Munich Personal RePEc Archive

Economic Policy and State Owned Enterprises: Evolution Towards Privatisation in India

Bala, Madhu (2006): Economic Policy and State Owned Enterprises: Evolution Towards Privatisation in India.


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The paper endeavours to look into the evolution of the role of the state and move towards privatisation in India. It starts with a discussion on the role of State intervention in the economic development within the contours of socio-economic and political circumstances. It recognises the fact that different scholars have advocated various ways through which state can intervene in an advanced capitalist economy and a developing economy or a colony. The nature of intervention is different in each case.

The paper argues that State owned enterprises (SOEs) are one such manifestation of state Intervention. In many developing countries, state enterprises are assigned the responsibility of fulfilling specific social goals, which have their origin in colonial period. Whatever may be the idea behind the creation of such enterprises, they come into existence either by direct state investment or through nationalisation of private enterprises. The state intervenes through state owned enterprises in the countries where investment needs for different projects are large and the expected returns at least in the short run are too low to motivate private capital to invest.

Since 1980, however, the intervention by the state through state owned enterprises has been undergoing a close scrutiny in many developing countries including India. The argument is that excessive political interference and lack of managerial interests (autonomy) hamper the performance of state enterprises. It has resulted in the reflection of various theories on assessing the performance of state enterprises which includes property rights theory, public choice theory, non-market failure and competition theory.

Since economic policy making by the state requires balance of accumulation and legitimisation, then generally, the adopted economic policy serves the interests of a few major social groups. These dominant social groups react to the adopted policy and their reactions are normally taken into account while amending the existing policy or making the new economic policy. Hence, the proper understanding of the economic policy of an economy like India necessitates its historical evaluation. Therefore, in this chapter, the whole period of interaction of economic policy and state owned sector in the post-independence India has been divided into following four phases: (i) 1950-1965, (ii) 1966-1984, (iii) 1984-91 and (iv) post-1991 policy regime. During the first phase, i.e. 1950-65, the growth rates of the economy were generally high and state owned sector was occupying the position of 'commanding heights'. Despite the economy passing through crisis during this phase, the state owned sector enjoyed by and large a significant position.

The policy adopted in 1982 was a step forward towards the process of liberalisation. In state owned enterprises, a visible change in the attitude took place. The economy was made predominantly dependent upon market forces rather than on the state. The industrial policy that was initiated in 1985 was the culmination of the process of drifting away, which started during the second phase of the economic policy in India. In the Post 1991, Policy Regime, the Eighth, Ninth and Tenth Plan documents suggested many policy initiatives towards restructuring, modernisation, rationalisation of capacity, product-mix changes, privatisation, autonomy, performance accountability and disinvestments policy.

However many studies emerged in favour of and against the policy of privatisation and disinvestment of SOEs and also on the performance of those enterprises that were privatised. While referring to those studies, the chapter looks into the trends of the privatisation of State Owned Enterprises from 1991 to 2000 and points out that during this period, the government offloaded shares in as many as 39 state owned enterprises. However, since March 2000 emphasis has increasingly been on strategic sales of identified state owned enterprises (SOEs). The chapter ends with a critical analysis of the performance of disinvestment process in india and observes that the policy of disinvestment has been looked upon with scepticism.

JEL Classifications: O11, P41, P47, P52

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