Privatization in India

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INDIA

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Privatization in India*
Privatization of public enterprises has generated much debate; developing economies, which had previously opted for planning as a strategy and system for national socio-economic development. Under the Five Year Plans, the Indian state took upon herself the responsibility to undertake investments in basic and strategic economic activities and to control and direct private sector through a network of regulatory institutions. After pursuance of planned development for nearly half a century, a stage was reached when questions were raised about the relevance and the need to continue the planned development strategy. There is an ideological position that asserts to ‘end all direct and indirect state interventions in the economy’. The state should, according to this viewpoint, roll back and occupy the minimum possible space. The market forces instead of the arbitrary decisions undertaken by bureaucrats and politicians should decide all economic decisions. The contrary viewpoint is that since the Indian economy is ridden with extreme disparities in incomes, wealth and consumption, macroeconomic decisions cannot be left to the operation of the free market system. Third World economies suffer from so many socio-economic limitations that it is obligatory on part of the state to operate from the ‘commanding heights’ and aim at the highest level of socio-economic good for the largest numbers.

1.

The concept

Privatization, in its broader sense, stands for policies to reduce the role of the state, assign larger role for the private sector pursuing the logic of the market in all economic decisions. Viewed in this perspective departure from the policy of reservations of certain economic activities for exclusive development by the public sector (dereservation) implies a reduction in the relative position of the state sector and larger role for the private sector. The entry of new private sector enterprises could introduce competition where public sector enjoyed monopoly. The existing public enterprises (PSEs) would be forced to go commercial and respond to the market discipline. The dereservation process has sometimes been described as ‘Parallelization’ in the privatization framework. Privatization is also witnessed when governments take a decision to reduce their obligations to regulate and direct the behaviour of private actors in the economy. Pursuance of deregulation policies is aimed to make the * The paper was presented by Prof. S.K. Goyal on behalf of Institute for Studies in Industrial Development, New Delhi.

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restrictive regulatory system less important. In India, deregulation would imply loosening such statutes like the Industries (Development & Regulation) Act, 1951 (IDRA), Monopolies & Restrictive Trade Practices Act, 1969, (MRTPA), Foreign Exchange regulation Act, 1973 (FERA), Capital Issues Control and technical scrutiny by the Directorate General of Technical Development (DGTD). Privatization, however, is most often associated with transfer of public sector enterprises and services to private ownership, management and control. The privatization process for public enterprises can involve steps ranging from dilution of state-held equity, to adoption of practices like franchising, award of lease and management contracts, sub-contracting of select activities and tasks, down-sizing of workforce, and changes in the process of decisionmaking even without change in ownership, so that business decisions are guided by market and commercial principles of profit maximisation than vague societal concerns. Privatization in Inida has been carried out in several stages; such as, deregulation, dereservation, privatisation and disinvestment. These are discussed in the subsequent sections. 1.1 Deregulation

Under the Indian planning system public sector investments are financed through financial allocations by the government. While there were no...
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