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Public Sector Reforms in India

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by

Monica Shrivastav

on 26 April 2017

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Transcript of Public Sector Reforms in India

Background
• 1990-1992 = period of economic instability (forex crisis) leading to political reform of the socialist economy under then Prime Minister PV Narasimha Rao – beginning of LPG in India.

• 1991 – Policy adopted is basically against state ownership (market oriented policies); however, public sector in India was too vast to be privatized.

HOW THE LARGE PUBLIC SECTOR CAME INTO BEING IN INDIA
• 1950s – Developmental Economics and 5 Year Plans
Private sector was weak and small thus state had to play a leadership role in economic matters.
Poor, newly independent countries were discouraged from industrialization by WB and developed countries. Thus India adopted vastly successful Soviet model of 5 Year Plans and became a socialist economy.
Existence of large public sector was not unusual – manipulating expenses of public sector was a way to influence employment levels of a country.

• 1970s – TCDC and the Policy of Self-reliance in India
1974 – Policy of self-reliance in Agriculture.
Policy of self-sufficiency via import substitution made sense in India because:
 Population size was large enough to sustain demand for various goods at a high level.
 Country was geographically large enough to produce mineral deposits.
 Vast population meant that despite illiteracy, there was enough skilled manpower.

CHANGES BROUGHT ABOUT BY REFORMS IN INDIA
1991 – LPG Era: Market oriented policies and market-based rules

o Rule 1: then Finance Minister Manmohan Singh removed blanket ban on private sector + foreign companies in their functioning in any field. 1956 industrial policy resolution was nullified. Public sector was to be confined to strategic areas like armament industry.

o Rule 2: remaining public sector would behave like the private sector i.e. government would refrain from subsidizing state enterprises.

o Rule 3: State bound by MoU limiting financial support from government but providing autonomy to make decisions relating to staff strength, promotion and wages.

o Rule 4: privatization of a large number of state-owned enterprises – Ministry of Disinvestment (only in India!)

THE DECLINE OF THE PUBLIC SECTOR
• Publicly owned enterprises have genuinely played an important role in the industrial development of the country.

• The fact that the public sector of East Asia is performing well while India’s is doing badly indicates that poor management rather than ownership is cause of failure.

• Part of the reason why the public sector expanded and made losses was because many of the failed private sector units were passed on to it.

DISINVESTMENTS: THE SAME OLD STORY OF SLEAZE
• Idea behind disinvestment v/s reality of disinvestment: Ideally, privatization of losing public concerns would be beneficial therefore disinvestment is desirable. However, what really happens is that the most efficient and profit-making public enterprises are the only ones that create a demand in the market.

• World Bank on divestiture:
o Ultimate goal should be efficiency and not divestiture itself.
o Successful divestiture takes time.
o Adequate preparation is essential.

• How relevant is World Bank mandate on Privatization?
o It does not take into account the circumstances that led to the proliferation of the public sector units.
 In India, selling of shares of some public enterprises became a regular feature of the national budget since 1991, but amount always fell short of targeted budget.
 Revenue considerations outweighed efficiency of public sector. Disinvestment confined to profit-earning enterprises. (defeats purpose)

• System of disinvestment streamlined in 1996 with appointment of Disinvestment Commission. WB insists that a regulatory authority be in place before disinvestment may be carried out.

Insurance Business In India
Private until mid 1950s
Forced Nationalisation by the Government
Why?

1. Went bankrupt
2. Failed to make payments to the clients
Before Privatisation
State owned, thriving public sector enterprised that made profit and contributed to the development through the path of investment:

1. LIC
Motto: to spread the message of insurance as far

2. GIC
Performed well in competitive market
Conducted business in rural areas and sponsored crop insurance schemes
High record (international avg.) of settlement of insurance claims
Malhotra Committee 1994
Claimed that coverage was low
Suggestions:
Open up for competitive environment
Expansion to private companies- Indian and foreign
Not to dismantle LIC-GIC
Choice between Indian public and Foreign private sector
Argument placed: current coverage by LIC-GIC of the Indian Population is low as compared to the figures of developed countries.
Two Pronged Attacks by the US from 1980s
Structural Transformation in US: 2/3rd of GDP and employment by the 'Service Sector' (providing financial services) and high growth rate of 15%
First attack: 'Service' included in agenda of Uruguay Round of GATT and incorporation into GATS, under the Marrakesh Agreement April 1994
Opened the economies to foreign agents
Free flow of services but restriction over flow of labour services with strict immigration laws
Seeks 'national treatment' of 'foreign capital'
Second attack: 'Super 301'
India under 'hit list' thrice since 1990
Forced to open up insurance sector to MNCs


DOUBLE STANDARDS OF THEN GOVERNMENT REGIMES
Setup of insurance regulatory authority post the liberalisation unlike elsewhere sectors
An anomaly called for the amendment
Later, in 1996 govt. said it was to regulate the private sector engaged in insurance but not to globalise and not bring multinationals
Earlier supported by BJP, the 1998 version of the same BJP allowed foreign ownership
PUBLIC SECTOR REFORMS IN INIDA POST 1990s
Presented by: Prerana and Monica
Questions rise over the thought positive role that is supposed to be played by the MNCs.
IMPLICATIONS
Lack of coverage of the basic products
Only caterring to the elite market
Premiums will go up, unlike the word
No ordinary middle class salaried can afford premium prescribed by private companies
No dissipation of technology unlike claimed by the notion of globalisation
RISKS
Disinvested Companies- NALCO and BALCO
Exposure of Indian Clientele to high risk of default
Bankruptcy- irrespective of the firm's size due to lack of management decisions and practices
Risk of shut down with private companies- high vulnerability
Private's uninterested to work in rural and low density areas
Crop insurance- unventured business by the private due to the fear of loss

Why allow them to enter just the 'juicy' areas when the vantage point of Indian economy is agriculture???

Why the neglect towards the social obligation of crop insurance in rural areas???

Points to answer before formulation of coherent national policy.
The Bharat Aluminium Co. Episode:

Suspicious manner of the bidding
Critisism to the valuation of the firm

The National Aluminium Co. Disinvestment:

Strong business and financial position- core sector company
Recommended 30% divest of govt. holding
High quality bauxite and low production cost allured many bidders
Anticipated- Aditya Birla Group to attain complete monopoly over domestic market of Aluminium , with least govt. intervention due to narrow definition of 'strategic sectors' limited to defence and railways.
Trade unions and leftists against the privitisation
Thank you
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