Liberalization

and
Privatization

Presented By:
Neha Singh…….…..004
Shweta Bhandari.….005
Varsha Tushir……...034
Brij Mohan Gupta..…037
Shilpa Deshwal…….047
Definition-Liberalization

 It refers to loosening or removal of controls so that

economic development gets encouragement.
 It includes abolition of those economic policies,
rules, regulations, administrative controls and
procedures which impede economic development
 In other words economic liberalisation is a new
economy policy of promoting market determined
economic decisions rather than bureaucratic
arbitrary economic decisions
Genesis
• 1980s, the root cause of the crisis was the large and growing fiscal
imbalance.

• Large fiscal deficits emerged as a result of mounting government

expenditures, particularly during the second half of the 80s.

• These fiscal deficits led to high levels of borrowing by the

government from the Reserve Bank of India (RBI), IMF, World Bank.

• Government expenditure in India grew at a phenomenal rate, faster

than what government earns as a revenues.

• The subsidies grew at a rate faster than government expenditures.

• Expenditure on subsidies rose from Rs.19.1 billion in 1980-81 to Rs.

107.2 billion in 1990-91.
Continued……
• The Indian economy was indeed in deep trouble.

• Lack of foreign reserves .

• Gold reserve was empty.

• Before 1991, India was a closed economy.

• The government was close to default and its foreign exchange

reserves had reduced to the point that India could barely finance
three weeks’ worth of imports.

• The Government of India headed by Chandra Shekhar, with

Manmohan Singh (appointed as a special economical advisor)
decided to usher in several reforms that are collectively termed as
liberalisation in the Indian media.
Economic Reforms

• Industrial delicensing and simplification and rationalization of tax structure

to promote investment and expansion.

• Liberal FDI regime to supplement domestic resources.

• Current account convertibility to have a liberal trade regime.

• Public sector disinvestment to ensure government does what it does best.

• WTO compatibility to plug into the global economy.

Reforms in Industrial Policy

• Industrial policy has seen the greatest change, with most central
government industrial controls being dismantled. The list of industries
reserved solely for the public sector -- which used to cover 18 industries,
including iron and steel, heavy plant and machinery, telecommunications
and telecom equipment, minerals, oil, mining, air transport services and
electricity generation and distribution -- has been drastically reduced to
three: defense aircrafts and warships, atomic energy generation, and
railway transport. Industrial licensing by the central government has been
almost abolished except for a few hazardous and environmentally sensitive
industries.
• The requirement that investments by large industrial houses needed a
separate clearance under the Monopolies and Restrictive Trade Practices
Act to discourage the concentration of economic power was abolished and
the act itself is to be replaced by a new competition law which will attempt
to regulate anticompetitive behavior in other ways.
MRTP Act and License Raj

• The Monopolistic and Restrictive Trade Practices Act, 1969, aims

to prevent concentration of economic power to the common
detriment, provide for control of monopolies and probation of
monopolistic, restrictive and unfair trade practice and protect
consumer interest.
• License Raj refers to the elaborate licenses, regulations and
accompanying red tape that were required to set up business in India
between 1947 and 1990. the license Raj was a result of India’s
decision to have a planned economy, where all aspects of the
economy are controlled by the state and licenses were given to a
select few.
Reforms in Trade Policy

• Import licensing was abolished relatively early for capital goods and
intermediates which became freely importable in 1993, simultaneously
with the switch to a flexible exchange rate regime. Import licensing had
been traditionally defended on the grounds that it was necessary to
manage the balance of payments, but the shift to a flexible exchange rate
enabled the government to argue that any balance of payments impact
would be effectively dealt with through exchange rate flexibility.
Foreign Investment In India

• After reforms in 1992, huge amounts of foreign direct investment

came into India
• In 1993, foreign institutional investors were allowed to purchase
shares of listed Indian companies in the stock market
• Foreign direct investments in India are approved through two
routes:
a) Automatic approval by RBI
b) The FIPB Route
Foreign Direct Investment

Exploration or mining of coal or 74%

lignite for captive consumption

Roads and Highways, Ports and Harbors 74%

Exploration and mining of diamonds and 74%

precious stones

Projects relating to electricity generation, 74%

transmission and distribution (other than
atomic power plants)
Continued….

Banking 74%

Airports Up to 100% with FDI, beyond 74%

requiring Government approval

Infrastructure related to marketing 100%

of petroleum products

Telecom Services 74%

Civil Aviation 49%

Insurance 26%
Special Economic Zone
• The main objectives of the SEZ Act are:
generation of additional economic activity
promotion of exports of goods and services;
promotion of investment from domestic and foreign sources;
creation of employment opportunities;
development of infrastructure facilities;
• The announcement of the Exim policy 2002–03 has given further
impetus to the creation of SEZs because the Exim policy has included
service-sector units to be set up in SEZs.
• Currently 500 approved and 220 operational.
 Disinvestment

• Disinvestment of the Government’s equity in CPSUs started in 1991-92,

• When minority shareholding of the Central Government in 30 individual

CPSUs was sold to selected financial institutions (LIC, GIC, UTI) in
bundles.
• In order to ensure that along with the attractive shares, the not so
attractive shares also got sold. Subsequently, shares of individual CPSUs
were sold and the category of eligible buyers was gradually expanded to
include individuals, NRIs and registered FIIs.
• By 1997, sale was also initiated and MTNL (1997-98), VSNL (1998-99)
and GAIL (1999-2000) all used the opportunity to access the GDR market.
• The number of listed CPSUs on domestic stock exchange stood at 42 as
on 31.3.2006.
Disinvestment Commission
The government constituted an independent body, the Disinvestment
Commission in 1996. The main terms of reference were:-

• A comprehensive overall long-term disinvestment programme

within 5-10 years for the PSUs referred to it by the Core Group.

• To select the financial advisors for specified PSUs to facilitate the

disinvestment process.

• To monitor the progress of disinvestment process and take

necessary measures.
1999 Onwards
• The progress of disinvestment in India was very slow

• According to the balance sheet of the government, at the end of

March 2000, the investments totalled Rs.2,52,554cr.

• Except for three years (1991-92, 1994-95 and 1998-99), the budget
targets for disinvestment were not met.

• Between 1991-92 & 1999-2000, the total realisation –

Rs. 18,368 cr against the targeted - Rs. 44,300 cr.

• More than 40 % of government equity had been disinvested in

HPCL, VSNL, MTNL, IPCL and Hindustan Organic Chemicals.
Disinvestments so far…..

S.No. Name of the CPSEs % of equity Name of the buyer Proceeds

disinvested realized (Rs.in
crore)

1. Bongaigaon Refineries & 74.46 Indian Oil Corporation 148.80

Petrochemicals Ltd. Limited
(BRPL)

2. Chennai Petroleum 51.81 Indian Oil Corporation 509.33

Corporation Limited Limited

3. Kochi-Refineries Limited 55.04 Bharat Petroleum 659.10

(KRL) Corporation Limited

4. Modern Food Industries 74% Hindustan Lever Ltd. 105.45

(India) Ltd.

5. Maruti Udyog Ltd. 45.79% Suzuki Motors 1,000.00

Strategic Sale cases called off
S. No. Name of the CPSU
1 Manganese Ore India Limited
2 Sponge Iron India Limited
3 Shipping Corporation of India
Limited
4 National Aluminium Company
Limited
5 National Building Construction
Corporation Limited
6 National Fertilizers Limited
7 Rashtriya Chemicals and Fertilizers
Limited
Percentage of equity which was earlier
proposed to be sold through Strategic Sale
51%
100%
54.12% (51% through Strategic Sale and 3.12%
to Employees)
61.15% (10% Domestic Issue, 20% ADR Issue,
29.15% Strategic Sale, 2% to Employees)
74%
53% (51% through Strategic Sale and 2% to
Employees)
53% (51% through Strategic Sale and 2% to
Employees)
Sector-wise Performance
• Steel
• Telecom
• Banking
• Insurance
 Steel
• India set plans in motion to partially privatize its nationalized industries in
1993. As such, 10 percent of SAIL was offered to private investors over
the next several years.
• Although India started exporting steel way back in 1964, exports were
not regulated and depended largely on domestic surpluses. However, in
the years following economic liberalisation, export of steel recorded a
quantum jump.
• After de-licensing of Indian Iron and Steel Industry and as a result of the
steps taken for creation of additional capacity in the private sector, 19
projects involving a total investment of Rs. 30,835 crores equivalent to a
capacity of approx. 13 million tonnes per annum have already been
cleared by Financial Institutions and are in various stages of
implementation. Already 8 units with a total capacity of Approx 5.45
million tonnes have already been commissioned.
Telecom Sector
• India introduced private competition in value-added services in 1992
followed by opening up of cellular and basic services for local area to
private competition.
• The Telecom Regulatory Authority of India (TRAI) was constituted in
1997 as an independent regulator in this sector.
• Competition was also introduced in national long distance (NLD) and
international long distance (ILD) telephony at the start of the current
decade.
• FDI in telecom sector which opened up with 49%, has been increased to
74% equity cap in 2004-05 Budget.
• As many as 72 million new phones have been added since 2007-2008
 Banking Sector
Reforms
• Operation autonomy to public sector banks and reduction of public ownership up to 49%
• Entry for Indian private sector, foreign and joint-venture banks and insurance companies.
• Reduction in reserve requirement, disbanding of administered interest rates, introduction
of pure inter-bank call money market and capital adequacy requirements and other
prudential norms .

Impact
• Reduction in the share of non-performing assets in the portfolio and
more than 90 percent of the banks now meet the new capital adequacy
standards.
• Increase in the overall profit of public sector banks.
Insurance Sector

• Insurance sector was opened up in August 2000.

• Private sector insurance companies with foreign equity allowed up to

26% were allowed to enter the field.

• An independent Insurance Development & Regulatory Authority has been

established.
Thank You