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system with those of the planned economic system. In 1991, India met with an economic crisis relating to its external debt the government was not able to make repayments on its borrowings from abroad. The origin of the financial crisis can be traced from the inefficient management of the Indian economy in the 1980s. For implementing various policies and its general administration, the government generates funds from various sources such as taxation, running of public sector enterprises etc. When expenditure is more than income, the government borrows to finance the deficit from banks and also from people within the country and from international financial institutions. When goods were imported like petroleum, payment was made in dollars which were earned from exports. Development policies required that even though the revenues were very low, the government had to overshoot its revenue to meet problems like unemployment, poverty and population explosion. The continued spending on development programmes of the government did not generate additional revenue. Moreover, the government was not able to generate sufficiently from internal sources such as taxation. When the government was spending a large share of its income on areas which do not provide immediate returns such as the social sector and defence, there was a need to utilise the rest of its revenue in a highly efficient manner. The income from public sector undertakings was also not very high to meet the growing expenditure. At times, our foreign exchange, borrowed from other countries and international financial institutions, was spent on meeting consumption needs. Neither was an attempt made to reduce such profligate spending nor sufficient attention was given to boost exports to pay for the growing imports. In the late 1980s, government expenditure began to exceed its revenue by such large margins that it became unsustainable. Prices of many essential goods rose sharply. Imports grew at a very high rate without matching growth of exports. Foreign exchange reserves declined to a level that was not adequate to finance imports for more than two weeks. There was also not sufficient foreign exchange to pay the interest that needs to be paid to international lenders. So India approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the crisis. For availing the loan, these international agencies expected India to liberalise and open up the economy by removing restrictions on the private sector, reduce the role of the government in many areas and remove trade restrictions. India agreed to the conditionalities of World Bank and IMF and announced the New Economic Policy (NEP).
are long-term measures. Liberalisation. Privatisation Globalisation. There was a need to maintain sufficient foreign exchange reserves and keep the rising prices under control. The government initiated a variety of policies which fall under three heads. The first two are policy strategies and the last one is the outcome of these strategies. The structural reform measures .The NEP consisted of wide ranging economic reforms. intended to correct some of the weaknesses that have developed in the balance of payments and to bring inflation under control. aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy. All these policy measures changed the direction of our developmental strategies. . This set of policies can broadly be classified into two groups: The stabilisation measures .are short term measures. The thrust of the policies was towards creating a more competitive environment in the economy and removing the barriers to entry and growth of firms.
The rate of corporation tax. Indian as well as foreign. The reform policies introduced in and after 1991 removed many of these restrictions. Those banks which fulfill certain conditions have been given freedom to set up new branches without the approval of the RBI and rationalize their existing branch networks. taxes levied on commodities. The RBI decides the amount of money that the banks can keep with themselves. One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilitator of financial sector. In many industries. aerospace and drugs and pharmaceuticals. Foreign investment limit in banks was raised to around 50 per cent. Though a few liberalisation measures were introduced in 1980s in areas of industrial licensing. has been gradually reduced. regulatory mechanisms were enforced in various ways (i) industrial licensing under which every entrepreneur had to get permission from government officials to start a firm. In order to encourage better . Foreign Institutional Investors (FII) such as merchant bankers. there has been a continuous reduction in the taxes on individual incomes as it was felt that high rates of income tax were an important reason for tax evasion. Direct taxes consist of taxes on incomes of individuals as well as profits of business enterprises. technology up gradation. close a firm or to decide the amount of goods that could be produced (ii) private sector was not allowed in many industries (iii) some goods could be produced only in small scale industries and (iv) controls on price fixation and distribution of selected industrial products. hazardous chemicals industrial explosives. Financial Sector Reforms: Financial sector includes financial institutions such as commercial banks. Deregulation of Industrial Sector: In India. Tax Reforms: Tax reforms are concerned with the reforms in government’s taxation and public expenditure policies which are collectively known as its fiscal policy. Many goods produced by small scale industries have now been dereserved. atomic energy generation and railway transport. The reform policies led to the establishment of private sector banks. in order to facilitate the establishment of a common national market for goods and commodities. cigarettes. nature of lending to various sectors etc. Though banks have been given permission to generate resources from India and abroad. electronics. The financial sector in India is controlled by the Reserve Bank of India (RBI). The only industries which are now reserved for the public sector are defence equipments. Since 1991. Industrial licensing was abolished for almost all but product categories — alcohol. which was very high earlier.Liberalisation The rules and laws which were aimed at regulating the economic activities became major hindrances in growth and development. mutual funds and pension funds are now allowed to invest in Indian financial markets. There are two types of taxes: direct and indirect. export-import policy. certain aspects have been retained with the RBI to safeguard the interests of the account-holders and the nation. investment banks. Efforts have also been made to reform the indirect taxes. It is now widely accepted that moderate rates of income tax encourage savings and voluntary disclosure of income. Liberalisation was introduced to put an end to restrictions and open up various sectors of the economy. fiscal policy and foreign investment. stock exchange operations and foreign exchange market. the market has been allowed to determine the prices. fixes interest rates. reform policies initiated in 1991 were more comprehensive. This means that the financial sector may be allowed to take decisions on many matters without consulting the RBI.
Trade and Investment Policy Reforms: Liberalisation of trade and investment regime was initiated to increase international competitiveness of industrial production and also foreign investments and technology into the economy. Foreign Exchange Reforms: The reform in the external sector was made in the foreign exchange market. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from April 2001. It also set the tone to free the determination of rupee value in the foreign exchange market from government control. the rupee was devalued against foreign currencies. Export duties have been removed to increase the competitive position of Indian goods in the international markets. These policies reduced efficiency and competitiveness which led to slow growth of the manufacturing sector. Now. more often than not. as an immediate measure to resolve the balance of payments crisis. This led to an increase in the inflow of foreign exchange. markets determine exchange rates based on the demand and supply of foreign exchange. Import licensing was abolished except in case of hazardous and environmentally sensitive industries. . a regime of quantitative restrictions on imports was followed.compliance on the part of taxpayers many procedures have been simplified and the rates also substantially lowered. This was encouraged through tight control over imports and by keeping the tariffs very high. In order to protect domestic industries. In 1991. The trade policy reforms aimed at (i) dismantling of quantitative restrictions on imports and exports (ii) reduction of tariff rates and (iii) removal of licensing procedures for imports. The aim was also to promote the efficiency of the local industries and the adoption of modern technologies.
The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions. The first set of navaratna companies included: Indian Oil Corporation Ltd (IOC). Government companies can be converted into private companies in two ways (i) by withdrawal of the government from ownership and management of public sector companies (ii) By outright sale of public sector companies.Privatisation Privatisation implies shedding of the ownership or management of a government owned enterprise. They were set up with the intention of providing infrastructure and direct employment to the public so that quality end-product reaches the masses at a nominal cost and the companies themselves were made accountable to all stakeholders. financial and managerial autonomy had also been granted to 97 other profit-making enterprises referred to as mini ratnas. The government envisaged that privatisation could provide strong impetus to the inflow of FDI. The granting of navaratna status resulted in better performance of these companies. The purpose of sale was mainly to improve financial discipline and facilitate modernisation. The government partly privatised them through disinvestment. the government chose nine PSUs and declared them as navaratnas. in order to improve efficiency of PSU. in taking various decisions to run the company efficiently and thus increase their profits. Steel Authority of India Ltd (SAIL). Indian Petrochemicals Corporation Ltd (IPCL). National Thermal Power Corporation (NTPC). . Bharat Heavy Electricals Ltd (BHEL). Mahanagar Telephone Nigam Ltd (MTNL) Many of these profitable PSUs were originally formed during the 1950s and 1960s when self-reliance was an important element of public policy. Bharat Petroleum Corporation Ltd (BPCL). In 1996. some PSUs have been granted special status as navaratnas and mini ratnas. Gas Authority of India Limited (GAIL). Oil and Natural Gas Corporation Ltd (ONGC). Hindustan Petroleum Corporation Ltd (HPCL). Privatisation of the public sector undertakings by selling off part of the equity of PSUs to the public is known as disinvestment. For instance. infuse professionalism and enable them to compete more effectively in the liberalised global environment. They were given greater managerial and operational autonomy. Videsh Sanchar Nigam Ltd (VSNL). It was also envisaged that private capital and managerial capabilities could be effectively utilised to improve the performance of the PSUs. Greater operational.
Voucher privatisations would be a genuine return of the assets into the hands of the general population.g. A very substantial benefit to share or asset sale privatisations is that bidders compete to offer the state the highest price. Voucher privatisation .Ways of Privatisation There are four main methods of privatisation: Share issue privatisation (SIP) .selling the entire firm or part of it to a strategic investor. boosting liquidity and potentially economic growth. but if the capital markets are insufficiently developed it may be difficult to find enough buyers. like all other private property. creating revenues for the state to redistribute in addition to new tax revenue.selling shares on the stock market. usually for free or at a very low price.shares of ownership are distributed to all citizens. under pricing required) may be higher. Vouchers. usually by auction. and create a real sense of participation and inclusion. . Share issue can broaden and deepen domestic capital markets. could then be sold on if preferred by what companies are offering. Franchising – authorizing the delivery of certain services in designated geographical areas. and transaction costs (e. Asset sale privatisation .
because of the growth of fast modes of communication. banking services. accountancy. book transcription. It involves creation of networks and activities transcending economic. With the help of modern telecommunication links including the Internet. Outsourcing. film editing. and even small companies. record keeping. mostly from other countries. It is turning the world into one whole or creating a borderless world.Globalization Globalisation is the outcome of the policies of liberalisation and privatisation. advertisement. Many of the services such as voice-based business processes (popularly known as BPO or call centres). Globalisation attempts to establish links in a way that the happenings in India can be influenced by events happening miles away. Most multinational corporations. clinical advice or even teaching are being outsourced by companies in developed countries to India. security — each provided by respective departments of the company). . the text. Outsourcing has intensified. particularly the growth of Information Technology (IT). It means integration of the economy of the country with the world economy. in recent times. computer service. voice and visual data in respect of these services is digitised and transmitted in real time over continents and national boundaries. It is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration. are outsourcing their services to India where they can be availed at a cheaper cost with reasonable degree of skill and accuracy. music recording. which was previously provided internally or from within the country (like legal advice. a company hires regular service from external sources. The low wage rates and availability of skilled manpower in India have made it a destination for global outsourcing in the post-reform period. social and geographical boundaries.
2. Defence aircraft and warships. chrome ore. The Statement of Industrial Policy dated July 24. 1991 stated that in the case of selected enterprises. The policy on disinvestment has evolved through statements of Finance Ministers in their budget speeches. manganese ore. . sale through the GDR route was also initiated and MTNL (1997-98). disinvestment of the Government’s equity in CPSUs (Central Public Sector Units) started in 1991-92. GIC. enhance availability of resources for these CPSUs and yield resources for the exchequer. it was announced that the Government would disinvest up to 20 per cent of its equity in selected public sector undertakings in favour of mutual funds and financial or investment institutions in the public sector to broad-base the shareholding. NRIs and registered FIIs. In the budget speech of 1996-97. gold and diamond Mining of copper. Subsequently. when minority shareholding of the Central Government in 30 individual CPSUs was sold to selected financial institutions (LIC. The number of listed CPSUs on domestic stock exchange stood at 42 as on 31. VSNL (1998-99) and GAIL (1999-2000) all used the opportunity to access the GDR market. 1953 Railway transport 4. UTI) in bundles.3.Arms and ammunition and allied items of defence equipment. It was also stated that the revenues generated from such disinvestment will be utilised for allocation to education and health sectors and for creating a fund to strengthen CPSUs. tin.Evolution of the Disinvestment Policy 1. In the interim budget 1991-92. As per statement of Industrial Policy dated 24th July 1991 the following industries were proposed to be reserved for the public sector:. the not so attractive shares also got sold. Atomic Energy Coal and lignite Mineral oils Mining of iron ore. improve management. zinc. shares of individual CPSUs were sold and the category of eligible buyers was gradually expanded to include individuals. The Rangarajan Committee recommended in April 1993 that the percentage of equity to be disinvested should be generally under 49% in industries reserved for the public sector and over 74% in other industries. in order to ensure that along with the attractive shares. molybdenum and wolfram Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order. lead. 3. sulphur. part of Government holdings in the equity share capital of these enterprises will be disinvested in order to provide further market discipline to the performance of public enterprises. By 1997.2006.Thus. the proposal to establish a Disinvestment Commission was announced. gypsum.
The interest of workers would be protected in all cases. in the generality of cases. 6. as an independent. the Government’s shareholding in CPSUs would be brought down to 26%. It was decided that the strategic CPSUs would be those functioning in areas of: o Arms and ammunition and the allied items of defence equipment. . In the budget speech of 1999-2000. 7. bring down Government’s shareholding in all non-strategic CPSUs to 26% or lower. non-statutory. In the case of CPSUs involving strategic considerations. trade sale in 8 cases. for a period of three years. closure of 4 units. 10. defence aircrafts and warships o Atomic energy (except in the areas related to the generation of nuclear power and applications of radiation and radio-isotopes to agriculture. 72 CPSUs were referred to the Commission. it was announced that. it was announced that the main elements of the Government’s policy were to restructure and revive potentially viable CPSUs. Ramakrishna as full time Chairman. and fully protect the interests of workers. it was decided that reduction of the Government’s shareholding to 26% would not be automatic and the manner and pace of doing so would be decided on a case-by-case basis on the following considerations: a) Whether the industrial sector required the presence of the public sector as a countervailing force to prevent concentration of power in private hands. and b) Whether the industrial sector required a proper regulatory mechanism to protect the consumer interests before Public Sector Enterprises were privatised. medicine and non-strategic industries) o Railway transport. 8. the Government would continue to retain majority shareholding.V. 9. The Public Sector Disinvestment Commission was established on 23rd August 1996. 8 cases were withdrawn. recommending strategic sale in 28 cases. Subsequently. which were registered with the Board for Industrial & Financial Reconstruction (BIFR). The Commission submitted 12 reports for 58 CPSUs. restructuring of CPSUs and for retiring public debt. four other Members (part time) and a full time Member Secretary. On 16th March 1999. In the budget speech of 1998–99. close down CPSUs which cannot be revived. privatising non-strategic ones through gradual disinvestment or strategic sale and devising viable rehabilitation strategies for weak units. The Commission did not take up examination of the cases of six CPSUs. All other CPSUs were to be considered as being non-strategic. For the non-strategic CPSUs. the Government classified the CPSUs into strategic and non-strategic areas for the purpose of disinvestment. It was also decided to establish a new Department for Disinvestment to systematize the policy approach to disinvestment and privatisation and to give a fresh impetus to this programme. it was announced that Government's strategy towards the CPSUs would continue to encompass a judicious mix of strengthening strategic units. equity sales in 6 cases and no change (disinvestment deferred) in 12 cases. In the budget speech of 2000-2001. The Department came into being on 10th December 1999. advisory body with Shri G.Public Sector Disinvestment Commission 5. The tenure of the Chairman of the Commission was extended till 30th November 1999. if necessary. The receipts from disinvestment and privatisation will be used for meeting expenditure on social sectors.
This additional allocation for the Plan would be contingent upon realisation of the anticipated receipts. 14. It would also ensure that disinvestment does not result in private monopolies. the Government reiterated the policy as “The main objective of disinvestment is to put national resources and assets to optimal use and in particular to unleash the productive potential inherent in our public sector enterprises. examine and make recommendations in the light of the Government policies articulated earlier on 16th March 1999 and the budget speeches of Finance Ministers from time to time. the Ministry of Finance and the Ministry of Disinvestment would work out guidelines. For the disinvestment of natural asset companies. The Government decided in September 2002 that CPSUs and Central Government owned cooperative societies (where Government’s ownership is 51% or more) should not be permitted to participate as bidders in the disinvestment of other CPSUs unless specifically approved by the Core Group of Secretaries on Disinvestment (CGD).Reconstituted Public Sector Disinvestment Commission 11.000 crore was to be used for providing restructuring assistance to CPSUs. The Public Sector Disinvestment Commission was re-constituted on 24th July 2001 for a period of two years with Dr. 5. the Government would set up a Disinvestment Proceeds Fund. The then Ministry of Disinvestment had informed the Commission on 23rd January 2002 that all non-strategic CPSUs.000 crore was budgeted from disinvestment. A receipt of Rs. ONGC and GAIL. 7. remain where they are. The policy of disinvestment specifically aims at: Modernization and up gradation of Public Sector Enterprises Creation of new assets Generating of employment Retiring of public debt Government would continue to ensure that disinvestment does not result in alienation of national assets. it was decided that Multi State Cooperative Societies under the Department of Fertilizers be allowed to participate in the disinvestment of fertilizer CPSUs including National Fertilizers Limited. and for retirement of public debt. In December 2002 on the basis of a proposal of the Department of Fertilizers. In a suo motu statement made in both Houses of Parliament on 9th December. safety net to workers and reduction of debt burden and a sum of Rs. Patil as Chairman (part time) along with four other Members (part time) and a full time Member Secretary. an amount of Rs. In order to provide complete visibility to the Government’s continued commitment of utilisation of disinvestment proceeds for social and infrastructure sectors. 12. by the then Minister of Disinvestment. The Disinvestment Commissions in 25 reports submitted between February 1997 – March 2004 disinvestment through strategic sale in 59 cases. Out of this. R. it was announced that CPSUs must be strengthened to compete and prosper in the new environment. The Ministry of Finance would also prepare for consideration of the . The Commission ceased to exist from 1st November. This Fund would be used for financing fresh employment opportunities and investment. 2004. In the budget speech of 2001 – 2002. including subsidiaries. but excluding IOC. 13. primarily in the social and infrastructure sectors. The term of the Commission was subsequently extended till 31st October 2004. disinvestment other than strategic sale in 32 cases and closure was recommended in 4 cases. stood referred to the Commission for it to prioritize. 2002. 12. through the process of disinvestment. which.000 crore for providing additional budgetary support for the Plan.H.
It also believes that there must be a direct link between privatization and social needs – like. would be finalized early in 2003-04. The UPA Government believes that privatization should increase competition.” 15. which outlines the policy of the Government with respect to the public sector. Generally profitmaking companies will not be privatized. Public sector companies and nationalized banks will be encouraged to enter the capital market to raise resources and offer new investment avenues to retail investors” . the Government announced that details regarding the already announced Disinvestment Fund and Asset Management Company. profit-making companies operating in a competitive environment. Government adopted the National Common Minimum Programme (NCMP). to hold residual shares post disinvestment. 16. not decrease it. chronically loss-making companies will either be sold-off. But for this. The then Ministry of Disinvestment issued guidelines regarding Management-Employee Bids in Strategic Sale on 25th April 2003 to encourage and facilitate the participation of employee participation in strategic sales. for example. It will not support the emergence of any monopoly that only restricts competition. after all workers have got their legitimate dues and compensation. there is need for selectivity and a strategic focus. The relevant extracts of NCMP are: “The UPA Government is committed to a strong and effective public sector whose social objectives are met by its commercial functioning. All privatizations will be considered on a transparent and consultative case-by-case basis. the use of privatization revenues for designated social sector schemes. The UPA will retain existing “navratna” companies in the public sector while these companies raise resources from the capital market.Cabinet Committee on Disinvestment a paper on the feasibility and modalities of setting up an Asset Management Company to hold manage and dispose the residual holding of the Government in the companies in which the Government’s equity has been disinvested to a strategic partner. In the budget speech for 2003-04. The UPA is pledged to devolve full managerial and commercial autonomy to successful. While every effort will be made to modernize and restructure sick public sector companies and revive sick industry. Current policy on disinvestment and programmes In May 2004. The UPA will induct private industry to turn around companies that have potential for revival. or closed.
930 equity shares by the company was open for subscription from 10th September. Government has decided on 8. an amount of Rs.895 shares of Power Grid Corporation of India Limited (PGCIL).994.965 equity shares out of Governments shareholding and a fresh issue of 38.per share.26.2. The Issue Price was fixed at the top of the Price Band (Rs.82 crore accrued to Government account from the sale of its shares in PGCIL. The realisation based on book value has been estimated at Rs. 2007. 1651 crore.52/.10. The issue was oversubscribed by 64. viz.. 2007 to 13th September.8 times.21. consisting of an ‘Offer for Sale’ of 19. 2007. at Rs.44/. The actual realization is expected to be higher and would depend on the prevailing market condition. The money was credited to Government account on 3rd October.39.to Rs. 2007 and trading in the shares of PGCIL commenced on 5th October.32.2007 to piggy-back with an ‘Offer for Sale’ of 10%. Accordingly. 52/.per share) viz.13. . propose to make public offerings of equity equal to 10% each of their pre-issue paidup equity capital. 5% and 5% respectively out of its shareholding. Brief on the Initial Public Offering of shares of Power Grid Corporation of India Limited (PGCIL) The Initial Public Offering (IPO) of 57. Power Grid Corporation of India Limited (PGCIL) and National Hydro-electric Power Corporation Limited (NHPC).Proposals under Implementation IPOs of Power Companies Three power companies. Rural Electrification Corporation Limited (REC).