2. 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.
3. 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.
4. 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
5. 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.
6. Main Features Of Economic Reforms
ECONOMIC
REFORMS
LIBERALISATION
PRIVATISATION
GLOBALISATION
7. 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.
8. 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…
9. 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.
10. 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.
11. 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.
12. 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
13. Disadvantages of Privatisation
• Lack of social welfare
• Class struggle
• Increase in inequality
• Increase in unemployment
• Exploitation of weaker section
15. 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
16. 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
17. 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
18. Criteria for Disinvestment
The 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
19. 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..
20. 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
21. 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
22. 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
23. 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
