privatisation liberalization

By Gunjan PorwalBusiness Environment

Privatisation & Liberlization

Reduction in the involvement of state/public sector in economic activities of a nation

Privatisation…..

Initiation of private management without its ownership

Public sector

ownership

Private sector ownership

Privatisation…..

Measures of Disinvestment Ownership Measures

Total denationalization Ex: VSNL to Tata

Joint VenturesExample: Maruti Suzuki

LiquidationHZL

Management Buy-OutDelhi airport

Contd…. Organisational Measures

Holding company

Leasing

Restructuring;financial/ basic restructuring

Some other forms….

• Divesture • Denationalization • Licensing of technology of PSUs to private

enterprise on annual royalty linked to output• Government withdrawal• Management contracts; govt. retains

ownership but with private management (lease)

Objectives

• To do away with non strategic enterprises• Release resources from non strategic

enterprises & re- deploy in prioitised areas• Reduction of public debt• Transferring commercial risk

Uncontrolled State Expansion….

• Economic inefficiency• Ineffectiveness in provision of goods &

services• Bureaucracy• Stressed public budget• Inefficient governance & management

Consequently…..

New Industrial Policy, 1991 pruned the listof the industries reserved for the public sector to only 8

Presently, only 2 industries are now reserved for the public sector. 

Atomic energy

Railways

In India Privatisation was adopted to….

• Modernize & upgrade PSUs• Asset creation• Optimal use of resources & assets/ productive potential• Employment generation• Restriction of private monopoly• Disinvestment • Divestment Proceeds Fund• Guidelines • Abolition of industrial policy• Sick units

Demerits

• Concentration of economic power• Slow down the growth of low margin

industries • Continuing industrial sickness• MNCs• Threat for weaker sections of society• Discarding the objectives of Public sector• Privatisation of vital sectors are against

national interest• Capital markets are not fully developed

Sector-wise Performance

• Steel• Telecom• Banking• Insurance

Steel

• India set plans in motion to partially privatize its nationalized industries in 1993

• Although India started exporting steel way back in 1964,restrictions on  external trade, both in import and  export  were  been removed

• Steel industry has been removed from the list of industries  reserved  for   the   public   sector

• Automatic   approval of foreign equity investment up to 100% is now available

Telecom Sector

• India introduced private competition in value-added services in 1992 followed by opening up of cellular and basic services for local area to private competition.

• The Telecom Regulatory Authority of India (TRAI) was constituted in 1997 as an independent regulator in this sector.

• Competition was also introduced in national long distance (NLD) and international long distance (ILD) telephony

Banking Sector

• Operation autonomy to public sector banks and reduction of public ownership up to 49%

• Entry for Indian private sector, foreign and joint-venture banks and insurance companies

• Reduction in reserve requirement, disbanding of administered interest rates, introduction of pure inter-bank call money market and capital adequacy requirements and other prudential norms

Reforms

Impact

• Reduction in the share of non-performing assets in the portfolio and more than 90 percent of the banks now meet the new capital adequacy standards.

• Increase in the overall profit of public sector banks.

Insurance Sector

• Insurance sector was opened up in August 2000• 49% FDI has been recently announced by government• An independent Insurance Development & Regulatory Authority has

been established.

Privatization occurred in..

• Bharat Aluminium Company - in 2001 by the BJP Government

• Maruti Udyog• BSNL• Hindustan Zinc Limited - in 2001 by the BJP [6]

• VSNL - by the BJP• Delhi Airport• Mumbai Airport• Hyderabad International Airport• Bangalore International Airport• Cochin International Airport

Decisions in line…

• Disinvestment in ONGC• Disinvestment in OIL• Divestment IOC

Liberalization

Loosening or removal of controls so that economic development gets encouragement

Abolition of those economic policies, rules, regulations, administrative controls and procedures which impede economic development

In other words economic liberalisation is a new economy policy of promoting market determined economic decisions rather than bureaucratic arbitrary economic decisions

Definition-Liberalization

Genesis• 1980s, the root cause of the crisis was the large and growing

fiscal imbalance

• Large fiscal deficits emerged as a result of mounting government expenditures, particularly during the second half of the 80s

• These fiscal deficits led to high levels of borrowing by the government from the Reserve Bank of India (RBI), IMF, World Bank

• Government expenditure in India grew at a phenomenal rate, faster than what government earns as a revenues.

• The subsidies grew at a rate faster than government expenditures

• Expenditure on subsidies rose from Rs.19.1 billion in 1980-81 to Rs. 107.2 billion in 1990-91

Continued……• The Indian economy was indeed in deep trouble

• Lack of foreign reserves

• Gold reserve was empty

• Before 1991, India was a closed economy

• The government was close to default and its foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports

• The Government of India with Manmohan Singh (appointed as a special economical advisor) decided to usher in several reforms that are collectively termed as liberalisation in the Indian media

Economic Reforms

• Industrial delicensing and simplification and rationalization of tax structure to promote investment and expansion

• Liberal FDI regime to supplement domestic resources

• Current account convertibility to have a liberal trade regime

• Limited industries for Public Players only• Monopolies and Restrictive Trade Practices Act to

new competition law

Reforms in Industrial Policy

Reforms in Trade Policy

• Import licensing was abolished relatively early for capital goods and intermediates which became freely importable in 1993

• Switch to a flexible exchange rate regime

Foreign Investment In India• After reforms in 1992, huge amounts of foreign direct

investment came into India• In 1993, foreign institutional investors were allowed to

purchase shares of listed Indian companies in the stock market

• Foreign direct investments in India are approved through two routes: a) Automatic approval by RBI

b) The FIPB Route

Special Economic Zone

• The main objectives of the SEZ Act are:

generation of additional economic activity

promotion of exports of goods and services;

promotion of investment from domestic and foreign sources;

creation of employment opportunities;

development of infrastructure facilities;• The announcement of the Exim policy 2002–03

has given further impetus to the creation of SEZs because the Exim policy has included service-sector units to be set up in SEZs

Resulted in…

• Delicensing• Freedom from locational requirement & government clearance• Freedom to PSUs to access capital market• Permission to corporates to buyback shares• Liberalisation in tax structure• Freedom for banks to enter in insurance sector• Shifting of product/industries from administered price mechanism• Freedom to transfer license & assets• Removal of restrictions on movement of products/ sale-purchase of

assets• Reduction in CRR & SLR• Tax exemptions/ concessions

Thank You