Table of Contents

Structural Reforms and disinvestment in the Indian Economy: Is it a prudent strategy? ...................................... 2
1.1 Introduction ............................................................................................................................................................... 2
2.1 Trade Liberalization ................................................................................................................................................. 2
2.1.1 Synopsis: ................................................................................................................................................................ 2
2.1.2 Pre-liberalization v/s Post-liberalization: ........................................................................................................... 2
2.1.3 India Today: .......................................................................................................................................................... 4
2.1.4 Pros and Cons: ...................................................................................................................................................... 5
3.1 Disinvestment in PSUs .............................................................................................................................................. 6
3.1.2 Genesis of PSUs ...................................................................................................................................................... 6
3.1.3 Objectives of Disinvestment .................................................................................................................................. 6
3.1.4 Literature Review .................................................................................................................................................. 6
3.1.5 Implied Potential ................................................................................................................................................... 7
3.1.6 Historical data ........................................................................................................................................................ 7
3.1.7 Challenges and Reasons for delay ........................................................................................................................ 8
3.1.8 Effects of Disinvestments ....................................................................................................................................... 9
3.1.9 Disinvestment: Pros and Cons .............................................................................................................................. 9
4.1 Subsidies................................................................................................................................................................... 10
4.1.1 Removing price controls and subsidies .............................................................................................................. 10
4.1.2 Subsidy scene in India at present: ...................................................................................................................... 11
4.1.3 Types of Government Subsidies : ..................................................................................................................... 12
4.1.4 Salient Features(Subsidy 2015):.......................................................................................................................... 12
4.1.5 Why are subsidy reforms important? ................................................................................................................ 12
5.1 FDI: .......................................................................................................................................................................... 13
5.1.1 Synopsis: ............................................................................................................................................................... 13
5.1.2 India Today: ......................................................................................................................................................... 13
5.1.3 Merits and Demerits of FDI: ............................................................................................................................... 14
5.1.4 Has India taken FDI seriously? .......................................................................................................................... 15
6.1.1 Tax Collection System ......................................................................................................................................... 15
6.1.2 Acquiring land and obtaining Environmental clearances. ............................................................................... 15
6.1.3 Transparency in the Government Functioning ................................................................................................. 16
References .......................................................................................................................... Error! Bookmark not defined.

Structural Reforms and disinvestment in the Indian Economy: Is it a prudent strategy?

1.1 Introduction
It is no hidden fact that Indian economy was going through its roughest phases during the latter part of the 80s. By
1990-91, it reached its worst when the withdrawal of international credit and non-resident Indian (NRI) deposits
generated the balance of payments crisis, leading to the collapse of foreign exchange reserves. At 8.4% of GDP, the
gross fiscal deficit was a warning for the days to come. If one includes the losses of non-financial public sector
enterprises, the consolidated public sector deficit stood at around 10.9% of GDP in 1990-91, of which nearly 4.3
percent of GDP was for interest payments on domestic and external debt. It was then that the government opted for
conditional credit from the International Monetary Fund to deal with the situation, necessitating policies of
stabilization, and an acceleration of 'structural reform' as well as its extension into the external and financial sectors.
The results were clearly visible from the first year itself, with fiscal deficit falling to 5.9% in 1991-92 and further to
5.7% in 1992-93. Now, even after almost two and a half decades, whenever the Indian economy hits a rough patch, the
one thing on the part of press and financial market participants is to say that "to improve economic growth, India needs
to go through structural reform". Conference speeches, macro strategy notes and newspaper op-ed pieces feel
incomplete without at least one mention of "structural reform". So what exactly is structural reform and are we in India
really so deprived of this economic aphrodisiac?
1.2 Structural Reforms:
The term structural reforms came into existence during 1950s, when International Monetary Fund (IMF) and World
Bank started dispensing loans to troubled economies. These loans came with certain pre-conditions, which later were
termed as structural reforms by various journalists and academics. On a broader classification based upon IMFs and
World Banks definition, the key aspects of structural reforms implemented in India were:
1. Trade liberalization, i.e. lifting restrictions on imports and exports;
2. Balancing budgets (rather than the overspending; disinvestments);
3. Removing price controls and state subsidies;
4. Encouraging more investment through FDI and FII flows;
5. Improving governance and fighting corruption.
It shall be wrong on our part to not appreciate the Indian Government for its commendable outlook in adopting
unconventional fiscal consolidation policies during such testing times. In this report, we shall further try to explain
these reforms in detail and what were their socio-economic impact.
2.1 Trade Liberalization
2.1.1 Synopsis:
What is liberalization? The dictionary meaning of liberalization is: the act of making less strict. In the economic
sense, it is defined as the loosening of government regulations in a country to allow free trade between different
countries. Before the economic liberalization of 1991, India was still reeling under the beliefs generated by socialism
and the colonial exploitation. The government tried to close the economy to the outside world and push it towards
import substitution i.e. making the market more dependent on domestic production rather than international trade. But
the balance of payment crisis forced them to change their position and to take proactive measures that would help
them recover.
2.1.2 Pre-liberalization v/s Post-liberalization:
While the pre-liberalization era was full of tax bundles and tariff packages that hand-tied the industrialists, the
post-liberalization era brought a whole lot of freedom to the entrepreneurs to establish any trade or business venture.
Gradual abolishment of import licenses and most of the quantitative restrictions further eased out the process.
Although these decisions received serious objections from the various fractions of the educated society, the results
presented a completely different picture. The following tables show this trend in the growth of the Indias foreign trade
volume from 1971-1991 (pre-liberalization) to 1992-2014 (post-liberalization).

Year

Exports

Table #1
Indias Trade in Pre - Liberalization Period
%
of Imports
%
of Total Trade %
change
change
change

1971
1608
4.76%
1972
1971
22.57%
1973
2523
28.01%
1974
3329
31.95%
1975
4036
21.24%
1976
5142
27.40%
1977
5408
5.17%
1978
5726
5.88%
1979
6418
12.09%
1980
6711
4.57%
1981
7806
16.32%
1982
8803
12.77%
1983
9771
11.00%
1984
11744
20.19%
1985
10895
-7.23%
1986
12452
14.29%
1987
15674
25.88%
1988
20231
29.07%
1989
27658
36.71%
1990
32558
17.72%
1991
44042
35.27%
Source: Reserve Bank of India.

1825
1867
2955
4519
5265
5074
6020
6811
9143
12549
13608
14293
15831
17134
19658
20096
22244
28235
35328
42095
47841

11.69%
2.30%
58.28%
52.93%
16.51%
-3.63%
18.64%
13.14%
34.24%
37.25%
8.44%
5.03%
10.76%
8.23%
14.73%
2.23%
10.69%
26.93%
25.12%
19.15%
13.65%

3433
3838
5478
7848
9301
10216
11428
12537
15561
19260
21414
23096
25602
28878
30553
32548
37918
48466
62986
74653
91883

of

8.33%
11.80%
42.73%
43.26%
18.51%
9.84%
11.86%
9.70%
24.12%
23.77%
11.18%
7.85%
10.85%
12.80%
5.80%
6.53%
16.50%
27.82%
29.96%
18.52%
23.08%

Year
1992

Export
53688

Table # 2
Indias Trade during the Post - Liberalization Period:
% of change Import
% of change Total Trade % of change
21.90%
63375
32.47%
117063
27.40%

1993

69749

29.92%

73177

15.47%

142926

22.09%

1994
1995
1996
1997

82673
106352
118817
130101

18.53%
28.64%
11.72%
9.50%

89971
122678
138920
154176

22.95%
36.35%
13.24%
10.98%

172644
229030
257737
284277

20.79%
32.66%
12.53%
10.30%

1998

139752

7.42%

178332

15.67%

318084

11.89%

1999

159095

13.84%

215529

20.86%

374624

17.78%

2000

201356

26.56%

228307

5.93%

429663

14.69%

2001

209018

3.81%

245200

7.40%

454218

5.71%

2002

255137

22.06%

297206

21.21%

552343

21.60%

2003

293367

14.98%

359108

20.83%

652475

18.13%

2004

375340

27.94%

501065

39.53%

876405

34.32%

2005

456418

21.60%

660409

31.80%

1116827

27.43%

2006

571779

25.28%

838048

26.90%

1409827

26.24%

Year
2007

Export
655864

% of change Import
14.71%
1005159

% of change Total Trade % of change

19.94%
1661023
17.82%

2008

840755

28.19%

1374436

36.74%

2215191

33.36%

2009

845534

0.57%

1363736

-0.78%

2209270

-0.27%

2010

1142922

35.17%

1683467

23.45%

2826389

27.93%

2011

1455959

27.39%

2345463

39.32%

3801422

34.50%

2012

1634318

12.25%

2669162

13.80%

4303480

13.21%

2013
1905011
16.56%
2014
1891645
-0.70%
Source: Reserve Bank of India.

2715434
2733935

1.73%
0.68%

4620445
4625580

7.37%
0.11%

This international trade data for both the periods was analyzed and plotted on a separate graph as shown in Figure#3
below.
Figure # 3 - Fluctuations in the Indias Foreign Trade
Total Trade

% of change

5000000

50.00%

4500000

45.00%

4000000

40.00%
35.00%

3500000

30.00%

3000000

25.00%

2500000

20.00%

2000000

15.00%

1500000

10.00%

1000000

5.00%

500000

0.00%
-5.00%

The plot clearly shows that the total international trade remained fairly stagnant during the period 1971-91. However,
the total trade shows almost an exponentially increasing trend post 1991.
2.1.3 India Today:
It suffices to say that Indian economy has outperformed the expectations of the world. It is now the fastest
growing economy, surpassing China. But to maintain such pace in this highly competitive and unified global
economy, new policies have to be made and the old ones need to be tweaked. While the rate of growth had slowed
down in the past 5 years due to various domestic political and world economic conditions, the change of guard at New
Delhi in 2014 has brought a new ray of hope and a positive sentiment can be seen again in the market. On 1st April
2015, the BJP government came up with its new foreign trade policy for the next 5 years. Some of the salient features
of this policy and post-liberalization amendments are discussed further in the report.
1. India has signed 28 Free Trade Agreements (FTAs) and Comprehensive Economic Cooperation and
Partnership Agreements (CECAs) with countries like Singapore, Mauritius, Australia, Indonesia, Thailand,
New Zealand, Japan, South Korea etc.
2. Demarcated strategic areas in different cities and developing them as Special Economic Zones (SEZs) to
facilitate exports. Till date, 202 SEZs have been made operational and they have been divided into the
following 7 zones : SEEPZ Special Economic Zone,- Kandla Special Economic Zone, - Cochin Special
Economic Zone, - Madras Special Economic Zone,- Visakhapatnam SEZ, - Falta Special Economic Zone and
- Noida Export Processing Zone
4

3. In line with WTO recommendations, quantitative restrictions on all import items were withdrawn.
4. Apart from agricultural goods like wheat, rice, maize, urea and petroleum products like diesel and petrol,
import of the majority of the items was de-canalized through the public sector agencies.
5. Custom duty has been reduced to a maximum of 15%.
6. The exchange rate policy has evolved and now the value of the rupee is market-determined.
7. The Exim Policy 2001 introduced the concept of Agri-Export Zones (AEZs) to give primacy to promotion of
agricultural exports and effect a reorganization of our export efforts on the basis of specific products and
specific geographical areas.
8. Market Access Initiative Scheme was launched in 2001- 02 for undertaking marketing promotion efforts
abroad. The key features of the scheme are in-depth market studies for select products in chosen countries to
generate data for promotion of exports from India, assist in promotion of India, Indian products and Indian
brands in the international market by display through showrooms and warehouses set up in rental premises by
identified exporters, display in identified leading departmental stores total exhibitions trade fairs, etc. The
scheme shall also assist quality upgradation of products as per requirements of overseas markets, intensive
publicity campaigns, etc.
9. Focus on export of services and tax benefits to Information Technology sector, the Telecommunication Sector
and the Entertainment Industry.
.and many more.
It is needless to say that it has become a part of the understanding of the government and others involved in policy
making to give equal importance to international market demands as it is given to the domestic market. That is why
the trade policy(s) that is designed now try to touch every aspect of the market, irrespective of the local consumer
demand. But as per market rules, everything comes at a price. In the next aspect of this report, we would try to weigh
in the benefits and the drawbacks of trade liberalization to come to our verdict.
2.1.4 Pros and Cons:
In this section we would try to enumerate the advantages and disadvantages of trade liberalization.
Advantages:
1. Economic Welfare: enables the countries to produce those goods and services that have a comparative
advantage, i.e. can be produced at the lowest opportunity cost.
2. Lower Prices: foreign trade facilitates reduction of prices of consumer goods as it brings scarce products
in the market.
3. Increased Competition: the entry of international producers increases competition, thereby increasing
efficiency and cutting costs.
4. Optimal resource utilization: trading helps in effective utilization of a countrys resources eg.
Economies of Gulf countries are majorly dependent on oil export.
5. Economies of scale: as trade liberalization enables specialization in production of certain goods, it results
in lower costs to customers. It is typically applicable to heavy industries.
6. Increased Employment: with more goods and services being traded in so many markets, aggregate
demand increases, thereby businesses expand or new entrepreneurs turn up, therefore more employment.
7. Exchange rates: it helps in keeping a check over the value of the currency and facilitates in keeping
deficits to the minimum. Therefore, in a way, it helps in saving government revenue that can essentially be
utilized in various socio-economic developmental activities.
Disadvantages:
1. Balance of economy: trading shifts the balance of economy as industries have unequal growth, some
might grow while others might run of business. This further raises the issue of unemployment.
2. Exploitation of environment: as economies tend to produce natural resources at an accelerated rate, they
start exploiting these resources as well as disturb the ecosystem.
3. Industry restrictions: as more and more industries focus on the trade, developing countries become
unable to diversify into other sectors.
5

Now, having assessed trade liberalization, lets move our focus to the second aspect of structural reforms. Removing
price controls and subsidies! So what exactly are subsidies and how and where are they employed in Indian economy?
3.1 Disinvestment in PSUs
3.1.1 Background and Motivation
Disinvestment or divestment as the name suggests, implies the conversion of assets into cash. Indian Government is on
the move to make around 70,000 crore from PSU disinvestment this fiscal. There are many reasons which impels
government to take this step but what is the most prominent and broad reason is to get relief of the huge deficit burden
which the country is having right now.
3.1.2 Genesis of PSUs
The underlying reason for such an extensive presence of PSU in Indian economy lies in the economic policy adopted
after independence. The greater thrust was given on economic development with social perspective. In order to attain
this, the method of central planning was adopted.
But since the targets set in the first Five Year plan (1951-56) were not attained, then the process of setting-up national
champions in strategic sectors -heavy industry, steel, oil & gas, banking & insurance among others was initiated to
achieve these targets. Some of the largest and most successful PSUs-BHEL, State Bank of India, ONGC, Indian Oil
Corp, Oil India, Steel Authority of India and Bharat Electronics among others owe their genesis to this period.
3.1.3 Objectives of Disinvestment
The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very negative rate of return
on capital employed. Inefficient PSUs had become and were continuing to be a drag on the Governments resources
turning to be more of liabilities to the Indian Economy than being assets. About 10 to 15 % of the total gross domestic
savings were getting reduced on account of low savings from PSUs. In relation to the capital employed, the levels of
profits were too low.
Hence, the need for the Government to get rid of these units and to concentrate on core activities was identified. In this
direction, the Government adopted the 'Disinvestment Policy'. This was identified as an active tool to reduce the
burden of financing the PSUs. The following main objectives of disinvestment were outlined:
To reduce the financial burden on the Government
To improve public finances
To introduce, competition and market discipline
Fund growth
To encourage wider share of ownership
To depoliticise non-essential services
3.1.4 Literature Review
3.1.4.1 Overview
Disinvestment in a Public Sector Undertaking (PSU) refers to the transfer of Government ownership when the dilution
is beyond 51 %. Department of Disinvestment is mandated to handle all matters relating to the disinvestment of
Government of India (GoI) shareholding in Central Public Sector Enterprises (CPSEs). This also includes sale of GoI
shareholding through offer for sale or private placement in the erstwhile CPSEs. Since its inception in the year 1999,
the Department of Disinvestment (DoD) has handled different kinds of disinvestment transactions.
3.1.4.2 Need for Disinvestment
The various reasons for disinvestment include
1. More Economic Sense: To extract the locked out funds beyond 51% equity for redeployment in area where
development is needed and resources for funding social sector programmes.
2. Increased Competition: All key developments in these PSUs will be closely scrutinized by the investor
community and hence competitive spirits will increase in the operations of the PSUs.
3. Robust Economy: The funds help in reducing the current account deficit of the country and hence make
Economy more robust and attractive for foreign investments, thereby opening doors for employment and
socio-economic growth.
6

3.1.4.3 Types of Disinvestments

There are primarily three different approaches to disinvestments:
1. Minority Disinvestment - This ensures that the government retains a majority stake in the company, typically
greater than 51%, thus ensuring management control.
2. Majority Disinvestment - The emphasis of this type of disinvestment is in favour of Strategic Sale viz. sale
of a large block of shares along with transfer of management control to a Strategic Partner identified through a
process of competitive bidding.
3. Complete Privatization - Complete privatization is a form of majority disinvestment wherein 100% control
of the company is passed on to a buyer.
3.1.5 Implied Potential
The current value of market capitalization of CPSEs of the country is Rs. 13,52,950.42 Crore. CPSEs constitute
13.34% and 13.68% of the total market capitalization of companies listed at BSE and NSE respectively (as on 30 June
2015). The CPSE with the highest market capitalization is Coal India Ltd. at Rs. 2,65,951 crore (BSE) and Rs.
2,66,077 crore (NSE) (as on 30 June 2015). In the current fiscal, The Finance Ministry has set a target of Rs 69,500
crore from PSU disinvestment. Of this, Rs 41,000 crore is to come from minority stake sale in PSUs and Rs 28,500
crore from strategic stake sale.
3.1.6 Historical data
The Government of India has raised Rs 100,143.45 crore in the last five years through disinvestment. As on 31st
March 2014, there were 290 Central Public Sector Enterprises wherein, 169 are Holding CPSEs and 121 are the
Subsidiary. Out of this, 07 are Maharatna, 17 are Navaratnas and 54 mini-ratnas. ONGC Public Offer in 2003-04 has
been the largest CPSE FPO, raising Rs. 10,542 crore. Coal India Public Offer in 2010-11 has been the largest CPSE
IPO, raising Rs. 15,199 crore. The maximum number of applications received in a PSU IPO/FPO since 2003-04 was in
CIL (15.96 lakhs). With four months of the ongoing financial year (2015-16) already over, the government has been
able to raise just Rs 1610 crore through stake sale in Rural Electrification Corporation (REC) and there are
apprehensions that it may miss the mammoth Rs 41,000 crore targets for the fiscal.

Yearwise reciept through Disinvestment

25000
20000
15000
10000

Total Receipts

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

5000

SUMMARY OF RECEIPTS FROM DISINVESTMENT: 1991-92 TO TILL DATE

Year
Total Receipts Transactions
(Rs. Crore)
1991-92
3,037.74
Minority shares sold in Dec, 1991 and Feb, 1992 by auction method
1992-93
1,912.51
Shares sold separately for each company by auction method.
1993-94
Equity of 6 companies sold by auction method but proceeds received in 94-95.
1994-95
4,843.10
Shares sold by auction method.
7

1995-96
1996-97
1997-98
1998-99

168.48
379.67
910.00
5,371.11

1999-00

1,860.14

2000-01
2001-02

1,871.26
5,657.69

2002-03

3,347.98

2003-04

15,547.41

2004-05

2,764.87

2005-06

1,569.68

2006-07
2007-08

4,181.39

2008-09
2009-10

23,552.93

2010-11

22,144.20

2011-12

13,894.05

2012-13

23,956.81

2013-14

15,819.46

2014-15

24,328.93

Shares sold by auction method.

GDR VSNL
GDR MTNL
GDR-VSNL; Domestic offerings of CONCOR and GAIL; Cross purchase by 3
Oil sector companies i.e. GAIL, ONGC and IOC.
GDR-GAIL; Domestic offering of VSNL; capital reduction and dividend from
BALCO; Strategic sale of MFIL.
Sale of KRL, CPCL and BRPL to CPSEs; Strategic sale of BALCO and LJMC.
Strategic sale of CMC, HTL, VSNL, IBP, PPL, hotel properties of ITDC and
HCI, slump sale of Hotel Centaur Juhu Beach, Mumbai and leasing of Ashok
Bangalore; Special dividend from VSNL, STC and MMTC; sale of shares to
VSNL employees.
Strategic sale of HZL, IPCL, hotel properties of ITDC, slump sale of Centaur
Hotel Mumbai Airport, Mumbai; Premium for renunciation of rights issue in
favour of SMC ; Put Option of MFIL; Sale of shares to employees of HZL and
CMC.
Strategic sale of JCL; Call Option of HZL; Offer for Sale of MUL, IBP, IPCL,
CMC, DCI, GAIL and ONGC; Sale of shares of ICI Ltd.
Offer for Sale of NTPC and spill over of ONGC; sale of shares to IPCL
employees.
Sale of MUL shares to Indian public sector financial institutions & banks and
employees
Sale of MUL (Rs.2366.94 cr) shares to public sector financial institutions,
public sector banks and Indian mutual funds and sale of PGCIL (Rs.994.82 cr)
and REC (Rs.819.63 cr) shares through Offer for Sale.
(Rs.2012.85 - NHPC, Rs.2247.05 - OIL and NTPC - 8480.098, REC Rs.882.52,
Rs.9330.42 NMDC, )
Rs.1062.74 SJVN, EIL 959.65, COAL INDIA 15199.44 CR; PGCIL 3721.17;
MOIL 618.75 #; SCI 582.45
Rs.1144.55 PFC, Rs. 12749.5 ONGC
Rs. 124.97 NBCC, Rs. 807.03 HCL, Rs. 5973.27 NMDC, Rs. 3141.51 OIL, Rs.
11457.54 NTPC, Rs.310.15 RCF, Rs.627.84 NALCO, Rs. 1514.50 SAIL
Rs.571.71 MMTC, Rs.259.56 HCL, Rs.101.08 NFL, Rs.30.17 ITDC, Rs.4.54
STC, Rs.358.21 NLC, Rs.2131.28 NHPC, Rs. 1637.32 PGCIL, Rs.497.32 EIL,
Rs. 1886.78 BHEL, Rs. 5341.49 IOCL, Rs. 3000 CPSE-ETF
Rs.3.60 Employee OFS of NFL, Rs. 48.16 Employee OFS of NTPC,
Rs.1719.54 SAIL, Rs.22557.63 COAL INDIA
Rs.1610.00 REC

2015-16
1610
Total
1,78,729.42
3.1.7 Challenges and Reasons for delay
1. Bearish market - Volatile stock markets have forced the government to delay the proposed stake sales in PSUs.
2. Global economic cues - Global equity markets have been on a downslide on fears over the spiralling debt crisis in
the euro zone, as well as credit crunch in the US.

3. Soft budget constraint - Unlike private companies, many loss-making PSUs are kept afloat by either direct
government subsidy or by directed bank credit from state-owned banks. In the past, even `sick' private companies have
been taken over by the state, out of political considerations, creating a further drag on state finances.
4. Policy adopted by the Government - The Government does not have a well-defined disinvestment policy with a
time bound programme. Lack of transparency in disinvestment process, co-operation and co-ordination between
disinvestment ministry and other concerned ministries has greatly affected the disinvestment programme. Since the
PSUs do not benefit monetarily from disinvestment, they have been reluctant to prepare and distribute prospectuses
5. Multiple control authorities - Unlike the private sector manager, the public sector manager is subject to control
and scrutiny by different ministries, the Bureau of Public Enterprise, various parliamentary committees and
investigating agencies. Result: Status quo is the safest option for the manager. No bold decision on modernisation,
diversification or technological upgradation is taken.
6. Less no. of Bidders: - The number of bidders for equity has been small not only in the case of financially weak
PSUs, but also in that of better performing PSUs. Besides, the government has often compelled financial institutions,
UTI and other mutual funds to purchase the equity which was being unloaded through disinvestment. This leads to low
valuation or underpricing of equity.
3.1.8 Effects of Disinvestments
Case Study: Bharat Aluminium Company Ltd. (BALCO)
The Government of India had 100% stake in BALCO prior to disinvestment. In 1997, the Disinvestment Commission
classified BALCO as non-core for the purpose of disinvestment and recommended immediate disinvestment of 40% of
the Government stake to a strategic partner, and a further reduction of the Government stake to 26% within 2 years of
the strategic sale through a domestic public offering. It further recommended disinvestment of the entire remaining
stake at an appropriate time thereafter. Later, The Government there upon appointed M/s Jardine Fleming as advisor to
assist in the sale of its 51% stake in BALCO to a strategic buyer.
The strategic sale process for BALCO started in late 1997, after the first decision of the Government, and finally came
to end on 2nd March 2001. The 51% stake was sold to Sterlite Industries, the highest bidder, and fetched the
Government Rs. 551.50 crore. The price received was higher than the values indicated by the various methods of
valuation used. The Government thus recovered Rs 827.50 crore from this privatisation against approximately Rs. 10
crore as dividend it used to get against the 51% shares during the peak Aluminium cycle.
Post privatization status
1. The new management introduced VRS from 31st July 2001 to 16th August 2001. 981 applications (from 151
executives and 830 workers) were received. 694 old VRS applications were also pending. A total of 956 applications
were accepted mostly where units were lying closed.
2. In spite of incurring losses to the tune of Rs. 200 crore due to the strike by the employees in 2001, an ex gratia
payment of Rs. 5000 was made to all the employees.
3. Long-term wage agreement for a period of 5 years was entered on 7th October 2001 (wage revision was due since
1stApril 1999 and the earlier revision was for 10 years) as follows:
Workmen get a guaranteed benefit at the rate of 20% of the basic pay
Increase in allowances: For ex, Night shift allowance: Rs.10 - Rs.20/shift, Canteen allowance: Rs. 400/month
(instead of subsidised canteen facilities), Education allowance: Rs. 50 - Rs. 75/month, Hostel allowance:
Rs.150 - Rs.200 per month, Scholarship amount to meritorious children doubled.
4. New practices of job rotation and appraisal system were introduced.
5. The new management proposed an investment of Rs. 6,000 crore which would increase production 4 times.
3.1.9 Disinvestment: Pros and Cons
Cons

Pros

Private sector cannot achieve equal distribution of

resources for all classes. Private enterprises only focus
on profit maximization. They wont cater poor people.
Therefore Government needs to control all or some
industrial sectors.

Government controlled units cannot compete in free

market economy due to political interference and
price control mechanisms. Ultimately more public
money is wasted in running these loss making
entities.

Governments dividend income will decline. (Because Whatever dividend Government earned so fartheyll have fewer shares). Consequently, Fiscal deficit compared to that, Government has spent far more
will increase.
crores rupees to revive these PSUs.
The funds received from disinvestment are used to Need amendments in FRBM act to ensure
this doesnt happen.
finance fiscal deficit. This is an unhealthy practice.
Employees of PSUs will be affected and may lose their Overstaffing is one of the main reasons why PSUs
dont make optimum profit.
jobs due to disinvestment
Disinvestment would lead to private monopolies

Dragging the logic too far. Unlikely to happen in

todays world. CCI is always watching and punishing
the firms that try to create monopoly or oligopoly.

To complete the disinvestment targets, Government

asks one PSUs to buy shares of another PSU. In such Need for a clear policy on disinvestment to stop this
cases, disinvestment doesnt decrease Government practice.
control over those companies.
4.1 Subsidies
4.1.1 Removing price controls and subsidies
Subsidies at best can be described as an instrument of fiscal policy through which government provides assistance that
can be shared by the population at large, in present and in future. In India, subsidies have been dished out in many
forms across various products and industries. According to a 2005 article by International Herald Tribune, subsidies in
India amount to around 14% of total expenditure of central government. While loss-making state-owned enterprises
have being assisted by the government, India spends relatively less on education, health, or infrastructure. Subsidies in
areas such as education, health and environment have been justified on the grounds that their benefits are well spread
beyond the immediate recipients. However, many subsidies shelter inefficiencies or doubtful distributional credentials.
Now the big question arises: why and how are subsidies so vital to economy that they become an indispensable part of
structural reforms? The answer lies in the fact that subsidies affect decisions concerning production, consumption and
allocation of resources. They account for a significant part of government's expenditures and cause a considerable
draft on the already strained fiscal resources. Subsidies distinctly affect the supply or demand curves of a product by
shifting one or the other to the right. The effect is to shift the supply curve to the right, leading to lower price and
higher quantity demanded. In the context of their economic effects, subsidies have been subjected to an intense debate
in India in recent years. Ineffective or distortionary subsidies need to be weaned out, for an undiscerning growth of
subsidies can prove detrimental for a country's public finances. However, subsidy is one expenditure that the
governments in India finds difficult to cut since, 33 percent of the world's poor live in India.

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Diagram of Subsidy
4.1.2 Subsidy scene in India at present:
The key ingredients in India's subsidy are fuel, fertiliser, food and agriculture. While subsidy on fuel has already been
reduced by government by freeing petrol and diesel prices, the other two continue to be heavily subsidised.
Some economists are of the view that subsidies are a waste of taxpayers money since they never reach the targeted
group due to leakages in the system. It is the rich who enjoy the benefits as lower priced food, fuel and fertiliser. That
is the reason poverty is not getting eradicated though the subsidy spending is rising at a scorching pace.
A look at the graphics below shows this contention might be true:

Over the last 10 years, subsidy pay out of the government has witnessed a steady increase from Rs 48,000 crore in
FY06 to Rs 2.61 lakh crore (budget estimate) in 2014-15 - an annual increase of about 22 percent on an average.
Subsidy as a percent of GDP also increased almost steadily from just 1.29 percent to 2 percent.

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Figures get much scarier when subsidies are compared against percentage of total expenditure. In FY06, subsidies
accounted for approximately 9.4 percent of total government spending. This rose to a high of 18.2 percent in FY13. As
per the revised estimates, this has declined to 16.09 percent in FY14. In FY15, it is likely to further fall to 14.54
percent of total expenditure, which is still uncomfortably high,
4.1.3 Types of Government Subsidies :
A government can provide two basic types of subsidies to encourage the production or consumption of a certain
product. For example, if the government pays car companies a certain amount of money for each environmentally
conscious car produced, this is referred to as a supply-side subsidy. If, however, the government provides money or a
refund to every consumer who buys an environmentally conscious car, it is called demand-side subsidy.
4.1.4 Salient Features(Subsidy 2015):
Rs 2.27 lakh crore ($37 billion) expected to be spent on major subsidies during the fiscal year starting 201516.
Out of Rs 2.27 lakh crore, Rs 1.24 lakh crore ($20.11 billion) to be given in food subsidies.The subsidy bill
on food, petroleum and fertilizers is estimated at Rs 2,27,387.56 crore for 2015-16Of the total food subsidy,
nearly Rs 65,000 crore is for implementation of National Food Security Act (NFSA).
Fertilizer subsidy has been pegged at Rs 72,968.56 crore for the next fiscal, higher than Rs 70,967.31 crore
estimated for this year.In fertilizer subsidy, the government has allocated Rs 38,200 crore for domestic urea
and Rs 12,300 crore for imported urea. The remaining Rs 22,468.56 crore has been earmarked for sale of
decontrolled P&K fertilizers.
Petroleum subsidy has been halved to Rs 30,000 crore for 2015-16 from estimated Rs 60,270 crore in the
current fiscal. Of Rs 30,000 crore for next fiscal, Rs 22,000 crore has been earmarked for LPG subsidy and the
rest is for kerosene.
4.1.5 Why are subsidy reforms important?
There are several angles to subsidy reforms and its importance can be discussed from many perspectives:
1. Economic benefits of Subsidy reforms:
A. Effects on budgetary expenditure: Scrapping subsidies that are ineffective can reduce budgetary
expenditures. Portfolio of government expenditure yields a higher average Return on
investment. Eliminating incidental negative impacts from ill-conceived subsidies can achieve
public benefits at cost savings.
B. Effects on sectoral efficiency and productivity: Removing a subsidy that is no longer giving the right
returns as it was supposed to give when it was initially conceived, increases sectoral efficiency and
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productivity.
2. Social benefits of subsidy reforms:
A. Effects on income distribution across producers and consumers: Subsidies that aim to redistribute income
expands the options of people at lower side of the income distribution.
B. Effects on Social Capital: Social Capital is defined as the informal and unofficial set of connections
among members of a society. These interactions may nevertheless be supported by subsidies, for example
to community centres, to amateur sports teams, to cultural exchanges, and so on. Most developed
countries have a very large range of small subsidy programs devoted to such causes.
3. Environmental benefits of subsidy reforms: Very often it has been observed that the ill designed subsidies
can harm the environment in indirect way. For example, subsidies given on fertilizers resulted in farmers
buying and using more fertilizer on the same piece of land, which not only proved detrimental to the health of
the people, but also rendered the land barren and unfit for future agriculture production.
Even though there economists having been crying loud about the much needed cuts in food and fertilizer subsidies,
government favored deregulating urea prices in a phased manner .More than 20% of the cuts in budget for subsidies
resulted from global oil prices rather than the much needed structural changes. Its about time that ineffective or
distorted subsidies are done away with so that the goal of fiscal deficit of 3.6 percent could be realized soon.
Discussion on structural reforms would be incomplete without the mention of FDI which is one of the key ingredients
of structural reforms for India.
5.1 FDI:
5.1.1 Synopsis:
FDI refers to capital inflows from abroad that invest in the production capacity of the economy and is usually
preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns
depend on the performance of the projects financed by the investors. FDI also facilitates international trade and
transfer of knowledge, skills and technology.
As early as the introductory chapter of the Ministry of Finance Economic Survey for 1991, the conclusion is
that compared to domestic investment the contribution of foreign investment is bound to remain minor, India has
come of age and proved itself to be one of the sought after FDI destinations of the world. Moreover, slowly and
steadily the envisioned role of FDI has evolved from that of a tool to solve the crisis under the license raj system to
that of a modernizing force that has been given special agencies and extensive discourse.
5.1.2 India Today:

FDI fund inflows in last 10 years

While foreign portfolio investments to India are slowing, net foreign direct investment (FDI) inflows, which are far
more stable, have touched a record high of $34.9 billion in 2014-15.In fact, net FDI inflows touched 1.7% of gross
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domestic product (GDP) in the just-ended fiscal year, up from 1.1% of GDP the previous year. Foreign investment
inflows to India are predominantly to infrastructure, mainly telecom, oil and gas, mining sectors, as well as the
services sector. In fact, FDI in manufacturing has remained lackluster, although there were some inflows into the auto
sector. Higher FDI flows are good for Indias current account deficit and also help drive domestic investments. With
the government opening up various sectors such as insurance and defence, these stable flows may continue this year as
well.
Inward FDI has led to the emergence of a number of industrial clusters in India, including those in the national capital
region (Delhi-Gurgaon-Faridabad) in the north, Maharashtra state (Mumbai-Nasik-Aurangabad) in the west, and Tamil
Nadu (Chennai-Hosur) in the south. Though considerable differences exist in the patterns of the formation of these
clusters, FDI can play an important catalytic role as evident through the early entry of Suzuki (Japan) has contributed
to the development of an industrial cluster in the NCR. A sectoral analysis of FDI inflows suggests that, on average,
between 2000 and 2012, more than 35% of FDI inflows have gone into services, telecom and construction sector, with
pharmaceuticals, chemicals and computer sector each receiving about 5% of the countrys total FDI inflows over the
corresponding period.

5.1.3 Merits and Demerits of FDI:

The benefits and shortcomings are elaborated to develop a holistic picture of FDI's contribution to the economy:
Merits :
Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and
services in India both in terms of import and export production. Products of superior quality are manufactured
by various industries in India due to greater amount of FDI inflows in the country.
Economic growth- This is one of the major sectors, which is enormously benefited from foreign direct
investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of
country.
Employment and skill levels- FDI has also ensured a number of employment opportunities by aiding the
setting up of industrial units in various corners of India.
Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing of knowledge from
India especially in the Information Technology sector. It helps in developing the know-how process in India in
terms of enhancing the technological advancement in India.
Linkages and spill-overs to domestic firms- Various foreign firms are now occupying a position in the
Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained
by the foreign firms through these joint ventures is spent on the Indian market.
Demerits:
It is conspicuous that FDI can affect local communities, when larger projects come in. It also means subjecting
domestic firms to foreign competition which can harm domestic firms, and this isn't necessarily due to incompetence
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of the domestic firm. Foreign firms may have technology that India has not acquired. On the other hand FDI brings
those technologies to India much quicker. This might hurt the local entrepreneurial spirit and can be detrimental to the
native industries.
5.1.4 Has India taken FDI seriously?
There is no way we can realize the Modi government's dream of becoming an exporting nation overnight. 'Make in
India' is yet to catch the imagination of foreigners and when it indeed does, the lag between investments and exports
would be at least a couple of years. Economists aver that the weakening of rupee to Rs 64 per US dollar cannot be
blamed on FII withdrawals alone given the fact that the greenback is surging against almost every other currency on
the back of emergence of green shoots of economic recovery in the USA and the reserve currency status of the US
dollar. The only choice therefore before the Modi government is to pull all stops and welcome FDI. Though the
receipts would be on capital account, one can take heart from the fact that they are not repayable unlike ECB. Modi
got several IOUs from his visit to Japan, the USA, Canada and Germany. It is time for him to encash them
substantially.
The government has hiked FDI limits in defence sector as well as insurance to 49 percent with the promise of further
leeway for defence even upto 100 percent on case to case basis. Indeed indigenous defence production with the cutting
edge technology of foreign companies can be the catalyst for growth besides bringing in the much needed foreign
capital. Still there is a long way in front of India to fully extract the benefits of FDI and a lot needs to be done to
exploit the benefits of FDI as a facilitator to India's behemoth economy.
6.1 Governance
For decades, India had large government but less attention has been paid to quality of governance. With the advent of
cutting edge technologies and for better growth prospects the Indian governments is working on improving
governance to speed up development activities, curb corruption, improve quality of education, and increase efficiency
of taxation system.
Improving Indias growth rate and reducing unemployment requires deeper structural reforms in Governance, laws
and policies in the following key areas.
Tax Collection System.
Curb Corruption at all levels in the Government.
Acquiring land and obtaining Environmental clearances.
Transparency in the Government Functioning.
Improving Education system.
The Indian Government has enacted below key acts in last ten years to improve governance:
6.1.1 Tax Collection System
Goods and Services Tax Bill
The Goods and Service Tax Bill or GST Bill is Value added Tax (VAT) to be implemented in India, from April 2016.
GST is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as
services at the national level. It will replace all indirect taxes levied on goods and services by
the Central and State governments. It is levied and collected on value addition at each stage of sale or purchase of
goods or supply of services based on input tax credit method but without State boundaries. There is no distinction
between taxable goods and taxable services and they are taxed at a single rate in a supply chain of goods and services
till the goods / services reach the consumer. Exports will be zero-rated and imports will be levied the same taxes as
domestic goods and services adhering to the destination principle. Thus, by amalgamating a large number of Central
and State taxes into a single tax, it would mitigate cascading or double taxation in a major way and pave the way for a
common national market. From the consumer point of view, the biggest advantage would be in terms of a reduction in
the overall tax burden on goods, which is currently estimated at 25%-30%. According to a report by National Council
of Applied Economic Research, GST is expected to increase economic growth by between 0.9% and 1.7%.
6.1.2 Acquiring land and obtaining Environmental clearances.

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6.1.2.1 Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act,
2013 (Land Acquisition Act, 2013):
This act of Indian Parliament regulates land acquisition as a part of industrialization and lays down the procedure and
rules for granting compensation, rehabilitation and resettlement to the affected persons in India. It has enabled private
investors to acquire land easily to develop heavy industries and contribute to the development of country.
6.1.2.2 Environmental Impact assessment and granting Environmental clearance:
The Indian Government has taken measures to reduce the total turnaround time to issue environmental clearance to
companies. To speed up the process of Environmental Impact assessment, government bodies implement single
window interaction and obtain relevant information from companies in one interaction. Also government is exempting
infrastructure projects from environmental clearance.
6.1.3 Transparency in the Government Functioning
Right to Information Act (RTI):
The Right to Information (RTI) Act is an act to provide for setting out the practical regime of right to information for
citizens to secure access to information under the control of public authorities. This act has promoted transparency and
accountability in the working of every public authority, and has thus reduced red tapeism.RTI played a major role in
exposing country's biggest 2G and CWG scam. Other noted scams exposed by RTI include Adarsh Scam.
Appropriation of govt. and relief funds MGNREGA scam.
7.1 Conclusion & Recommendations
As we have seen through this study, India was brought on the global map of industrialization and commercial markets
because of structural reforms in its economic outlook. By externally restructuring through reduced taxes, removal of
tariffs, and internally restructuring by removal of subsidies and red tapism, Indian economy opened doors for
international as well as private players and marshaled an era of economic development. But as Sociiete Generale
rightly pointed out in one of its research note: The economic reforms that were ushered in during 1991 have outlived
their utility as catalysts for growth and the country now needs to embark on the next round of reform measures to
remove the structural constraints that impact growth, it has become imperative to reanalyze these insights in the
context of further structural reforms.
If India is to get back on 8% plus growth rate track, then following recommendations can be considered:
(i)

(ii)
(iii)

(iv)
(v)

Major effort at raising the rate of domestic savings by reducing government dissaving at the central and
state levels through cuts and refocusing of explicit and implicit subsidies, stricter control of nondevelopmental expenditure, improvement in the tax ratio through stronger tax enforcement, and
strengthening incentives for savings.
Larger investment and better performance of infrastructural services, both in the public and private sector;
A more vigorous pursuit of economic reforms at the center and in the states; in particular, reform of the
public sector enterprises which handle most of the country's infrastructural services and, more generally,
of public administration deserves high priority.
Ending delays in environmental clearances, obtaining parliamentary approval of the complex land
acquisition bill.
Attract more foreign savings, especially foreign direct investment, and thus raise the investment rate.

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References:
1. http://timesofindia.indiatimes.com/budget-2015/union-budget-2015/Budget-2015-India-to-spend-2-27-lakhcrore-rupees-on-major-subsidies/articleshow/46411433.cms?
2. https://www.cbd.int/doc/case-studies/inc/cs-inc-oecd-SubsidyReform-PoliticalEconomy-en.pdf
3. IMF Report-2015
4. The Hindu Newspaper
5. The National Council of Applied Economic Research
6. www.rbi.org.in
7. Changing faces of India's International Trade before and after Liberalization period- Mr A Hari Kumar
8. http://www.firstpost.com/business/did-india-not-adhere-enough-importance-to-fdi-than-it-should-have2235076.html
9. www.divest.nic.in

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