Economic globalisation reIers to increasing economic interdependence oI national

economies across the world through a rapid increase in cross-border movement oI goods,
service, technology and capital.
|1|
It is the process oI increasing economic integration
between countries, leading to the emergence oI a global marketplace or a single world
market
|2|
. Depending on the paradigm, globalisation can be viewed as either a positive or a
negative phenomenon.
Economic globalisation comprises the globalisation oI production, markets, competition,
technology, and corporations and industries.
|1|
Whilst economic globalization has been
occurring Ior the last several hundred years (since the emergence oI trans-national trade), it
has begun to occur at an increased rate over the last 2030 years
|3|
. This recent boom has
been largely accounted by developed economies integrating with less developed economies,
by means oI Ioreign direct investment, the reduction oI trade barriers, and the modernization
oI these developing cultures, though through this investment, it may provide a loss (such as
sending the textile industry overseas).
GIobaIization
The human society around the world, over a
period of time, has established greater contact,
but the pace has increased rapidly since the mid 1980's.The term globalization means international integration. t
includes an array of social, political and economic changes. Unimaginable progress in modes of communications,
transportation and computer technology have given the process a new lease of life.
The world is more interdependent now than ever before .Multinational companies manufacture products across
many countries and sell to consumers across the globe. Money, technology and raw materials have broken the
nternational barriers. Not only products and finances, but also ideas and cultures have breached the national
boundaries.
Laws, economies and social movements have become international in nature and not only the Globalization of
the Economy but also the Globalization of Politics, Culture and Law is the order of the day. The formation of
General Agreement on Tariffs and Trade (GATT), nternational Monetary Fund and the concept of free trade has
boosted globalization.

GIobaIization in India
n early 1990s the ndian economy had witnessed dramatic policy changes. The idea behind the new economic
model known as Liberalization, Privatization and Globalization in ndia (LPG), was to make the ndian economy
one of the fastest growing economies in the world. An array of reforms was initiated with regard to industrial,
trade and social sector to make the economy more competitive. The economic changes initiated have had a
dramatic effect on the overall growth of the economy. t also heralded the integration of the ndian economy into
the global economy. The ndian economy was in maj or crisis in 1991 when foreign currency reserves went down
to $1 billion and inflation was as high as 17%. Fiscal deficit was also high and NR's were not interested in
investing in ndia. Then the following measures were taken to liberalize and globalize the economy.

Steps Taken to GIobaIize Indian Economy

Some of the steps taken to IiberaIize and gIobaIize our economy were:

1. DevaIuation: To solve the balance of payment problem ndian currency were devaluated by 18 to 19%.

2. Disinvestment: To make the LPG model smooth many of the public sectors were sold to the private sector.

3. AIIowing Foreign Direct Investment (FDI): FD was allowed in a wide range of sectors such as nsurance
(26%), defense industries (26%) etc.

4. NRI Scheme: The facilities which were available to foreign investors were also given to NR's.


erits and Demerits of GIobaIization

The erits of GIobaIization are as foIIows:
O There is an nternational market for companies and for consumers there is a wider range of products to
choose from.
O ncrease in flow of investments from developed countries to developing countries, which can be used for
economic reconstruction.
O Greater and faster flow of information between countries and greater cultural interaction has helped to
overcome cultural barriers.
O Technological development has resulted in reverse brain drain in developing countries.
The Demerits of GIobaIization are as foIIows:
O The outsourcing of jobs to developing countries has resulted in loss of jobs in developed countries.
O There is a greater threat of spread of communicable diseases.
O There is an underlying threat of multinational corporations with immense power ruling the globe.
O For smaller developing nations at the receiving end, it could indirectly lead to a subtle form of
colonization.
Summary
ndia gained highly from the LPG model as its GDP increased to 9.7% in 2007-2008. n respect of market
capitalization, ndia ranks fourth in the world. But even after globalization, condition of agriculture has not
improved. The share of agriculture in the GDP is only 17%. The number of landless families has increased and
farmers are still committing suicide. But seeing the positive effects of globalization, it can be said that very soon
ndia will overcome these hurdles too and march strongly on its path of development.

Functions Of The Board SEBI
O The Board is responsible for the securing the interests of investors in securities and to facilitate the
growth of and to monitor the securities market in an appropriate manner.
O To monitor and control the performance of stock exchange and derivative markets.
O Listing and monitoring the functioning of stock brokers, sub brokers, share transfer agents, bankers to
an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers,
investment advisers and others associated with securities markets by any means.
O Monitoring and Controlling the functioning of venture capital funds and mutual funds.
O Forbid unjust and dishonest trade practices in the security markets and forbid insider trading in the
security market.
O Undertake periodic audits of stock exchanges, mutual funds, individuals and self regulatory
organizations associated with the security market.

Reserve Bank Of India
The Reserve Bank Of ndia was established on
April 1 1935, according to the provision of RB Act
1934.nitially the Central Office of the RB was in
Calcutta, which was later shifted to Mumbai in
1937.The RB policies are formulated by the governor at the Central Office. The RB was nationalized in 1949.

PreambIe

The PreambIe of RBI states:
"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in ndia
and generally to operate the currency and credit system of the country to its advantage."

CentraI Board
The RB is monitored by a central board of directors. The board is appointed by the Government of ndia in


accordance with the RB act.

ocaI Boards
O Local Boards are present in the four metros of Mumbai, Calcutta, Chennai and New Delhi.
O Local Board consists of five members.
O Local Board is appointed by the Central Government.
O Local Board is for a period of four years.
FinanciaI Supervision
The RB accomplishes the role of financial supervision through the Board For Financial Supervision (BFS).The
BFS was initiated in November 1994.

Functions Of BFS
O Streamlining the system of bank inspections.
O nduction of offsite surveillance.
O Consolidating the role of statutory auditors and
O Consolidating the internal defenses of supervised institutions.
Current Focus Of BFS
O Supervise financial institutions.
O Consolidate accounts.
O Deal with legal issues in bank frauds.
O Variance in assessment of nonperforming assets and
O Supervisory rating model for banks.
egaI Framework

UmbreIIa Acts
O Reserve Bank Of ndia Act 1934 governs the Reserve Bank functions.
O Banking Regulation Act 1949 governs the financial sector.
Functions of RBI

onetary Authority:
The RB is responsible for implementing, formulating and monitoring the monetary policy of ndia.

Objective: Keeping this authority in mind the RB is required to maintain price stability and ensure adequate flow
of credit to productive sectors.

ReguIator And Supervisor Of The FinanciaI System:
The Supreme Financial Body sets down broad parameters of banking operations within which the country's
banking and financial system operates.

Objective: This reasonably helps in maintaining public confidence in the system. t in turn protects depositors'
interest and provides lucrative banking services to the public.

anager of Exchange ControI:
The RB is responsible for managing the Foreign Exchange Management Act, 1999.

Objective: t is the nodal agency which facilitates external trade and payment and promotes orderly development
and maintenance of foreign exchange market in ndia.

Issuer Of Currency:
t is the only supreme body which issues and exchanges or destroys currency and coins not fit for circulation.

Objective: This facilitates in giving the public adequate quantity of currency notes and coins and in good quality.

DeveIopmentaI RoIe
The RB since its inception performs a wide range of promotional functions to support national objectives and
generate goodwill among the citizens of the country.

ReIated Functions

Banker to the Government: The RB performs merchant banking function for the central and the state
governments and also acts as their banker. The RB often advises the Government of the current monetary
condition in the state.

Banker to Banks: maintains banking accounts of all scheduled banks. The RB looks after the functioning of the
state banks and grants them license and even cancels the same on account of fraud practice.


Income Tax Structure Post iberaIization
The wave of tax reforms which started across the world in the second half of 1980's found its way into ndia. As
part of its policy of liberalization, ndia introduced tax reforms in the 1990's.The reforms introduced in the ndian
tax structure are different in comparison to other countries. The tax reforms in ndia took place independent of
interference from any external multilateral agency unlike some other countries. But the tax reforms took place in
such a way as to ensure its adherence to the prevailing nternational trends.

During the initial stages of reforms, the restructuring of the tax structure took place with a view to increase
savings and use the increased savings towards investment, to bring in equitable distribution of income and to
rectify the disparities due to oligopolistic market that existed due to co existence of both private and public sector.
The tax structure reform in ndia can be used as an example for many developing countries that are in the same
path of development, due to the large size of the country and the disproportion in the socio economic condition
across the country
WIen gIobuIIzuLIon Ieuves peopIe beIInd
NIW YORK - oIng by economIc meusures, ndIu Is u gIobuIIzuLIon success sLory.
Averuge Incomes, rIsIng uL percenL Lo q percenL u yeur, Iuve doubIed sInce LIe mId-
1q8os. DynumIc new IndusLrIes Iuve emerged, mosL vIsIbIy In LIe IIgI-LecInoIogy Iubs
oI BunguIore und Hyderubud. oreIgn InvesLmenL, wIIIe sLIII dwurIed by IIows Lo CIInu,
Ius grown Irom $1 bIIIIon u yeur In LIe mId-1qqos Lo $ bIIIIon LIIs yeur.
WIen we Lry Lo meusure wIeLIer peopIe's IIves Iuve Improved, Iowever, LIe IIgures LeII
u dIIIerenL sLory. PoverLy Ius IuIIen Iur more sIowIy LIun one wouId expecL, gIven ndIu's
economIc success. One In LIree ndIuns IIve on Iess LIun $1 u duy und ndIu Is sLIII Iome
Lo LIe worId's IurgesL congIomeruLIon oI muInourIsIed peopIe. AImosL IuII oI LIe
counLry's cIIIdren ure underweIgIL Ior LIeIr uge - wIIcI IeIps Lo expIuIn LIe Lwo mIIIIon
cIIId deuLIs eucI yeur.
TIe IuLesL UN Humun DeveIopmenL ReporL druws uLLenLIon Lo LIe worryIng gup LIuL Is
emergIng beLween economIc growLI und socIuI progress.
WIuL Is goIng wrong? PurL oI LIe probIem Is LIuL economIc growLI Ius been buIIL on u
nurrow buse. TIe InIormuLIon LecInoIogy secLor, Ior exumpIe, Ius so Iur creuLed uround
one mIIIIon jobs - buL meunwIIIe, LIe Iubor Iorce Is expundIng by ubouL eIgIL mIIIIon u
yeur. BroudenIng und deepenIng LIe growLI process In Iubor-InLensIve munuIucLurIng
und In ruruI ureus Is vILuI.
TIe more proIound cIuIIenge Is Lo LuckIe Ieud-on LIe deep-rooLed InequuIILIes LIuL ure
IoIdIng buck socIuI progress, especIuIIy LIe deep InequuIILIes In opporLunILy LIuL dIvIde
women und men.
TIese InequuIILIes sLurL uL bIrLI, wILI IuLuI consequences. IrIs uged Irom 1 Lo Iuce u o
per cenL IIgIer rIsk oI cIIIdIood morLuIILy LIun LIeIr broLIers, reIIecLIng dIsudvunLuges
In uccess Lo nuLrILIon und IeuILI provIsIon. TIuL sLuLIsLIc LrunsIuLes InLo 1o,ooo
"mIssIng" gIrI cIIIdren - deuLIs LIuL wouId be uverLed eucI yeur II deuLI ruLes Ior gIrIs
were LIe sume us LIose Ior boys.
OverIuppIng wILI LIese gender-bused dIIIerences ure wIder InequuIILIes. CIIId morLuIILy
ruLes umong LIe pooresL zo per cenL ure more LIun LIree LImes IIgIer LIun umong LIe
rIcIesL. And LIere ure gIurIng gups beLween LIe norLIern "poverLy beIL" sLuLes IIke ULLur
PrudesI und BIIur und more successIuI sLuLes sucI us TumII Nudu und KeruIu. WILI u
popuIuLIon Iurger LIun NIgerIu, ULLur PrudesI ImmunIzes onIy one In IIve cIIIdren
uguInsL LIe mujor cIIIdIood dIseuses.
AcceIeruLIng socIuI progress wIII requIre more LIun susLuIned economIc growLI, crILIcuI
us LIuL muy be. As AmurLyu Sen Ius wrILLen: "Even u Iundred BunguIores und
Hyderubuds wIII noL, on LIeIr own, soIve ndIu's LenucIous poverLy und deep-seuLed
InequuIILy."
n zooq, ndIu's eIecLoruLe decIsIveIy rejecLed u governmenL LIuL ceIebruLed "Brund
BunguIore" InsLeud oI IocusIng on spreudIng prosperILy more wIdeIy. SInce LIen, LIe
Congress-Ied governmenL, Ius seL u new course. egIsIuLIon Ius been upproved Ior u $z.
bIIIIon u yeur scIeme LIuL LurgeLs poor ruruI ureus LIrougI pubIIc works progrums. n
IusL yeur's budgeL, LIe governmenL sIgnuIed u Iur sIurper Iocus on educuLIon, ImposIng u
Lux surcIurge Lo Iund u $1 bIIIIon Increuse In spendIng LIIs yeur.
Across ruruI ndIu, LIe pubIIc IeuILI sysLem, sLurved oI resources, Ius become u byword
Ior cIInIcs LIuL Iuck drugs und LruIned sLuII. I currenL budgeL pIuns ure ImpIemenLed,
IeuILI spendIng wIII rIse Irom Iess LIun 1 per cenL oI nuLIonuI Income Lo per cenL.
CIungIng pubIIc spendIng prIorILIes Is dIIIIcuIL. BuL cIungIng LIe sLrucLures LIuL consIgn
ndIu's ruruI poor, especIuIIy poor women, Lo u IIIeLIme oI dIsudvunLuge Is more dIIIIcuIL
sLIII. L wIII requIre IundumenLuI cIunges In governunce und - more ImporLunL - In pubIIc
uLLILudes Lo gender equuIILy.
TIe cIuIIenges ure Immense. BuL economIc growLI und u LIrIvIng democrucy provIde
ndIu wILI un opporLunILy Lo become u reuI gIobuIIzuLIon success sLory
The Economic Aspects of Globalization
The globalization of economic flows may be the most manifest nowadays, and it is the first thing
one thinks of when globalization itself is discussed. Limiting the once sovereign role of nation-
state, expanding the market across the planet without a visible chance of anyone preventing it,
amassing wealth in ever fewer countries is combined with the growing disproportion between
the rich and the poor within these countries. What seemed probable over the few decades after
World War II - the prominent role of the so-called nation state, care for the less able, less
healthy and elderly population, free schooling and healthcare - seem to be vanishing into
historic oblivion. The ancient principle of survival of the fittest is more and more at work, not
even trying too hard to mask its role with seemingly humane goals. As early as twenty years
ago, far-sighted economists foresaw the creation of new - global - economy, which would be
something different from the currently known and widely accepted international economy.
The so-called welfare states owe most of their current problems to the structural change of the
worlds economic system, which is, for some, a synonym for globalization. As we have already
said, these changes greatly limit (even tend to fully abolish!) the force of action of nation-states
so that, even if they want it, they are unable to provide their own citizens with what they have
been used to for decade. Transnational capital does not have much mercy on social policy,
equal care for all strata of population, especially those who are unable to generate profit. The
increasing dissatisfaction of masses spurred by this is directed at their own governments, who,
in turn, have their hands tied. Unless an international system is created in the foreseeable
future whereby the control and freedoms of states, corporations and individuals will be
regulated more clearly, there are ever smaller chances that citizens will receive any kind of
protection from their governments. This also renders the institution of democratic elections
senseless, reducing it to the role of mere political folklore. It is implied that the poor societies
(mostly those of the Third and even the Second World) have nothing to seek in the "fair
competition. A newly imposed problem is the fear that even the wealthiest and the most stable
societies will not be able to endure this race. If the market demands as advocated by the neo-
liberal ideologists are accepted, the already attained wide scope of various social rights that
their citizens are used to does not have much chance to survive. As Habermas clearly
formulates it: `To remain competitive on the growing global market, they (the OECD states)
have to take steps causing irreparable damage to the harmony of civil society. the most urgent
task of the First World in the forthcoming decade will therefore be squaring the circle of welfare,
social harmony and political freedom.
[1]
And we know all too well what a simple task squaring
the circle is.
Attempts at an appropriate response to the collapse (after a lengthy agony) of the so-called
laissez-faire capitalism date back as early as the times of the great economic crisis in the
1920s. This is the time of the occurrence of `controlled capitalism
[2]
, taking three forms in
capitalist communities: as the `New Deal in the USA, `protective in Japan, and `social
capitalism in Western Europe. Regardless of certain differences, the common element in all
these three forms of reformed capitalism presents a concern for wide strata of population. They
form the basis on which the welfare state developed later. Witnessing the return to some old
economic models thought to be outdated, we can conclude that this actually specific historical
regression. If this opinion is founded, then the not so loud discourse of neo-liberally oriented
intellectuals and economists on history, which has reached its final, ultimate step (of evolution)
- has no foundation. But more will be said on this later.
As it was compellingly demonstrated by Naomi Klein as well, all the trends of capital `movement
to underdeveloped regions are present, but not out of concern for the welfare of local population
as it is declaratively stated, but for their ruthless exploitation. But at the same time, such a
manner of re-distributing production to the poor regions of the Third World will render millions
of domestic workforce jobless, closing the circle of poverty. Regardless of the proclamations on
the `visible progress of global economy. `The current progress of economic globalization points
to the fact that capital is moving to underdeveloped regions, i.e. escaping developed regions,
causing, primarily, social problems in them. Stopping this process would mean leaving
underdeveloped regions to their `fate which would, in turn, whether they get `stuck with being
underdeveloped, or choose their own way of developing which could be radically different from
the Western, mean the discontinuation of the current globalization trend, or it would be limited
only to developed regions as some kind of "mini-globalization.
[3]
It is clear that this is a threat
to globalization itself, if it is to be understood as the export of the Western, already confirmed
model of organizing human society. If it remained only in some regions of the planet, then it
could not be fully and duly labeled as globalization. If it were the generator of the occurrence of
an alternative globalization, then the results would be even worse for the neo-liberal ideology.
This is undoubtedly one of the major problems to which the above-mentioned have not provided
an adequate answer so far.
Moreover, despite the proclaimed efforts (and perhaps even a genuine wish) to put an end to
ethnically-based conflicts by reducing the significance of local identities, the growing poverty
among and within various societies seems to be encouraging animosities, conflicts, and, in the
foreseeable future, even wars of the conflicting ethic, religious, racial or class groups. `The neo-
liberal type of globalization is creating a new geography of social inclusion (apartheid). The
worlds of wealth and extreme poverty are not divided by the Great Wall of China - a new
poverty is spreading amid the society of affluence. The "black holes of globalization, people and
regions excluded from progress, can be found in all the cities of the "First World - in American
urban ghettoes, North African communities in France, Japanese Yoseba slums, Asian
megalopolises. They are inhabited by millions of homeless people, by a world of prostitution,
crime and drugs, the sick and the illiterate.
[4]
In one of her texts
[5]
, Naomi Klein gives a vivid
example of how `real is the advice of the intellectual gurus of neo-liberal provenance. Namely,
explaining why capital is moving to underdeveloped regions, Thomas Friedman provides a very
interesting answer. Claiming to have talked to several young Palestinians when he was at
Ramallah at the West Coast in his twenties, he established that their desire for war, terrorist
actions and suicide attacks results from lacking jobs, hope and dignity. At first sight, this
explanation does not seem irrational. The listed reasons are surely a good reason for various
sources of frustration. But what does Friedman propose for them? That moving `jobs from the
West not only to India or Pakistan, but to Palestine as well would create not only a more
prosperous world, but also a safer world for our own twenty-year-olds! This should be one of
the crucial reasons in favour of globalization as envisaged by similar intellectuals.
More will be said about what kind of `jobs these are in the section on Naomi Kleins book No
logo. We shall dwell on another topic here. Friedman `forgets to state what are the political
causes of the dissatisfaction of the Palestinian or Iraqi people. Klein does not hesitate to remind
him: In other words, economic development will not come to Palestine via call centers but
through liberation. Friedman's argument is equally absurd when applied to the country where
terrorism is rising most rapidly: Iraq. As in Palestine, Iraq is facing an unemployment crisis, one
fueled by occupation. And no wonder: Paul Bremer's first move as chief US envoy was to lay off
400,000 soldiers and other state workers. His second was to fling open Iraq's borders to cheap
imports, predictably putting hundreds of local companies out of business. Klein is even more
lucid when finding an even more efficient way of fighting terrorism: Friedman's bright idea of
fighting terrorism with outsourced American jobs is overly complicated. A better plan would be
to end the occupation and stop sending American workers to steal Iraqi jobs.
Although the current global economy is structured around three main centres of economic
power, it can be best described as a post-hegemonistic order that no single centre, not even the
USA, can control through rules of global trade or exchange.
[6]
By this, the advocates of such
development of economic course mean that the complex world economy is developing on a
totally free, unconditioned market and that individual, i.e. state responsibility is the only
criterion of success or failure in this field. But regardless of this, despite internationalisation and
regionalisation, the role and position of most developing countries in the global economy is
changing incredibly slowly even in long time intervals of a whole century. Held and McGrew
observe that the current international division of labour is based on the one recognised by
Marx.
[7]
Todays globalisaton brings about an inconcievably united world for rich individuals, for
the elites, but also a growing division inside societies, as the global international division of
labour is divided into parts, into rich and poor countries, the globalizations winners and losers.
If globalization were as successful as it is (perhaps) desired, then its favourable effect would
influence most of the worlds population, rather than those (chosen?) groups that most offen
have a share in its implementation. Neo-liberals suggest that economic globalization is the only
effective road (highlighted by D.P.) leading to global poverty reduction, whereas, in practice,
this looks completely different. The failure of certain countries to join the community of the so-
called First World is explained by their failure to harmonise and integrate into the contemporary
world economy fast enouth. Translated from the language of euphemism, they seem to mean
that these are simply - incompetent.
Not only are differences increasingly felt between states, but they are increasingly obvious
inside the countries themselves. Stratification is more and more under way, ever fewer
(super)rich individuals own ever bigger capital, while the number of those living below the
threashold of poverty is growing proportionately. A few percent of the richest population
segment owns more than one-half of national wealth. This chiefly applies to the USA, although
such trends exist in capitalist countries as well. How paradoxical it all is is maybe best
expressed by the fact that powerful corporations posssess more assets than many (=most)
countries of the world, and that this list may even include individuals! An argument that it is
about the progress of global economy may be valid, if limited to people we have just
mentioned. Then there is really no dilemma that this argument is valid. But if the moral issue of
simultaneous impoverishment of the majority of the world is raised as equal, then such an
attitude is significal+ntly overshadowed. This is what neo-liberally oriented intellectuals call
struggle on the open market: To the extent that standardised life situations and careers are
disappearing, individuals facing multiple options, feeling the growing burden of decisions they
must now make themselves, i.e. arrangements that they have to negotiate themselves. The
pressure of individualisation urges for new social rules to be discovered and controlled at the
same time. Freed subjects, no longer bound and governed by traditional roles, must create
binding relations through their own communication efforts.
[8]
The above is not questionable at
all, but it is appropriate to remind that the `freed subjects have never been asked anything
about their forhtcoming roles! Although these decisions affect them most directly, they were
made elswhere. It is therfore no wander that, in the ever wider regions of the losers of
globalization, the globalization proces is percieved simply as the continuation of well-known
colonisation, i.e. Western imperialism. It will remain so as long as the global inequality remains
increasingly manifest. The fact that many citizens of the imperialist countries do not feel the
benefits of the proclaimed process does not diminish in the least the justified anger of the
inhabitants of all the underprivileged countries of the Second, Third and all all other worlds in
the leaast. It is maybe here that one should look for the roots of growing terrorism which is
really democratically shared - affecting everyone equally!
How do these radically oriented groups and their acts of violence come about? Even in
developed countries, the increasing class differentiation brings about a fear that the existing
wealth will have to be shared and that the aliens present in a given society will take away their
share of the cake undeserved. Such fears (and let us remember that the Nazis once took over
the power riding on such demagogical cliches) are (ab)used by politicians who political points
with populist, isolationist and even openly hostile messages. National, regligious, racial or class
hatred, as well as xenofobia are for the most part rooted in the above. Needless to say, when
such forces take over the power, genuine economic progress is out of question! And this is all a
logical consequence of the philosphy of open, deregulated market. It only favours its favourites
which adapt most sucessfull to its unwritten laws, to a way of life in which the absolute purpose
of human life is generating and increasing profit. Its aim is not common good, but the
realisation of the ancient idea of the human society as war of all against all. The road from there
to universal harmony it proclaims declaratively is a long and rough one. It is also questionable
how justifiable is to expand the impact of market ideology to all other - non-economic -
segments of society, and the democratic legitimacy of international financial institutions (such
as the IMF, the World Bank, WTO etc.) is also highly questinable, as they have no forms of
control above themselves and, accordingly, are not accountable to anyone. We can only
speculate what abuses are possible here. Held tries to provide an answer to all these questions:
These sobering realities lead to the conclusion that it is only within the borders of the state -
within the nation as a moral community - that legitimate and effective solutions to the problem
of global social injustice can be constructed.
[9]

Historically, the state saw the greatest expansion and prosperity in Germany at the time of
World War I and during the Nazi rule in 1930s. It is interesting that it is in the Third Reich
[10]

that appeals to social justice and various forms of social protection were vociferous, parallel
with the development of impressive military machinery. This was, of course, one of major
arguments used by those who criticize contemporary welfare states as well. The fact that this
happened in Germany becomes clearer bearing in mind that it was in this country that the first
steps to creating a welfare system were made as early as 1883, by establishing health care,
taking care of the unemployed, senior population segments, etc. At the time, the costs allocated
for these expenditures were not too great a burden for the states production sector. The
initiator of establishing such a system was the famous Chancellor Bismarck. This idea spread
like wildfire all over the planet during the twentieth century, to such extent that the clear
definition of social policies has become a key feature of the modern state. However, some
things had to be sacrificed by these policies. In this case it was the efficiency of capitalist
production methods. The advocates of neo-liberal society put the blame on the enormous
growth of public expenditure, taxation and bureaucracy as one of the causes of the inherent
totalitarianism of the welfare stated. This can, of course, give an opportunity to the beneficiaries
of the public social system to abuse it. Anthony Mueller does not fail to notice this: The
coverage of old age, sickness and unemployment insurance, along with social aid, and disability
insurance and with all the numerous special branches of social policy have turned Germany into
an Eldorado for those seeking a free ride. Often described as "generous", the German social
welfare system actually provides a plethora of incentives for intentionally becoming
unemployed, seeking early retirement and fulfilling the necessary requirements in order to
become eligible for social aid and disability payments. This especially applies to the period after
World War II when any action directed against such policies was labeled as (expressed in
modern terms) a form of politically incorrect discourse. Thus, increasing expenditure is
imposed on the economically active population, and in view of the aging population structure of
most of the countries of the Western hemisphere, the percentage of really economically active
people is drastically reduced and, proportionally, more burdened by various categories of
budget beneficiaries. How to balance the reasonable and objective needs of social policy
beneficiaries and their evident abuses is becoming a new problem to be addressed.
We can take an example from Italy. Namely, the legislator (the state in this case) has stipulated
that an employee laid off from an enterprise with more than 15 employees may sue his or her
own employer. There have been cases in practice that many of such claims have received
positive replies. Should the employer be forced to re-employ the same worker, apart from being
entitled to payment of all lost receivables, he or she would receive further compensation for
dismissal, as well as the money from social insurance. What does this tell us? That the
employers hands are tied, that laying off workers may cause more economic harm than
keeping them in their jobs. This is what opens space for various blackmail activities by
employees, such as working to rule, lower productivity, open sabotage of the working process,
etc. Not to mention that nothing would motivate the worker to achieve better work results, and
the employer would not have the opportunity to make qualitative selection among different
workers, under the threat of possible lawsuit and multiple damages that may follow.
Furthermore, this is a direct hindrance to economic growth, as many companies will purposely
remain within the limit of fifteen employees, lest they face this threat. This is only an example
[11]
of the implications of the excessive consideration of the employees interests in relation to
the employer, which is still an important wheel in the development of every economy; and no
less than referendum was held on this issue. Regarding this issue, Minardi quotes the opinion of
Bruno Leoni from his book Liberty and Law, where he argues that employers are not the
`stronger side in a possible dispute, nor must employees be the `weaker side. In cases when he
or she needs workers more than the workers need him or her, and is unable to find them, the
employer can by no means be regarded as the weaker side or seen through the traditional
prism of the notorious exploiter.
One of the positive examples of neo-liberally oriented economy comes from Chile, where they
came up with the idea of - private pensions! This is no doubt a very interesting suggestion, so
let us see what it is about. `The Chilean pension model is a comprehensive alternative to the
social collectivism initiated by German chancellor Otto von Bismarck at the end of the 19th
century, which was used as a model for the welfare states of the 20th century. By cutting the
link between individual contributions and benefits-that is, between effort and reward-and by
entrusting governments not only with the responsibility but also with the management of these
complex programs, the Bismarckian pay-as-you-go pension system turned out to be the central
pillar of the welfare state, in which the possibility of winning elections by buying votes with
other peoples money-even with the money of other generations-led to an inflation of social
entitlements, and thus to gigantic unfunded, and hidden, state liabilities. In Chile, the same
rationale that applies to the private pension system has already been extended, although
imperfectly, to the areas of health and unemployment, with individual insurance (health) or
accounts (unemployment) managed by the private sector.
[12]
This system has already been
established in many South American countries (Mexico, Bolivia, Salvador, Peru, Columbia,
Argentina, Uruguay), but also in many of the former Socialist block countries (Hungary, Poland,
Kazakhstan), which may be especially interesting, but also indicative as a precedent.
Hungary was the first former Socialist country to `break the ice in 1998 and allow for a portion
of the workers salaries to be invested in pension savings accounts. The previous method of
investing in pension funds had been in deficit as early as the nineties, when the contributions
amounted to 30% of the salary. If the system had remained unchanged, Hungary would have
been forced to raise the taxes on wages up to 55%, which would, in a few decades (around
2035 as estimated) have lead to each pensioner being supported by only one worker. Knowing
that in a country such as Italy the government used to pay disability pensions for 30,000 dead
people, and also bearing in mind that it is the country with the lowest birth rate in the world, we
can only imagine what the public expenditures were over a budget year. There was even an
example of a woman receiving a (disability) pension as a blind person, while working as a driver
at the same time. The annual expenditure on public pensions in Italy amounts to as much as
14.5% of GDP. Jos Piera argues that nowadays pension systems are under the highest threat
in Western Europe, with the proverbially strong influence of the traditional welfare state. Apart
from purely economic, we can provide a non-economic argument in favour of private pension
system. Poor people, who usually start working earlier than their somewhat better off peers,
have (on the average) a shorter lifespan than the latter. Under such a method of pension
payment, poorer workers would find it easier to accumulate higher amounts on their accounts,
thereby de facto lessening the well-known gap between the rich and the poor, as the workers
have so far been investing into a system providing them with the yield rate of less than 2%.
Here is, finally a truly socially humane argument in favor of neo-liberal thinkers! If such a rate
could be applied in different socio-economic models of different countries with an equal success
rate, we see no reason why it should not be done.
Features of GIobaIization
O Characteristics of economic globalization include a rapid increase in international trade in
goods and services, as well as the freer flow of labor and capital across borders. Technological
and political factors drive modern economic globalization. Technological factors include
improvements in transportation, which have reduced the cost of shipping goods internationally,
and advances in communications and computer technology. Grieco and kenberry wrote that
companies have learned to use these technological changes to their advantage, to be more
active in the world economy. On the political front, nations have reduced tariffs and other trade
barriers, allowing other countries' goods access to their markets. Further, governments have
worked together through international organizations such as the World Trade Organization to
resolve economic problems.
Significance
O Grieco and kenberry cite American military power as playing a key role in facilitating
economic globalization. They note that U.S. military strength has protected Japan and Western
Europe since the end of World War , allowing these countries greater freedom to pursue
economic globalization efforts because of fewer worries about their own national security.
Effects
O While economic globalization has increased the connectedness of the world's nations
through increased trade and international investment, Grieco and kenberry point out that
globalization also makes nations more vulnerable to economic shocks and crises that originate in
other parts of the world. The 2008 global credit crunch provides a useful illustration. Problems in
the U.S. housing market that began in 2007 soon affected other the financial systems of other
nations that had invested mortgage-backed securities.

Cutcomes of r|vat|zat|on

iterature reviews
|10||11|
Iind that in competitive industries with well-inIormed consumers,
privatization consistently improves eIIiciency. Such eIIiciency gains mean a one-oII increase
in GDP, but through improved incentives to innovate and reduce costs also tend to raise the
rate oI economic growth. The type oI industries to which this generally applies include
manuIacturing and retailing. Although typically there are social costs associated with these
eIIiciency gains, Citation needed}}
|12|
many economists argue that these can be dealt with
by appropriate government support through redistribution and perhaps retraining.
In sectors that are natural monopolies or public services (such as, say, passenger rail in the
United States), the results oI privatization are much more mixed, as a private monopoly
behaves much the same as a public one in liberal economic theory. The government is
actually seen as a more natural provider oI public goods and services. However, the
eIIiciency oI an existing public sector operation can be put into question requiring changes to
be made. Changes may include, inter alia, the imposition oI related reIorms such as greater
transparency and accountability oI management, an improved cost-beneIit analysis, improved
internal controls, regulatory systems, and better Iinancing, rather than privatization itselI.
Regarding political corruption, it is a controversial issue whether the size oI the public sector
per se results in corruption. The Nordic countries have low corruption but large public
sectors. However, these countries score high on the Ease oI Doing Business Index, due to
good and oIten simple regulations, and Ior political rights and civil liberties, showing high
government accountability and transparency. One should also notice the successIul,
corruption-Iree privatizations and restructuring oI government enterprises in the Nordic
countries. For example, dismantling telecommunications monopolies has resulted in several
new players entering the market and intense competition with price and service.
Also regarding corruption, the sales themselves give a large opportunity Ior grand corruption.
Privatizations in Russia and atin America were accompanied by large-scale corruption
during the sale oI the state-owned companies. Those with political connections unIairly
gained large wealth, which has discredited privatization in these regions. While media have
reported widely the grand corruption that accompanied the sales, studies have argued that in
addition to increased operating eIIiciency, daily petty corruption is, or would be, larger
without privatization, and that corruption is more prevalent in non-privatized sectors.
Furthermore, there is evidence to suggest that extralegal and unoIIicial activities are more
prevalent in countries that privatized less.
|13|


mpact of Globalisation on Developing Countries and ndia





Introduction:
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
Definition:
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 migrations and more
generally increased mobility of persons, goods, capital, data and ideas but also
infections, diseases and pollution
lmpacL on lndla
lndla opened up Lhe economy ln Lhe early nlneLles followlng a ma[or crlsls LhaL led by a forelgn
exchange crunch LhaL dragged Lhe economy close Lo defaulLlng on loans 1he response was a slew of
uomesLlc and exLernal secLor pollcy measures parLly prompLed by Lhe lmmedlaLe needs and parLly
by Lhe demand of Lhe mulLllaLeral organlsaLlons 1he new pollcy reglme radlcally pushed forward ln
favour of amore open and markeL orlenLed economy
Ma[or measures lnlLlaLed as a parL of Lhe llberallsaLlon and globallsaLlon sLraLegy ln Lhe early nlneLles
lncluded scrapplng of Lhe lndusLrlal llcenslng reglme reducLlon ln Lhe number of areas reserved for
Lhe publlc secLor amendmenL of Lhe monopolles and Lhe resLrlcLlve Lrade pracLlces acL sLarL of Lhe
prlvaLlsaLlon programme reducLlon ln Larlff raLes and change over Lo markeL deLermlned exchange
raLes
Cver Lhe years Lhere has been a sLeady llberallsaLlon of Lhe currenL accounL LransacLlons more and
more secLors opened up for forelgn dlrecL lnvesLmenLs and porLfollo lnvesLmenLs faclllLaLlng enLry of
forelgn lnvesLors ln Lelecom roads porLs alrporLs lnsurance and oLher ma[or secLors
1he lndlan Larlff raLes reduced sharply over Lhe decade from a welghLed average of 723 ln 1991
92 Lo 246 ln 1996971hough Larlff raLes wenL up slowly ln Lhe laLe nlneLles lL Louched 331 ln
200102 lndla ls commlLLed Lo reduced Larlff raLes eak Larlff raLes are Lo be reduced Lo be reduced
Lo Lhe mlnlmum wlLh a peak raLe of 20 ln anoLher 2 years mosL nonLarlff barrlers have been
dlsmanLled by march 2002 lncludlng almosL all quanLlLaLlve resLrlcLlons
lndla ls Clobal
1he llberallsaLlon of Lhe domesLlc economy and Lhe lncreaslng lnLegraLlon of lndla wlLh Lhe global
economy have helped sLep up Cu growLh raLes whlch plcked up from 36 ln 199091 Lo a peak
level of 778 ln 199697 CrowLh raLes have slowed down slnce Lhe counLry has sLlll bee able Lo
achleve 36 growLh raLe ln Lhree of Lhe lasL slx years 1hough growLh raLes has slumped Lo Lhe
lowesL level 43 ln 200203 malnly because of Lhe worsL droughLs ln Lwo decades Lhe growLh raLes
are expecLed Lo go up close Lo 70 ln 200304 A Clobal comparlson shows LhaL lndla ls now Lhe
fasLesL growlng [usL afLer Chlna
1hls ls ma[or lmprovemenL glven LhaL lndla ls growLh raLe ln Lhe 1970s was very low aL 3 and Cu
growLh ln counLrles llke 8razll lndonesla korea and Mexlco was more Lhan Lwlce LhaL of lndla
1hough lndlas average annual growLh raLe almosL doubled ln Lhe elghLles Lo 39 lL was sLlll lower
Lhan Lhe growLh raLe ln Chlna korea and lndonesla 1he plck up ln Cu growLh has helped lmprove
lndlas global poslLlon ConsequenLly lndlas poslLlon ln Lhe global economy has lmproved from Lhe
8
Lh
poslLlon ln 1991 Lo 4
Lh
place ln 2001 When Cu ls calculaLed on a purchaslng power parlLy basls
CloballsaLlon and overLy
CloballsaLlon ln Lhe form of lncreased lnLegraLlon Lhough Lrade and lnvesLmenL ls an lmporLanL
reason why much progress has been made ln reduclng poverLy and global lnequallLy over recenL
decades 8uL lL ls noL Lhe only reason for Lhls ofLen unrecognlsed progress good naLlonal pollces
sound lnsLlLuLlons and domesLlc pollLlcal sLablllLy also maLLer
uesplLe Lhls progress poverLy remalns one of Lhe mosL serlous lnLernaLlonal challenges we face up
Lo 12 bllllon of Lhe developlng world 48 bllllon people sLlll llve ln exLreme poverLy
8uL Lhe proporLlon of Lhe world populaLlon llvlng ln poverLy has been sLeadlly decllnlng and slnce
1980 Lhe absoluLe number of poor people has sLopped rlslng and appears Lo have fallen ln recenL
years desplLe sLrong populaLlon growLh ln poor counLrles lf Lhe proporLlon llvlng ln poverLy had noL
fallen slnce 1987 alone a furLher 213mllllon people would be llvlng ln exLreme poverLy Loday
lndla has Lo concenLraLe on flve lmporLanL areas or Lhlngs Lo follow Lo achleve Lhls goal 1he areas
llke Lechnologlcal enLrepreneurshlp new buslness openlngs for small and medlum enLerprlses
lmporLance of quallLy managemenL new prospecLs ln rural areas and prlvaLlsaLlon of flnanclal
lnsLlLuLlons 1he manufacLurlng of Lechnology and managemenL of Lechnology are Lwo dlfferenL
slgnlflcanL areas ln Lhe counLry
1here wlll be new prospecLs ln rural lndla 1he growLh of lndlan economy very much depends upon
rural parLlclpaLlon ln Lhe global race AfLer lmplemenLlng Lhe new economlc pollcy Lhe role of vlllages
goL lLs own slgnlflcance because of lLs unlque ouLlook and brandlng meLhods lor example food
processlng and packaglng are Lhe one of Lhe area where new enLrepreneurs can enLer lnLo a blg way
lL may be organlsed ln a collecLlve way wlLh Lhe help of cooperaLlves Lo meeL Lhe global demand
undersLandlng Lhe currenL sLaLus of globallsaLlon ls necessary for seLLlng course for fuLure lor all
naLlons Lo reap Lhe full beneflLs of globallsaLlon lL ls essenLlal Lo creaLe a level playlng fleld resldenL
8ushs recenL proposal Lo ellmlnaLe all Larlffs on all manufacLured goods by 2013 wlll do lL ln facL lL
may exacerbaLe Lhe prevalenL lnequallLles Accordlng Lo Lhls proposal Larlffs of 3 or less on all
manufacLured goods wlll be ellmlnaLed by 2003 and hlgher Lhan 3 wlll be lowered Lo 8 SLarLlng
2010 Lhe 8 Larlffs wlll be lowered each year unLll Lhey are ellmlnaLed by 2013
Cu CrowLh raLe
1he lndlan economy ls passlng Lhrough a dlfflculL phase caused by several unfavourable domesLlc
and exLernal developmenLs uomesLlc ouLpuL and uemand condlLlons were adversely affecLed by
poor performance ln agrlculLure ln Lhe pasL Lwo years 1he global economy experlenced an overall
deceleraLlon and recorded an ouLpuL growLh of 24 durlng Lhe pasL year growLh ln real Cu ln
200102 was 34 as per Lhe Lconomlc Survey ln 200001 1he performance ln Lhe flrsL quarLer of
Lhe flnanclal year ls38 and second quarLer ls 61
LxporL and lmporL
lndlas LxporL and lmporL ln Lhe year 200102 was Lo Lhe exLenL of 32372 and 38362 mllllon
respecLlvely Many lndlan companles have sLarLed becomlng respecLable players ln Lhe lnLernaLlonal
scene AgrlculLure exporLs accounL for abouL 13 Lo 18 of LoLal annual of annual exporL of Lhe
counLry ln 200001 AgrlculLural producLs valued aL more Lhan uS $ 6mllllon were exporLed from Lhe
counLry 23 of whlch was conLrlbuLed by Lhe marlne producLs alone Marlne producLs ln recenL
years have emerged as Lhe slngle largesL conLrlbuLor Lo Lhe LoLal agrlculLural exporL from Lhe counLry
accounLlng for over one flfLh of Lhe LoLal agrlculLural exporLs Cereals (mosLly basmaLl rlce and non
basmaLl rlce) oll seeds Lea and coffee are Lhe oLher promlnenL producLs each of whlch accounLs fro
nearly 3 Lo 10 of Lhe counLrles LoLal agrlculLural exporLs
Where does lndlan sLand ln Lerms of Clobal lnLegraLlon?
lndla clearly lags ln globallsaLlon number of counLrles have a clear lead among Lhem Chlna large
parL of easL and far easL Asla and easLern Lurope LeLs look aL a few lndlcaLors how much we lag
OCver Lhe pasL decade lul flows lnLo lndla have averaged around 03 of Cu agalnsL 3 for Chlna
33 for 8razll Whereas lul lnflows lnLo Chlna now exceeds uS $ 30 bllllon annually lL ls only uS $
4bllllon ln Lhe case of lndla
OConslder global Lrade lndlas share of world merchandlse exporLs lncreased from 03 Lo 07
over Lhe paL 20 years Cver Lhe same perlod Chlnas share has Lrlpled Lo almosL 4
Olndlas share of global Lrade ls slmllar Lo LhaL of Lhe hlllpplnes an economy 6 Llmes smaller
accordlng Lo lMl esLlmaLes lndla under Lrades by 7080 glven lLs slze proxlmlLy Lo markeLs and
labour cosL advanLages
OlL ls lnLeresLlng Lo noLe Lhe remark made lasL year by Mr 8lmal !alan Covernor of 88l uesplLe all
Lhe Lalk we are now where ever close belng globallsed ln Lerms of any commonly used lndlcaLor of
globallsaLlon ln facL we are one of Lhe leasL globallsed among Lhe ma[or counLrles however we
look aL lL
OAs AmarLya Sen and many oLher have polnLed ouL LhaL lndla as a geographlcal pollLlcoculLural
enLlLy has been lnLeracLlng wlLh Lhe ouLslde world LhroughouL hlsLory and sLlll conLlnues Lo do so lL
has Lo adapL asslmllaLe and conLrlbuLe 1hls goes wlLhouL saylng even as we move lnLo whaL ls
called a globallsed world whlch ls dlsLlngulshed from prevlous eras from by fasLer Lravel and
communlcaLlon greaLer Lrade llnkages denLlng of pollLlcal and economlc soverelgnLy and greaLer
accepLance of democracy as a way of llfe
Consequences
The implications of globalisation for a national economy are many. Globalisation has intensified
interdependence and competition between economies in the world market. This is reflected in
Interdependence in regard to trading in goods and services and in movement of capital. As a result
domestic economic developments are not determined entirely by domestic policies and market
conditions. Rather, they are influenced by both domestic and international policies and economic
conditions. It is thus clear that a globalising economy, while formulating and evaluating its
domestic policy cannot afford to ignore the possible actions and reactions of policies and
developments in the rest of the world. This constrained the policy option available to the
government which implies loss of policy autonomy to some extent, in decision-making at the
national level

%0 n00/ for privatization proc0ss: l0ssons from /0v0lopm0nt an/ impl0m0ntation.
The decision to privatize state services is oIten a controversial one. What are the pitIalls
commonly encountered, and how can a state avoid them? In Massachusetts, a healthy clash oI
interests between a Republican governor eager to privatize and a Democratic legislature
responsive to state employees provides important lessons. Bruce Wallin Iinds that many
mistakes, oI both a political and policy nature, were made by an administrative crusade. The
legislative response, a bill regulating privatization, suggests that it is best to establish a
decision-making process Ior privatization that is well speciIied, inclusive, and ideally has
some independent check on the decisions.
Privatization oI government services, or the use oI the private sector to attain public goals,
has taken center stage in Iederal, state, and local government attempts to reIorm service
delivery and lower cost (Gore, 1993; Gormley, 1991; Chi, 1993; Florestano, 1994; Cigler,
1990). Although much has been written about the advantages and disadvantages oI
privatization, the conditions which support it, and the service areas most readily privatized
(Savas, 1987; Donohue, 1989), there has been remarkably little discussion in the literature oI
how the privatization decision process might best be structured, especially at the state level
(Kettl, 1993a). That is, how should the rules Ior privatization be written? Who should be
involved? How should proposals be initiated? What guidelines are needed? This article
discusses such questions based on a case study oI Governor William Weld's privatization
eIIorts in Massachusetts.
Applied piecemeal in many states, privatization has not yet become an overarching theme Ior
most states. While states diIIer in many ways, lessons can be learned Irom an analysis oI the
privatization politics and policy decisions oI a state like Massachusetts, where privatization
has been aggressively pursued by a Republican governor and equally aggressively opposed
by a Democratically controlled legislature. Indeed privatization became one oI the
cornerstones oI an administration that has increasingly attracted national attention, and yet, at
the same time it remained a Iocal point oI controversy within the Commonwealth. Although
case studies have their limitations, they are clearly instructional in the early years oI policy
development and implementation (Pressman and Wildavsky, 1997). In their separate reviews
oI eIIorts at the state level, Florestano (1994), Kettl (1993a), and Chi (1993) have noted the
need Ior more inIormation on what states are doing with privatization, and how they are
doing it.
Privatization must be done careIully. To overcome bureaucratic intransigence, union
opposition, and partisan politics, proponents oI privatization may Ieel that they have to
aggressively promote their agenda. Privatization may then become a goal in itselI, when it
should be viewed as a means to more eIIicient and less costly provision oI government
services. Ideologically driven/overly promoted privatization crusades can, like most crusades,
have innocent victims, with unintended consequences Ior those who deliver government
services and Ior those who beneIit Irom them. Opponents oI privatization, on the other hand,
may oppose its implementation Ior narrowly selIish personal or political reasons.
Privatization in the states is most oIten initiated in and implemented by the executive branch,
with governors cited as the most active players in one survey (Chi, 1993, 24). Although the
gubernatorial perspective can provide insight on alternative service delivery, the
Massachusetts experience suggests that legislative involvement may be beneIicial and may
provide an important check on potentially overzealous privatization. Decisions that, in eIIect,
weigh Ilexibility, eIIiciency, and cost savings in the provision oI government services against
expertise, stability, and control are important ones and are best made with input Irom both
administrative and political perspectives.
The Massachusetts experience Iurther suggests that, at the least, it is best to set up in advance
oI privatization a decision-making process that is well-speciIied, inclusive (especially
including current government workers), and ideally has some independent check on the
decisions, preIerably by an oIIice or organization with little to gain Irom the decision.
Because oI a Iavorable political climate, privatization policy in Massachusetts has moved in
this direction, and the result is better policy.

AdvanLages
1 8aslc advanLage ln prlvaLlzaLlon ls accuraLeness and commlLmenL Lowards Lhe servlce as Lhey
prlvaLe organlzaLlons are very much concerned abouL Lhe proflLs Lhey make ulLlmaLely whlch depend
on Lhe quallLy of servlce belng provlded by Lhem and Lhe publlc response Lo lL
2 rlvaLlzaLlon generaLes more revenue compared Lo governmenL enLerprlses Lhus govL can
lndlrecLly earn a blL more by leaslng ouL enLerprlses Lo prlvaLe organlzaLlons
3 CusLomer supporL and saLlsfacLlon baslcally ls of much lnLeresL ln prlvaLe enLerprlses
comparaLlvely
ulsadvanLages
1 1he blggesL LhreaL ls rellablllLy 1here ls noLhlng LhaL backs up Lhe prlvaLe organlzaLlons where as
govL can back up lLs enLerprlses easlly ln Lerms of funds 1here are more chances of bankrupLcy ln
prlvaLe orgs where are 0 Lo few ln govL orgs
2 1hough Lhe quallLy of servlce may be llLLle compromlsed lLs rellable
3 Some deparLmenLs need soclal responslblllLy whlch can be done only by governmenL llke pollce
deparLmenL Lrafflc managemenL

Tre proposed researcr |s |rlerded lo survey lre process ol pr|val|zal|or |r lrd|a ard assess |ls |rpacl or lre lrd|ar
ecorory. Tre cerlra| |ssue We W||| address |s lre |rpacl ol pr|val|zal|or lral ras la|er p|ace so lar or prol|lao|||ly ard
perlorrarce ol P3us. 0o|rg oeyord lr|s, We W||| allerpl lo urderslard Wral exp|a|rs lre |rpacl ol pr|val|zal|or or
perlorrarce. ls |l lre use ol rar|el poWer oy o||gopo||sl|c l|rrs Wrose pr|c|rg poWer rad oeer corslra|red urder
goverrrerl oWrersr|p ? ls perlorrarce oougrl al lre experse ol |aoour lrrougr exlers|ve |ay- olls so lral Wral We see |s
esserl|a||y a lrarsler lror Wor|ers lo srarero|ders ? 0r are We corlus|rg lre |rpacl ol pr|val|zal|or W|lr lre rore
gerera||sed |rpacl ol deregu|al|or |r lre ecorory, Wr|cr |r |lse|l cou|d spur ell|c|ercy ?
The research output will comprise the Iollowing:
1. A survey oI the literature on privatization, particularly with respect to less
developed countries.
2. A review oI the role oI the public sector in the Indian economy, and the process oI
ecoror|c ||oera||zal|or ard pr|val|zal|or |r lrd|a uplo lr|s po|rl.
3. lrpacl ol pr|val|zal|or or l|rr perlorrarce.
1. Exp|aral|or lor lre |rpacl ol pr|val|zal|or
5. Assessrerl ol recrar|srs ol corporale goverrarce |r lrd|a.

Background: privatization in theory and practice
A greal Wave ol pr|val|zal|or ras sWepl lre Wor|d |r lre pasl lWo decades, erorac|rg lre |rduslr|a| ecoror|es, lre
lrars|l|or ecoror|es ol Easl Europe ard |arge parls ol lre |ess deve|oped Wor|d, ard |l corl|rues lo ro|| or. ll |s
|rleresl|rg, roWever, lral |ls oas|s |r lreory Was soreWral sra|y lo slarl W|lr. Voreover, a s|zao|e erougr oody ol
erp|r|ca| ev|derce, or Wr|cr rypolreses aooul |ls |rpacl cou|d oe lesled, oecare ava||ao|e or|y severa| years doWr
lre road. 3o rucr ol lre |r|l|a| |rpelus lo pr|val|zal|or erla||ed a |eap |r la|lr, ard, as rappers a|| loo oller |r lre
deve|oprerl ol |roW|edge, allerpls lo exp|a|r |ls |rpacl rave lo||oWed or lre ree|s ol W|despread ex|sl|rg pracl|ce.
A|lrougr |deo|og|ca| cors|deral|ors - exerp||l|ed oy sucr slalererls as, ' goverrrerls rave ro ous|resss lo oe |r
ous|ress - rave oller oeer pararourl |r dr|v|rg pr|val|zal|or |r var|ous parls ol lre Wor|d, |l |s a|so lrue lral
goverrrerls rave sougrl lo jusl|ly pr|val|zal|or |r re|al|or lo cerla|r oojecl|ves. Trese oojecl|ves |rc|ude ore or rore
ol lre lo||oW|rg:
1. to promote increased eIIiciency.
2. to raise revenues Ior the state (and thereby to bridge Iiscal deIicits).
3. to reduce government interIerence in the economy and promote greater private
initiative.
4. to promote wider share ownership and the development oI the capital market.
0l lrese, lre l|rsl oojecl|ve, lre reed lo prorole ell|c|ercy |r rurr|rg correrc|a|
orgar|zal|ors, ras arugao|y oeer lre dor|rarl rol|val|or. Trere |s a serse lral puo||c oWrersr|p soreroW |eads lo
|oWer |eve|s ol ell|c|ercy lrar are poss|o|e urder pr|vale oWrersr|p; ard |rell|c|erl erlerpr|ses, |r lurr, are seer as
creal|rg olrer proo|ers sucr as pre-erpl|or ol goverrrerl reverues (oad|y reeded lor |rveslrerl |r soc|a| seclors
|r lre |ess deve|oped courlr|es ) lrrougr suos|d|es or recap|la||zal|or ard urcorpel|l|ve |rduslr|es |r lre ecorory.
A|| lr|s |s roW v|rlua||y la|er as ax|oral|c ard |s parl ol lre corverl|ora| W|sdor, oul |l |s roleWorlry lral reoc|ass|ca|
lreory dWe|l does rol rave rucr lo say aooul l|rrownership, dWe|||rg |rslead or lre |rporlarce ol market structure
|r gereral|rg ell|c|erl oulcores . ll arylr|rg urder cerla|r cord|l|ors ol rar|el la||ure lral carrol rol oe erl|re|y
recl|l|ed lrrougr P|gouv|ar laxes or suos|d|es, lrere |s a case lor puo||c, ralrer lrar pr|vale, oWrersr|p lo reel
overr|d|rg soc|a| oojecl|ves.
3uosequerl ||leralure, draW|rg oragency lreory ras, roWever, core up W|lr a ruroer ol reasors Wry pr|vale
oWrersr|p r|grl oe super|or. 0re |s lral raragers |r lre puo||c seclor |ac| |rcerl|ves lo perlorr oecause lrey are
poor|y ror|lored (v|c|ers ard YarroW, (1988)). Poor ror|lor|rg, |r lurr, slers lror lre lacl lral oWrersr|p |s d|lluse,
ard, roreover, lre l|rrs are rol puo||c|y lraded ard rerce rol vu|rerao|e lo lre lrreal ol la|eover. Fror lre
perspecl|ve ol lre properly r|grls scroo|, |rell|c|ercy |r P3us ar|ses lror oecause lre la||ure lo ass|gr properly r|grls.
wrer everyore oWrs a l|rr, lrrougr lre slale, rooody does, ard rerce rooody ras lre |rcerl|ve lo de|sgr ell|c|ercy
|rcerl|ve slruclures.
Arolrer reasor raragers |r lre puo||c seclor |ac| |rcerl|ves lo perlorr |s lral lrey do rol lear oar|ruplcy; lrar|s lo
lre 'soll oudgel' corslra|rl raragers |r lre puo||c seclor car expecl lo oe oa||ed oul oy puo||c lurds (Korra|,
1980).Agercy lreory a|so suggesls lral, ur|||e lre|r courlerparls |r lre pr|vale seclor, raragers |r lre puo||c seclor
r|grl |ac| locus oecause lrey are expecled lo pursue a var|ely ol oojecl|ves, rol a|| ol Wr|cr are ca|cu|aled lo
rax|r|ze prol|l (3r|e|ler ard v|srry, 199). Vu|l|p||c|ly ol oojecl|ves ar|se lror lre lacl lral puo||c seclor raragers
are arsWerao|e lo d|llererl corsl|lulerls, sucr as |eg|s|alors, c|v|| servarls ard r|r|slers, eacr W|lr |ls oWr oojecl|ve.
lr parl|cu|ar, po||l|c|ars, Wro are arsWerao|e lo corsl|luerls sucr as |aoour, Wou|d lerd lo pusr puo||c seclor
raragers lo pursue oojecl|ves, sucr as ar |rcrease |r erp|oyrerl, lral r|||lale aga|rsl prol|l rax|r|zal|or.
Tre propos|l|or lral agercy proo|ers are recessar||y so rucr rore acule |r lre puo||c seclor lrar |r lre pr|vale
seclor as lo ra|e a d|llererce lo perlorrarce ras rol gore urcra||erged. 3l|g||lz (199Z) ra|es lre po|rl lral |r a||
o|g l|rrs, Wrelrer |r lre puo||c or lre pr|vale seclor, raragers erjoy cors|derao|e d|screl|or. 3|rce raragers car
appropr|ale or|y a sra|| lracl|or ol ary |rprovererl |r producl|v|ly, |r re|lrer seclor do raragers rave ary |rcerl|ve
lo des|gr good |rcerl|ve slruclures. loWever, |l |s a|so lrue lral lre ellorl requ|red lo des|gr |rcerl|ves slruclures |s
rol so greal as lo |rpose a rajor |rped|rerl |r e|lrer case. As 3l|g||lz puls |l, ' ll seers exlrere|y |rp|aus|o|e lo
lr|r|, |r e|lrer case, ol raragers ru|||rg over Wrelrer lo exerl lre ||ll|e ellorl lo des|gr a good |rcerl|ve slruclure lral
W||| ra|e lre orgar|zal|or lurcl|or oeller, carelu||y oa|arc|rg lre relurrs lrey W||| oola|r W|lr lre exlra ellorl lrey W|||
rave lo exerl. 3l|g||lz c|les lre exlraord|rary perlorrarce ol puo||c erlerpr|ses |r cerla|r prov|rces ol Cr|ra lo ra|e
lre po|rl lral ecoror|c success |s poss|o|e ever urder cord|l|ors |r Wr|cr properly r|grls are |||-del|red.
Tre 3app|rglor-3l|g||lz lreorer (198Z) sroWs lral cord|l|ors urder Wr|cr pr|val|zal|or cou|d lu||y |rp|ererl puo||c
oojecl|ves ol equ|ly ard ell|c|ercy are exlrere|y reslr|cl|ve. Tr|s |s rel|ecled |r sore ol lre cro|ces soc|el|es rave
rade lor puo||c producl|or. ll |s d|ll|cu|l, lor |rslarce, lo des|gr P|gouv|ar laxes or
suos|d|es lo alla|r lre 'r|grl |eve| ol r|s|-la||rg or |rrova|or or lo alla|r oojecl|ves |r puo||c educal|or sucr as 'soc|a|
|rlegral|or. Tre lreorer a|so derorslrales lral arideal goverrrerl cou|d do a oeller joo ol rurr|rg ar erlerpr|se
|lse|l lrar |l cou|d lrrougr pr|val|zal|or- a|lrougr, |r pracl|ce, sucr ar |dea| goverrrerl ray oe rard lo core oy.
A|| lr|s ras |ed lo lre corlerl|or lral Wral rallers |s rol oWrersr|p so rucr as corpel|l|or. (3l|g||lz (1993), verror-
welze| ard welze| (1989)). loWever, |l ras a|so oeer po|rled oul lral, Wr||e corpel|l|or urdouoled|y corlr|oules lo
ell|c|ercy ga|rs, lre ex|slerce ol a puo||c|y-oWred l|rr as lre |rcuroerl, r|grl deler olrer l|rrs lror erler|rg lre
rar|el, ro raller lral corpel|l|or |s perr|lled. Voreover, s|rce rea| corpel|l|or rears rol or|y lreedor lo erler oul
lreedor lo la||, lre ex|slerce ol P3us ray rol corduce lo rear|rglu| corpel|l|or (3resr|rs|| ard Lopez-Ca|va,
1998).
0|ver lre rary |ls ard ouls aooul lre lreorel|ca| rer|ls ol pr|val|zal|or, researcrers rave rad lo lurr |rev|lao|y lo lre
ev|derce or lre grourd |r order lo arr|ve al corc|us|ors. 8ul lre erp|r|ca| ev|derce or oWrersr|p ard ell|c|ercy,
corlrary lo |rpress|ors lral r|grl rave oeer crealed |r lre popu|ar press, |s oy ro rears uraro|guous, |easl ol a||
Wrere |ess deve|oped courlr|es are corcerred- as lre rexl secl|or oul||res.
Econometric analysis oI pre- and post-privatization perIormance: lr lr|s calegory ol slud|es are lrose lral |oo| al a
|arge sarp|e ol l|rrs lral rave urdergore pr|val|zal|or, Wrelrer |r a g|ver courlry or across severa| courlr|es.
Arorg lre rosl dela||ed slud|es lo dale |s oy Vegg|rsor el a| (1991). Trey corpared lre pre- ard posl- pr|val|zal|or
l|rarc|a| ard operal|rg perlorrarce ol 1 corpar|es lror 18 courlr|es ard 32 |rduslr|es dur|rg lre per|od 191 lo
1990. Trey lourd |rcreases |r prol|lao|||ly, ell|c|ercy, cap|la| sperd|rg, erp|oyrerl (Wr|cr lrey adr|l |s a surpr|s|rg
resu|l) ard rea| sa|es aller d|vesl|lure. ll |s Worlr po|rl|rg oul, roWever, lral lre|r sludy lourd lre |rcrease |r
prol|lao|||ly (reasured oy relurr or sa|es) lo oe |rs|gr|l|carl lor regu|aled |rduslr|es, sucr as ul|||l|es ard oar||rg
Wr|cr Wou|d appear lo re|rlorce lre douols ra|sed oy sore ol lre olrer slud|es rerl|ored ear||er aooul lre oerel|ls ol
pr|val|zal|or |r sucr |rduslr|es.
0re srorlcor|rg ol lr|s sludy |s lral |l does rol corlro| lor crarges |r lre ecoror|c erv|rorrerl (Wr|cr |r |lse|l cou|d
corlr|oule lo |rproved perlorrarce |r lre posl-d|vesl|lure per|od) or lor pre-pr|val|zal|or reslruclur|rg. Tr|s proo|er
ras oeer addressed oy Frydrar, 0ray, lesse| ard Rapaczyrs|| (199Z) |r lre|r sludy ol lrars|l|or ecoror|es, parl ol
a suoslarl|a| oody ol Wor| or pr|val|zal|or |r Easlerr Europe. Tre aulrors argue lral |l |s rol erougr lo corpare pre-
ard posl- pr|val|zal|or perlorrarce |r se|ecled l|rrs. ll oeller l|rrs Were croser lor pr|val|zal|or, se|ecl|or o|as cou|d
occur. To avo|d lr|s o|as, lre aulrors coro|re
lre lWo approacres- corpar|rg slale ard pr|vale l|rrs, |r add|l|or lo corpar|rg pre-ard posl-pr|val|zal|or
perlorrarce. Trey do lr|s oy orea||rg up lre|r ara|ys|s |r lWo parls. F|rsl, lrey corpare posl-pr|val|zal|or
perlorrarce ol pr|val|zed l|rrs W|lr slale l|rrs; secord|y, lrey corpare lrepre-privatization perlorrarce ol lre
pr|val|zed l|rrs W|lr slale l|rrs as We||. ll lrere a d|llererce |r perlorrarce or|y |r lre l|rsl case, lrer |l |s poss|o|e lo
|rler lral oWrersr|p ras rade a d|llererce.
Tre aulrors' ara|ys|s |s oased or a sarp|e ol aooul 190 r|d-s|zed corpar|es |r lre Czecr Repuo||c, lurgary ard
Po|ard ard covers lre per|od 1990 lo 1991 (red|ar erp|oyrerl |r lre sarp|e: 30 lu||-l|re erp|oyees; red|ar
sa|es: S r||||or). Tre aulrors reporl lral lre pr|val|zal|or rad a draral|c |rpacl or perlorrarce, reasured oy lour
d|llererl var|ao|es: reverue, erp|oyrerl, reverue per erp|oyee ard cosl/reverue ral|o. Tre |rpacl Was rosl
draral|c or reverue.Tre aulrors suggesl lral oecause reverue la||s Were arresled, lre |rpacl or erp|oyrerl Was
a|so pos|l|ve, corlrary lo lre oe||el lral pr|val|zal|or cou|d |rpose cosls |r lerrs ol |oWer erp|oyrerl. Tre aulrors
a|so ver|l|ed lral lre pr|val|zal|or ellecl |s rol ||r|led lo a parl|cu|ar courlry, |rduslr|a| seclor or a parl|cu|ar v|rlage ol
pr|val|zed l|rr.
As rerl|ored ear||er, |r order lo e||r|rale se|ecl|or o|as, lre aulrors allerpled lo ascerla|r Wrelrer lresame
pr|val|zed l|rrs lral Were oulperlorr|rg slale l|rrs aller pr|val|zal|or Were a|so oulperlorr|rg lresame slale l|rrs
oelore pr|val|zal|or. Trey lourd lral Wrer |rs|der-oWred l|rrs Were |rc|uded, lrere |s a slal|sl|ca|||y s|gr|l|carl pre-
pr|val|zal|or ellecl as We||. loWever, Wrer |rs|der- oWred l|rrs Were exc|uded lror lre pre- ard posl-pr|val|zal|or
corpar|sors, lre pre-pr|val|zal|or ellecl oecores slal|sl|ca||y |rs|gr|l|carl. Trey suggesl lral |rs|der-oWred l|rrs |ead
lo a regal|ve se|ecl|or o|as Wr|cr ras|s lre |rpacl ol pr|val|zal|or. ll |s roleWorlry, roWever, |r lral ore ol lre rare
slud|es lral allerpls lo corpare slale ard pr|val|zed l|rrs oelore ard aller pr|val|zal|or, lre resu|ls are rol
uraro|guous|y |r lavour ol pr|val|zal|or.
0a|a| el a| (1991) allerpl ar exp|aral|or as lo Wry slud|es or pr|val|zal|or core lo corlrad|clory corc|us|ors. 0re
reasor |s lral sore ol lre slud|es corpare corpel|l|ve erlerpr|ses |r lre pr|vale seclor W|lr roropo|y erlerpr|ses |r
lre puo||c seclor, ard, rol surpr|s|rg|y, l|rd super|or perlorrarce |r lre lorrer calegory. 3ecord|y, sore l|rd pr|vale
seclor perlorrarce |eg|l|rale|y super|or oecause lrey are corpar|rg reasorao|y corpel|l|ve erlerpr|ses, ard sra||
puo||c erlerpr|ses |r a corpel|l|ve s|lual|or carrol oe expecled lo do oeller lrar pr|vale erlerpr|ses
Tr|rd|y, sore ol lre slud|es corpare puo||c ard pr|vale roropo||es, ard lr|s |s ar area Wrere, as lre aulrors pul |l,
'lre resu|ls are a|| over lre rap.
III.
Privatization in less developed countries
Vary ol lre slud|es c|led aoove rave oeer carr|ed oul |r lre deve|oped Wor|d. wrer |l cores lo |ess deve|oped
courlr|es (a calegory lral, |r lre wor|d 8ar|'s c|ass|l|cal|or, exc|udes lre lrars|l|or ecoror|es ol Easlerr Europe ), |l
oecores ever rore d|ll|cu|l lo core oy uraro|guous ev|derce |r lavour ol pr|val|zal|or.
lr |ls rev|eW ol pr|val|zal|or progrars, lre wor|d 8ar| (1992) roled, 'Vosl pr|val|zal|or success slor|es core lror
r|gr- or r|dd|e-|rcore courlr|es. ll |s rarder lo pr|val|ze |r |oW-|rcore sell|rgs, Wrere lre process |s rore d|ll|cu|l lo
|aurcr, a|lrougr lre sludy Was qu|c| lo add, ' 8ul ever |r |oW-|rcore lre resu|ls ol sore pr|val|zal|ors rave oeer
r|gr|y pos|l|ve... ll |s |rleresl|rg lo role lral lre sludy oy Vegg|rsor el a| (1991), c|led aoove, Wr||e l|rd|rg
|rprovererls |r prol|lao|||ly |r deve|op|rg courlr|es posl-pr|val|zal|or, lourd |rcreases |r ell|c|ercy or|y |r corpar|es
readquarlered |r 0EC0 courlr|es. 0re ol lre ear||er surveys dore oy V|||ard (1988) roled qu|le erpral|ca||y: ' Trere
|s ro ev|derce ol a slal|sl|ca||y sal|slaclory ||rd lo suggesl lral puo||c erlerpr|ses |r L0Cs rave a
lower level oI technical eIIiciency than private Iirms operating at the same level oI
operation.
lr |ls assessrerl ol pr|val|zal|or |r suo-3ararar Alr|ca, lre wor|d 8ar| (1991) corc|uded lral 'sucr ||r|led
pr|val|sal|or ras rad ||ll|e |rpacl or ell|c|ercy ard ecoror|c groWlr. 0r Vex|co, We rave lWo slud|es W|lr d|ller|rg
corc|us|ors. Jorr we|ss (1995) |oo|ed al lre 500 |argesl erlerpr|ses |r Vex|co over lre per|od 1985-90, ard
corpared reasures sucr as sa|es al corslarl pr|ces, sa|es per Wor|er al corslarl pr|ces ard sa|es per ur|l ol lola|
assels al corslarl pr|ces. l|s corc|us|or: 'lr lerrs ol lre |rl|uerce ol oWrersr|p, Wr|cr |s lre ra|r locus ol lrs
ara|ys|s, lrere |s ro supporl lor lre v|eW lral slale oWrersr|p per se |rp||es poor perlorrarce.... wral |s c|ear.. |s lral
lre resu|ls g|ve ro supporl lor pr|val|zal|or ol lre rera|r|rg erlerpr|ses or ell|c|ercy grourds.
Tre l|rd|rgs ol LaPorla ard Lopez-0e-3||ares (1998) are d|arelr|ca||y oppos|le. Tre|r sludy covered 218 l|rrs |r 2
d|llererl seclors, pr|val|zed oelWeer 1983 ard 1991. Trey lourd lral prol|lao|||ly, reasured oy lre ral|o ol operal|rg
|rcore lo sa|es, |rcreased oy 21 per cerlage po|rls. Tre aulrors decorposed lre ga|rs |rlo lrree corporerls:
|rcrease |r pr|ces, reducl|or |r Wor|ers, ard producl|v|ly ga|rs. Trey lourd lral 5Z ol lre ga|rs Were or accourl ol
producl|v|ly |rcreases. Tre aulrors a|so corpared corpel|l|ve ard ror-corpel|l|ve rar|els ard lourd lral lre lorrer
rad r|grer ga|rs |r prol|lao|||ly lrar lre |aller.
8ouoa|r| ard Cossel (1998) |oo|ed al lre |rpacl ol pr|val|zal|or us|rg dala ol Z9 corpar|es lror 21 deve|op|rg
courlr|es. Trey lourd s|gr|l|carl |rprovererls |r
relurr or sa|es, rea| sa|es, ard cap|la| experd|lure/sa|es, oul rol |r erp|oyrerl.
Trere are, ol course, good reasors Wry pr|val|zal|or ray rol y|e|d qu|le lre sare |rpacl |r L0Cs as |r lre deve|oped
Wor|d. ll |s oy roW We|| recogr|zed lral, oroad|y, lWo cord|l|ors reed lo oe sal|sl|ed lor successlu| oulcores lo resu|l
lror pr|val|zal|or. 0re, lre pr|or ex|slerce ol a rar|el-lr|erd|y racroecoror|c erv|rorrerl, supporled oy |rsl|lul|ora|
ard regu|alory capac|ly. TWo, lre ex|slerce ol corpel|l|ve erlerpr|ses |r seclors |r Wr|cr pr|val|zal|or la|es p|ace. lr
rary L0Cs, re|lrer ol lrese cord|l|ors ray oe adequale|y rel, ard, |r add|l|or, lrere are adverse laclors sucr as
Wea| |aW erlorcererl, lr|r cap|la| rar|els, ard lre aoserce ol recrar|srs lral spur pr|vale seclor perlorrarce
sucr as la|eovers ard ror|lor|rg oy |rsl|lul|ora| srarero|ders. urder lrese c|rcurslarces, pr|vale oWrersr|p carrol
oe expecled lo produce r|gr slardards ol perlorrarce, ard |rdeed rary ol lre slud|es or pr|val|zal|or |r L0Cs po|rl
lo ore or olrer ol lrese laclors lo epx|a|r Wry pr|val|zal|or ras rol qu|le produced lre expecled resu|ls.
IV.
Privatization in India
lr rary Ways, lrd|a prov|des ar exce||erl lesl|rg grourd lor rypolreses aooul pr|val|zal|or ard |ls |rpacl, excepl lral
so lar pr|val|zal|or ras rol oeer allerpled or a sca|e lral researcrers Wou|d |||e lo see. Tre courlry ras a |arge,
We||- d|vers|l|ed puo||c seclor. ur|||e rary ol lre lrars|l|or ecoror|es, |l a|so ras a |org lrad|l|or ol pr|vale erlerpr|se,
|rc|ud|rg o|g corpar|es |r lre pr|vale seclor, a|lrougr lrere are cerla|r seclors |r Wr|cr pr|vale seclor parl|c|pal|or |s
qu|le reW, lrese seclors rav|rg oeer reserved url|| recerl|y lor lre puo||c seclor.
Pr|val|zal|or |r lrd|a gerera||y goes oy lre rare ol 'd|s|rveslrerl' or 'd|veslrerl' ol equ|ly. Tr|s |s oecause
pr|val|zal|or ras lrus lar rol rearl lrarsler ol corlro| or ever ol corlro|||rg |rleresl lror goverrrerl lo aryoody e|se.
Tre goverrrerl ras so|d sla|es rarg|rg lror ore per cerl lo 10 |r 10 P3us, oul |r ro corpary ras |ls sla|e la||er
oe|oW lre rag|c l|gure ol 51 Wr|cr |s seer as corlerr|rg corlro|||rg |rleresl.
Tre pr|val|zal|or prograr |s |lse|l re|al|ve|y reW lo lre courlry. ll |s parl ol ar aro|l|ous process ol ecoror|c relorrs
cover|rg |rduslry, lrade, lre l|rarc|a| seclor ard agr|cu|lure ard a|so |rvo|v|rg a prograr ol racro-ecoror|c
slao|||zal|or locused or lre ledera| oudgel, Wr|cr correrced |r 1991. Pr|val|zal|or |s seer as a recessary
corcor|larl ol deregu|al|or ol |rduslry, recessary |r order lo erao|e l|rrs |r lre puo||c seclor lo corpele ard surv|ve
|r lre reW erv|rorrerl.
Tre rajor e|ererl |r |rduslr|a| deregu|al|or ras oeer lre lrduslr|a| Po||cy 3lalererl ol Jure 1991 Wr|cr, arorg
olrer lr|rgs, drasl|ca||y reduced lre ruroer
ol seclors ol |rduslry reserved lor lre puo||c seclor lror 1Z lo e|grl. Tr|s ||sl ras s|rce oeer lrurcaled lo lour:
delerce, alor|c erergy, spec|l|ed r|rera|s ard ra||Way lrarsporl. Voreover, a|| lre areas ear||er reserved lor lre
puo||c seclor rave a|so oeer exerpled lror lre sysler ol |rduslr|a| ||cers|rg urder Wr|cr lre pr|vale seclor Was
requ|red lo oola|r a ||cerse lror lre goverrrerl |r order lo slarl a ous|ress. Tr|s ras ralura||y exposed lre r|lrerlo
cosselled puo||c seclor lo corpel|l|or or a sca|e lo Wr|cr |l ras rol oeer accuslored. 0|s|rveslrerl, Wr||e ra|s|rg
reverues lor lre goverrrerl, ras oeer perce|ved as recessary |r order lo suojecl P3us lo rar|el d|sc|p||re ard lo
ersure lral lrey ra|se lre|r slardards ol perlorrarce.
0|s|rveslrerl ol equ|ly |r 10 P3us ras ra|sed aooul Rs12 o||||or (S 2.8 or) so lar. 0r|y prol|l-ra||rg erlerpr|ses
rave oeer ollered lor sa|e. lr lre l|rsl rourd ol d|s|rveslrerl, lre goverrrerl ollered 'ourd|es ol srares ol var|ous
P3us (eacr ourd|e carry|rg a rol|ora| reserve pr|ce) lo |oca| |rsl|lul|ors. Laler, lre o|dd|rg process Was opered lo
lore|gr |rsl|lul|ora| |rveslors ard lre puo||c al |arge. Tre overWre|r|rg crur| ol lurds ra|sed lrrougr d|s|rveslrerl
(Rs9.9 or) ras oeer lrrougr lre aucl|or roule. Tre relrod ol d|s|rveslrerl Was W|dered |r 199-9Z
when disinvestment was eIIected through both the GDR (Global depository
receipts) route and public issue in the domestic market.
Trere rave oeer severa| cr|l|c|srs ol lre d|s|rveslrerl process. 0re |s lral va|ual|ors processes Were ursourd ard
lral lre goverrrerl gave aWay |ls sla|es loo creap|y; lWo, d|s|rveslrerl ras oeer rere|y a reverue-ra|s|rg alla|r lor
lre goverrrerl, W|lr ||ll|e lrougrl oe|rg g|ver lo lre requ|rererls ol lre l|rrs corcerred; lr|rd|y, |l |s corlerded lral
lre goverrrerl's re|uclarce lo d|s|rvesl rore lrar 51 ard re||rqu|sr corlro| over P3us ras rearl lral lre
goverrrerl ras oeer urao|e lo allracl su|lao|y pr|ced o|ds, as o|dders do rol oe||eve lre l|rrs' perlorrarce Wou|d
|rprove s|gr|l|carl|y W|lr sra|| goverrrerl sla|es oe|rg oll|oaded.
Aller lre |r|l|a| rourd ol d|s|rveslrerl |r 1991-92, lre process Was gu|ded oy recorrerdal|ors rade oy a Corr|llee
or 0|s|rveslrerl sel up |r 1993. Laler, rea||z|rg lre sers|l|v|ly |r po||l|ca| lerrs ol lre Wro|e process, lre goverrrerl
corsl|luled |r 199 ar |rdeperderl oody, lre 0|s|rveslrerl Corr|ss|or (role lre re|uclarce lo use lre dreaded P-
Word), lo draW up a corprerers|ve prograrre ol d|s|rveslrerl over a 5-10 year per|od lor puo||c seclor
urderla||rgs (P3us) relerred lo lre Corr|ss|or oy a Core 0roup ol goverrrerl secrelar|es. Tre Corr|ss|or Was
as|ed lo adv|se or sucr rallers as lre exlerl ol d|s|rveslrerl, lre rode ol d|s|rveslrerl, se|ecl|or ol l|rarc|a|
adv|sors lo lac|||lale lre process elc.
Tre 0|s|rveslrerl Corr|ss|or ras lorru|aled a oroad approacr lo d|s|rveslrerl ard a|so rade spec|l|c
recorrerdal|ors |r respecl ol 19 oul ol 50 P3us relerred lo |l oy lre Core 0roup. Tre Corr|ss|or ras oroad|y
d|sl|rgu|sred oelWeer a 'core
group ard 'ror-core ' group ol |rduslr|es. lr lre 'core group are |rduslr|es sucr as le|ecorrur|cal|ors, poWer,
pelro|eur elc lral are cap|la|-|rlers|ve ard Wrere lre rar|el slruclure cou|d oe ar o||gopop|y. Tre 'core group a|so
|rc|udes oas|c |rduslr|es |r Wr|cr P3us rave a cors|derao|e rar|el preserce ard |r Wr|cr pr|vale seclor preserce |s
sl||| ||r|led. For lre 'core group, lre Corr|ss|or advocales se|||rg goverrrerl equ|ly uplo 19, lral |s, lre
goverrrerl Wou|d rela|r 51 ol equ|ly. lr lre 'ror-core group, lre Corr|ss|or advocales sa|e ol uplo Z1 ol
goverrrerl equ|ly. As lor lre 19 P3us lor Wr|cr lre Corr|ss|or ras rade spec|l|c recorrerdal|ors, lrese |rc|ude
slraleg|c sa|e ol a |arge crur| ol equ|ly lo a pr|vale parly (doresl|c or lore|gr), oller ol srares lo lre puo||c, oulr|grl
sa|e ard delerrerl ol d|s|rveslrerl.
A|lrougr lre va|ue ol d|s|rveslrerl |r lre |asl lWo or lrree years ras lerded lo l|ag ard rea||zal|ors rave la||er srorl
ol largels proposed |r lre arrua| oudgels, lrere are s|grs lral po||l|ca| parl|es are W||||rg lo g|ve a rajor pusr lo
pr|val|zal|or |r lre cor|rg years, Wr|cr Wou|d |rc|ude reducl|or |r lre goverrrerl's sla|e |r sore P3us lo oe|oW
51. 0re s|gr |s lre recerl oller ol 2 ol equ|ly |r lrd|ar
Petrochemicals td (IPC) through an advertisement placed in the ondon
Economist; another is the equally bold move to sell oI 76 equity in the loss-
ra||rg Voderr Foods lrd|a L|r|led lo a pr|vale parly; a lr|rd |s lre goverrrerl's recerl arrourcererl lral |l |s
W||||rg lo se|| 51 ol |ls sla|e |r lrd|ar A|r||res. Trese are a|| roves arrourced oy lre currerl ru||rg coa||l|or, Wrose
rosl |rporlarl corsl|lulerl rad oeer |rp|acao|e opposed lo relorrs Wr||e |r lre oppos|l|or.
loWever, ever as pr|val|zal|or galrers slear, lrere ras oeer ro allerpl so lar lo assess lre |rpacl or P3us ol
d|llererl degrees ol d|s|rveslrerl ard lo arr|ve al a judgererl or lre re|al|ve rer|ls ol lu|| ard parl|a|
pr|val|zal|or.Trere are a|so urarsWered quesl|ors aooul roW corlro| over raragers Wou|d oe exerc|sed |r |rslarces
Wrere ro dor|rarl pr|vale oWrer ererges.
Tre quesl|or ol goverrarce ras cors|derao|e re|evarce |r lre lrd|ar corlexl. Tre lrd|ar corporale seclor la||s |rlo
lrree oroad calegor|es: slale l|rrs, VNCs ard lar||y-raraged lrd|ar ous|resses. 0overrrerl-oWred l|rarc|a|
|rsl|lul|ors ard oar|s ro|d equ|ly |r corpar|es, oul lrey rave lrus lar p|ayed a pass|ve ro|e |r corpar|es excepl |r
exlrere |rslarces ol r|s-raragererl. 0uesl|ors rave oeer ra|sed |r lre corlexl ol pr|val|zal|or aooul lre
accourlao|||ly ol proless|ora| raragers al slale l|rrs, orce lre goverrrerl's sla|e la||s oe|oW 51 per cerl, g|ver lral
|arge, pr|vale |rsl|lul|ora| p|ayer lral are cruc|a| lo goverrarce |r lre |rduslr|a| ecoror|es are aoserl |r lre lrd|ar
corlexl.
Tr|s quesl|or ras rol oeer W|de|y addressed |r lre ||leralure, presurao|y oecause |r lre deve|oped courlr|es a
cerla|r acceplao|e |eve| ol goverrarce car oe presured. 0re ol lre |rleresl|rg l|rd|rgs ol Frydrar el a| (199Z), c|led
ear||er, |s lral lre pr|val|zal|or ellecl |s oesl rar|lesled Wrer lrere |s ore dor|rarl oWrer aller pr|val|zal|or, Wrelrer
|l |s a lore|gr oWrer, a pr|val|zal|or lurd, ar |rd|v|dua| oWrer or lre slale |lse|l . wrere oWrersr|p |s d|lluse, as Wrer
oWrersr|p |s d|slr|ouled arorg Wor|ers, lre pr|val|zal|or |rpacl |s rucr Wea|er. Tr|s aspecl reeds lo oe addressed
|r p|arr|rg lor lulure pr|val|zal|or.
we expecl lral our researcr W||| address lr|s cruc|a| aspecl oased or lre exper|erce so lar |r lre lrd|ar corlexl ard
a|so |r olrer corlexls. A|| |r a||, lre l|rd|rgs ol our proposed sludy Wou|d oe l|re|y ard cou|d corce|vao|y ra|e a
va|uao|e corlr|oul|or lo lre lorru|al|or ol po||cy or lulure pr|val|zal|or.
V.
Proposed research
The proposed research is intended to survey the process oI privatization in India
and assess its impact on the Indian economy. The central issue we will address isthe impact oI
privatization that has taken place so Iar on proIitability and
perIormance oI PSUs.
0o|rg oeyord lr|s, We W||| allerpl lo urderslard Wral exp|a|rs lre |rpacl ol pr|val|zal|or or perlorrarce. ls |l lre
use ol rar|el poWer oy o||gopo||sl|c l|rrs Wrose pr|c|rg poWer rad oeer corslra|red urder goverrrerl oWrersr|p ?
ls perlorrarce oougrl al lre experse ol |aoour lrrougr exlers|ve |ay-olls so lral Wral We see |s esserl|a||y a lrarsler
lror Wor|ers lo srarero|ders ? 0r are We corlus|rg lre |rpacl ol pr|val|zal|or W|lr lre rore gerera||sed |rpacl ol
deregu|al|or |r lre ecorory, Wr|cr |r |lse|l cou|d spur ell|c|ercy ?
The research output will comprise the Iollowing:
1. A survey oI the literature on privatization, particularly with respect to less
developed countries.
2. A review oI the role oI the public sector in the Indian economy, and the process oI
ecoror|c ||oera||zal|or ard pr|val|zal|or |r lrd|a uplo lr|s po|rl.
3. lrpacl ol pr|val|zal|or or l|rr perlorrarce.
1. Exp|aral|or lor lre |rpacl ol pr|val|zal|or
5. Assessrerl ol recrar|srs ol corporale goverrarce |r lrd|a
0ela||s ol lre researcr agerda urder eacr ol lre aoove are spe|l oul oe|oW:
1.iterature survey: Expard|rg or lre or|el rev|eW oul||red |r lr|s proposa|, lre proposed sludy W||| slr|rg logelrer lre
ev|derce or pr|val|zal|or lre Wor|d over, pay|rg parl|cu|ar allerl|or lo slud|es or pr|val|zal|or |r |ess deve|oped
courlr|es.
2.Review oI privatization: Tre rev|eW W||| dela|| lre pr|val|zal|or prograr urderla|er oy lre goverrrerl ol lrd|a, sel
aga|rsl lre oac|drop ol lre overa|| prograrre ol ecoror|c ||oera||zal|or. ll W||| ||sl lre corpar|es pr|val|zed, lre
exlerl ol d|veslrerl, lre arourls ra|sed lrrougr d|veslrerl, lre relrods adopled lor d|veslrerl ol lre goverrrerl's
equ|ly, ard lre cr|l|c|srs ol lre pr|val|zal|or prograrre.
3.Impact on perIormance: We propose to test a number oI hypotheses relating to the
puo||c seclor ard pr|val|zal|or. 0ur pr|rc|pa| sources ol dala W||| oe: corpary arrua| reporls, lre arrua| reporls ol lre
8ureau ol Puo||c Erlerpr|ses, ard lre dalaoase or ||sled corpar|es,Prowess, supp||ed oy ar |rdeperderl agercy,
lre Cerlre lor Vor|lor|rg lrd|ar Ecorory, oased |r Vuroa|. Tre rypolreses lo oe lesled are ||sled oe|oW.
Hypothesis 1: PSUs in India are less proIitable compared to the private sector
Tesl: Tre aoove rypolres|s |s gerera||y oased or a corpar|sor ol prol|lao|||ly ol lre puo||c seclor |r lre aggregale
W|lr lral |r lre pr|vale seclor. 3ucr corpar|sors oller do rol corlro| lor laclors sucr as s|ze, |rduslr|a| seclor, elc. we
W||| lesl lre rypolres|s, corlro|||rg lor sucr laclors, lor lre per|od s|rce ecoror|c ||oera||zal|or oegar (1991- 99), lor a
corparao|e per|od oelore ||oera||zal|or, ard lor lre lWo per|ods coro|red as We||.
Hypothesis 2: PSUs are less eIIicient compared to the private sector
Test: We will compare measures oI eIIiciency in the public and private sectors.This
comparison will again be made Ior the pre- and post- liberalization periods.
Hypothesis 3: Privatization has improved proIitability, eIIiciency, employment, capital
spending, output and net taxes in the privatized Iirms
Tests: As this hypothesis is central to the study, we propose three diIIerent tests.
(|) F|rsl, We W||| exar|re Wrelrer |ey pararelers (oul||red oe|oW) urder eacr ol lre reads- prol|lao|||ly, ell|c|ercy,
erp|oyrerl, cap|la| sperd|rg ard rel laxes- rave crarged s|gr|l|carl|y lo||oW|rg pr|val|zal|or lor our sarp|e.
(||) Tre aoove lesl |s oper lo lre cr|l|c|sr ol se|ecl|or o|as: |l |s poss|o|e lral l|rrs oesl |||e|y lo oerel|l lror
pr|val|zal|or Were croser |r lre l|rsl p|ace. Voreover, olrer laclors sucr as deregu|al|or |r lre ecorory r|grl rave
corlr|ouled lo super|or
perlorrarce |r lre posl-pr|val|zal|or per|od. To dea| W|lr lrese |ssues, We W||| l|rsl corpare lre perlorrarce ol
pr|val|zed l|rrs W|lr P3us rol pr|val|zed; rexl, lre perlorrarce beIore privatization oI the privatized Iirms will be
compared with PSUs rol pr|val|zed. we W||| lesl lo see |l lrere are ary s|gr|l|carl d|llererces |r perlorrarce posl-
pr|val|zal|or lral were not there oelore pr|val|zal|or.
(|||) we W||| a|so corpare perlorrarce adjusled lor |rduslr|es. we W||| do lr|s oy us|rg a corlro| group ol ||sled
corpar|es |r lre pr|vale seclor |r lre sare |rduslry lor eacr pr|val|zed l|rr. we W||| esl|rale lre d|llererce |r
pararelers lor lre P3u ard lre corlro| group oelore pr|val|zal|or ard aller pr|val|zal|or ard see |l lre |rduslry-
adjusled ral|os sroW ary d|llererce
Hypothesis 4: Improvement in perIormance aIter privatization depends on the degree oI
divestment
Tesl: lrprovererl |r perlorrarce posl-pr|val|zal|or W||| oe corpared, al d|llererl |eve|s ol d|veslrerl, W|lr perlorrarce
oelore pr|val|zal|or see Wrelrer lre degree ol d|veslrerl corlr|oules lo a slal|sl|ca||y s|gr|l|carl |rprovererl |r
perlorrarce posl- pr|val|zal|or
PerIormance measures to be tested are :
(i) ProIitability: operating income/sales, operating income/Iixed assets, net
income/sales, net income/Iixed assets
(ii) Operating eIIiciency: cost per unit, log (sales/Iixed assets), log (sales/employees),
operating income/employees
(iii) Employment: log (employees)
(iv) Capital spending: log (Iixed assets), investment/sales, investment/employees,
|rveslrerl/l|xed assels, |og (l|xed assels/ erp|oyees)
(v) 0ulpul: |og (rea| sa|es)
(v|) Nel laxes: rel laxes/sa|es, rel laxes
4.Explaining the impact oI privatization: In attempting to explain the impact oI
privatization, we propose to test the Iollowing hypotheses:
Hypothesis 1: Changes in perIormance are to be explained by use oI market power by
Iirms.
Test: We propose to compare perIormance in competitive sectors with those in non-
corpel|l|ve seclors. 0re v|eW aooul pr|val|zal|or |s lral |l |s lre ror-corpel|l|ve seclors lral slard lo reg|sler |arge
ga|rs |r prol|lao|||ly; a|so lral groWlr |r oulpul, erp|oyrerl ard |rveslrerl |r lrese seclors |s |oWer lrar |r
corpel|l|ve seclors oecause lre lorrer |ac| lre |rcerl|ve lo reslruclure aggress|ve|y.
Hypothesis 2: Privatization transIers wealth Irom workers to shareholders
Tests: (i) : Compare real wages oI workers beIore and aIter privatization
(||): Eva|uale corlr|oulo|r ol sav|rgs lror Wor|er |ayolls lo prol|lao|||ly
lypolres|s 3: 0eregu|al|or exp|a|rs crarges |r perlorrarce aller pr|val|zal|or
Tesl: we W||| lesl lr|s rypolres|s oy rurr|rg regress|ors Wrose deperderl var|ao|es
Wou|d oe lrechange, lo||oW|rg pr|val|zal|or, |r lre |rduslry- adjusled pararelers del|red aoove. As |rdeperderl
var|ao|es, We use durry var|ao|es lor |rd|calors ol regu|al|or (sucr as pr|ce/quarl|ly corlro|s lor a g|ver |rduslry ard
oarr|ers lo lrade |r lral |rduslry) ard a|so lor ralure ol lre |rduslry (o||gopo||sl|c or corpel|l|ve). Tre coell|c|erls ol lre
durry var|ao|es lor regu|al|or srou|d le|| us Wrelrer lre degree ol deregu|al|or |s a raler|a| laclor. Tre coell|c|erl
lor lre durry var|ao|e lor |rduslry slruclure srou|d re|p us cross-crec| lre corc|us|or regard|rg rypolres|s (1)
aoove.
5.Mechanisms oI corporate governance : lr lre |rduslr|a| ecoror|es, recrar|srs ol goverrarce, sucr as
la|eovers ard |rsl|lul|ora| ror|lor|rg, car oe oe sale|y assured. Tr|s |s rol lrue ol a corlexl sucr as lrd|a's. lrdeed,
ore correrl reard lror lore|gr |rveslors |s lral, Wralever lre|r olrer srorlcor|rgs, P3us derorslrale super|or
goverrarce lo lre pr|vale seclor. Leav|rg as|de corporale goverrarce, a rore lurdarerla| requ|s|le lor pr|vale seclor
perlorrarce, |aW erlorcererl, |s qu|le |ax |r lrd|a. lr la||rg a v|eW or pr|val|zal|or |r lrd|a, |l |s recessary, lrerelore,
lo oe c|ear aooul rallers re|aled lo lre slruclure ol oWrersr|p |r lre pr|vale seclor, lre slruclure ard ro|e ol doresl|c
l|rarc|a| |rsl|lul|ors as ror|lors, ard recrar|srs lor goverrarce deve|oped lor pr|val|zal|or e|seWrere ard lrose
proposed |r lrd|a. Trese W||| oe rev|eWed |r our sludy.


When India became Iree, our top planners thought that socialism could be ushered in by
centralizing production and setting up a large number oI public sector units catering to the
varied needs oI the people. Huge investments were, thereIore, made in public sector units and
a number oI autonomous or semi-government corporations were set up in the country. With
the means oI production and distribution under government control, it was thought, the
economy oI the country could be placed on a sound Iooting.
Things, however, did not work out the way they should have. While public sector units
perIormed well in some areas like water supply, deIence services, postal and communication
services, steel, oil and thermal power generation, they Iailed in several other areas. More than
hundred public enterprises, Ior example, produced a loss oI Rs. 3,06.o8 crore during the year
1990-91. The outstanding debt burden in diIIerent sectors also touched new heights in the
year 1992 (coal 281 crore, Iron and Steel-3200 crore, Electricity-1081 crore, sugar-755 crore
and so on). External debt burden oI the country increased up to Rs. 2,97,413 crore in the year
1991-92.
In such a sad situation, it became impossible Ior the country to bail out this large number oI
sick public sector units by giving more Iinancial support. The only way to bring the loss
making public sector units into proIit was to privatise them in a phased manner.
Many countries like the U.S.A., the United Kingdom, Germany, Korea and France had
already tried privatization under similar circumstances with wonderIully encouraging results.
India, thereIore, took the cue and came out with a liberalized trade and economic policy.
Privatization means transIerring oI power Irom the government to the private individuals. It is
based on the principle oI least governmental interIerence` and maximum private
responsibility.` In order to convert public sector units into private enterprise, the government
decided to sell, in phases, some selected P.S.U shares to private entrepreneurs or to the
general public through capital market. In some cases, the government thought oI disinvesting
the P.S.U .s in the Iorm oI privatization oI the management and the ownership.
The government is aware that it has to establish legal and institutional Irame-work to make
the market economy enIorce competition and attract investment. The government has also
opened up trade with the outside world together with currency control to ensure that domestic
prices are related to the world market price.
The private managed enterprises, it is expected, will show better results because oI high
managerial skills. It also brings about a social control over business, timely supply oI goods
and services and brings in belter competition. About 50 countries in the world have already
taken to the process oI privatization.
The government oI India has recently taken a big leap Iorward by signing the G ATT
agreement. This agreement that has Iound Iavour with more than 125 countries, places the
country in the open world market in respect oI trade and commerce. We may have to Iace
tough competition and initial problems but we are certainly on the road to a respectable place
in the world market. We are not going to lag behind in the matter oI quality or quantity oI
production. It is expected that the new liberal policy oI the government oI India would show
better results in years to come.


Later reforms in liberalization
O ALal 8lharl va[payees admlnlsLraLlon surprlsed many by conLlnulng reforms when lL was aL
Lhe helm of affalrs of lndla for flve years
20

O 1he va[payee admlnlsLraLlon conLlnued wlLh prlvaLlzaLlon reducLlon of Laxes a sound flscal
pollcy almed aL reduclng deflclLs and debLs and lncreased lnlLlaLlves for publlc works
O 1he ul governmenL aLLempLed a progresslve budgeL LhaL encouraged reforms buL Lhe 1997
Aslan flnanclal crlsls and pollLlcal lnsLablllLy creaLed economlc sLagnaLlon
O Lconomlc and LechnologyrelaLed sancLlons have repeaLedly noL proved Lo be very effecLlve
ln compelllng naLlons Lo change Lhelr soverelgn declslons made ln enllghLened selflnLeresL
lndla faced severe sancLlons afLer okhranl (flve nuclear LesLs on May 11 and 13 1998 aL
Lhe okhran range ln 8a[asLhan ueserL)and sancLlons LhaL were more comprehenslve were
lmposed followlng okhranll 1here were dlre predlcLlons of Lhe collapse of Lhe economy
doubledlglL lnflaLlon eLc
O AfLer flve years mosL of Lhe sancLlons have been llfLed and Lhe lndlan economy ls conLlnulng
Lo grow aL an accepLably saLlsfacLory raLe 1he anLlclpaLed growLh raLe for 200304 ls 60
1hough lndla's Cross naLlonal lncome ls only $4774 bllllon by convenLlonal calculaLlons lL
LranslaLes lnLo $2913 bllllon purchaslng power parlLy () accordlng Lo Lhe laLesL world
developmenL lndlcaLors ln Lerms lL ls Lhe worlds fourLh largesL economy behlnd only
Lhe uS Chlna and !apan

What Is FIscaI PoIIcy!
FIscal polIcy Involves the use of government spendIng, taxatIon and borrowIng to Influence both
the pattern of economIc actIvIty and also the level and growth of aggregate demand, output and
employment. A rIse In government expendIture, or a fall In the burden of taxatIon, should Increase
aggregate demand and boost employment. The sIze of the resultIng fInal change In equIlIbrIum
natIonal Income Is determIned by the multIplIer effect. The larger the natIonal Income multIplIer,
the greater the change In natIonal Income wIll be.
However fIscal polIcy Is also used to Influence the supplysIde performance of the economy. For
example, changes In fIscal polIcy can affect competItIve condItIons IndIvIdual markets and
IndustrIes and change the IncentIves for people to look for work and for companIes to Invest and
engages In research and development. Covernment capItal spendIng on transport Infrastructure and
publIc sector Investment In educatIon and health can also have a dIrect but unpredIctable effect In
the long run on the competItIveness and costs of busInesses In every Industry.
Covernment SpendIng
Covernment spendIng can be broken down Into three maIn categorIes:
4 CeneraI government expendIture consIsts of the combIned capItal and current spendIng
of central government IncludIng debt Interest payments to holders of government debt
4 CeneraI government fInaI consumptIon Is government expendIture on current goods and
servIces excludIng transfer payments
4 %ransfer payments - transfers are transfers from taxpayers to benefIt recIpIents through
the workIng of the socIal securIty system. The total welfare bIll now exceeds f140 bIllIon
per year
Covernment SpendIng and FIscaI PoIIcy DbjectIves
The Treasury has outlIned the maIn goals of fIscal polIcy to be the followIng:
4 6uIty concerns: To ensure that government spendIng and taxatIon Impact faIrly wIthIn
and across generatIons - fIscal polIcy should be equItable to current and future generatIons
4 FundIng government spendIng: To meet the government's spendIng and tax prIorItIes
wIthout a damagIng rIse In the burden of government debt
4 %he benefIt prIncIpIe: ThIs prIncIple seeks to ensure that those who benefIt from publIc
servIces such as the benefIts from educatIon, health and transport also meet as far as
possIble the costs of the servIces they consume
4 acroeconomIc stabIIIty: FIscal polIcy In the UK Is now desIgned to support monetary
polIcy In 'smoothIng the path of aggregate demand over the economIc cycle' and In
contrIbutIng to an
4 envIronment of sustaInable growth and stable InflatIon - thIs Is the maIn macroeconomIc
objectIve of fIscal polIcy. Cordon 8rown has Introduced two fIscal rules to support thIs
objectIve
4 Ith the total level of government spendIng rIsIng above f480 bIllIon In 2004, much concern
has been gIven to the actual results from thIs level of publIc sector spendIng. n partIcular
the sIze of the state sector has been crItIcIsed by those who claIm that publIc sector
spendIng Is open to a hIgh level of waste and lack of effIcIency. The medIa often talk of the
need for the publIc servIces to "delIver" value for money In terms of meetIng people's
needs and wants.
4 $uccessIve governments have strIven to Improve the effIcIency wIth whIch publIc servIces
are provIded. ThIs has Included the wIdespread use of contractIng-out and competItIve
tenderIng where prIvate sector busInesses compete wIth the publIc sector for the contracts
to provIde servIces such as NH$ caterIng, laundry and cleanIng servIces, together wIth
maIntenance of the road network and aspects of the prIson servIce. The government has
also Introduced vaIue for money audIts for each major government spendIng department
together wIth a huge and growIng number of performance targets.
We decompose flscal pollcy ln Lhree componenLs l) responslveness ll) perslsLence and lll) dlscreLlon
uslng a sample of 132 counLrles our resulLs polnL ouL LhaL flscal pollcy Lends Lo be more perslsLenL
Lhan Lo respond Lo ouLpuL condlLlons We also found LhaL whlle Lhe effecL of crosscounLry
covarlaLes ls poslLlve (negaLlve) for dlscreLlon lL ls negaLlve (poslLlve) for perslsLence Lhereby
suggesLlng LhaL counLrles wlLh hlgher perslsLence have lower dlscreLlon and vlce versa ln parLlcular
whlle governmenL slze counLry slze and lncome have negaLlve effecLs on Lhe dlscreLlon componenL
of flscal pollcy Lhey Lend Lo lncrease flscal pollcy perslsLence

Contents


Chapter 1: Indias key challenges to sustaining high growth
The Indian economy has undergone a remarkable transformation over the past two
decades. The growth rate of average incomes has increased from 1 per cent prior to
1980 to 7% by 2006. Between 1999 and 2004, the absolute number of people living
under the national poverty line has fallen for the first time since Independence. Faster
growth has been brought about by a paradigm shift in economic polices that has opened
the economy to foreign trade and markedly reduced direct tax rates and government
influence over most investment decisions. Despite this favourable performance, there is
still much room for improving policy settings to further raise growth potential. This
chapter first looks at Indias past reforms and the main sources of its improved growth
performance and then identifies a number of key challenges that could make growth
faster, more sustainable and more even across the country: i) making goods and service
markets more competitive; ii) enhancing employment in the formal sector through
broadranging labour market reforms; iii) further liberalising the banking sector; iv)
improving public finances to achieve more rapid growth through a more ambitious fiscal
consolidation, reducing subsidies and further reducing tax distortions; v) improving
infrastructure and facilitating urbanisation by involving private players more intensely;
and vi) upgrading the quality of educational outcomes through institutional reforms.

Chapter 2: Indias growth pattern and obstacles to higher growth
Indias growth performance has improved significantly over the past 20 years, but it has
been uneven across industries and states. While some service industries, notably the
information and communications technology (ICT) sector, have become highly
competitive in world markets - yielding considerable gains for employees and investors -
manufacturing industries have lagged and improved their performance only recently. A
divergence in performance has taken place, with firms in those states and sectors with
the best institutions gaining, and those in the more tightly regulated states and sectors
falling further behind. As a result, the competitive landscape is uneven across sectors
and states and a high degree of concentration continues in different industries. While
this is partly the result of the legacy of licensing, change has been politically difficult,
making it harder for the manufacturing sector than for the service sector to expand. The
need for further institutional reforms is urgent, focusing on product and labour market
regulations at the central and state levels.

Chapter 3: Reforming Indias product and service markets
The degree of competition in product markets has been found to be an important
determinant of economic growth in both developed and developing countries. This
chapter uses the OECDs indicators of product market regulation to assess the extent to
which the regulatory environment in India is supportive of competition in markets for
goods and services. The results indicate that although liberalisation has improved the
regulatory environment to international best practices in some areas, the overall level of
product market regulation is still relatively restrictive. In addition, estimating the product
market regulation indicators for 21 Indian states shows that the relatively more liberal
states have higher labour productivity, attract more foreign direct investment, and have
a larger share of employment in the private formal sector in comparison to the relatively
more restrictive states. The chapter goes on to review various aspects of Indias product
market regulation and suggests a number of policy initiatives that would improve the
degree to which competitive market forces are able to operate.

Chapter 4: Improving the performance of the labour market
Over the past decade, labour market outcomes have improved in India, with net
employment rising markedly for the economy as a whole. However, these gains have
arisen primarily in the unorganised and informal sectors of the economy, where
productivity and wages are generally much lower than in the formal organised sector. It
is only Indias organised sector that is subject to labour market regulation, and here
employment has fallen. The role of employment protection legislation in affecting
employment outcomes is controversial both in the OECD area and in India. This chapter
looks at the impact of employment protection legislation and related regulation on the
dynamics of employment in the organised sector of the economy, using newly
constructed measures of national regulation and state labour reforms. We find that while
reforms have taken some of the bite out of core labour laws, more comprehensive
reforms are needed to address the distortions that have emerged.

Chapter 5: Reforming the financial system
This chapter examines the performance of Indias financial sector and compares its
structure to that of other emerging economies. The financial sector went through a
period of considerable re-organisation during the last 15 years. New regulators were
introduced for all sectors of the market and this has boosted the development of highly
efficient equity and commodity markets. The health of the banking sector has also
improved and competition within the sector has increased. Nonetheless, costs remain
high in a sector that is still dominated by public sector banks. The corporate bond
market is still underdeveloped, as is the foreign exchange market. Considerable scope
exists for improving efficiency in the financial sector by opening it to more foreign direct
investment and removing a number of regulatory constraints that impede the
development of a full set of financial markets.

Chapter 6: Improving the fiscal system
This chapter examines areas of government spending, taxation and fiscal federalism
where further reforms are desirable to reduce economic distortions and improve the
provision of public services. As to government spending, it finds that a large share is
used to subsidise commercial undertakings, agriculture and food distribution and that
there is much room to improve the quality of spending and target it better to reduce
poverty. On taxes, which have undergone major reforms since the early 1990s, it points
to the large number of loopholes and suggests that a broadening of the tax bases would
allow further reductions in tax rates and make the system simpler and more efficient.
Reforms of indirect taxes should focus on creating a common market within India so that
goods can move between states without border controls. Indias federal structure has led
to a well-developed system of tax-sharing and transfers, both through constitutionally
empowered bodies and delivered through the annual budget. Overall, this transfer
system has worked well; moving resources towards the poorest states, but the system
has become very complex and, in the past, weakened fiscal discipline. Furthermore, it
has not been able to create an effective local government system; this would be
important for improving accountability and responsiveness to citizens needs as three-
quarters of the population live in states with over 50 million inhabitants.

Chapter 7: Removing infrastructure bottlenecks
With high rates of economic growth and low public sector investment, Indias
infrastructure is in short supply and potentially a major constraint on future growth. To
alleviate fiscal constraints and improve infrastructure productivity, the government is
turning increasingly to the private sector to finance and run infrastructure projects. In
some infrastructure sectors in which the regulatory environment is conducive to private
sector involvement, performance has improved significantly. However, although
infrastructure policy is moving in the right direction in some sectors, there are still a
number of ways in which the regulatory environment could be improved further. This
chapter outlines a range of policy initiatives that would increase private sector
participation and improve infrastructure service delivery to international standards. It
begins by discussing the role of public-private partnerships in the provision of
infrastructure services before moving on to review the regulatory environment in a
number of infrastructure sectors with a focus on regulatory settings that constrain
competition.

Chapter 8: Improving human capital formation
The provision of high-quality education and health care to all of the population is
considered a core element of public policy in most countries. In India, the government is
active in both education and health but the private sector also plays an important role,
notably for heath, and to a lesser extent in education. At present, the quality and
quantity of the outputs from education, and also form public health care, are holding
back the process of economic development. Steps are being taken to draw more children
into primary education and the chapter considers ways to keep children in school. The
chapter also considers institutional changes that may help to improve the performance of
the educational system and so boost human capital formation.
Characteristics oI ReIorms
Gradual and Step by Step Approach
not a Big Bang or Shock Therapy
Approach
WDemocratic and political constraint
WStrong emphasis on 'human Iace
Weast sacriIice made by people
WNo write-oII or rescheduling oI
external debt
Agency constraint and No
backtracking
Nationality constraint
Ownership oI reIorms
2.1 Motivation Ior Fiscal
ReIorms
WLarge l|sca| del|c|ls ard auloral|c
rorel|zal|or ol del|c|ls |ead|rg lo r|gr
|rl|al|or ard r|gr |rleresl rales ard
croWd|rg oul pr|vale |rveslrerl.
Wl|gr ard |rral|ora| lax rales, r|gr lar|ll
Wa||s |ed lo |rduslr|a| |rell|c|ercy, |ac| ol
corpel|l|veress, r|gr cosl ecorory ard
ror-opl|ra| a||ocal|or ol resources.
WLarge var|arce ard ru|l|p||c|ly ol lax
rales or lre oas|s ol erd-uses |ed lo
corp||caled ard Wea| lax adr|r|slral|or
ard rerl see||rg.
2.2 Motivation Ior Fiscal ReIorms
ow buoyancy and elasticity oI both
direct and indirect taxes.
Complicated tax structure, legal laws,
rules and procedures.
WLoW corp||arce rale, r|gr degree ol
lax evas|or, |oW adr|r|slral|ve
ell|c|ercy.
WNarroW lax oase ard grealer
deperderce or |rd|recl laxes |ead|rg
lo |requ|ly
WCrarge |r lre ro|e ol lre goverrrerl lror operalor lo
regu|alor, supp||er ol goods ard serv|ces lo lac|||lalor
2.3 Motivation Ior Fiscal
ReIorms
iberalization oI trade, industry, investment
Emphasis oI social services and saIety net in the context
oI so-called PG (liberalization, privatization and
globalization).
Public sector enterprises reIorms and disinvestment oI
government equity.
Integration oI monetary, exchange rate, regulatory and
other policies.
Globalization and Regionalization oI economic activities.
Impact oI WTO, SAARC, BTAs and FTAs.
2.4 Motivation Ior Fiscal
ReIorms
W0erograpr|c crarge (soc|a| secur|ly
ard rea|lr care lor ser|or c|l|zers ard
relorrs |r pers|ors, prov|derl ard
|rsurarce lurds).
WF|sca| ledera||sr, Cerlre-slale
re|al|ors, decerlra||zal|or, grass rool
p|arr|rg, Parcrayal| Raj.
To tackle environment degradation
through Iilth tax /environment tax.
IMF/ World Bank/ ADB conditionalities
Ior reIorms and Iiscal sustainability.
3.1 Major Fiscal ReIorms
Reduction oI Iiscal deIicit
Fiscal Responsibility and Budget
Management Act 2003
W3|rp||ly|rg ru|es ard procedures W3lrerglrer|rg lax
adr|r|slral|or Ww|der|rg lax oase & errarc|rg
buoyancy
Rationalisation and Reduction oI both
direct and indirect tax rates
3.2 F|sca| Respors|o|||ly ard
8udgel Varagererl (FR8V) Acl
2003
FRBM Act 2003 and FRBM Rules 2004 came
into Iorce w.e.I. 5 July 2004.
WTre Acl rardales lre Cerlra| govl lo
e||r|rale reverue del|c|l oy Varcr 2009 ard
lo reduce l|sca| del|c|l lo 3 ol 00P oy Varcr
2008.
Wurder secl|or Z ol lre Acl, lre cerlra| govl |s
requ|red lo |ay oelore oolr rouses ol
Par||arerl Ved|ur Terr F|sca| Po||cy
3lalererl, F|sca| Po||cy 3lralegy 3lalererl
ard Vacro Ecoror|c FrareWor| 3lalererl
a|org W|lr lre Arrua| F|rarc|a| 3lalererl ard
0erard lor 0rarls
3.3 FRBM Rules 2004
Reduction oI revenue deIicit by 0.5 oI GDP
or more every year.
Reduction oI gross Iiscal deIicit by 0.3 oI
GDP or more every year.
WNo assurpl|or ol add|l|ora| deol exceed|rg
9 ol 00P lor 2001-05 ard progress|ve
reducl|or ol lr|s ||r|l oy al |easl ore
percerlage po|rl ol 00P |r eacr suosequerl
year.
3.4 FRBM Rules 2004
No guarantee in excess oI 0.5 oI GDP in
any Iinancial year.
WFour l|sca| |rd|calors lo oe projecled lor lre
red|ur lerr. Trese |rc|ude reverue
del|c|l, l|sca| del|c|l, lax reverue ard lola|
deol as ol 00P.
Greater transparency in the budgetary
process, rules, accounting standards and
policies having bearing on Iiscal indicators.
Quarterly review oI the Iiscal situation.
3.5 FRBM Rules 2004
WTre ru|es rardale lre Cerlra| 0overrrerl
lo la|e appropr|ale co||ecl|ve acl|or |r lre
case ol reverue ard l|sca| del|c|ls
exceed|rg 15 ol lre oudgel esl|rales, or
lola| ror-deol rece|pls la|||rg srorl ol 10
ol lre oudgel esl|rales al lre erd ol ra|l
year ol lre l|rarc|a| year.
The rules also prescribe the Iormats Ior the
mandatory statements.
3.8 Recommendations oI the
TwelIth Finance Commission (1)
Fiscal deIicit to GDP Ior the Centre and
States be targeted at 3.
Revenue deIicit I the Centre and States be
reduced to zero by 2008-09.
State`s recruitment policy must ensure that
salary bill as oI revenue exp, net oI interest
payments, is within 35.
Each State must enact Fiscal Responsibility
bill to reduce Iiscal deIicit to SDP ratio to 3
and revenue deIicit to zero by 2008-09.
3.9 Recommendations oI the
TwelIth Finance Commission (2)
States` share in net proceeds oI shareable
central taxes be increased Irom 29.5 to
30.5.
Indicative amount oI overall transIers to
States be Iixed at 38 oI the Centre`s gross
revenue receipts.
A grant oI Rs.20,000 crore Ior Panchayati Raj
lrsl|lul|ors ard Rs.5,000 crore lor uroar |oca|
ood|es lo oe g|ver lo 3lales lor lre per|od
2005-2010.
4.1 Progress o F sca
ReIorms
Status in June 1991
(a)Budget support to
PSEs: 1.5 oI GDP
(b) Price and purchase
preIerence Ior PSEs
(c )PreIerential treatment
Ior bank credits
(d) No hard budget
corslra|rls lor P3Es
(e) No d|s|rveslrerl
(l)3lCA does rol |rc|ude
sick PSUs
Status in January 2007
(a) Support reduced to
0.5 oI GDP
(o)No pr|ce prelererce,
oul purcrase
prelererce ex|sls
(c )No preIerential treat-
rerl lor oar| cred|ls (d) V0us slrerglrered (e)
0|veslrerl a||oWed (l)3lCA app||cao|e lor
PSUs


4.2 Fiscal DeIicit (as oI
GDP)
Status in 1990-91
Cerlra| 0ovl
F|sca| 0el|c|l .
Reverue del|c|l 3.3
Pr|rary del|c|l 2.8
3lale goverrrerls
F|sca| 0el|c|l 3.3
Reverue del|c|l 0.9
Pr|rary del|c|l 1.8
Status in 2005-06
Cerlra| 0ovl
F|sca| 0el|c|l 1.1
Reverue del|c|l 2.
Pr|rary del|c|l 0.5
3lale goverrrerls
F|sca| 0el|c|l 3.3
Reverue del|c|l 0.5
Pr|rary del|c|l 0.Z
4.3 Fiscal DeIicit as oI GDP
Status in 1990-91
0erera| goverrrerl
F|sca| 0el|c|l 9.1
Reverue del|c|l 3.3
Pr|rary del|c|l 2.8
Monetization oI budget
deIicit
WCorlro| or |rleresl rale
or goverrrerl
secur|l|es
Status in 2005-06
0erera| goverrrerl
F|sca| 0el|c|l Z.3
Reverue del|c|l 3.1
Pr|rary del|c|l 1.2
No automatic
monetization
W0ovl secur|l|es are
aucl|ored ard so|d al
rar|el pr|ces
4.4 Progress oI Fiscal
ReIorms
Status in June 1991
Public debt as
percentage oI GDP
(a) Central govt 61
- Internal 50
- External 12
(b) States
19
- Internal 19
(c )General govt 68
- Internal 56
- External 12
Status in March 2006
Public debt as
percentage oI GDP
(a) Central govt 66
- Internal 60
- External 6
(b) States
33
- Internal 33
(c )General govt 99
- Internal 93
- External 6
4.5 Progress oI Fiscal
ReIorms
Status in June 1991
Fiscal DeIicit was
Iinanced by:
(a) RBI Ad Hoc TBs at
4.6 interest
(b) Banks through SR
holdings at 38.5
ard CRR 25
(c ) Var|el oorroW|rgs
(d) Puo||c lurds
(e) Exlerra| deol
Status in January 2007
(a) Ad hocs replaced by
WMAs at market rate
(b) SR reduced to 25
and CRR 5
(c)Govt. securities are sold
at market rates
(d) Reduction oI interest
rates Ior public Iunds
(e) ess dependence on
External debt
4.6 Progress oI Fiscal
ReIorms
Status in June 1991
High duty & tax rates
Maximum rates
Exc|se duly 110 lrporl duly 100 lrcore lax 51
Corporate taxes:
Domestic COs. 49
and 54
Foreign COs. 65
Status in January 2007
Duties & taxes reduced
Maximum rates
Excise duty 16 Cenvat 16
SED
Import duty 12.5
Income tax 30
Corporate taxes:
Domestic COs. 30 10
surcharge
Foreign COs. 402.5
surcharge
4.7 Progress oI Fiscal
ReIorms
Status in June 1991
WNo serv|ce lax
WNo V|rA|lerral|veTax
WNo lrarsacl|ors lax
WNo lar|ll va|ue
W0|v|derd lax or oolr
|rd|v|dua|s & Cos.
WEx|slerce ol g|ll lax
WL|r|led cases ol lax-
holidays
No Iringe beneIit tax
(FBT)
Status in January 2007
W3erv|ce lax _12
WVAT |rlroduced
WTrars. lax _0.0225
increase in 2006-07
TariII value introduced
Dividend tax on only
companies
GiIt tax abolished
Tax holidays widened to
many inIrastructure
FBT imposed
4.8 Progress oI Fiscal
ReIorms
Status in June 1991
No MRP linked
excise duties
No estimated
income scheme Ior
retail traders
No presumptive tax
No state level VAT
Status in January 2007
Concept oI MRP introduced
Ior consumer goods
Estimated income scheme
introduced Ior retail traders.
Presumptive income tax
scheme introduced
State level VAT introduced
weI April 05
4.9 Related Financial
ReIorms
Status in June 1991
WCRR 25
W3LR 38.5
W8ar| Rale 12
WPLR aoove 21
W0epos|l ard |rleresl
rates are controlled
Capital issues and
prices determined by
the CCI in MOF
Status in January 2007
WCRR 5
W3LR 25
W8ar| rale
WPLR 11 lo 11.5
W0epos|l ard |rleresl
rates are liberalised
WTre oll|ce ol CCl
aoo||sred ard 3E8l
eslao||sred
4.10 Related Financial
ReIorms
Status in June 1991
Indian Iirms not
a||oWed lo ra|se lurds
lror lore|gr sloc|
excrarges
PortIolio investment
oy lore|gr |rveslors |r
lrd|ar corpar|es rol
a||oWed
Foreigners not
allowed to buy G-secsStatus in January 2007
Wlrd|ar l|rrs a||oWed lo
ra|se lore|gr lurds oy
00R, A0R, FCC8s &
ollsrore lurds
WFlls, NRls ard 0C8s
a||oWed lo ouy sloc|s |r
lrd|ar rar|els s.l.
overa|| ||r|l ol 19
FIIs/ NRIs/ OCBs allowed
to buy G-secs
5.1 Second Generation Fiscal
ReIorms
Coordinating state level reIorms
Accelerated privatisation
Development oI debt and bond markets
ReIorms in Insurance, Provident and Pension
Iunds
Thrust on state provision oI basic needs
Rationalisation oI user charges Ior public utilities
Rationalisation oI subsidies
6. Concluding Remarks
Transparency and accountability oI
budget Iormulation
Multi-year budget and macro-economic
Iorecast
Adequacy and sustainability oI policies
Willingness to pay by stakeholders
Strengthening institutional set up

Fiscal ReIorms in India since1991
Why reIorms were needed?

arge Iiscal deIicits and automatic monetization oI deIicitsleading to
high inIlation and high interest rates and crowdingout private
investment
.

High and irrational tax rates, high tariII walls led to
industrialineIIiciency

Complicated tax structure, legal laws, rules and procedures

Change in the role oI the government Irom operator toregulator,
supplier oI goods and services to Iacilitator

iberalization oI trade, industry, investment

Globalization and Regionalization oI economic activities

aract0ristics of R0forms

Gradual and Step by Step Approach

Democratic and political constraint

east sacriIice made by people

No write-oII or rescheduling oI external debt

Agency constraint and No backtracking

Nationality constraint

Ownership oI reIorms
Broad View on the Outcome oI Fiscal ReIorms

D0ficit in/icators

While there was some reduction in Iiscal deIicit in the Iirst halI oI the 1990s,
progress was reversed in the late 1990s mainly due to the impact
oI implementation oI the FiIth Pay Commission`s awards.

Iiscal consolidation underway has been some qualitative progress, as reIlected
in the reduction in the proportion oI revenue deIicit to gross Iiscal deIicit.

Outstan/ing Liabiliti0s

The high level oI Iiscal deIicits both at the Centre and the States led to debt
accumulation over the period resulting in a rise in the debt to GDP ratio.

Contingent liabilities witnessed some decline in the recent years under
the FRBM Act, the annual increase in the stock oI contingent liabilities oI the
Central Government is limited to a ceiling oI 0.5 per cent oI GDP

The Fiscal Responsibility and Budget Management
(FRBM)Act, 2003

Targeting long term development by achieving suIIicient
revenue surplus and removing Iiscal impediments

The central government should take appropriate
measures to reduce the Iiscal deIicit and revenue deIicit so
as to eliminate revenue deIicit by 31stoI March, 2008 and
thereaIter build up adequate revenue surplus

The revenue deIicit as a ratio oI GDP should be brought
down by 0.5 per cent every year and eliminated by 2007-08;

The Iiscal deIicit as a ratio oI GDP should be reduced
by 0.3 per cent every year and brought down to 3 per
cent by 2007-08;

The Union Government shall not give guarantee to
loans raised by PSUs and State governments Ior more
than 0.5 per cent oI GDP in the aggregate;

The Union Government should place three documents
along with the budget, namely, the Macroeconomic
Framework Statement, the Medium Term Fiscal Policy
Statement and the Fiscal Policy Strategy Statement
D0ficit an/ Growt
]
A high level oI Iiscal deIicit tends to have a negativeimpact on real
GDP growth through crowding out eIIects and/or rise in interest
rates in the economy.
]
ow Iiscal deIicits also enable more eIIective monetary policy.
%ax-GDP Ratio
]
Decline in the gross tax-GDP ratio oI the Central Govt. Irom 10.3 per
cent in 1991-92 to 9.4 per cent in 1996-97 and Iurther to a low oI 8.2
per cent in 2001-02, attributed to the initial eIIects oI the reduction in
tax rates.
]
The distorting impact oI high and varied indirect taxes on overall
resource allocation has been reduced considerably, enabling increased
economy wide economic eIIiciency
]
Improved corporate results during years have led to signiIicant rise in
collection oI corporate income tax

Fiscal D0ficit an/ Public S0ctor Savings
]
The reduction in Iiscal deIicits has helped in turning around savings
and investments in recent years.
]
Implementation oI rule-based Iiscal reIorms has helped in enabling
the turnaround in the public sector savings, in turn, gross domestic
savings along with the substantial increase in private corporate sector
savings
onetary poIicy
on0tary policy is the process by which the monetary authority oI a country controls the
supply oI money, oIten targeting a rate oI interest Ior the purpose oI promoting economic
growth and stability.
|1|
The oIIicial goals usually include relatively stable prices and low
unemployment. Monetary theory provides insight into how to craIt optimal monetary policy.
Monetary policy is reIerred to as either being expansionary or contractionary, where an
expansionary policy increases the total supply oI money in the economy more rapidly than
usual, and contractionary policy expands the money supply more slowly than usual or even
shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a
recession by lowering interest rates in the hope that easy credit will entice businesses into
expanding. Contractionary policy is intended to slow inIlation in hopes oI avoiding the
resulting distortions and deterioration oI asset values.
Monetary policy diIIers Irom Iiscal policy, which reIers to taxation, government spending,
and associated borrowing.
|2|

berbiew
Monetary policy rests on the relationship between the rates oI interest in an economy, that is,
the price at which money can be borrowed, and the total supply oI money. Monetary policy
uses a variety oI tools to control one or both oI these, to inIluence outcomes like economic
growth, inIlation, exchange rates with other currencies and unemployment. Where currency is
under a monopoly oI issuance, or where there is a regulated system oI issuing currency
through banks which are tied to a central bank, the monetary authority has the ability to alter
the money supply and thus inIluence the interest rate (to achieve policy goals). The beginning
oI monetary policy as such comes Irom the late 19th century, where it was used to maintain
the gold standard.
A policy is reIerred to as contractionary iI it reduces the size oI the money supply or
increases it only slowly, or iI it raises the interest rate. An expansionary policy increases the
size oI the money supply more rapidly, or decreases the interest rate. Furthermore, monetary
policies are described as Iollows: accommodative, iI the interest rate set by the central
monetary authority is intended to create economic growth; neutral, iI it is intended neither to
create growth nor combat inIlation; or tight iI intended to reduce inIlation.
There are several monetary policy tools available to achieve these ends: increasing interest
rates by Iiat; reducing the monetary base; and increasing reserve requirements. All have the
eIIect oI contracting the money supply; and, iI reversed, expand the money supply. Since the
1970s, monetary policy has generally been Iormed separately Irom Iiscal policy. Even prior
to the 1970s, the Bretton Woods system still ensured that most nations would Iorm the two
policies separately.
Within almost all modern nations, special institutions (such as the Federal Reserve System in
the United States, the Bank oI England, the European Central Bank, the People's Bank oI
China, and the Bank oI Japan) exist which have the task oI executing the monetary policy and
oIten independently oI the executive. In general, these institutions are called central banks
and oIten have other responsibilities such as supervising the smooth operation oI the Iinancial
system.
The primary tool oI monetary policy is open market operations. This entails managing the
quantity oI money in circulation through the buying and selling oI various Iinancial
instruments, such as treasury bills, company bonds, or Ioreign currencies. All oI these
purchases or sales result in more or less base currency entering or leaving market circulation.
Usually, the short term goal oI open market operations is to achieve a speciIic short term
interest rate target. In other instances, monetary policy might instead entail the targeting oI a
speciIic exchange rate relative to some Ioreign currency or else relative to gold. For example,
in the case oI the USA the Federal Reserve targets the Iederal Iunds rate, the rate at which
member banks lend to one another overnight; however, the monetary policy oI China is to
target the exchange rate between the Chinese renminbi and a basket oI Ioreign currencies.
The other primary means oI conducting monetary policy include: (i) Discount window
lending (lender oI last resort); (ii) Fractional deposit lending (changes in the reserve
requirement); (iii) Moral suasion (cajoling certain market players to achieve speciIied
outcomes); (iv) "Open mouth operations" (talking monetary policy with the market).
eory
Monetary policy is the process by which the government, central bank, or monetary authority
oI a country controls (i) the supply oI money, (ii) availability oI money, and (iii) cost oI
money or rate oI interest to attain a set oI objectives oriented towards the growth and stability
oI the economy.|1| Monetary theory provides insight into how to craIt optimal monetary
policy.
Monetary policy rests on the relationship between the rates oI interest in an economy, that is
the price at which money can be borrowed, and the total supply oI money. Monetary policy
uses a variety oI tools to control one or both oI these, to inIluence outcomes like economic
growth, inIlation, exchange rates with other currencies and unemployment. Where currency is
under a monopoly oI issuance, or where there is a regulated system oI issuing currency
through banks which are tied to a central bank, the monetary authority has the ability to alter
the money supply and thus inIluence the interest rate (to achieve policy goals).
It is important Ior policymakers to make credible announcements. II private agents
(consumers and Iirms) believe that policymakers are committed to lowering inIlation, they
will anticipate Iuture prices to be lower than otherwise (how those expectations are Iormed is
an entirely diIIerent matter; compare Ior instance rational expectations with adaptive
expectations). II an employee expects prices to be high in the Iuture, he or she will draw up a
wage contract with a high wage to match these prices. Hence, the expectation oI lower wages
is reIlected in wage-setting behavior between employees and employers (lower wages since
prices are expected to be lower) and since wages are in Iact lower there is no demand pull
inIlation because employees are receiving a smaller wage and there is no cost push inIlation
because employers are paying out less in wages.
To achieve this low level oI inIlation, policymakers must have credible announcements; that
is, private agents must believe that these announcements will reIlect actual Iuture policy. II an
announcement about low-level inIlation targets is made but not believed by private agents,
wage-setting will anticipate high-level inIlation and so wages will be higher and inIlation will
rise. A high wage will increase a consumer's demand (demand pull inIlation) and a Iirm's
costs (cost push inIlation), so inIlation rises. Hence, iI a policymaker's announcements
regarding monetary policy are not credible, policy will not have the desired eIIect.
II policymakers believe that private agents anticipate low inIlation, they have an incentive to
adopt an expansionist monetary policy (where the marginal beneIit oI increasing economic
output outweighs the marginal cost oI inIlation); however, assuming private agents have
rational expectations, they know that policymakers have this incentive. Hence, private agents
know that iI they anticipate low inIlation, an expansionist policy will be adopted that causes a
rise in inIlation. Consequently, (unless policymakers can make their announcement oI low
inIlation credible), private agents expect high inIlation. This anticipation is IulIilled through
adaptive expectation (wage-setting behavior);so, there is higher inIlation (without the beneIit
oI increased output). Hence, unless credible announcements can be made, expansionary
monetary policy will Iail.
Announcements can be made credible in various ways. One is to establish an independent
central bank with low inIlation targets (but no output targets). Hence, private agents know
that inIlation will be low because it is set by an independent body. Central banks can be given
incentives to meet targets (Ior example, larger budgets, a wage bonus Ior the head oI the
bank) to increase their reputation and signal a strong commitment to a policy goal.
Reputation is an important element in monetary policy implementation. But the idea oI
reputation should not be conIused with commitment.
While a central bank might have a Iavorable reputation due to good perIormance in
conducting monetary policy, the same central bank might not have chosen any particular
Iorm oI commitment (such as targeting a certain range Ior inIlation). Reputation plays a
crucial role in determining how much would markets believe the announcement oI a
particular commitment to a policy goal but both concepts should not be assimilated. Also,
note that under rational expectations, it is not necessary Ior the policymaker to have
established its reputation through past policy actions; as an example, the reputation oI the
head oI the central bank might be derived entirely Irom his or her ideology, proIessional
background, public statements, etc.
In Iact it has been argued
|3|
that to prevent some pathologies related to the time inconsistency
oI monetary policy implementation (in particular excessive inIlation), the head oI a central
bank should have a larger distaste Ior inIlation than the rest oI the economy on average.
Hence the reputation oI a particular central bank is not necessary tied to past perIormance,
but rather to particular institutional arrangements that the markets can use to Iorm inIlation
expectations.
Despite the Irequent discussion oI credibility as it relates to monetary policy, the exact
meaning oI credibility is rarely deIined. Such lack oI clarity can serve to lead policy away
Irom what is believed to be the most beneIicial. For example, capability to serve the public
interest is one deIinition oI credibility oIten associated with central banks. The reliability with
which a central bank keeps its promises is also a common deIinition. While everyone most
likely agrees a central bank should not lie to the public, wide disagreement exists on how a
central bank can best serve the public interest. ThereIore, lack oI deIinition can lead people to
believe they are supporting one particular policy oI credibility when they are really
supporting another.
|4|

istory of monetary policy
Monetary policy is associated with interest rates and availabilility oI credit. Instruments oI
monetary policy have included short-term interest rates and bank reserves through the
monetary base.
|5|
For many centuries there were only two Iorms oI monetary policy: (i)
Decisions about coinage; (ii) Decisions to print paper money to create credit. Interest rates,
while now thought oI as part oI monetary authority, were not generally coordinated with the
other Iorms oI monetary policy during this time. Monetary policy was seen as an executive
decision, and was generally in the hands oI the authority with seigniorage, or the power to
coin. With the advent oI larger trading networks came the ability to set the price between
gold and silver, and the price oI the local currency to Ioreign currencies. This oIIicial price
could be enIorced by law, even iI it varied Irom the market price.
Paper money called "jiaozi" originated Irom promissory notes in 7th century China. Jiaozi did
not replace metallic currency, and were used alongside the copper coins. The successive
Yuan Dynasty was the Iirst government to use paper currency as the predominant circulating
medium. In the later course oI the dynasty, Iacing massive shortages oI specie to Iund war
and their rule in China, they began printing paper money without restrictions, resulting in
hyperinIlation.
With the creation oI the Bank oI England in 1694, which acquired the responsibility to print
notes and back them with gold, the idea oI monetary policy as independent oI executive
action began to be established.
|6|
The goal oI monetary policy was to maintain the value oI
the coinage, print notes which would trade at par to specie, and prevent coins Irom leaving
circulation. The establishment oI central banks by industrializing nations was associated then
with the desire to maintain the nation's peg to the gold standard, and to trade in a narrow band
with other gold-backed currencies. To accomplish this end, central banks as part oI the gold
standard began setting the interest rates that they charged, both their own borrowers, and
other banks who required liquidity. The maintenance oI a gold standard required almost
monthly adjustments oI interest rates.
During the 1870-1920 period, the industrialized nations set up central banking systems, with
one oI the last being the Federal Reserve in 1913.
|7|
By this point the role oI the central bank
as the "lender oI last resort" was understood. It was also increasingly understood that interest
rates had an eIIect on the entire economy, in no small part because oI the marginal revolution
in economics, which demonstrated how people would change a decision based on a change in
the economic trade-oIIs.
Monetarist macroeconomists have sometimes advocated simply increasing the monetary
supply at a low, constant rate, as the best way oI maintaining low inIlation and stable output
growth.
|8|
However, when U.S. Federal Reserve Chairman Paul Volcker tried this policy,
starting in October 1979, it was Iound to be impractical, because oI the highly unstable
relationship between monetary aggregates and other macroeconomic variables.
|9|
Even
Milton Friedman acknowledged that money supply targeting was less successIul than he had
hoped, in an interview with the Financial Times on June 7, 2003.
|10||11||12|
ThereIore,
monetary decisions today take into account a wider range oI Iactors, such as:
O shorL Lerm lnLeresL raLes
O long Lerm lnLeresL raLes
O veloclLy of money Lhrough Lhe economy
O exchange raLes
O credlL quallLy
O bonds and equlLles (corporaLe ownershlp and debL)
O governmenL versus prlvaLe secLor spendlng/savlngs
O lnLernaLlonal caplLal flows of money on large scales
O flnanclal derlvaLlves such as opLlons swaps fuLures conLracLs eLc
A small but vocal group oI people, primarily libertarians and Constitutionalists
|13|
, advocate
Ior a return to the gold standard (the elimination oI the dollar's Iiat currency status and even
oI the Federal Reserve Bank). Their argument is basically that monetary policy is Iraught
with risk and these risks will result in drastic harm to the populace should monetary policy
Iail. Others
|4|
see another problem with our current monetary policy. The problem Ior them
is not that our money has nothing physical to deIine its value, but that Iractional reserve
lending oI that money as a debt to the recipient, rather than a credit, causes all but a small
proportion oI society (including all governments) to be perpetually in debt.
In Iact, many economists
|4|
disagree with returning to a gold standard. They argue that
doing so would drastically limit the money supply, and throw away 100 years oI
advancement in monetary policy. The sometimes complex Iinancial transactions that make
big business (especially international business) easier and saIer would be much more diIIicult
iI not impossible. Moreover, shiIting risk to diIIerent people/companies that specialize in
monitoring and using risk can turn any Iinancial risk into a known dollar amount and
thereIore make business predictable and more proIitable Ior everyone involved. Some have
claimed that these arguments lost credibility in the global Iinancial crisis oI 2008-2009.
rends in central banking
The central bank inIluences interest rates by expanding or contracting the monetary base,
which consists oI currency in circulation and banks' reserves on deposit at the central bank.
The primary way that the central bank can aIIect the monetary base is by open market
operations or sales and purchases oI second hand government debt, or by changing the
reserve requirements. II the central bank wishes to lower interest rates, it purchases
government debt, thereby increasing the amount oI cash in circulation or crediting banks'
reserve accounts. Alternatively, it can lower the interest rate on discounts or overdraIts (loans
to banks secured by suitable collateral, speciIied by the central bank). II the interest rate on
such transactions is suIIiciently low, commercial banks can borrow Irom the central bank to
meet reserve requirements and use the additional liquidity to expand their balance sheets,
increasing the credit available to the economy. owering reserve requirements has a similar
eIIect, Ireeing up Iunds Ior banks to increase loans or buy other proIitable assets.
A central bank can only operate a truly independent monetary policy when the exchange rate
is Iloating.
|14|
II the exchange rate is pegged or managed in any way, the central bank will
have to purchase or sell Ioreign exchange. These transactions in Ioreign exchange will have
an eIIect on the monetary base analogous to open market purchases and sales oI government
debt; iI the central bank buys Ioreign exchange, the monetary base expands, and vice versa.
But even in the case oI a pure Iloating exchange rate, central banks and monetary authorities
can at best "lean against the wind" in a world where capital is mobile.
Accordingly, the management oI the exchange rate will inIluence domestic monetary
conditions. To maintain its monetary policy target, the central bank will have to sterilize or
oIIset its Ioreign exchange operations. For example, iI a central bank buys Ioreign exchange
(to counteract appreciation oI the exchange rate), base money will increase. ThereIore, to
sterilize that increase, the central bank must also sell government debt to contract the
monetary base by an equal amount. It Iollows that turbulent activity in Ioreign exchange
markets can cause a central bank to lose control oI domestic monetary policy when it is also
managing the exchange rate.
In the 1980s, many economists
|4|
began to believe that making a nation's central bank
independent oI the rest oI executive government is the best way to ensure an optimal
monetary policy, and those central banks which did not have independence began to gain it.
This is to avoid overt manipulation oI the tools oI monetary policies to eIIect political goals,
such as re-electing the current government. Independence typically means that the members
oI the committee which conducts monetary policy have long, Iixed terms. Obviously, this is a
somewhat limited independence.
In the 1990s, central banks began adopting Iormal, public inIlation targets with the goal oI
making the outcomes, iI not the process, oI monetary policy more transparent. In other words,
a central bank may have an inIlation target oI 2 Ior a given year, and iI inIlation turns out to
be 5, then the central bank will typically have to submit an explanation.
The Bank oI England exempliIies both these trends. It became independent oI government
through the Bank oI England Act 1998 and adopted an inIlation target oI 2.5 RPI (now 2
oI CPI).
The debate rages on about whether monetary policy can smooth business cycles or not. A
central conjecture oI Keynesian economics is that the central bank can stimulate aggregate
demand in the short run, because a signiIicant number oI prices in the economy are Iixed in
the short run and Iirms will produce as many goods and services as are demanded (in the long
run, however, money is neutral, as in the neoclassical model). There is also the Austrian
school oI economics, which includes Friedrich von Hayek and udwig von Mises's
arguments,
|15|
but most economists Iall into either the Keynesian or neoclassical camps on
this issue.
ebeloping countries
Developing countries may have problems establishing an eIIective operating monetary
policy. The primary diIIiculty is that Iew developing countries have deep markets in
government debt. The matter is Iurther complicated by the diIIiculties in Iorecasting money
demand and Iiscal pressure to levy the inIlation tax by expanding the monetary base rapidly.
In general, the central banks in many developing countries have poor records in managing
monetary policy. This is oIten because the monetary authority in a developing country is not
independent oI government, so good monetary policy takes a backseat to the political desires
oI the government or are used to pursue other non-monetary goals. For this and other reasons,
developing countries that want to establish credible monetary policy may institute a currency
board or adopt dollarization. Such Iorms oI monetary institutions thus essentially tie the
hands oI the government Irom interIerence and, it is hoped, that such policies will import the
monetary policy oI the anchor nation.
Recent attempts at liberalizing and reIorming Iinancial markets (particularly the
recapitalization oI banks and other Iinancial institutions in Nigeria and elsewhere) are
gradually providing the latitude required to implement monetary policy Irameworks by the
relevant central banks.
ypes of monetary policy
In practice, to implement any type oI monetary policy the main tool used is modiIying the
amount oI base money in circulation. The monetary authority does this by buying or selling
Iinancial assets (usually government obligations). These open market operations change
either the amount oI money or its liquidity (iI less liquid Iorms oI money are bought or sold).
The multiplier eIIect oI Iractional reserve banking ampliIies the eIIects oI these actions.
Constant market transactions by the monetary authority modiIy the supply oI currency and
this impacts other market variables such as short term interest rates and the exchange rate.
The distinction between the various types oI monetary policy lies primarily with the set oI
instruments and target variables that are used by the monetary authority to achieve their
goals.

,onetary o||cy 1arget ,arket Var|ab|e Long 1erm Cb[ect|ve
lnflaLlon 1argeLlng
lnLeresL raLe on overnlghL
debL
A glven raLe of change ln Lhe Cl
rlce Level 1argeLlng
lnLeresL raLe on overnlghL
debL
A speclflc Cl number
MoneLary AggregaLes 1he growLh ln money supply A glven raLe of change ln Lhe Cl
llxed Lxchange 8aLe
1he spoL prlce of Lhe
currency
1he spoL prlce of Lhe currency
Cold SLandard 1he spoL prlce of gold
Low lnflaLlon as measured by Lhe gold
prlce
Mlxed ollcy usually lnLeresL raLes usually unemploymenL + Cl change
The diIIerent types oI policy are also called mon0tary r0gim0s, in parallel to exchange rate
regimes. A Iixed exchange rate is also an exchange rate regime; The Gold standard results in
a relatively Iixed regime towards the currency oI other countries on the gold standard and a
Iloating regime towards those that are not. Targeting inIlation, the price level or other
monetary aggregates implies Iloating exchange rate unless the management oI the relevant
Ioreign currencies is tracking exactly the same variables (such as a harmonized consumer
price index).
nflation targeting
Under this policy approach the target is to keep inIlation, under a particular deIinition such as
Consumer Price Index, within a desired range.
The inIlation target is achieved through periodic adjustments to the Central Bank interest rate
target. The interest rate used is generally the interbank rate at which banks lend to each other
overnight Ior cash Ilow purposes. Depending on the country this particular interest rate might
be called the cash rate or something similar.
The interest rate target is maintained Ior a speciIic duration using open market operations.
Typically the duration that the interest rate target is kept constant will vary between months
and years. This interest rate target is usually reviewed on a monthly or quarterly basis by a
policy committee.
Changes to the interest rate target are made in response to various market indicators in an
attempt to Iorecast economic trends and in so doing keep the market on track towards
achieving the deIined inIlation target. For example, one simple method oI inIlation targeting
called the Taylor rule adjusts the interest rate in response to changes in the inIlation rate and
the output gap. The rule was proposed by John B. Taylor oI StanIord University.
|16|

The inIlation targeting approach to monetary policy approach was pioneered in New Zealand.
It is currently used in Australia, Brazil, Canada, Chile, Colombia, the Czech Republic, New
Zealand, Norway, Iceland, Philippines, Poland, Sweden, South AIrica, Turkey, and the
United Kingdom.
Price lebel targeting
Price level targeting is similar to inIlation targeting except that CPI growth in one year over
or under the long term price level target is oIIset in subsequent years such that a targeted
price-level is reached over time, e.g. Iive years, giving more certainty about Iuture price
increases to consumers. Under inIlation targeting what happened in the immediate past years
is not taken into account or adjusted Ior in the current and Iuture years.
Monetary aggregates
In the 1980s, several countries used an approach based on a constant growth in the money
supply. This approach was reIined to include diIIerent classes oI money and credit (M0, M1
etc.). In the USA this approach to monetary policy was discontinued with the selection oI
Alan Greenspan as Fed Chairman.
This approach is also sometimes called monetarism.
While most monetary policy Iocuses on a price signal oI one Iorm or another, this approach is
Iocused on monetary quantities.
Fixed excange rate
This policy is based on maintaining a Iixed exchange rate with a Ioreign currency. There are
varying degrees oI Iixed exchange rates, which can be ranked in relation to how rigid the
Iixed exchange rate is with the anchor nation.
Under a system oI Iiat Iixed rates, the local government or monetary authority declares a
Iixed exchange rate but does not actively buy or sell currency to maintain the rate. Instead,
the rate is enIorced by non-convertibility measures (e.g. capital controls, import/export
licenses, etc.). In this case there is a black market exchange rate where the currency trades at
its market/unoIIicial rate.
Under a system oI Iixed-convertibility, currency is bought and sold by the central bank or
monetary authority on a daily basis to achieve the target exchange rate. This target rate may
be a Iixed level or a Iixed band within which the exchange rate may Iluctuate until the
monetary authority intervenes to buy or sell as necessary to maintain the exchange rate within
the band. (In this case, the Iixed exchange rate with a Iixed level can be seen as a special case
oI the Iixed exchange rate with bands where the bands are set to zero.)
Under a system oI Iixed exchange rates maintained by a currency board every unit oI local
currency must be backed by a unit oI Ioreign currency (correcting Ior the exchange rate). This
ensures that the local monetary base does not inIlate without being backed by hard currency
and eliminates any worries about a run on the local currency by those wishing to convert the
local currency to the hard (anchor) currency.
Under dollarization, Ioreign currency (usually the US dollar, hence the term "dollarization")
is used Ireely as the medium oI exchange either exclusively or in parallel with local currency.
This outcome can come about because the local population has lost all Iaith in the local
currency, or it may also be a policy oI the government (usually to rein in inIlation and import
credible monetary policy).
These policies oIten abdicate monetary policy to the Ioreign monetary authority or
government as monetary policy in the pegging nation must align with monetary policy in the
anchor nation to maintain the exchange rate. The degree to which local monetary policy
becomes dependent on the anchor nation depends on Iactors such as capital mobility,
openness, credit channels and other economic Iactors.
old standard
The gold standard is a system under which the price oI the national currency is measured in
units oI gold bars and is kept constant by the government's promise to buy or sell gold at a
Iixed price in terms oI the base currency. The gold standard might be regarded as a special
case oI "Iixed exchange rate" policy, or as a special type oI commodity price level targeting.
The minimal gold standard would be a long-term commitment to tighten monetary policy
enough to prevent the price oI gold Irom permanently rising above parity. A Iull gold
standard would be a commitment to sell unlimited amounts oI gold at parity and maintain a
reserve oI gold suIIicient to redeem the entire monetary base.
Today this type oI monetary policy is no longer used by any country, although the gold
standard was widely used across the world between the mid-19th century through 1971.
|17|
Its
major advantages were simplicity and transparency. The gold standard was abandoned during
the Great Depression, as countries sought to reinvigorate their economies by increasing their
money supply.
|18|
The Bretton Woods system, which was a modiIied gold standard, replaced
it in the aItermath oI World War II. However, this system too broke down during the Nixon
shock oI 1971.
The gold standard induces deIlation, as the economy usually grows Iaster than the supply oI
gold. When an economy grows Iaster than its money supply, the same amount oI money is
used to execute a larger number oI transactions. The only way to make this possible is to
lower the nominal cost oI each transaction, which means that prices oI goods and services
Iall, and each unit oI money increases in value. Absent precautionary measures, deIlation
would tend to increase the ratio oI the real value oI nominal debts to physical assets over
time. For example, during deIlation, nominal debt and the monthly nominal cost oI a Iixed-
rate home mortgage stays the same, even while the dollar value oI the house Ialls, and the
value oI the dollars required to pay the mortgage goes up. Mainstream economics considers
such deIlation to be a major disadvantage oI the gold standard. Unsustainable (i.e. excessive)
deIlation can cause problems during recessions and Iinancial crisis lengthening the amount oI
time a economy spends in recession. William Jennings Bryan rose to national prominence
when he built his historic (though unsuccessIul) 1896 presidential campaign around the
argument that deIlation caused by the gold standard made it harder Ior everyday citizens to
start new businesses, expand their Iarms, or build new homes.
Policy of barious nations
O AusLralla lnflaLlon LargeLlng
O 8razll lnflaLlon LargeLlng
O Canada lnflaLlon LargeLlng
O Chlle lnflaLlon LargeLlng
O Chlna MoneLary LargeLlng and LargeLs a currency baskeL
O Czech 8epubllc lnflaLlon LargeLlng
O Colombla lnflaLlon LargeLlng
O ong kong Currency board (flxed Lo uS dollar)
O lndla MulLlple lndlcaLor approach
O new Zealand lnflaLlon LargeLlng
O norway lnflaLlon LargeLlng
O Slngapore Lxchange raLe LargeLlng
O SouLh Afrlca lnflaLlon LargeLlng
O SwlLzerland lnflaLlon LargeLlng
19

O 1urkey lnflaLlon LargeLlng
O unlLed klngdom
20
lnflaLlon LargeLlng alongslde secondary LargeLs on ouLpuL and
employmenL
O unlLed SLaLes
21
Mlxed pollcy (and slnce Lhe 1980s lL ls well descrlbed by Lhe 1aylor rule
whlch malnLalns LhaL Lhe led funds raLe responds Lo shocks ln lnflaLlon and ouLpuL)
Monetary policy tools
Monetary base
Monetary policy can be implemented by changing the size oI the monetary base. Central
banks use open market operations to change the monetary base. The central bank buys or
sells reserve assets (usually Iinancial instruments such as bonds) in exchange Ior money on
deposit at the central bank. Those deposits are convertible to currency. Together such
currency and deposits constitute the monetary base which is the general liabilities oI the
central bank in its own monetary unit. Usually other banks can use base money as a Iractional
reserve and expand the circulating money supply by a larger amount.
eserbe requirements
The monetary authority exerts regulatory control over banks. Monetary policy can be
implemented by changing the proportion oI total assets that banks must hold in reserve with
the central bank. Banks only maintain a small portion oI their assets as cash available Ior
immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By
changing the proportion oI total assets to be held as liquid cash, the Federal Reserve changes
the availability oI loanable Iunds. This acts as a change in the money supply. Central banks
typically do not change the reserve requirements oIten because it creates very volatile
changes in the money supply due to the lending multiplier.
iscount window lending
Discount window lending is where the commercial banks, and other depository institutions,
are able to borrow reserves Irom the Central Bank at a discount rate. This rate is usually set
below short term market rates (T-bills). This enables the institutions to vary credit conditions
(i.e., the amount oI money they have to loan out), thereby aIIecting the money supply. It is oI
note that the Discount Window is the only instrument which the Central Banks do not have
total control over.
By aIIecting the money supply, it is theorized, that monetary policy can establish ranges Ior
inIlation, unemployment, interest rates ,and economic growth. A stable Iinancial environment
is created in which savings and investment can occur, allowing Ior the growth oI the
economy as a whole.
nterest rates
The contraction oI the monetary supply can be achieved indirectly by increasing the nominal
interest rates. Monetary authorities in diIIerent nations have diIIering levels oI control oI
economy-wide interest rates. In the United States, the Federal Reserve can set the discount
rate, as well as achieve the desired Federal Iunds rate by open market operations. This rate
has signiIicant eIIect on other market interest rates, but there is no perIect relationship. In the
United States open market operations are a relatively small part oI the total volume in the
bond market. One cannot set independent targets Ior both the monetary base and the interest
rate because they are both modiIied by a single tool open market operations; one must
choose which one to control.
In other nations, the monetary authority may be able to mandate speciIic interest rates on
loans, savings accounts or other Iinancial assets. By raising the interest rate(s) under its
control, a monetary authority can contract the money supply, because higher interest rates
encourage savings and discourage borrowing. Both oI these eIIects reduce the size oI the
money supply.
urrency board
A currency board is a monetary arrangement that pegs the monetary base oI one country to
another, the anchor nation. As such, it essentially operates as a hard Iixed exchange rate,
whereby local currency in circulation is backed by Ioreign currency Irom the anchor nation at
a Iixed rate. Thus, to grow the local monetary base an equivalent amount oI Ioreign currency
must be held in reserves with the currency board. This limits the possibility Ior the local
monetary authority to inIlate or pursue other objectives. The principal rationales behind a
currency board are threeIold:
1 1o lmporL moneLary credlblllLy of Lhe anchor naLlon
2 1o malnLaln a flxed exchange raLe wlLh Lhe anchor naLlon
3 1o esLabllsh credlblllLy wlLh Lhe exchange raLe (Lhe currency board arrangemenL ls Lhe
hardesL form of flxed exchange raLes ouLslde of dollarlzaLlon)
In theory, it is possible that a country may peg the local currency to more than one Ioreign
currency; although, in practice this has never happened (and it would be a more complicated
to run than a simple single-currency currency board). A gold standard is a special case oI a
currency board where the value oI the national currency is linked to the value oI gold instead
oI a Ioreign currency.
The currency board in question will no longer issue Iiat money but instead will only issue a
set number oI units oI local currency Ior each unit oI Ioreign currency it has in its vault. The
surplus on the balance oI payments oI that country is reIlected by higher deposits local banks
hold at the central bank as well as (initially) higher deposits oI the (net) exporting Iirms at
their local banks. The growth oI the domestic money supply can now be coupled to the
additional deposits oI the banks at the central bank that equals additional hard Ioreign
exchange reserves in the hands oI the central bank. The virtue oI this system is that questions
oI currency stability no longer apply. The drawbacks are that the country no longer has the
ability to set monetary policy according to other domestic considerations, and that the Iixed
exchange rate will, to a large extent, also Iix a country's terms oI trade, irrespective oI
economic diIIerences between it and its trading partners.
Hong Kong operates a currency board, as does Bulgaria. Estonia established a currency board
pegged to the Deutschmark in 1992 aIter gaining independence, and this policy is seen as a
mainstay oI that country's subsequent economic success (see Economy oI Estonia Ior a
detailed description oI the Estonian currency board). Argentina abandoned its currency board
in January 2002 aIter a severe recession. This emphasized the Iact that currency boards are
not irrevocable, and hence may be abandoned in the Iace oI speculation by Ioreign exchange
traders. Following the signing oI the Dayton Peace Agreement in 1995, Bosnia and
Herzegovina established a currency board pegged to the Deutschmark (since 2002 replaced
by the Euro).
Currency boards have advantages Ior 82,ll, 45en economies that would Iind independent
monetary policy diIIicult to sustain. They can also Iorm a credible commitment to low
inIlation.

Unconbentional monetary policy at te zero bound
ter forms of monetary policy, particularly used wen interest rates are at or near 3
and tere are concerns about deflation or deflation is occurring, are referred to as
unconventional monetaiy policy. ese include credit easing, quantitatibe easing, and
signaling. n credit easing, a central bank purcases pribate sector assets, in order to
improbe liquidity and improbe access to credit. Signaling can be used to lower market
expectations for future interest rates. For example, during te credit crisis of 8, te
US Federal eserbe indicated rates would be low for an "extended period", and te Bank
of anada made a "conditional commitment" to keep rates at te lower bound of basis
points {.3] until te end of te second quarter of .

Reforms in the Indian onetary PoIicy During 1990s

The Monetary policy of the RB has undergone massive changes during the economic reform period. After 1991
the Monetary policy is disassociated from the fiscal policy. Under the reform period an emphasis was given to the
stable macro economic situation and low inflation policy.
The maj or changes in the ndian Monetary policy during the decade of 1990.
1. Reduced Reserve Requirements : During 1990s both the Cash Reserve Ratio (CRR) and the Statutory
Liquidity Ratio (SLR) were reduced to considerable extent. The CRR was at its highest 15% plus and
additional CRR of 10% was levied, however it is now reduced by 4%. The SLR is reduced form 38.5% to a
minimum of 25%.
2. Increased icro Finance : n order to strengthen the rural finance the RB has focused more on the Self Help
Group (SHG). t comprises small and marginal farmers, agriculture and non-agriculture labour, artisans and
rural sections of the society. However still only 30% of the target population has been benefited.
3. FiscaI onetary Separation : n 1994, the Government and the RB signed an agreement through which the
RB has stopped financing the deficit in the government budget. Thus it has seperated the Monetary policy
from the fiscal policy.
4. Changed Interest Rate Structure : During the 1990s, the interest rate structure was changed from its earlier
administrated rates to the market oriented or liberal rate of interest. nterest rate slabs are now reduced up to 2
and minimum lending rates are abolished. Similarly, lending rates above Rs. Two lakh are freed.
5. Changes in Accordance to the ExternaI Reforms : During the 1990, the external sector has undergone
major changes. t comprises lifting various controls on imports, reduced tariffs, etc. The Monetary policy has
shown the impact of liberal inflow of the foreign capital and its implication on domestic money supply.
6. Higher arket Orientation for Banking : The banking sector got more autonomy and operational flexibility.
More freedom to banks for methods of assessing working funds and other functioning has empowered and
assured market orientation.

EvaIuation of the onetary PoIicy in India

During the reforms though the Monetary policy has achieved higher success in the Monetary policy, it is not free
from limitation or demerits. t needs to be evaluated on a proper scale.
1. FaiIed in TackIing Budgetary Deficit : The higher level of the budget deficit has made the Monetary policy
ineffective. The automatic monetization of the deficit has led to high Monetary expansion.
2. imited Coverage : The Monetary policy covers only commercial banking system leaving other non-bank
institutions untouched. t limits the effectiveness of the monitor policy in ndia.
3. Unorganized oney arket : n our country there is a huge size of the unorganized money market. t dose
not come under the control of the RB. Thus any tools of the Monetary policy dose not affect the unorganized
money market making Monetary policy less affective.
4. Predominance of Cash Transaction : n ndia still there is huge dominance of the cash in total money
supply. t is one of the main obstacles in the effective implementation of the Monetary policy. Because
Monetary policy operates on the bank credit rather on cash.
5. Increase VoIatiIity : As the Monetary policy has adopted changes in accordance to the changes in the
external sector in ndia, it could lead to a high amount of the volatility.
There are certain drawbacks in the working of the Monetary Policy in ndia. However, during the economic
reforms it has got different dimensions.

ow do you ebaluate monetary policy?
8y Amol Agrawal
Suppose you are made a consultant to a central bank to evaluate their monetary policy. How
does one go about it? ars Svensson has a paper on the same. Urbanomics also has some
comments on the paper.
;,lu,ting infl,ti4n-t,rgeting 24net,ry 54licy i8 24re c425lic,ted t,n
cecking eter infl,ti4n ,8 been 4n t,rget, bec,u8e infl,ti4n c4ntr4l i8
i25erfect ,nd flexible infl,ti4n t,rgeting 2e,n8 t,t de;i,ti4n8 fr42 t,rget 2,y
be deliber,te in 4rder t4 8t,bili:e te re,l ec4n42y. A 24dified T,yl4r cur;e, te
f4rec,8t T,yl4r cur;e, 84ing te tr,de4ff beteen te ;,ri,bility 4f te
infl,ti4n-g,5 ,nd 4ut5ut-g,5 f4rec,8t8 c,n be u8ed t4 e;,lu,te 54licy ex ,nte,
t,t i8, t,king int4 ,cc4unt te inf4r2,ti4n ,;,il,ble ,t te ti2e 4f te 54licy
deci8i4n8, ,nd e;en e;,lu,te 54licy in re,l ti2e. In 5,rticul,r, by 5l4tting 2e,n
86u,red g,58 4f infl,ti4n ,nd 4ut5ut-g,5 f4rec,8t8 f4r ,ltern,ti;e 54licy-r,te
5,t8, it 2,y be ex,2ined eter 54licy ,8 ,cie;ed ,n efficient 8t,bili:,ti4n
4f b4t infl,ti4n ,nd te re,l ec4n42y ,nd ,t rel,ti;e eigt 4n te 8t,bility
4f infl,ti4n ,nd te re,l ec4n42y ,8 effecti;ely been ,55lied. x ,nte
e;,lu,ti4n 2,y be 24re rele;,nt t,n e;,lu,ti4n ex 548t, ,fter te f,ct.
Public,ti4n 4f te intere8t-r,te 5,t ,l84 ,ll48 te e;,lu,ti4n 4f it8 credibility
,nd te effecti;ene88 4f te i25le2ent,ti4n 4f 24net,ry 54licy.
Pretty interesting paper and much oI it is in English. Gives you some ideas on evaluating
monetary policy and takes you to economics textbooks where we evaluated choices given a
Irontier (production, consumption etc).
Insider trading
nsi/0r tra/ing is the trading oI a corporation's stock or other securities (e.g. bonds or stock
options) by individuals with potential access to non-public inIormation about the company. In
most countries, trading by corporate insiders such as oIIicers, key employees, directors, and
large shareholders may be legal, iI this trading is done in a way that does not take advantage
oI non-public inIormation. However, the term is Irequently used to reIer to a practice in
which an insider or a related party trades based on material non-public inIormation obtained
during the perIormance oI the insider's duties at the corporation, or otherwise in breach oI a
Iiduciary or other relationship oI trust and conIidence or where the non-public inIormation
was misappropriated Irom the company.
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In the United States and several other jurisdictions, trading conducted by corporate oIIicers,
key employees, directors, or signiIicant shareholders (in the U.S., deIined as beneIicial
owners oI ten percent or more oI the Iirm's equity securities) must be reported to the regulator
or publicly disclosed, usually within a Iew business days oI the trade. Many investors Iollow
the summaries oI these insider trades in the hope that mimicking these trades will be
proIitable. While "legal" insider trading cannot be based on material non-public inIormation,
some investors believe corporate insiders nonetheless may have better insights into the health
oI a corporation (broadly speaking) and that their trades otherwise convey important
inIormation (e.g., about the pending retirement oI an important oIIicer selling shares, greater
commitment to the corporation by oIIicers purchasing shares, etc.)
Illegal insider trading is believed to raise the cost oI capital Ior securities issuers, thus
decreasing overall economic growth.
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edit] Legal insider trading
egal trades by insiders are common, as employees oI publicly-traded corporations oIten
have stock or stock options. These trades are made public in the US through SEC Iilings,
mainly Form 4. Prior to 2001, US law restricted trading such that insiders mainly traded
during windows when their inside inIormation was public, such as soon aIter earnings
releases.
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SEC Rule 10b5-1 clariIied that the U.S. prohibition against insider trading does
not require prooI that an insider actually used material nonpublic inIormation when
conducting a trade; possession oI such inIormation alone is suIIicient to violate the provision,
and the SEC would impute an insider in possession oI material nonpublic inIormation uses
this inIormation when conducting a trade. However, Rule 10b5-1 also created Ior insiders an
aIIirmative deIense iI the insider can demonstrate that the trades conducted on behalI oI the
insider were conducted as part oI a preexisting contract or written, binding plan Ior trading in
the Iuture.
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For example, iI a corporate insider plans on retiring aIter a period oI time and, as
part oI his or her retirement planning, adopts a written, binding plan to sell a speciIic amount
oI the company's stock every month Ior the next two years, and during this period the insider
comes into possession oI material nonpublic inIormation about the company, any subsequent
trades based on the original plan might not constitute prohibited insider trading.
edit] llegal insider trading
Rules against insider trading on material non-public inIormation exist in most jurisdictions
around the world, though the details and the eIIorts to enIorce them vary considerably. The
United States is generally viewed as having the strictest laws against illegal insider trading,
and makes the most serious eIIorts to enIorce them.
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edit] efinition of insider
In the United States and Germany, Ior mandatory reporting purposes, corporate insiders are
deIined as a company's oIIicers, directors and any beneIicial owners oI more than ten percent
oI a class oI the company's equity securities. Trades made by these types oI insiders in the
company's own stock, based on material non-public inIormation, are considered to be
Iraudulent since the insiders are violating the Iiduciary duty that they owe to the shareholders.
The corporate insider, simply by accepting employment, has undertaken a legal obligation to
the shareholders to put the shareholders' interests beIore their own, in matters related to the
corporation. When the insider buys or sells based upon company owned inIormation, he is
violating his obligation to the shareholders.
For example, illegal insider trading would occur iI the chieI executive oIIicer oI Company A
learned (prior to a public announcement) that Company A will be taken over, and bought
shares in Company A knowing that the share price would likely rise.
In the United States and many other jurisdictions, however, "insiders" are not just limited to
corporate oIIicials and major shareholders where illegal insider trading is concerned, but can
include any individual who trades shares based on material non-public inIormation in
violation oI some duty oI trust. This duty may be imputed; Ior example, in many
jurisdictions, in cases oI where a corporate insider "tips" a Iriend about non-public
inIormation likely to have an eIIect on the company's share price, the duty the corporate
insider owes the company is now imputed to the Iriend and the Iriend violates a duty to the
company iI he or she trades on the basis oI this inIormation.
edit] Liability for insider trading
iability Ior insider trading violations cannot be avoided by passing on the inIormation in an
"I scratch your back, you scratch mine" or quid pro quo arrangement, as long as the person
receiving the inIormation knew or should have known that the inIormation was company
property. It should be noted that when allegations oI a potential inside deal occur, all parties
that may have been involved are at risk oI being Iound guilty.
For example, iI Company A's CEO did not trade on the undisclosed takeover news, but
instead passed the inIormation on to his brother-in-law who traded on it, illegal insider
trading would still have occurred.
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edit] Misappropriation teory
A newer view oI insider trading, the "misappropriation theory" is now part oI US law. It
states that anyone who misappropriates (steals) inIormation Irom their employer and trades
on that inIormation in any stock (not just the employer's stock) is guilty oI insider trading.
For example, iI a journalist who worked Ior Company B learned about the takeover oI
Company A while perIorming his work duties, and bought stock in Company A, illegal
insider trading might still have occurred. Even though the journalist did not violate a
Iiduciary duty to Company A's shareholders, he might have violated a Iiduciary duty to
Company B's shareholders (assuming the newspaper had a policy oI not allowing reporters to
trade on stories they were covering).
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edit] Proof of responsibility
Proving that someone has been responsible Ior a trade can be diIIicult, because traders may
try to hide behind nominees, oIIshore companies, and other proxies. Nevertheless, the U.S.
Securities and Exchange Commission prosecutes over 50 cases each year, with many being
settled administratively out oI court. The SEC and several stock exchanges actively monitor
trading, looking Ior suspicious activity.
edit] rading on information in general
Not all trading on inIormation is illegal inside trading, however. For example, while dining at
a restaurant, you hear the CEO oI Company A at the next table telling the CFO that the
company's proIits will be higher than expected, and then you buy the stock, you are not guilty
oI insider trading unless there was some closer connection between you, the company, or the
company oIIicers. However, inIormation about a tender oIIer (usually regarding a merger or
acquisition) is held to a higher standard. II this type oI inIormation is obtained (directly 4r
indirectly) and there is reason to believe it is non-public, there is a duty to disclose it or
abstain Irom trading.
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edit] racking insider trades
Since insiders are required to report their trades, others oIten track these traders, and there is a
school oI investing which Iollows the lead oI insiders. This is oI course subject to the risk that
an insider is making a buy speciIically to increase investor conIidence, or making a sell Ior
reasons unrelated to the health oI the company (e.g. a desire to diversiIy or pay a personal
expense).
As oI December 2005 companies are required to announce times to their employees as to
when they can saIely trade without being accused oI trading on inside inIormation.
edit] nsider rading bs. nsider nformation
In the industry oI investing, there is a diIIerence between insider trading and insider
inIormation. For example, there was inIormation released about Continental and United
Airlines merging in late 2009. At the turn oI the year, it was believed that the merger was
going to Iall through and that the two companies were not going to act upon the merger. By
summer oI 2010 and the Iinal signing oI the legal details (a), the deal went through oIIicially.
The acquisition oI the added resources, capital, and inIrastructure Ior the two companies
would easily drive up the stock price oI the new 'company under UA on the New York
Stock Exchange. With this done, insider traders could have acted back when there were
rumors assuming the price would have gone up. However, insider inIormants 'said that the
merger Iell through and nothing was going to happen. This creates gossip in the trading world
and inIormation that an insider can be giving out to Iriends and Iamily may not be completely
accurate since they do not know the Iull story.
Generally, insider traders act upon inIormation that they believe to be true that is not
available to the public giving them the upper hand in making proIits. Insider inIormants pass
along inIormation in the Iorm oI gossip and do not personally buy or sell stock based on
projections. Whether or not either party is acting illegally is solely in the hands oI the SEC