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INKLING ABOUT REFORMS AND DISINVESTMENT
Vinod Anand | 22 Jul 2011

The year 1991 had witnessed a major economic crisis in India when, due to many reasons accumulating over the years, especially in the eighties, the macro economic scenario became very gloomy, and the macro economic problems got accentuated.

The year 1991 had witnessed a major economic crisis in India when, due to many reasons accumulating over the years, especially in the eighties, the macro economic scenario became very gloomy, and the macro economic problems got accentuated. There were many reasons for this. One basic reason was the growing fiscal deficits in terms of the revenue and the expenditure accounts of the government. The other was the deteriorating balance of payments situation in terms of income and expenditure of the economy as a whole. In fact, the internal imbalance in the fiscal situation and the external imbalance in the payments situation get closely related when there is an absence of prudence in the macro management of the economy, and when the economy attempts to live beyond its means. This reality was, in fact, completely ignored by the Government and the macroeconomic policies of the eighties forced the economy to live beyond its means both through internal and external borrowings. Apart from other things, this had serious fallout in terms of high inflationary pressures. The rate of inflation rose to 10.3 percent per annum in 1990-91, and, in terms of the consumer price index, it went up to 11.2 percent per annum. This was a serious cause for concern. The end result was a deep economic crisis that gripped the economy in early 1991. A few other reasons like, the Gulf war in late 1990, and the political instability in the country at that time worked as positive catalysts in accentuating the already grim situation in the country. In order to get over this appalling situation the only way out was to introduce economic reforms. The conditions were so desperate that the country was pushed towards the reforms process. As a result, it was in July 1991 that the economic reforms package was introduced, comprising both of macro economic stabilisation and structural reforms. Macroeconomic stabilisation basically implies cutting down fiscal deficits and the rate of growth of money supply. In other words, it focuses on control of inflation, fiscal adjustment, and balance of payment adjustment. Structural reforms aim to improve the supply side of the economy, and focus on trade and capital flows, financial sector, industrial deregulation, and disinvestment of public sector undertakings. The reforms package also implies globalisation in terms of integrating the economy with the world economy. In other words, globalisation amounts to gradual opening-up of the economy. Globalisation also implies privatisation in the sense of giving greater powers to individuals to mange the affairs of the economic system at the macro level. In essence, it leads to decentralisation of the functioning of the economic system with result that the public sector becomes relatively free to manage the affairs of certain strategic and key areas.In the context of the on-going reforms process this Paper briefly focuses on four aspects of disinvestment and privatisation. It initially talks of the rationale of disinvestment, and then depicts the present scenario, and then underlining some of the weaknesses of the disinvestment policy, it concludes by suggesting a few positive measures for an all-round success of privatisation.THE RATIONALEAs we have already said, disinvestment of public sector undertakings is an important component of structural reforms. This is one of the ways to make the economy market-friendly, encourage privatisation, and open the gates for foreign investment. Apart from all this, disinvestment also achieves another major objective in the functioning of the Government. The government?s job is not essentially in business, it is in other important spheres like, governance, social provisions, and security (both internal and external). It is through the process of disinvestment that the government gradually gets out of its unwarranted business and gets time to focus on its important roles. It is rather surprising to note that the government has invested an enormous amount of Rs.270, 000 crores of public money in 240 public sector undertakings, and that too without creating sufficient employment for the people. Apart from accommodating an extremely low percentage of the labour force, a majority of the public sector undertakings run in a loss. The scenario is even worse at the state level. It is, thus, seen that public sector undertakings do not create much employment, and, hence, we have all the reasons to support the policy of disinvestment and privatisation.II.THE SCENARIOIndia has now entered the second phase of Reforms. The economic impact has been encouraging (though slowly) especially on the industrial front through various policies including the policy ofcomplete delicensing leading to lesser hassles for the industrialists;ease of entry of foreign investors, leading to more foreign direct investment, especially in consumer goods and durables; andtrade liberalisation, leading, amongst other things, to liberal imports in the country, and also to export competitiveness.Coupled with all this is the development of the information technology sector, which is, perhaps, more because of the technological boom in the United States, and India?s subsidized system of higher education in that sphere, and less because of economic reforms. Despite these shifts, it is rather unfortunate that the country is experiencing the lowest industrial growth and low profit growth, because of an acute slowdown in the manufacturing sector. This has led to the process of restructuring and downsizing, and hence reduction in the existing employment opportunities through voluntary retirement schemes (VRS) and retirement policies. This has resulted into severe lack of job security, and has further added to the gloomy employment scenario in the countryThe economic impact on the agricultural front has not been satisfactory too. In fact, there has been a prolonged stagnation in agriculture in recent years, which has led to a slack of demand for industrial goods. There is, therefore, an urgent need of egalitarian economic reforms, and effective food security system. The social impact of the reforms process has almost been negligible in terms of poverty alleviation, employment creation, income equalities, and social provisions, basically because of poor governance and ineffective implementation of existing laws. In fact, it appears that the social sector reforms have not yet begun.Despite the gloomy scenario both in the industrial and agricultural sectors in recent years, the overall scenario of the economy is not that bad. Foreign exchange reserves are burgeoning. The current account deficit is safe. External debt is manageable. Inflation is moderate. Foodgrain stocks are huge. The economy?s growth rate has been highly impressive by world standards. Talking of disinvestment, it is seen that the process of disinvestment has been made a political issue by some sections on the grounds that it has amounted to plunder of public wealth, and, therefore, should not go ahead. In fact this political bottleneck is just a political strategy of some political entrepreneurs who are guided more by their own vested interests than by national interests. They are well aware of the fact that the decline in the number of public undertakings will, somehow, adversely affect their political hold and the accompanying ?rent-seeking? and ?directly unproductive profit-seeking? activities. This opposition is just a political gimmick and will have no long-term impact, whatsoever, on the on-going process of disinvestment. III.THE WEEKNESSES Despite the fact that disinvestment is one of India?s recent successes, the process and its outcome indicate many weaknesses and drawbacks. Some of these are briefly described below:Public sector companies are sold only to the indigenous entrepreneurs with the result that the process of disinvestment and privatisation of public sector companies is not bringing in foreign investment, and in that sense it is not adding much to globalisation. In terms of the recommendations of the Disinvestment Commission of 1996, priority for sale of public sector companies was to be given to loss-making units, and not so much to efficiently-running, well-performing, and cash-rich companies. But, in recent years, this recipe has been ignored, and all kinds of companies have been sold to the private sector in a rush without following any proper sequencing on the basis of given criteria of performance and efficiency.Selling public sector companies to the private sector does not mean that the age-old public dimension and history of such units will be completely undone. The new investors of the private sector, taking over the public sector undertakings, must perform a new role of living up to the expectations of the public. The enormous amount of money that is being unlocked through the sale of public sector undertakings is filling the coffers of the government without being utilised for social development in terms of social provisions say, in the field of human resource development (education, nutrition, and health), and also in terms of developing the basic infrastructure in relatively backward regions of the country. IV:THE LAST WORDPrivatisation is not just limited to the sale of the existing public sector undertakings to the private investors. It does not mean that the role of the government in business ventures will get completely eliminated once all the public sector undertakings have been sold to the private sector. The process of disinvestment and privatisation will go on for all time. Public sector will always have to play an important role in strategic areas like, water, power, and infrastructure. It will have to act like a venture capitalist, who starts a project, takes it to optimal heights, gets out of it, and then hands it over to the private investors, and moves on to other projects. Good governance is another important area. It is required to effectively and efficiently administer any government programme (including even legislation). The policy of disinvestment and privatisation is also linked with good governanceJust like everything else the policy of disinvestment and privatisation has both positive and negative effects and fallouts, both in the short-term and in the long-term. The Government has to be careful in assuring, of course within the given assumptions, that the net effect of this process, essentially in the long run, does not in any way become immiserising for the country as a whole. The future is there, but we have to make it bright.PAGE PAGE 1