Liberalization and Privatization

Definition-Liberalization
It refers to loosening or removal of controls so that economic development gets encouragement. It includes abolition of those economic policies, rules, regulations, administrative controls and procedures which impede economic development In other words economic liberalisation is a new economy policy of promoting market determined economic decisions rather than bureaucratic arbitrary economic decisions

Genesis
1980s, the root cause of the crisis was the large and growing fiscal imbalance.
Large fiscal deficits emerged as a result of mounting government expenditures, particularly during the second half of the 80s. These fiscal deficits led to high levels of borrowing by the government from the Reserve Bank of India (RBI), IMF, World Bank.

Government expenditure in India grew at a phenomenal rate, faster than what government earns as a revenues.
The subsidies grew at a rate faster than government expenditures. Expenditure on subsidies rose from Rs.19.1 billion in 1980-81 to Rs. 107.2 billion in 1990-91.

Continued
The Indian economy was indeed in deep trouble. Lack of foreign reserves . Gold reserve was empty. Before 1991, India was a closed economy. The government was close to default and its foreign exchange reserves had reduced to the point that India could barely finance three weeks worth of imports. The Government of India headed by Chandra Shekhar, with Manmohan Singh (appointed as a special economical advisor) decided to usher in several reforms that are collectively termed as liberalisation in the Indian media.

Economic Reforms
Industrial delicensing and simplification and rationalization of tax structure to promote investment and expansion.
Liberal FDI regime to supplement domestic resources.

Current account convertibility to have a liberal trade regime.

Public sector disinvestment to ensure government does what it does best. WTO compatibility to plug into the global economy.

Reforms in Industrial Policy

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

MRTP Act and License Raj

The Monopolistic and Restrictive Trade Practices Act, 1969, aims to prevent concentration of economic power to the common detriment, provide for control of monopolies and probation of monopolistic, restrictive and unfair trade practice and protect consumer interest.

License Raj refers to the elaborate licenses, regulations and accompanying red tape that were required to set up business in India between 1947 and 1990. the license Raj was a result of Indias decision to have a planned economy, where all aspects of the economy are controlled by the state and licenses were given to a select few.

Reforms in Trade Policy

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

Foreign Investment In India

After reforms in 1992, huge amounts of foreign direct investment came into India In 1993, foreign institutional investors were allowed to purchase shares of listed Indian companies in the stock market Foreign direct investments in India are approved through two routes: a) Automatic approval by RBI b) The FIPB Route

Foreign Direct Investment

Exploration or mining of coal or lignite for captive consumption 74%

Roads and Highways, Ports and Harbors 74%

Exploration and mining of diamonds and precious stones

74%

Projects relating to electricity generation, 74% transmission and distribution (other than atomic power plants)

Continued.
Banking 74%

Airports

Up to 100% with FDI, beyond 74% requiring Government approval 100%

Infrastructure related to marketing of petroleum products Telecom Services

74%

Civil Aviation Insurance

49% 26%

Special Economic Zone

The main objectives of the SEZ Act are: generation of additional economic activity promotion of exports of goods and services; promotion of investment from domestic and foreign sources; creation of employment opportunities; development of infrastructure facilities; The announcement of the Exim policy 200203 has given further impetus to the creation of SEZs because the Exim policy has included service-sector units to be set up in SEZs. Currently 500 approved and 220 operational.

Disinvestment

Disinvestment of the Governments equity in CPSUs started in 1991-92,

When minority shareholding of the Central Government in 30 individual CPSUs was sold to selected financial institutions (LIC, GIC, UTI) in bundles. In order to ensure that along with the attractive shares, the not so attractive shares also got sold. Subsequently, shares of individual CPSUs were sold and the category of eligible buyers was gradually expanded to include individuals, NRIs and registered FIIs. By 1997, sale was also initiated and MTNL (1997-98), VSNL (1998-99) and GAIL (1999-2000) all used the opportunity to access the GDR market. The number of listed CPSUs on domestic stock exchange stood at 42 as on 31.3.2006.

Disinvestment Commission
The government constituted an independent body, the Disinvestment Commission in 1996. The main terms of reference were:

A comprehensive overall long-term disinvestment programme within 5-10 years for the PSUs referred to it by the Core Group. To select the financial advisors for specified PSUs to facilitate the disinvestment process. To monitor the progress of disinvestment process and take necessary measures.

1999 Onwards

The progress of disinvestment in India was very slow

According to the balance sheet of the government, at the end of March 2000, the investments totalled Rs.2,52,554cr.

Except for three years (1991-92, 1994-95 and 1998-99), the budget targets for disinvestment were not met.
Between 1991-92 & 1999-2000, the total realisation Rs. 18,368 cr against the targeted - Rs. 44,300 cr. More than 40 % of government equity had been disinvested in HPCL, VSNL, MTNL, IPCL and Hindustan Organic Chemicals.

Disinvestments so far..
S.No. Name of the CPSEs % of equity disinvested Name of the buyer Proceeds realized (Rs.in crore) 148.80

1.

Bongaigaon Refineries & Petrochemicals Ltd. (BRPL)

74.46

Indian Oil Corporation Limited

2.
3. 4.

Chennai Petroleum Corporation Limited

Kochi-Refineries Limited (KRL) Modern Food Industries (India) Ltd. Maruti Udyog Ltd.

51.81
55.04 74%

Indian Oil Corporation Limited

Bharat Petroleum Corporation Limited Hindustan Lever Ltd.

509.33
659.10 105.45

5.

45.79%

Suzuki Motors

1,000.00

Strategic Sale cases called off

S. No. Name of the CPSU 1 2 3 Manganese Ore India Limited Sponge Iron India Limited Shipping Corporation of India Limited Percentage of equity which was earlier proposed to be sold through Strategic Sale 51% 100% 54.12% (51% through Strategic Sale and 3.12% to Employees)

4
5 6 7

National Aluminium Company Limited

National Building Construction Corporation Limited National Fertilizers Limited Rashtriya Chemicals and Fertilizers Limited

61.15% (10% Domestic Issue, 20% ADR Issue, 29.15% Strategic Sale, 2% to Employees)
74% 53% (51% through Strategic Sale and 2% to Employees) 53% (51% through Strategic Sale and 2% to Employees)

Sector-wise Performance
Steel Telecom Banking Insurance

Steel
India set plans in motion to partially privatize its nationalized industries in 1993. As such, 10 percent of SAIL was offered to private investors over the next several years. Although India started exporting steel way back in 1964, exports were not regulated and depended largely on domestic surpluses. However, in the years following economic liberalisation, export of steel recorded a quantum jump. After de-licensing of Indian Iron and Steel Industry and as a result of the steps taken for creation of additional capacity in the private sector, 19 projects involving a total investment of Rs. 30,835 crores equivalent to a capacity of approx. 13 million tonnes per annum have already been cleared by Financial Institutions and are in various stages of implementation. Already 8 units with a total capacity of Approx 5.45 million tonnes have already been commissioned.

Telecom Sector
India introduced private competition in value-added services in 1992 followed by opening up of cellular and basic services for local area to private competition. The Telecom Regulatory Authority of India (TRAI) was constituted in 1997 as an independent regulator in this sector. Competition was also introduced in national long distance (NLD) and international long distance (ILD) telephony at the start of the current decade. FDI in telecom sector which opened up with 49%, has been increased to 74% equity cap in 2004-05 Budget. As many as 72 million new phones have been added since 2007-2008

Banking Sector
Reforms
Operation autonomy to public sector banks and reduction of public ownership up to 49% Entry for Indian private sector, foreign and joint-venture banks and insurance companies. Reduction in reserve requirement, disbanding of administered interest rates, introduction of pure inter-bank call money market and capital adequacy requirements and other prudential norms .

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

Insurance Sector

Insurance sector was opened up in August 2000.

Private sector insurance companies with foreign equity allowed up to 26% were allowed to enter the field. An independent Insurance Development & Regulatory Authority has been established.

Thank You