ECONOMIC REFORMS

Meaning of Economic Reform• The term economic reform broadly indicates

necessary structural adjustments to external events.

• It includes the function of country’s spending to the level parallel to its income and thereby reducing fiscal deficits.

• This requires gradual reduction in import and increase in export.

• These adjustments also require market change in order to make economy flexible.

The Crisis of June 1991• The present process of economic reforms

was born out of the crisis in the economy, which climaxed in 1991.

• The crisis compelled the government to adopt a new path-breaking economic policy under which a series of economic reform measures were initiated with the objective to deal with the crisis and to take the economy on a high-growth path.

Need of Economic Reforms

• Increase in Fiscal Deficit• Increase in adverse balance of Payment• Gulf Crisis• Fall in foreign Exchange Reserve• Rise in Prices• Poor Performance of Public Sector

Early Crisis Management Measures as Trend Setters to The Reform Process

• The top and immediate priority of the government was to stabilize the economy, bring the growth of the economy to its normal track and to win back confidence of masses in the country and the international financial community.

• The crisis management measures focussed largely on fiscal correction, industrial decontrol and balance of payments.

Main Features Of Economic Reforms

ECONOMIC

REFORMS

LIBERALISATION

PRIVATISATIONGLOBALISATI

ON

Liberalisation• It means to free the economy from direct or physical

controls imposed by the government.

• Prior 1991, government had imposed several types of controls on Indian economy e.g. industrial licensing system, price control or financial control on goods, import license, foreign exchange control, restriction on investment by big business houses, etc.

• These controls leads to fall in economy growth.

• Economic reforms were based on the assumption that market forces could guide the economy in a more effective manner than government control.

Measures taken for Liberalisation

• Abolition of industrial licensing and Registration: According to new industrial policy , with the exception of 6 sectors, industrial licensing has been removed.

• Concession from MRTP Act• Freedom from Expansion and Production to

Industries

Contd…

Measures taken for Liberalisation

• Increase in the Investment Limit of the Small Industries– It has been raised to Rs.1crore & – Investment limit has been raised to Rs.25 lakh.

• Freedom to import capital goods• Freedom to import technology• Action plan for information Technology and

software development.

Privatisation• Privatisation means allowing the private

sector to set up more and more of industries that were previously reserved for public sector.

• Change in ownership: Degree of privatisation judged by the extent of ownership transferred from public to private sector.

Objectives of Privatisation• To increase efficiency & competitive

power of the enterprises• To strengthen industrial management.• To earn more & more Foreign currency.• To make optimum use of resources• To achieve rapid industrial development

of the country.

Advantages of Privatisation• Reduction in economic burden• Increase in efficiency• Reduction in sense of irresponsibility• Scientific Management• Reduction in Political Interference• Encouragement of new Inventions

Disadvantages of Privatisation

• Lack of social welfare

• Class struggle

• Increase in inequality

• Increase in unemployment

• Exploitation of weaker section

Disinvestment“The action of an organisation or government selling or liquidating an asset or subsidiary”

Objectives of Disinvestment

To reduce the financial burden on government

To improve public finances To introduce, competition and market

discipline To increase growth of the firm To encourage wider share of ownership

Reasons for Disinvestment

• To meet fiscal deficit• Expansion or diversification of the firm• To repayment of government debts• Implementation of government plan• PSU's give negative rate of return on

capital

The Indian economy had virtually embraced bankruptcy during the period of 1980-92.

In 1991, there was 236 operating public sector undertakings, of which only 123 were profit making.

The top 20 profit making PSU’s were responsible for 80 percent of profits.

The return on public sector investment for the year 1990-91 was just over 2 percent.

Background of Disinvestment

Criteria for DisinvestmentThe decision regarding disinvestment or liquidation viewed in the light of following criteria:Whether the objectives of the company are achieved

Whether there is decrease in number of beneficiaries

Whether serving the national interest will be affected because of disinvestment

Whether private sector can efficiently operate and manage the undertaking.

Whether the original rate of return targeted could not be possible to achieve.

Whether socio-economic objectives lots its purpose

The govt. in July 1991 initiated the disinvestment process in India, while launching the New Economic Policy (NEP).

The govt. had appointed the Krishnamurthy committee in 1991 and Rangarajan committee in 1992 to look after the disinvestment process.

Both the committees have recommended disinvestments to fulfill objectives of modernization of the PSE’s through:

(a) Strengthening R &D

(b) Initiating diversification/expansion programme.

(c) Retaining and reemployment of employees.

(d) Funding genuine needs of expansion.

(e) Mitigating fiscal deficit of the government.

Process of Disinvestment

Contd..

These committees also distinguished between the short term and long term goals of the disinvestment and advised the govt. not to sacrifice the long term goals for the sake of fulfilling the short term objectives.

The govt. has announced in its NEP that mitigating the fiscal deficits is the only objective of disinvestment.

The crucial shift in govt. policy for disinvestment of PSU’s was mainly attributed to poor performance of these enterprises and burden of financing their requirements through budget allocation.

Contd..

Process of Disinvestment

Further in 1996, the govt. constituted a five member public sector disinvestment commission under the chairmanship of G.K.Ramakrshna for drawing a long term disinvestment programme for the PSU’s.

The committee submitted its report covering 58 enterprises, out of 70 enterprises referred to it by the govt. recommendations ranged from strategic sales in various proportions to disinvestments ant various level.

This committee was ultimately abolished in 1999.

Contd..

Process of Disinvestment

The govt. set up a new Department of Disinvestment in 1991 to establish a systematic policy approach to disinvestment and to give fresh impetus to the programme of disinvestment, which will increasingly emphasize strategic sales of identified PSU’s.

In 2001, the govt. reconstituted the disinvestment commission with R.H.Patil as its chairman.

The govt. has decided to refer all ‘non-strategic’ PSU’s and their subsidiaries, excluding IOC, ONGC, and GAIL to the commission for its independent advice.

Process of Disinvestment

Privatization implies a change in ownership, resulting in a change in management.

The privatization of public sector enterprises will occur only when govt. sells more than 51% of its ownership to private entrepreneurs.

Disinvestment on the other hand, has a much wider connotation as it could either involve dilution of govt. stake to a level that result in a transfer of management or could also be limited to such a level as would permit govt. to retain control over the organization.

Disinvestment beyond 50% involves transfer of management, where as disinvestment below 50% would result in the govt. continuing to have a major say in the undertaking.

Privatization and Disinvestment