999-2000 2000-01 2001-02
2003-04 Manmohan Singh Chidambaram Yashwant Sinha Yashwant Sinha
Yashwant Sinha Yashwant Sinha Jaswant Singh
For broad-based equity Improve management Raising resources for
the PSUs Long-term disinvestments policy for enhancing budgetary
receipts For improving productivity and profitability of
enterprises Developing capital markets To unlock production
potential of undertakings Selected PSUs Silent Non-strategic PSUs
Non-strategic PSUs Up to 20 per centequity to MFs/investment
institutions in public sector Do Government to retain majority
equity in strategic PSUs Do Though gradual disinvestments or
strategic sale Bring down government equity to 26 per cent or less
Not in small lots Asset management Co. to hold residual shares post
disinvestments
How disinvestments proceed be used? 1992-93 Manmohan Singh NRF
for assistance to workers (specially women)in unorganized sector;
Also, for special employment schemes in backward areas After meting
VRS needs, create a Restructuring fund for PSUs. 1999-2000 Yashwant
Sinha To fund social and infrastructure sectors 2001-02 Yashwant
Sinha PSU restructuring For creating workers safety net Public debt
reduction Social and infrastructure sector 2003-04 Jaswant Singh
Create Disinvestment Fund to direct proceeds for specific uses.
Source: Sarma (2004): 2195 Table 1: List of Privatised PSEs1 2
Lagan Jute Machinery Company Limited (LJMC) Modern Food Industries
Limited (MFIL)
R Nagaraj
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Disinvestment and Privatisation
3 4 5 6 7 8 9 10 11 12 13 14
Bharat Aluminium Company Limited (BALCO) CMC Ltd. (CMC) HTL Ltd.
(HTL) IBP Co. Ltd. (IBP) Videsh Sanchar Nigam Limited (VSNL)
Indian Tourism Development Corporation (ITDC) Hotel Corporation
of India Limited (HCI) Paradeep Phosphates Limited (PPL)Jessop and
Company Limited Hindustan Zinc Limited(HZL) Maruti Udyog Limited
(MUL) Indian Petrochemicals Corporation Ltd.(IPCL)
Table 2: Actual Disinvestment from April 1991 onwards and
Methodologies Adopted No. of Target receipt Actual Companies in for
the year (Rs. receipts (Rs. Methodology which equity in Crore) in
Crore) sold Minority shares sold by auction 47 (31 in one method in
bundles of very tranche and 16 2500 3038 good, good, and average in
other) companies. Bundling of shares abandoned. 35 ( in 3 2500 1913
Shares sold separately for each tranches) company by auction
method. Equity of 7 companies sold by 3500 0 open auction but
proceeds received in 94-95. Sale through auction method, in which
NRIs and other persons 13 4000 4843 legally permitted to buy, hold
or sell equity, allowed to participate. Equities of 4 companies
auctioned and Government piggy 5 7000 361 backed in the IDBI fixed
price offering for the fifth company. GDR (VSNL) in international 1
5000 380 market. 1 4800 902 GDR (MTNL) in international
Year
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97 1997-98
R Nagaraj
22
Disinvestment and Privatisation
1998-99 5
5000
5371
1999-00# 4
10000
1860
2000-01 4
10000
1871
2001-02 9 #
12,000
5632
2002-03 6
12,000
3348
2003-04 9
13,200
15547
market. GDR (VSNL) / Domestic offerings with the participation
of FIIs (CONCOR, GAIL). Cross purchase by 3 Oil sector companies
i.e. GAIL, ONGC & Indian Oil Corporation GDRGAIL, VSNL-domestic
issue, BALCO restructuring, MFILs strategic sale and others
Strategic sale of BALCO, LJMC; Takeover - KRL (CRL), CPCL (MRL),
BRPL Strategic sale of CMC 51%, HTL 74%, VSNL 25%, IBP 33.58%,
PPL-- 74%, and sale by other modes: ITDC & HCI; surplus
reserves: STC and MMTC Strategic sale : HZL 26%, MFIL-26%, IPCL 25%
HCI, ITDC, Maruti: control premium from renunciation of rights
issue, ESOP:HZL,CMC. Maruti- IPO(27.5%), Jessop & Co. Ltd.
(Strategic sale-72%), HZL (Call Option of SP 18.92%), Public Offers
- IPCL (28.95%), CMC (26%), IBP (26%), DRDG (20%), GAIL (10%), ONGC
(10%), ICI (9.2%)
Total #
48*
91500
45066
* Total number of companies in which disinvestment has taken
place so far. # Figures (inclusive of control premium,
dividend/dividend tax, restructuring and transfer of surplus cash
reserves prior to disinvestment etc.) Table 3: Disinvestment in
Public Sector Enterprises(Rs. Crore)
Year 1991-91 1992-93 1993-94 1994-95R Nagaraj
Target 2,500 2,500 3,000 4,00023
Proceeds 3038 1913 4843Disinvestment and Privatisation
1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03
2003-04
7,000 5.000 4,800 5,000 10,000 10,000 12,000 12,000 14,500
362 380 902 5371 1860 1871 5632# 3348 15,547
# Figures inclusive of amount realized by way of control
premium, dividend/dividend tax and transfer of surplus cash
reserves prior to disinvestment etc.Source: Economic Survey
2003-04
Table 4: Status of Privatisation of SLPEs (as on March 31, 2003)
State No. of No. enterprises privatized 128 82 5 42 54 30 39 No.
Proposed to be privatized Closed Working enterprises Profit Loss
making making 22 15 25 11 34 47 2 5 3 36 30 8
Andhra Pradesh Tamil Nadu Arunachal Pradesh Assam Bihar
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Disinvestment and Privatisation
Delhi Goa Gujarat Haryana Himachal Pradesh Jammu-Kashmir
Karnataka Kerala Lakshwadeep Madhya Pradesh Maharashtra Manipur
Meghalaya Mizoram Nagaland Orissa Pondicherry Punjab Rajasthan
Sikkam Tripura UP West Bengal TotalSource: Mishra (2004)
15 16 49 28 21 23 79 109 1 34 66 16 13 6 6 67 11 53 29 11 9 104
81 1158
5 3 1 5 15 3 2 1 1 1 1 4 1 24 1 2 23 5 180 6 2 2 12 23 6 18 3 1
14 5 10 11 30 20 288 22 12 8 3 32 34
3 24 16 13 16 38 59 44 10 4 3 10 5 25 11 68 62 519
35
24 10 103
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Disinvestment and Privatisation
Figure 1: Employment in Central PSEs25 20 In lakh 15 10 5 0 92
93 94 95 96 97 98 99 2000 2001 2002 2003 Year ending Employment
Figure 2: P ublic sector's share in fiscal deficit of the
non-fin. con. gen. govt. 80 70 Per cent of fiscal deficit 60 50 40
30 20 10 0 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 Fiscal
year ending
Figure 3:NDNFEs' budget constraint, 1961-96 Govt equity+loans in
NDNFEs' investment Per cent of NDNFEs' investment 100 80 60 40 20 0
61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 Fiscal year
ending Govt's contribution
R Nagaraj
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Disinvestment and Privatisation
F ig u re 4 : F ina nc ing o f N D N F E s , 1 9 8 1 -9 5 a s %
o f g ro s s inve s tm e nt90 80 70 Per cent of gross cap.
formation 60 50 40 30 20 10 0 -1 0 81 82 83 84 85 86 87 88 89 90 91
92 93 94 95 96 F is c a l y e a r e n d in g In te rn a l re s o u
rc e s D o m e s t ic re s o u rc e s F o re ig n re s o u rc e
s
F igure 5: P rofita b ility of C P E s G ross p rofit to ca
pital e m p loye d20 Profitability in per cent 15 10 5 0 81 82 83
84 85 86 87 88 89 90 91 92 93 94 95 96 97 F is c al y ear ending
Total CP E s A ll CP E s -petroleum
R Nagaraj
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Disinvestment and Privatisation
Figure 6: Public sector price deflator relative to GDP deflator,
1982-96.Relative price 11 4 11 2 11 0 10 8 10 6 10 4 82 83 8 4 8 5
8 6 8 7 8 8 8 9 9 0 9 1 92 93 94 9 5 9 6 Fiscal year ending
Relative price
84 82 80 Per cent 78 76 74 72 70
Figure 7: Cost and efficiency of power sect or Revenue-cost rat
io and P lant load fact or
70 65 60 55 50 45 40
91
92
93
94
95
96
97
98
Fiscal year Revenue to cost rat ending load f actor Plant
R Nagaraj
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Disinvestment and Privatisation
Appendix 1 Industrial Policy statement in 1991 Public Sector
Portfolio of public sector investment will be reviewed with a view
to focus the public sector on strategic, high-tech and essential
infrastructure. Whereas some reservation for the public sector is
being retained there would be no bar for areas of exclusivity to be
opened up to the private sector selectively. Similarly the public
sector will also be allowed entry in areas not reserved for it.
Public enterprises which are chronically sick and which are
unlikely to be turned around will, for the formulation of
revival/rehabilitation schemes, be referred to the Board for
Industrial and Financial Reconstruction (BIFR), or other similar
high level institutions created for the purpose. A social security
mechanism will be created to protect the interests of workers
likely to be affected by such rehabilitation packages. In order to
raise resources and encourage wider public participation, a part of
the government's shareholding in the public sector would be offered
to mutual funds, financial institutions, general public and
workers. Boards of public sector companies would be made more
professional and given greater powers. There will be a greater
thrust on performance improvement through the Memoranda of
understanding (MOU) systems through which managements would be
granted greater autonomy and will be held accountable. Technical
expertise on the part of the Government would be upgraded to make
the MOU negotiations and implementation more effective. To
facilitate a fuller discussion on performance, the MOU signed
between Government and the public enterprise would be placed in
Parliament. While focusing on major management issues, this would
also help place matters on day-to-day operations of public
enterprises in their correct perspective. Excerpts relating to
public sector taken from Press release on July 24, 1991.
R Nagaraj
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Disinvestment and Privatisation
Appendix 2 Public Sector Enterprises and Fiscal Deficit
Alternative estimates for India To test if PSEs growing deficits is
the principal reason for the increasing fiscal imbalance, we need
consistent time series information that includes all PSEs, at all
levels of government (in a federal set up), after reconciling
transactions among them. Since India's National Accounts Statistics
(NAS) seem to provide such data set, it perhaps offers an
opportunity to test the hypothesis in a limited way. Moreover, as
quality of Indian data is accepted to be better than many
developing countries, such an exercise appears a useful starting
point. Nature and the limitations of the data set In NAS, public
sector consists of (i) administrative departments, (ii)
departmental enterprises (DEs) like railways, telecom, postal and
irrigation services, and (iii) nondepartmental enterprises (NDEs)
that include corporate entitities like Steel Authority of India,
statutory organizations like state electricity boards and road
transport corporations. NDEs are further disaggragated into (a)
non-departmental financial enterprises and (b) non-departmental
non-financial enterprises (NDNFEs). If PSEs are publicly owned
organizations that produce goods and services whose selling price
is related to costs, then DEs plus NDNFEs would include all PSEs in
India. However, the NAS data has some limitations: (i) given the
format of the published information, it is not always possible to
aggregate DEs and NDNFEs, (ii) since the data are not presented in
balance sheet format, widely appreciated financial ratios cannot be
computed, and (iii) considerable delay in publication of these
tables. Although these categories are comprehensive (compared to
the easily available information on central government PSEs), we
cannot present all our results for total PSEs; some times they are
restricted for NDNFEs only. However, as the information is
available for three decades, results based on it could have
considerable value. Results reported in Nagaraj (1993) follows the
above method. However, this method has some limitations. For
instance, it excludes DEs, underestimating the deficits of PSEs.
While the overall deficit is estimated using the NAS, the fiscal
deficit is based on the public finance statistics that does not
fully capture the transactions between the government and its
enterprises. To overcome these limitations, we use Anand Gupta's
(1993) method that consistently uses NAS. To arrive at the true
size of India's fiscal deficit, Gupta outlined a method to estimate
gross fiscal deficit of the general government including its
enterprise sector, by reconciling various accounts of the public
sector. In other words, his method estimates capital finance
accounts for various parts of the public sector, and aggregates
them to compute the fiscal deficit (excluding non-departmental
financial enterprises).
R Nagaraj
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Disinvestment and Privatisation
Introduction
Indian economy had experienced major policy changes in early
1990s. The new economic reform, popularly known as, Liberalization,
Privatization and Globalization (LPG model) aimed at making the
Indian economy as fastest growing economy and globally competitive.
The series of reforms undertaken with respect to industrial sector,
trade as well as financial sector aimed at making the economy more
efficient.
With the onset of reforms to liberalize the Indian economy in
July of 1991, a new chapter has dawned for India and her billion
plus population. This period of economic transition has had a
tremendous impact on the overall economic development of almost all
major sectors of the economy, and its effects over the last decade
can hardly be overlooked. Besides, it also marks the advent of the
real integration of the Indian economy into the global economy.
This era of reforms has also ushered in a remarkable change in
the Indian mindset, as it deviates from the traditional values held
since Independence in 1947, such as self reliance and socialistic
policies of economic development, which mainly due to the inward
looking restrictive form of governance, resulted in the isolation,
overall backwardness and inefficiency of the economy, amongst a
host of other problems. This, despite the fact that India has
always had the potential to be on the fast track to prosperity.
Now that India is in the process of restructuring her economy,
with aspirations of elevating herself from her present desolate
position in the world, the need to speed up her economic
development is even more imperative. And having witnessed the
positive role that Foreign Direct Investment (FDI) has played in
the rapid economic growth of most of the Southeast Asian countries
and most notably China, India has embarked on an ambitious plan to
emulate the successes of her neighbors to the east and is trying to
sell herself as a safe and profitable destination for FDI.
Globalization has many meanings depending on the context and on
the person who is talking about. Though the precise definition of
globalization is still unavailable a few definitions are worth
viewing, Guy Brainbant: says that the process of globalization not
only includes opening up of world trade, development of advanced
means of communication, internationalization of financial markets,
growing importance of MNCs, population migrations and more
generally increased mobility of persons, goods, capital, data and
ideas but also infections, diseases and pollution. The term
globalization refers to the integration of economies of the world
through uninhibited trade and financial flows, as also through
mutual exchange of technology and knowledge. Ideally, it also
contains free inter-country movement of labor. In context to India,
this implies opening up the economy to foreign direct investment by
providing facilities to foreign companies to invest in different
fields of economic activity in India, removing constraints and
obstacles to the entry of MNCs in India, allowing Indian companies
to enter into foreign collaborations and also
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Disinvestment and Privatisation
encouraging them to set up joint ventures abroad; carrying out
massive import liberalization programs by switching over from
quantitative restrictions to tariffs and import duties, therefore
globalization has been identified with the policy reforms of 1991
in India.
The Important Globalization)
Reform
Measures
(Step
Towards
liberalization
privatization
and
Indian economy was in deep crisis in July 1991, when foreign
currency reserves had plummeted to almost $1 billion; Inflation had
roared to an annual rate of 17 percent; fiscal deficit was very
high and had become unsustainable; foreign investors and NRIs had
lost confidence in Indian Economy. Capital was flying out of the
country and we were close to defaulting on loans. Along with these
bottlenecks at home, many unforeseeable changes swept the economies
of nations in Western and Eastern Europe, South East Asia, Latin
America and elsewhere, around the same time. These were the
economic compulsions at home and abroad that called for a complete
overhauling of our economic policies and programs. Major measures
initiated as a part of the liberalization and globalization
strategy in the early nineties included the following:
Devaluation: The first step towards globalization was taken with
the announcement of the devaluation of Indian currency by 18-19
percent against major currencies in the international foreign
exchange market. In fact, this measure was taken in order to
resolve the BOP crisis
Disinvestment-In order to make the process of globalization
smooth, privatization and liberalization policies are moving along
as well. Under the privatization scheme, most of the public sector
undertakings have been/ are being sold to private sector
Dismantling of The Industrial Licensing Regime At present, only
six industries are under compulsory licensing mainly on accounting
of environmental safety and strategic considerations. A
significantly amended locational policy in tune with the
liberalized licensing policy is in place. No industrial approval is
required from the government for locations not falling within 25
kms of the periphery of cities having a population of more than one
million.
Allowing Foreign Direct Investment (FDI) across a wide spectrum
of industries and encouraging non-debt flows. The Department has
put in place a liberal and transparent foreign investment regime
where most activities are opened to foreign investment on automatic
route without any limit on the extent of foreign ownership. Some of
the recent initiatives taken to further liberalize the FDI regime,
inter alias, include opening up of sectors such as Insurance (upto
26%); development of integrated townships (upto 100%); defense
industry (upto 26%); tea plantation (upto 100% subject to
divestment of 26% within five years to FDI); enhancement of FDI
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Disinvestment and Privatisation
limits in private sector banking, allowing FDI up to 100% under
the automatic route for most manufacturing activities in SEZs;
opening up B2B e-commerce; Internet Service Providers (ISPs)
without Gateways; electronic mail and voice mail to 100% foreign
investment subject to 26% divestment condition; etc. The Department
has also strengthened investment facilitation measures through
Foreign Investment Implementation Authority (FIIA).
Non Resident Indian Scheme the general policy and facilities for
foreign direct investment as available to foreign investors/
Companies are fully applicable to NRIs as well. In addition,
Government has extended some concessions especially for NRIs and
overseas corporate bodies having more than 60% stake by NRIs
Throwing Open Industries Reserved For The Public Sector to
Private Participation. Now there are only three industries reserved
for the public sector
Abolition of the (MRTP) Act, which necessitated prior approval
for capacity expansion
The removal of quantitative restrictions on imports.
The reduction of the peak customs tariff from over 300 per cent
prior to the 30 per cent rate that applies now.
Wide-ranging financial sector reforms in the banking, capital
markets, and insurance sectors, including the deregulation of
interest rates, strong regulation and supervisory systems, and the
introduction of foreign/private sector competition.
Impact of Globalization of Indian Economy The novel Tale of Two
Cities of Charles Dickens begins with a piquant description of the
contradictions of the times: It was the best of times, it was the
worst of times; it was the age of wisdom, it was the age of
foolishness; it was the epoch of belief, it was the epoch of
incredulity; we had everything before us, we had nothing before
us
At the present, we can also say about the tale of two Indias: We
have the best of times; we have the worst of times. There is
sparkling prosperity, there is stinking poverty. We have dazzling
five
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Disinvestment and Privatisation
star hotels side by side with darkened ill-starred hovels. We
have everything by globalization, we have nothing by
globalization.
Though some economic reforms were introduced by the Rajiv Gandhi
government (1985-89), it was the Narasimha Rao Government that gave
a definite shape and start to the new economic reforms of
globalization in India. Presenting the 1991-92 Budget, Finance
Minister Manmohan Singh said: After four decades of planning for
industrialization, we have now reached a stage where we should
welcome, rather fear, foreign investment. Direct foreign investment
would provide access to capital, technology and market. In the
Memorandum of Economic Policies dated August 27, 1991 to the IMF,
the Finance Minister submitted in the concluding paragraph: The
Government of India believes that the policies set forth in the
Memorandum are adequate to achieve the objectives of the program,
but will take any additional measures appropriate for this purpose.
In addition, the Government will consult with the Fund on the
adoption of any measures that may be appropriate in accordance with
the policies of the Fund on such consultations.
The Government of India affirmed to implement the economic
reforms in consultation with the international bank and in
accordance of its policies. Successive coalition governments from
1996 to 2004, led by the Janata Dal and BJP, adopted faithfully the
economic policy of liberalization. With Manmohan Singh returned to
power as the Prime Minister in 2004, the economic policy initiated
by him has become the lodestar of the fiscal outlook of the
government.
The Bright Side of Globalization
The rate of growth of the Gross Domestic Product of India has
been on the increase from 5.6 per cent during 1980-90 to seven per
cent in the 1993-2001 period. In the last four years, the annual
growth rate of the GDP was impressive at 7.5 per cent (2003-04),
8.5 per cent (200405), nine per cent (2005-06) and 9.2 per cent
(2006-07). Prime Minister Manmohan Singh is confident of having a
10 per cent growth in the GDP in the Eleventh Five Year Plan
period.
The foreign exchange reserves (as at the end of the financial
year) were $ 39 billion (200001), $ 107 billion (2003-04), $ 145
billion (2005-06) and $ 180 billion (in February 2007). It is
expected that India will cross the $ 200 billion mark soon.
The cumulative FDI inflows from 1991 to September 2006 were
Rs.1, 81,566 crores (US $ 43.29 billion). The sectors attracting
highest FDI inflows are electrical equipments including computer
software and electronics (18 per cent), service sector (13 per
cent), telecommunications (10 per cent), transportation industry
(nine per cent), etc. In the inflow of FDI, India has surpassed
South Korea to become the fourth largest recipient.
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Disinvestment and Privatisation
India controls at the present 45 per cent of the global
outsourcing market with an estimated income of $ 50 billion.
In respect of market capitalization (which takes into account
the market value of a quoted company by multiplying its current
share price by the number of shares in issue), India is in the
fourth position with $ 894 billion after the US ($ 17,000 billion),
Japan ($ 4800 billion) and China ($ 1000). India is expected to
soon cross the trillion dollar mark.
As per the Forbes list for 2007, the number of billionaires of
India has risen to 40 (from 36 last year)more than those of Japan
(24), China (17), France (14) and Italy (14) this year. A press
report was jubilant: This is the richest year for India. The
combined wealth of the Indian billionaires marked an increase of 60
per cent from $ 106 billion in 2006 to $ 170 billion in 2007. The
40 Indian billionaires have assets worth about Rs. 7.50 lakh crores
whereas the cumulative investment in the 91 Public Sector
Undertakings by the Central Government of India is Rs. 3.93 lakh
crores only.
The Dark Side of Globalization
On the other side of the medal, there is a long list of the
worst of the times, the foremost casualty being the agriculture
sector. Agriculture has been and still remains the backbone of the
Indian economy. It plays a vital role not only in providing food
and nutrition to the people, but also in the supply of raw material
to industries and to export trade. In 1951, agriculture provided
employment to 72 per cent of the population and contributed 59 per
cent of the gross domestic product. However, by 2001 the population
depending upon agriculture came to 58 per cent whereas the share of
agriculture in the GDP went down drastically to 24 per cent and
further to 22 per cent in 2006-07. This has resulted in a lowering
the per capita income of the farmers and increasing the rural
indebtedness.
The agricultural growth of 3.2 per cent observed from 1980 to
1997 decelerated to two per cent subsequently. The Approach to the
Eleventh Five Year Plan released in December 2006 stated that the
growth rate of agricultural GDP including forestry and fishing is
likely to be below two per cent in the Tenth Plan period.
The reasons for the deceleration of the growth of agriculture
are given in the Economic Survey 2006-07: Low investment, imbalance
in fertilizer use, low seeds replacement rate, a distorted
incentive system and lo post-harvest value addition continued to be
a drag on the sectors performance. With more than half the
population directly depending on this sector, low agricultural
growth has serious implications for the inclusiveness of growth.
Introduction:
R Nagaraj
35
Disinvestment and Privatisation
Globalisation is the new buzzword that has come to dominate the
world since the nineties of the last century with the end of the
cold war and the break-up of the former Soviet Union and the global
trend towards the rolling ball. The frontiers of the state with
increased reliance on the market economy and renewed faith in the
private capital and resources, a process of structural adjustment
spurred by the studies and influences of the World Bank and other
International organisations have started in many of the developing
countries. Also Globalisation has brought in new opportunities to
developing countries. Greater access to developed country markets
and technology transfer hold out promise improved productivity and
higher living standard. But globalisation has also thrown up new
challenges like growing inequality across and within nations,
volatility in financial market and environmental deteriorations.
Another negative aspect of globalisation is that a great majority
of developing countries remain removed from the process. Till the
nineties the process of globalisation of the Indian economy was
constrained by the barriers to trade and investment liberalisation
of trade, investment and financial flows initiated in the nineties
has progressively lowered the barriers to competition and hastened
the pace of globalisation Sponsored Links
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Values!www.GlobalIndian.org.sg/BKKDefinition: Globalised World -
What does it mean? Does it mean the fast movement of people which
results in greater interaction? Does it mean that because of IT
revolution people can be in touch with each other in any part of
the world? Does it mean trade and economy of each country is open
in Non-Intrusive way so that all varieties are available to
consumer of his choice? Does it mean that mankind has achieved
emancipation to a level of where we can say it means a social,
economic and political globalisation? Though the precise definition
of globalisation is still unavailable a few definitions worth
viewing, Stephen Gill: defines globalisation as the reduction of
transaction cost of transborder movements of capital and goods thus
of factors of production and goods. Guy Brainbant: says that the
process of globalisation not only includes opening up of world
trade, development of advanced means of communication,
internationalisation of financial markets, growing importance of
MNC's, population
R Nagaraj
36
Disinvestment and Privatisation
migrations and more generally increased mobility of persons,
goods, capital, data and ideas but also infections, diseases and
pollution
Impact on India: India opened up the economy in the early
nineties following a major crisis that led by a foreign exchange
crunch that dragged the economy close to defaulting on loans. The
response was a slew of Domestic and external sector policy measures
partly prompted by the immediate needs and partly by the demand of
the multilateral organisations. The new policy regime radically
pushed forward in favour of amore open and market oriented economy.
Major measures initiated as a part of the liberalisation and
globalisation strategy in the early nineties included scrapping of
the industrial licensing regime, reduction in the number of areas
reserved for the public sector, amendment of the monopolies and the
restrictive trade practices act, start of the privatisation
programme, reduction in tariff rates and change over to market
determined exchange rates. Over the years there has been a steady
liberalisation of the current account transactions, more and more
sectors opened up for foreign direct investments and portfolio
investments facilitating entry of foreign investors in telecom,
roads, ports, airports, insurance and other major sectors. The
Indian tariff rates reduced sharply over the decade from a weighted
average of 72.5% in 1991-92 to 24.6 in 1996-97.Though tariff rates
went up slowly in the late nineties it touched 35.1% in 2001-02.
India is committed to reduced tariff rates. Peak tariff rates are
to be reduced to be reduced to the minimum with a peak rate of 20%,
in another 2 years most non-tariff barriers have been dismantled by
march 2002, including almost all quantitative restrictions. India
is Global: The liberalisation of the domestic economy and the
increasing integration of India with the global economy have helped
step up GDP growth rates, which picked up from 5.6% in 1990-91 to a
peak level of 77.8% in 1996-97. Growth rates have slowed down since
the country has still bee able to achieve 5-6% growth rate in three
of the last six years. Though growth rates has slumped to the
lowest level 4.3% in 2002-03 mainly because of the worst droughts
in two decades the growth rates are expected to go up close to 70%
in 2003-04. A Global comparison shows that India is now the fastest
growing just after China. This is major improvement given that
India is growth rate in the 1970's was very low at 3% and GDP
growth in countries like Brazil, Indonesia, Korea, and Mexico was
more than twice that of India. Though India's average annual growth
rate almost doubled in the eighties to 5.9% it was still lower than
the growth rate in China, Korea and Indonesia. The pick up in GDP
growth has helped improve India's global position. Consequently
India's position in the global economy has improved from the 8th
position in 1991 to 4th place in 2001. When GDP is calculated on a
purchasing power parity basis.R Nagaraj 37 Disinvestment and
Privatisation
Globalisation and Poverty: Globalisation in the form of
increased integration though trade and investment is an important
reason why much progress has been made in reducing poverty and
global inequality over recent decades. But it is not the only
reason for this often unrecognised progress, good national polices
, sound