Meaning of Economic Reform• The term economic reform broadly indicatesnecessary structural adjustments to externalevents.• It includes the function of country’s spending tothe level parallel to its income and therebyreducing fiscal deficits.• This requires gradual reduction in import andincrease in export.• These adjustments also require market changein order to make economy flexible.
The Crisis of June 1991• The present process of economic reformswas born out of the crisis in the economy,which climaxed in 1991.• The crisis compelled the government toadopt a new path-breaking economic policyunder which a series of economic reformmeasures were initiated with the objectiveto deal with the crisis and to take theeconomy 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 asTrend Setters to The Reform Process• The top and immediate priority of thegovernment was to stabilize the economy, bringthe growth of the economy to its normal trackand to win back confidence of masses in thecountry and the international financialcommunity.• The crisis management measures focussedlargely on fiscal correction, industrial decontroland balance of payments.
Main Features Of Economic ReformsECONOMICREFORMSLIBERALISATIONPRIVATISATIONGLOBALISATION
Liberalisation• It means to free the economy from direct or physicalcontrols imposed by the government.• Prior 1991, government had imposed several types ofcontrols on Indian economy e.g. industrial licensingsystem, price control or financial control on goods,import license, foreign exchange control, restrictionon investment by big business houses, etc.• These controls leads to fall in economy growth.• Economic reforms were based on the assumption thatmarket forces could guide the economy in a moreeffective manner than government control.
Measures taken for Liberalisation• Abolition of industrial licensing andRegistration: According to new industrialpolicy , with the exception of 6 sectors,industrial licensing has been removed.• Concession from MRTP Act• Freedom from Expansion and Production toIndustriesContd…
Measures taken for Liberalisation• Increase in the Investment Limit of the SmallIndustries– 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 andsoftware development.
Privatisation• Privatisation means allowing the privatesector to set up more and more of industriesthat were previously reserved for publicsector.• Change in ownership: Degree of privatisationjudged by the extent of ownership transferredfrom public to private sector.
Objectives of Privatisation• To increase efficiency & competitivepower of the enterprises• To strengthen industrial management.• To earn more & more Foreign currency.• To make optimum use of resources• To achieve rapid industrial developmentof 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 orgovernment selling or liquidatingan asset or subsidiary”
Objectives of Disinvestment To reduce the financial burden ongovernment To improve public finances To introduce, competition and marketdiscipline 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• PSUs give negative rate of return oncapital
The Indian economy had virtually embracedbankruptcy during the period of 1980-92.In 1991, there was 236 operating public sectorundertakings, of which only 123 were profit making.The top 20 profit making PSU’s were responsible for80 percent of profits.The return on public sector investment for the year1990-91 was just over 2 percent.Background of Disinvestment
Criteria for DisinvestmentThe decision regarding disinvestment or liquidationviewed 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 affectedbecause of disinvestment Whether private sector can efficiently operate and managethe undertaking. Whether the original rate of return targeted could not bepossible to achieve. Whether socio-economic objectives lots its purpose
The govt. in July 1991 initiated the disinvestment process inIndia, while launching the New Economic Policy (NEP). The govt. had appointed the Krishnamurthy committee in1991 and Rangarajan committee in 1992 to look after thedisinvestment process. Both the committees have recommended disinvestments tofulfill 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 DisinvestmentContd..
These committees also distinguished between theshort term and long term goals of the disinvestmentand advised the govt. not to sacrifice the long termgoals for the sake of fulfilling the short termobjectives. The govt. has announced in its NEP that mitigating thefiscal deficits is the only objective of disinvestment. The crucial shift in govt. policy for disinvestment ofPSU’s was mainly attributed to poor performance ofthese enterprises and burden of financing theirrequirements through budget allocation.Contd..Process of Disinvestment
Further in 1996, the govt. constituted a five member publicsector disinvestment commission under the chairmanshipof G.K.Ramakrshna for drawing a long term disinvestmentprogramme for the PSU’s. The committee submitted its report covering 58enterprises, out of 70 enterprises referred to it by the govt.recommendations ranged from strategic sales in variousproportions 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 1991to establish a systematic policy approach to disinvestment andto give fresh impetus to the programme of disinvestment,which will increasingly emphasize strategic sales of identifiedPSU’s. In 2001, the govt. reconstituted the disinvestmentcommission with R.H.Patil as its chairman. The govt. has decided to refer all ‘non-strategic’ PSU’s andtheir subsidiaries, excluding IOC, ONGC, and GAIL to thecommission for its independent advice.Process of Disinvestment
Privatization implies a change in ownership, resulting in achange in management.The privatization of public sector enterprises will occur onlywhen govt. sells more than 51% of its ownership to privateentrepreneurs.Disinvestment on the other hand, has a much widerconnotation as it could either involve dilution of govt. stake toa level that result in a transfer of management or could alsobe limited to such a level as would permit govt. to retaincontrol 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