Public Sector To Foreign And Private Capital example essay topic

After independence, the country's slogan of 'self reliance' proved to be ostentatious in no time. The evolution of post-Independence economic policy had three basic features: autarchic trade policy, extension of public sector, and direct, discretionary and quantitative controls on the private sector. These features interacted in the institutional environment of functioning markets and private ownership of means of production to generate perverse incentives that constricted the operation of the market forces and private economic agents and resulted in a low rate of economic growth of 3.5 per cent per annum despite the doubling of the rates of domestic savings and investment over the thirty year period 1950-80. Public sector units were expected to operate efficiently and generate resources for further investment. Instead, they were saddled with multiplicity of often-conflicting objectives; they had to accept politically driven inappropriate administered prices for their products and services, and were subjected to bureaucratic and political interference, which made their efficient operation difficult. They also faced the 'soft-budget constraint' with neither penalty for losses nor rewards for efficient functioning.

Poor performance of public sector units had multiplier effects through inefficient, low quality and often irregular and fluctuating supplies of infrastructure services and universal intermediate inputs (like iron and steel and financial services), which partly contributed to the inefficiencies of the private sector units. At the macro level, they became a drain on the exchequer through their recurring losses instead of generating resources for investment. At the same time, complex structure of differential indirect tax rates as also administered interest rates and labor legislation led to distortions in relative product and factor prices and resulted in not only inefficient allocation but also misallocation of resources out of line with relative scarcities of capital and labor. In spite of rigorous exercise of control over imports and release of foreign exchange, the imports, particularly from the nations of imperialism, grew at an ever-increasing rate. This was caused mainly on account of arms race and ever increasing import of petrol and petroleum products, machinery, equipments, spare parts and other intermediate capital goods. Since these could not be paid by exports, the country faced the problem of ever increasing foreign debt.

As on March ending 1948, Britain owed India Rs 16120 million. But by March 31, 1991, India owed the foreign countries (or India's foreign debt stood at) Rs 1630010 million. Foreign trade deficit 14 and foreign debts servicing in 1990-91 amounted to Rs 106450 million and Rs 143370 million respectively. India's foreign currency reserve was equivalent to Rs 114160 million which was highly inadequate to meet the foreign currency obligations arising out of foreign trade deficit and foreign debt servicing, India was unable to obtain loan from international money market on account of its low credit rating. India, thus, was forced to negotiate loans from International Monetary Fund and World Bank in 1991 on very harsh conditions whereby foreign exchange control and import restrictions were progressively done away with.

The basic approach was to allow the global markets in capital and commodities but not in labor to be eventually made free from restrictions. This was the beginning of the phase of globalization or the phase of Liberalization or the phase of New Economic Policy in India. In India there were several attempts to liberalize or reform the system of economic management. In 1990's, India began to adjust the long-pursued economic policy, which stressed on development of state-run heavy industry and import-substitution. The main contents of the new economic policy consisted of measures such as to relax the control on private enterprises and foreign capital, to open industries (e.g. aluminum making, machine-tool building, chemical industry, chemical fertilizer, electricity, pharmaceutical etc), which had been monopolized by the public sector, to foreign and private capital. India's competitiveness had weakened because of its technological backwardness.

In order to change the situation, the Indian Government revised the policy of import substitution to provide incentives to export and reducing the protection on imports. In the 1990's, the Indian Government stressed on reorganization of low-efficient state-run enterprises and partial disinvestment's, further relaxations of the control of private enterprises and foreign capital, introduction of a competitive mechanism, reduction of protection for domestic industries, promotion and importation of advanced technological equipment from abroad etc. In July 1991, India had introduced a series of economic reform measures. These measures were initiated with the purpose of macro-economic stabilization mainly by a sharp reduction in the deficit of the public sector in the Central Government budget.

The Government continuously attempted to reduce the ratio of fiscal deficit in GDP by reducing public expenditure, increasing taxation, abolishing part of commodity price subsidies and a partial privatization of public enterprises. In addition, a new trade and industrial policy was announced. The new industrial policy abolished the system of industrial licenses, opened nine of the 17 industries which are monopolized by the state to private enterprises, the proportion of foreign equity was raised from 40 per cent to 51 per cent. It also eliminated licensing requirements for private domestic and foreign investment in certain industries and relaxed the restrictions under the Monopolies and Restrictive Trade Practices Act on expansion, diversification, mergers and acquisitions by large firms and industrial houses. The power sector, which had been a monopoly of the public sector, was opened to private, domestic and foreign investors. Regulations on pricing and distribution of steel were lifted.

Domestic and foreign investors were invited to invest in the production, refining and marketing of oil and gas and in certain segments of the coal industry. A National Renewal Fund was established to assist workers who might be laid off during the process of modernizing, restructuring or closing uncompetitive firms in the public and private sectors. The Committees appointed by the Government to look into the functioning of the financial sector insurance and the tax system have submitted their reports. Another committee has formulated guidelines for the privatization of public enterprises. The new trade policy de-regularized export and relaxed control over import of advanced technological equipment.

In order to promote exports and link India with the world markets, the Government has reduced tariffs many times. In February 1993, the rupee on trade account was declared to be fully convertible. In terms of policies related to foreign capital, the important measures which have adopted since 1992 include: foreign institutions are permitted to buy shares issued by Indian companies; the development of many kinds of minerals has been opened to foreign capital in accordance with the revised law of mineral products and India signed the convention of protection for foreign investment. The wide-ranging economic reforms in India since 1991 involved a major shift in the development strategy. The earlier strategy adopted public sector dominated autarchic investment planning of industrialization with direct discretionary controls on private investment. The interaction of this strategy with the institutional framework of functioning markets and predominant private ownership of means of production pushed the economy into persistent low growth equilibrium.

Economic reforms of 1991 aim at putting the economy on a sustained and rapid growth path through greater participation in international division of labor and private capital movements, and greater reliance on private initiative and markets, and the consequent shift to market-friendly policy regime.