ECONOMICS –I

MAHARASHTRA NATIONAL LAW UNIVERSITY,

AURANGABAD

ECONOMICS

PRIVATISATION AND ECONOMIC REFORMS IN INDIA

SUBMITTED TO
Department of
Economics
SEMESTER III,B.A.LL.B(Hons)

1
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TABLE OF CONTENT

SR.No TITLE PAGE No

1 INDIAN ECONOMY 3
2 PRIVATISATION 5
3 INDIAN ECONOMY AND ECONOMIC REFORMS 12
4 CONCLUSION 19

Research Methodology

This project report is based on Descriptive Research Methodology. Secondary and Electronic
resources have been largely used to gather information and data about the topic. Books and
other reference as guided by Faculty have been primarily helpful in giving this project a firm
structure. Websites, dictionaries and articles have also been referred.
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INDIAN ECONOMY

After Independence India launched her First Five Years plan in 1950-51; then now 5-Year
Plan is going on.

Although India is an agro-based economy, but lot of emphasis has been given on the
development of industries (both consumer goods and capital goods), service sector (including
construction, trade, commerce, banking system etc.) and socio-economic infrastructure (like
education, health, housing power, energy, transport, communication etc.).

Both central and state governments in India join their hands in all the spheres leading to
economic development.

On the basis of production:

Indian economy can broadly be divided into three heads:

(i) Primary or Agricultural Sector

This sector consists of agriculture and its allied activities including dairy, poultry, cattle
rearing, fishing, forestry, animal husbandry etc. In the primary sector, most of the goods are
produced by using natural resources, since India is a overpopulated agro based economy,
therefore, this sector plays an important role for economic growth.

(ii) Secondary or Manufacturing Sector

This sector is also known as industrial sector. In this category, all types of manufacturing
sector like large scale, small scale and tiny scale are included. Small and tiny scale industries
include clothes, candle, poultry, match box, handloom, toys etc. These units provide huge
employment. On the other hand, large scale industries like iron and steel, heavy engineering,
chemicals, fertilizers, shipbuilding etc. contribute a huge amount in our gross domestic
production.

(iii) Service or Tertiary Sector

This sector produces different services like transport, communication, banking, insurance,
trade and commerce, including both national and international trade. Moreover, all the
professional services like doctors, engineers, teachers, lawyers etc. come under service sector.
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Again the services provided by the government itself for the welfare of citizens are also
included in the tertiary sector.

On the basis of Ownership or Organization:

Indian economy can be broadly divided into two heads:

(i) Public Sector

It consists of all the economic organizations which are controlled and managed by the
government. All the government-owned production units come under this head. These units
produce and distribute goods and services among the common mass with an objective of
welfare motives.

(ii) Private Sector

It consists of all the economic enterprises which are controlled and managed by the private
enterprises. All the privately owned production units are come under this head. These units
will produce and distribute goods and services among the people with an objective of profit
motive.

On the basis of habitation, Indian economy can again broadly be divided into two heads:

(i) Rural Sector

According to M.K. Gandhi, “India lives in villages”. About three-fourths of total population
in India lived in the rural sector. The main occupations of this sector are agriculture and allied
activities.

(ii) Urban Sector

One-fourth of the total population in India lived in the urban sector. It consists of towns and
cities. People living in this sector are mainly engaged in either secondary sector or tertiary
sector.
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PRIVATISATION

The transfer of ownership, property or business from the government to the private sector is
termed privatization. The government ceases to be the owner of the entity or business. The
process in which a publicly-traded company is taken over by a few people is also called
privatization. The stock of the company is no longer traded in the stock market and the
general public is barred from holding stake in such a company. The company gives up the
name 'limited' and starts using 'private limited' in its last name. Privatization is considered to
bring more efficiency and objectivity to the company, something that a government company
is not concerned about. India went for privatization in the historic reforms budget of 1991,
also known as 'New Economic Policy or LPG policy'.

Privatization, described as the transfer of state owned enterprises (SOEs) to the private owners, has
become a common economic policy tool around the globe. The trend toward privatization is debatable
issue. Indeed, the debate between the superiority of the private and public sectors has been going on
for the past four to five decades. The discussion initially focused on how the size of public sector
measured by the size of government consumption affected economic growth.

Major causes of privatization are:

- To reduce the burden on Government

- To strengthen competition

- To improve Public finances

- To fund infrastructure growth

- Accountability to shareholders

- To reduce unnecessary interference

- More disciplined labour force.

The private sector has effective policies in solving the problem of externalities, through costless
bargaining, driven by individual incentives. According to the Coase Theorem, individual parties will
directly or indirectly take part in a cost-benefit analysis, which will eventually result in the most
efficient solution.

When comparing with public sector, the private sector responds to incentives in the market. On the
other hand, public sector often has non-economic goals. The public sector is not highly driven to
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maximize production and allocate resources effectively; causing the government to run high cost,
low-income enterprises. Privatization directly shifts the focus from political goals to economic goals,
which leads to development of the market economy. The downscaling aspect of privatization is an
important one since bad government policies and government corruption can play a large, negative
role in economic growth. Through privatizing, the role of the government in the economy is
condensed, thus there is less chance for the government to negatively impact the economy.

Privatization may have a positive impact on a country's economic situation. Privatization should not
be used to finance new government expenditures and pay off future debts. Instead, privatization
enables countries to pay a portion of their existing debt, thus reducing interest rates and raising the
level of investment. By reducing the size of the public sector, the government reduces total
expenditure and begins collecting taxes on all the businesses that are now privatized. This process can
help bring an end to a vicious cycle of over-borrowing and continuous increase of the national debt .

Nations around the world have adopted different methods of privatizing state assets depending on the
initial conditions of the country's economy and the economic principles of the political party in
charge.

Major method of privatization is the sale of state-owned enterprises to private investors. The state
would simply decide which institutions should be privatized and through the use of market
mechanism, private investors are able to buy shares of each organization. Advantage of this method of
privatization is that it creates badly needed revenues for the state while putting privatized firms in the
hands of investors who have the incentives and the means of investing and reformation.

Other method of privatization is called voucher privatization. The government universally distributes
vouchers to its eligible citizens, which can be sold to other investors or exchanged for shares in other
institutions being privatized. Although this method does not create profits for the state, it does
privatize state-owned firms in a short period of time.

Next method of privation is called internal privatization, also known as "employee or management
buyout". State-owned enterprises are sold to managers (for an extremely low price) who are already
familiar with the particular firm and its structure, but there are minimal revenues created for the state.
This method creates some incentives but the incentives are much stronger when firms are sold to
strategic investors. Furthermore, new owners often do not have the resources to invest and restructure,
which is badly needed in a large percentage of state-owned firms in underdeveloped countries .

One of the noticeable feature of privatization is the improved competitive characteristics it provides to
the enterprises which prove to be fruitful for the business as well as the country. Nonetheless,
privatization contracts are greatly influenced by merger variables and even global issues and are
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structured on the basis of manipulation of the government and the private actors along with the
administering jurisdiction.

Privatization can be categorized in to three parts:

- Delegation: Government keeps hold of responsibility and private enterprise handles fully or partly
the delivery of product and services.

- Divestment: Government surrenders the responsibility.

- Displacement: The private enterprise expands and gradually displaces the government entity.

Privatization certainly is beneficial for the progress and sustainability of the state-owned enterprises.

The advantages of privatization can be apparent from both microeconomic and macroeconomic
impacts that privatization exerts.

Microeconomic advantages:

1. State owned enterprises generally are outdone by the private enterprises competitively. When
compared the latter, it shows better results in terms of profits and efficiency and productivity.
Therefore, privatization can provide the necessary push to the underperforming PSUs.

2. Privatization brings about fundamental structural changes providing momentum in the

competitive sectors.

3. Privatization leads to implementation of the global best practices along with management and
motivation of the best human talent to foster sustainable competitive advantage and
improvised management of resources.

Macroeconomic advantages:

1. Privatization has a positive impact on the financial growth of the sector which was previously
state dominated by way of decreasing the deficits and debts.

2. The net transfer to the State owned Enterprises is lowered through privatization.

3. It helps in escalating the performance benchmarks of the industry in general.

4. It can initially have an undesirable impact on the employees but progressively in the long
term, shall prove advantageous for the growth and prosperity of the employees.

5. Privatized enterprises provide better and quick services to the clients and help in improving
the overall infrastructure of the country.
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Though privatization offers numerous advantages, it has many disadvantages:

1. Private sector mainly focuses more on profit maximization and less on social objectives
dissimilar to public sector that initiates socially viable adjustments in case of emergencies and
criticalities.

2. There is lack of clearness in private sector and stakeholders do not get the complete
information about the functionality of the enterprise.

3. Privatization has provided the unnecessary support to the corruption and unlawful ways of
accomplishments of licenses and business deals amongst the government and private bidders.
Lobbying and bribery are the common issues corrupting the practical applicability of
privatization.

4. Privatization loses the mission with which the enterprise was established and profit
maximization programme encourages malpractices like production of lower quality products,
elevating the hidden indirect costs, price escalation etc.

5. Privatization results in high employee turnover and a lot of investment is required to train
staff and even making the existing manpower of PSU abreast with the latest business
practices.

6. There can be a conflict of interest amongst stakeholders and the management of the buyer
private company and initial resistance to change can impede the performance of the
enterprise.

7. Privatization intensifies price inflation in general as privatized enterprises do not get

government subsidies after the deal and the burden of this inflation affects the common man.

Analysis of private Sector with reference to the Indian Economy:

Government of India chose for a mixed economy in which both public and private sectors were
permitted to operate. The private sector had to operate within the provisions of the Industries
(Development and Regulation) Act. 1951 and other relevant legislations. In this framework, the
Industrial Policy Resolution 1956 stated, Industrial undertakings in the private sector have necessarily
to fit into the framework of the social and economic policy of the State and will subject to control and
guideline in terms of the Industries (Development and Regulation) Act and other relevant legislation.
The Government of India recognizes that it would be desirable to allow such undertakings to develop
with as much freedom as possible, consistent with the targets and objectives of the national plan.
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Reports indicated that in spite of speedy progress of the public sector in the period of planning,
private sector is the principal sector in the Indian economy.

Since many decades, numerous modern industries have been established in the private sector.
Important consumer goods industries were set up in the pre-Independence period itself. Examples
include cotton textile industry, sugar industry, paper industry and edible oil industry. These industries
were set up in response to the opportunities offered by the market forces. They were highly suitable
for private sector since they ensured good returns and required less capital for establishment. Though
the engineering industries were not established in the pre-Independence period, yet Tata had initiated
in the field of iron and steel industry at Jamshedpur. After Independence, a number of consumer
goods industries were set up in the private sector. Presently, India is practically self-reliant in its
requirements for consumer goods. According to the 1956 resolution, "industries producing
intermediate goods and machines can be set up in the private sector." As a result, chemical industries
like paints, varnishes, plastics etc. and industries manufacturing machine tools, machinery and plants,
ferrous and non-ferrous metals, rubber, paper, etc. have been set up in the private sector.

In India, there is a need of privatization of companies to enhance economic status. Though the PSUs
have contributed a lot to develop the industrial base of the country, they continue to suffer from a
number of inadequacies such as;

Many PSUs have been incurring and reporting losses on a continual basis. Consequently, a large
number of PSUs have already been referred of loss giving units.

Multiplicity of authorities to whom the PSUs are accountable. Delay in implementation of projects
leading to cost escalation and other consequences.

There is Ineffective and extensive inefficiency on management.

Many PSUs are over-staffed resulting in lower labour productivity, bad industrial relations.

There are many examples of privatization of companies in India such as:

- Lagan Jute Machinery Company Limited (LJMC)

- Videsh Sanchar Nigam Limited (VSNL)

- Hindustan Zinc Limited (HZL)

- Hotel Corporation Limited of India (HCL)

- Bharat Aluminium Company limited (BALCO)

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Privatisation in infrastructure sector started with the modification of relevant legislation to permit
private enterprises to enter power generation in October 1991. Reforms have been much successful in
telecommunications sector. Value added services were opened to private sector in 1992, followed by
the enunciation of the National Telecom Policy in 1994-95 which opened up basic telecom services to
competition. Foreign equity participation up to 49% was permitted in case of a joint venture between
an Indian and a foreign firm.

The Telecom Regulatory Authority of India (TRAI) was established in 1997. In order to separate the
service-providing function of publicly owned telecom enterprises and policy-making function, both of
which were initially with the Department of Telecommunications, a separate Department of Telecom
Services was set up in 1999- 2000. The two public sector service providers were corporatised in 2000-
01. International long-distance business, which was a public sector monopoly, was opened to
unrestricted entry in 2002-03.

In roads sector, there are also infrastructure reforms. Major reform was the creation of a major new
source of funding for national, state and rural road construction, called the Central Road Fund (CRF)
under the Central Road Fund Act of2000. The National Highway Development Project funded by the
CRF is one of the largest single highway projects in the world. It includes the nearly 6,000 km of
Golden Quadrilateral (GQ) connecting the four metropolitan cities of Chennai, Delhi, Kolkata and
Mumbai and 7,300 km of North-South and East-West Corridor.

Major impact of Privatisation on Indian Economy is as under:

It frees the resources for a more productive utilisation.

- Private concerns tend to be profit oriented and transparent in their functioning as private owners are
always oriented towards making profits and get rid of sacred cows and hitches in conventional
bureaucratic management.

- Since the system becomes more transparent all fundamental corruption are minimised and owners
have a free reign and incentive for profit maximisation so they tend to get rid of all free loaders and
vices that are inherent in government functions.

- Gets rid of employment inconsistencies like free loaders or over employed departments reducing the
strain on resources.

- Lessen the government's financial and administrative load.

- Effectively minimises corruption and optimises output and functions.

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- Private firms are less tolerant towards capitulation and appendages in government departments and
hence tend to right size the human resource potential befitting the organisations needs and may cause
resistance and disgruntled employees who are accustomed to the benefits as government
functionaries.

- Permit the private sector to contribute to economic development.

- Development of the general budget resources and diversifying sources of income.

In short, privatization is the process of transfer of ownership, can be of both permanent or long term
lease in nature, of a once upon a time state-owned or public owned property to individuals or groups
that intend to utilize it for private benefits and run the entity to generate revenues. Privatization is
overriding process to enhance productivity and competitiveness, as well as attracting foreign direct
investment.
ECONOMICS –I

INDIAN EONOMY AND ECONOMIC REFORMS

Economic reforms were introduced by the Government of India in July 1991. The reform
process has completed 17 years. It would, therefore, be both interesting and instructive to
make an overall assessment of the reform process so as to ascertain whether the country is
moving in the right direction, or, to terminate the reform process altogether.

Goals

The objectives of the reform process were

(a) To promote a faster rate of growth,

(b) To enlarge employment potential leading to full employment,

(c) To reduce the incidence of poverty,

(d) To promote equity, leading to a better deal for the poor and less well-off sections of
society,

(e) Reduction of regional disparities, i.e., the gap between the rich and the poor states, and

(f) Improving the BOP position.

1. GDP Growth

The annual growth rate in the post-reform decade (1990-91 to 2000-01) was the same as that
of the pre-reform decade (1980-81 to 1990-91), viz., 5.6% per annum. After the teething
troubles of the first two years, viz., 1991-92 and 1992-93, the growth rate during 1993-94 and
1997-98 has averaged to more than 7% per annum.

After 1991-92, the growth momentum has been sustained. Reforms have, no doubt, improved
the growth potential of the economy. This is clear from the fact that the growth rate of GDP
during the 5-year period (2000-01 to 2005-06) was 7% p.a. It increased to about 8.9% in the
next year. (2006-2007)

2. Poverty Alleviation

The overall poverty ratio declined from 36% in 1993-94 to 27.5% in 2004-05 a decline of
8.5% during the 11-year period. Annual average reduction of poverty during this period was
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0.74%. However, the rate of poverty reduction during 1973-74 and 1987-88 was from 54.9%
to 38.9% a reduction of 14 percentage points during the 14-year period.

So, poverty reduction was at the rate of 1 % p.a., which was higher than that during the post-
reform period, even though GDP growth rate during the post-reform period was much higher
than that in the pre-reform period.

The number of persons below the poverty line was 300 million in 2004-05 compared to 320
million in 1993-94. This means that the absolute number of poor declined very slowly during
the post-reform period. So, the trickledown effect of the growth process did not benefit the
poor.

3. Employment Generation

One of the causes of poverty is growing unemployment or underemployment. Total

employment increased from 302 lakhs in 1983-84 to 3,568 lakhs in 1990-91 and then to
3,829 lakhs in 1997- 98. The rate of growth of employment was of the order of 2.39% p.a.
during 1983-84 and 1990- 91, which was just equal to the rate of growth of labour force
during this period.

But over the period 1990-91 and 1997-98 the overall growth rate of employment was only
1%. Since the reform process is limited to the organised sector, more so to the large corporate
sector, the growth rate of employment in the organised sector decelerated to 0.60% during
1990-91 to 1997-98 as against 1.73% p.a. witnessed in the 7-year pre-reform period of 1983-
84 1990- 91.

There was also a substantial slowdown in the employment growth rate of the unorganised
sector to merely 1.1% during 1990-91 and 1997-98 as against employment growth rate of
2.41% witnessed during the 7-year pre-reform period.

4. Economic Reforms and its Impact on Labour

(a) Person Days Lost

The number of person days lost due to strikes and lockouts declined during the period 1991-
2000 compared to that in the period.

1981-1990. This can be treated as an index improvement of industrial relations in the post-
reform period.
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(b) Downsizing

Although the government has not formally accepted an exit policy, by the scheme of
voluntary retirement, the load of workers is being reduced, both in the public and private
sectors. So workers are being pushed from the organised to the unorganised sector and from
secure to insecure employment.

5. Increase in Productivity and Movements, Real Wage

Although labour productivity had increased by 3.32% during 1987-88 and 1993-94, the real
earning of workers increased at the annual average rate of 1%. In other words, the gains of
increased labour productivity were not shared by the workers.

The basic problem with economic reforms is not to treat labour as an asset but as a mere
instrument which can be disposed with when it is no longer useful. Thus economic reforms so
far had an adverse effect on labour welfare, more so in view of the fact that there is no
comprehensive social security system in India.

6. Neglect of Agriculture The Main Drawback of Economic Reforms

A major criticism of the process of economic reforms is the neglect of agriculture—the

mainstay of livelihood of two-thirds of the population. Due to inadequate attention given to
agriculture food grains production did not increase much. Even during 2004-05 and 2006-07,
food grains production stagnated at around 2008-09 million tones. As a result foods prices
rose sharply. This created inflation and, thus, was one of the causes of poverty.

The reform process has emphasised the growth of manufacturing and service sectors and thus
neglected agriculture. As a result, agricultural growth has stagnated around 2% during the last
decade. It was 2.1% during the Ninth Plan (1997-2002) and was estimated to be 2.3% during
the Tenth Plan (2002-2007).

The structural weakness of the agricultural sector reflected in low level of investment,
exhaustion of the yield potential of new high yield varieties of wheat and rice, an inadequate
incentive system and post-harvest value addition all conjointly accounted for slow agriculture
growth, or virtual stagnation since 2000-2001. Moreover, public sector investment in
irrigation, flood control, water harvesting, rural infrastructure, reclamation of degraded lands,
etc., also had a spread effect.
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The neglect of agriculture casts a shadow on sustainability of agricultural growth unless there
is a reorientation of priorities with much greater emphasis on agriculture and rural
industrialisation. It is time the state, instead of withdrawing from investment in agriculture,
irrigation and rural infrastructure, strengthened public sector investment in these areas.

7. Economic Reforms and Industrial Growth

Economic reforms were mainly intended to remove the bottlenecks which acted as obstacles
to industrial growth. The reform process dismantled the system of industrial licensing which
was considered to be a main roadblock to the progress of India’s industrial economy,
measured in terms of industrial growth and diversification.

In spite of this, India’s industrial sector took a back seat. Whereas, in the pre-reform period
(1981-82 to 1990-91), the general index of industrial production recorded an annual average
growth rate of 7.8%, the growth rate of industrial production slowed down to 6.7% during
1993-94 and 2004-05, which is generally identified as a period of wide-ranging reforms in
the industrial sector.

The growth was much below the target. It failed even to equal the performance observed in
the 1980s, not to speak of improving the performance, as a consequence of the reform
process. The failure of the basic goods and capital goods sectors really put a question mark
on the success of the reform process.

8. Performance of the Public Sector Enterprises

The Central Public Sector Enterprises have shown an improved performance during the 10-
year period of reform (1993-94 to 2003-04). In spite of this, the Government has undertaken
disinvestments of these enterprises instead of improving their performance still farther
through the reform process.

9. Economic Reforms and the Movements of WPI and CPI

In the post-reform period (1993-94 to 2005-06) the movement of the CPI (IW) was slightly
higher than the movement of WPI (IW). This indicates that retail inflation in the post-reform
period was slightly higher than wholesale inflation. The weighted price index (base 1993-94
= 100) showed an annual average increase of 6.3% during 1993-94 and 2005-06.
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10. Trends of Growth in Infrastructure

In case of saleable steel and cement, the growth rates were higher in the post-reform period
than in the pre-reform period for acceleration in the production of cement was largely the
result of introduction of dual pricing in case of cement introduced in 1982 with progressive
reduction in the percentage of controlled cement, to eventually freeing cement prices from
state control. This led to massive increase in the production capacity and output of sugar.

Similarly, the gradual easing of steel price control introduced since 1983 led to rise in output.
All these measures, taken in the pre-reform period, helped to create an environment to these
industries to raise their production capacity and output without any bottlenecks.

However, other infrastructure industries electricity, coal and petroleum did not fare well
during the reform period. Excessive dependence on the private sector did not yield the
desired result.

11. India’s Foreign Trade and BOP

During 1981-82 and 1987-88 India followed a restrictive import policy. During 1988-89 and
1990-91 the Government adopted a policy of export promotion. So, there was a shift of
emphasis in trade policy in the second half of the 1980s. A very distressing aspect of this
period is the steady decline in exports of net invisibles and the consequent fall in export
earnings from invisibles.

Economic reforms went in for a rapid globalisation of the Indian economy by reducing and/
or abolishing quantitative restrictions and also reducing tariff barriers which hindered trade.
The reform measures were mainly directed toward boosting exports as well as to facilitate
developments imports (mainly capital and intermediate goods) as also imports of some basic
raw materials which were so vital for increasing industrial production.

The post-reform period can be divided into three parts

i. Period 1: 1991-92 to 1995-96

During this period the annual average growth rate of exports was 11.8%, while imports
increased at the rate of 9.3% p.a. As a result the current account deficit was restricted to
$3,025 million.
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ii. Period 2: 1996-97 to 2000-01

During this period exports increased at an average rate of 6.8% per annum, while imports
increased at the rate of 6.3%. This implies that export promotion could not become effective.
Consequently, trade deficit as on average reached a record level of $15,156 million.

But a very encouraging effect of this period is the sharp increase in surplus from net
invisibles to an average level of $10,667 million which neutralized the trade deficit to a large
extent. Consequently, the current account deficit was restricted to $4,489 million.

iii. Period 3: 2001-02 to 2005-06

During this period a big boost was given to export promotion and exports grew at an average
annual rate of 18.4% p.a. As against this, the rate of growth of imports was of the order of
21.4% p.a. The most notable achievement of this period was the big surge in net invisibles
which more than offset the trade deficit. The current account turned positive in 2001-02. The
surplus, which was $3,400 million in 2001-02, increased to $14,083 million in 2003-04.

An Overall Evaluation of India’s External Account

On balance it seems that India’s foreign trade position was quite satisfactory during the
reform period. Exports have grown faster than imports in percentage terms. No doubt trade
deficit has increased, but the massive increase in net invisibles has helped to reduce current
account deficit. The emergence of a favourable current account balance during 2001-02 and
2003-04 is, no doubt, a major achievement of the post-reform period.

The situation has taken a turn in 2005-06, since imports increased faster than exports.
Consequently, the trade deficit touched a record level of $51,554 million. No doubt net
invisibles were positive to the extent of $40,492 million.

Yet they were not adequate as to wipe out the trade deficit. The net result was the emergence
of a negative balance on current account to the tune of $10,612 million. The situation did not
change much in 2006-07 and the trade deficit was likely to be $60,600 million.

12. Reduction of Regional Disparities

One of the declared objectives of India’s planning as also of industrial policy is to reduce
regional disparities. However, the reform process initiated in 1991 has been emphasizing the
use of the market forces, which naturally attract investment to regions which are more
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developed in terms of infrastructure both economic and financial. However, it did not pay any
attention to the question of regional imbalance.

The reform process helped the forward states much more than their backward counterparts
and was responsible for widening regional disparities. More than two-thirds of investment
proposals were concentrated in the forward states. A similar situation prevailed in terms of
financial assistance disbursed by all-India financial institutions as well as SFCs.

In short, the reform process has favoured the forward states in terms of approval of
investment proposals as well as financial assistance. Consequently, the already better-off
states are in a position to accelerate their growth process further. In sharp contrast to this,
backward states, being unfavourably treated, face a retardation of growth. This explains the
growing disparities in terms of NSDP both total and per capita.

The on-going reforms with stress on stabilisation and deregulation policies as their prime
instrument and a very significant role for the private sector seem to have aggravated the inter-
state disparities.

Four main drawbacks of the reform process are

1. It increased disparities among states.

2. It displaced people having little, if any marketable skills.

3. It increased the incidence of poverty and inequality.

4. It failed to ensure human development whose key indicators are life expectancy, literacy
rate, infant mortality rate, death rate and birth rate.

The true challenge before us is to combine the economies of growth with the economies of
equity and social justice. The age-old problem of planning has been the conflict between
growth and distributive justice.
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CONCLUSION

It is a fact that the reform process will not be able to achieve its socio-economic objectives
because of excessive private participation in the economy and the private sector is solely
guided by the objective of profit maximisation. No doubt the liberalisation process has
reduced the role of public sector investment.

But it has failed to fill the vacuum created by the withdrawal of public sector investment in
infrastructure, more so in the backward states. Obviously, this calls for a review of the reform
process and taking corrective measures.

The three way fast lane of liberalisation, privatisation and globalisation (LPG) failed to make
a dent on the problem of unemployment. The whole reform process makes at least one thing
clear the market forces do not help the poor.