Boctor Ot ^^Hoitj^F^V in ECONOMICS
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IMPACT OF ECONOMIC REFORMS ON THE PUBLIC SECTOR IN INDIA SINCE 1991 ABSTRACT THESIS SUBMITTED FOR THE AWARD OF THE DEGREE OF Boctor ot ^^Hoitj^f^v IN ECONOMICS BY ASMITA SRIVASTAVA A^ UNDER THE SUPERVISION OF DR. MOHD SAEED KHAN DEPARTMENT OF ECONOMICS ALIGARH MUSLIM UNIVERSITY ALIGARH (INDIA) 2009 ABSTRACT Economic reforms initiated in Indian economy in early nineties were far broader in their scope. Reforms were attempted earlier too but their scope and coverage was not that wide as the reforms under reference for this study were far extensive, touching almost every aspect, of the economy in some measure. Thus, some sort of restructuring of the economy has been attempted. Public sector in India occupies a very central position in the structure of the economy. It represented not only an economic activity but a philosophy and strategy for economic development. In a sense the responsibility of economic development in India as also the shape the Indian industry would take was, in greater degree, assigned to the public sector through the industrial policy resolutions of 1948 and 1956. Public sector progressed impressively in the first two and a half decade but then started showing the signs of decline in efficiency. The problems significantly for some public sector units magnified to assume the crises proportion. Finally the voices began to be raised against its very existence. ,The major cause for worry was the persistent losses incurred by some public sector units and the pressure that was put on the governments' budget to keep these units going on. Deteriorating fiscal condition could not have sustained such pressure as its priorities too were to be reshuffled and the things culminated into the reforms of 1991. Present study examines the whole range of questions. The Introductory Chapter discusses the scenario in brief and sets the agenda for study by identifying research questions, that are; • If the need for which huge public sector was created, did not exist any longer, • If there is some problem inherent in the structure of PSEs, • If the project selections were made objectively. Besides setting the problem in the proper context, it also explains the methodology, data base and limitations of the study. The Second Chapter contains the referential matter on the Economic Policy, Economic Reforms, Public Sector, Industrialization, Privatization and disinvestment. Some of the views of the scholars who have dealt with different aspects of the Indian economy are being given here under: India's industrial policy and planning have had a mix of economic and social objectives. The economic objective is growth and the social objectives have been located in the sphere of encouragement of small industry, promotion of regional balance, prevention of concentration, etc. (J.C Sandesara), The primary objective of industrial policy has to be to search for an industrial pattern which would be less energy-intensive, less capital-intensive, more employment-intensive and yet capable of improving overall factor productivity in the economy (Arun Ghosh); The reforms introduced in 1991 had two dominant objectives. There was an immediate objective of managing the balance of payments crisis and restoring viability in external payments and also a medium term objective of setting the economy on the path of rapid and sustainable growth (Montek S. Ahluwalia), India's biggest failure in its economic reforms programme is that there has not been a transformation of public enterphse (Anand P. Gupta); The public enterprises are inherently inefficient, and as contended that a crucial aspect has been the objectives and the priorities with which the public enterprises have been run (Sudip Chaudhuri); The privatization is a major theme in public sector reform. It is argued on the basis of empirical evidence that improving the performance of public enterprises is an alternative measure where privatization is a difficult policy option to implement in the short term (K.P. Kalirajan and R.T. Shand), Many enthusiasts of privatization seem to believe that a shift from public to private ownership will automatically make for improved performance (T.T. Ram Mohan); Disinvestment of public sector undertakings became an important aspect of fiscal of Government of India. On account of the diverse political ideologies, disinvestment continues to remain a contentious issue with valuation being at the core of controversies (Sarvashri Nand Kishore, Ms. Rudra Saha etc.), there is a strong relation between the public and private sector in India. The argument is that it is competition between industries and not their ownership, which determines efficiency of an enterprise and this criterion should guide the allocation of resources between the two sectors. The deliberation also undertakes a critical appraisal of the disinvestment process through the case studies of BALCO, Lagan Jute, Air India, CMC and MFIL (Simrit Kaur) and so on. The Third Chapter presents what the public sector had inherited from its colonial past which forced it to adopt the policy of reform. The policy of reform did not procure the substantive role of the public sector in a sudden way, but passing through the certain stages it became effective to broaden the scope of this sector in the interest of the country's economy. This chapter basically stresses on the concept of mixed economy. In this context, I have explained IPR 1948, 1956, various policy statements and new economic policy. The chapter also focuses on the Five-Year Plans in order to observe how far the public sector has grown during the plans. However, the sixth plan was the first plan when allocation to the public sector was smaller than the private one. It was realized during the seventh plan that the public sector be eased off some of the pressures what it had shouldered successfully. The purpose was to prepare the Indian industry to respond effectively to the emerging challenges. Moreover, the needs for the public sector in India and the major objectives of setting up of the public sector have also been discussed herein. It is found necessary to explain the problems faced by the public sector and the government's efforts to reform the public sector. The government took a number of steps in this regard to reform the public sector like establishment of Public Sector industrial Board (PSIB), BIFR and one of the most important measures was to redefine the role of the government and the downsizing its hold on the public sector. Chapter Four explains the need for reforms in the economy in the light of the momentum of economic growth achieved during the eighties, particularly the seventh plan period was impossible to sustain without comprehensive policy changes. The basic thrust of economic reforms was on simplifying procedures, reducing bureaucracy induced delays and encouraging larger inter-play of market forces through private initiative. Moreover, chapter also discusses the immediate cause of reforms which forced the government to move towards the structural adjustment program. In continuance of this discussion, nature of reforms is examined which shows that crisis was so multidimensional that a multi-seeded strategy was needed through bold economic reforms The root of crisis may be attributed to factors such as steep increase in public spending during 1980s leading to continuous increase in fiscal deficit, deficits in balance of payments (BOP) financed by continuous external borrowings, growing inflation rate, failure of the public sector to generate surpluses, restrictive trade and industrial licensing policies resulting in serious loss of efficiency in production and export competitiveness of Indian products, gulf crisis in leading to fall in remittances and increase in oil price etc. In this context, I have analyzed the annual average growth rate of Indian economy, inflation, growth of imports and exports, impact of reforms on external sector, gross domestic product and its sectoral shares, growth of GDP, savings, capital formation, consumption expenditure etc. a discussion is also made on the relation between growth of employment and GDP including the steps taken by the government regarding public sector reform. The objectives of the reform were to promote both domestic and foreign competition to accelerate productivity, achieve reduction in cost and improvements in quality of products and services, and encourage innovations and adaptation of modern technologies. Chapter Five includes a brief discussion on the development of the public sector during sixties, seventies and eighties. Thereafter, the role of the public sector in India and significance of the public sector has been elaborated. In furtherance of the same, the impact of reforms on the performance of the PSEs like pattern of investment, contribution to the industrial production, contribution to resources, capital productivity, employment generation, comparison of employment in the organized public and private sector, efficiency use of investment, financial performance of the PSEs, i.e. their profit profile and net losses, export earning and foreign exchange earning are deliberated in detail. In addition to this, the developments of essential services as well as the relation between the fiscal deficit and savings-investment gap are also taken into consideration. This chapter also traces at what extent budgetary supports to the PSEs were provided. Lastly, the reasons are given for the poor performance of the PSUs and suggestions for their betterment. Thus, the discussion on the performance of the public enterprises reveals that the vast investments failed to produce surpluses which they were expected to generate and the return on capital employed was obviously quite low. This raises the issue whether the present ills of the PSUs can be modified by adopting the policy of disinvestment. The main thrust on this device is the content of the next chapter. In Chapter Six, the impact of disinvestment on the performance of PSEs has been examined. Since the initiation of the disinvestment process in 1991-92, the policy on the subject has evolved broadly in three phases.