Introduction Since independence, India followed the mixed economy framework by combining the advantages of the market economic

system with those of the planned economic system. In 1991, India met with an economic crisis relating to its external debt the government was not able to make repayments on its borrowings from abroad. The origin of the financial crisis can be traced from the inefficient management of the Indian economy in the 1980s. For implementing various policies and its general administration, the government generates funds from various sources such as taxation, running of public sector enterprises etc. When expenditure is more than income, the government borrows to finance the deficit from banks and also from people within the country and from international financial institutions. When goods were imported like petroleum, payment was made in dollars which were earned from exports. Development policies required that even though the revenues were very low, the government had to overshoot its revenue to meet problems like unemployment, poverty and population explosion. The continued spending on development programmes of the government did not generate additional revenue. Moreover, the government was not able to generate sufficiently from internal sources such as taxation. When the government was spending a large share of its income on areas which do not provide immediate returns such as the social sector and defence, there was a need to utilise the rest of its revenue in a highly efficient manner. The income from public sector undertakings was also not very high to meet the growing expenditure. At times, our foreign exchange, borrowed from other countries and international financial institutions, was spent on meeting consumption needs. Neither was an attempt made to reduce such profligate spending nor sufficient attention was given to boost exports to pay for the growing imports. In the late 1980s, government expenditure began to exceed its revenue by such large margins that it became unsustainable. Prices of many essential goods rose sharply. Imports grew at a very high rate without matching growth of exports. Foreign exchange reserves declined to a level that was not adequate to finance imports for more than two weeks. There was also not sufficient foreign exchange to pay the interest that needs to be paid to international lenders. So India approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the crisis. For availing the loan, these international agencies expected India to liberalise and open up the economy by removing restrictions on the private sector, reduce the role of the government in many areas and remove trade restrictions. India agreed to the conditionalities of World Bank and IMF and announced the New Economic Policy (NEP).

The NEP consisted of wide ranging economic reforms. The thrust of the policies was towards creating a more competitive environment in the economy and removing the barriers to entry and growth of firms. This set of policies can broadly be classified into two groups: The stabilisation measures - are short term measures, intended to correct some of the weaknesses that have developed in the balance of payments and to bring inflation under control. There was a need to maintain sufficient foreign exchange reserves and keep the rising prices under control. The structural reform measures - are long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy. The government initiated a variety of policies which fall under three heads, Liberalisation, Privatisation Globalisation. The first two are policy strategies and the last one is the outcome of these strategies. All these policy measures changed the direction of our developmental strategies.

Liberalisation The rules and laws which were aimed at regulating the economic activities became major hindrances in growth and development. Liberalisation was introduced to put an end to restrictions and open up various sectors of the economy. Though a few liberalisation measures were introduced in 1980s in areas of industrial licensing, export-import policy, technology up gradation, fiscal policy and foreign investment, reform policies initiated in 1991 were more comprehensive. Deregulation of Industrial Sector: In India, regulatory mechanisms were enforced in various ways (i) industrial licensing under which every entrepreneur had to get permission from government officials to start a firm, close a firm or to decide the amount of goods that could be produced (ii) private sector was not allowed in many industries (iii) some goods could be produced only in small scale industries and (iv) controls on price fixation and distribution of selected industrial products. The reform policies introduced in and after 1991 removed many of these restrictions. Industrial licensing was abolished for almost all but product categories alcohol, cigarettes, hazardous chemicals industrial explosives, electronics, aerospace and drugs and pharmaceuticals. The only industries which are now reserved for the public sector are defence equipments, atomic energy generation and railway transport. Many goods produced by small scale industries have now been dereserved. In many industries, the market has been allowed to determine the prices. Financial Sector Reforms: Financial sector includes financial institutions such as commercial banks, investment banks, stock exchange operations and foreign exchange market. The financial sector in India is controlled by the Reserve Bank of India (RBI). The RBI decides the amount of money that the banks can keep with themselves, fixes interest rates, nature of lending to various sectors etc. One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilitator of financial sector. This means that the financial sector may be allowed to take decisions on many matters without consulting the RBI. The reform policies led to the establishment of private sector banks, Indian as well as foreign. Foreign investment limit in banks was raised to around 50 per cent. Those banks which fulfill certain conditions have been given freedom to set up new branches without the approval of the RBI and rationalize their existing branch networks. Though banks have been given permission to generate resources from India and abroad, certain aspects have been retained with the RBI to safeguard the interests of the account-holders and the nation. Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds are now allowed to invest in Indian financial markets. Tax Reforms: Tax reforms are concerned with the reforms in governments taxation and public expenditure policies which are collectively known as its fiscal policy. There are two types of taxes: direct and indirect. Direct taxes consist of taxes on incomes of individuals as well as profits of business enterprises. Since 1991, there has been a continuous reduction in the taxes on individual incomes as it was felt that high rates of income tax were an important reason for tax evasion. It is now widely accepted that moderate rates of income tax encourage savings and voluntary disclosure of income. The rate of corporation tax, which was very high earlier, has been gradually reduced. Efforts have also been made to reform the indirect taxes, taxes levied on commodities, in order to facilitate the establishment of a common national market for goods and commodities. In order to encourage better

compliance on the part of taxpayers many procedures have been simplified and the rates also substantially lowered. Foreign Exchange Reforms: The reform in the external sector was made in the foreign exchange market. In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange. It also set the tone to free the determination of rupee value in the foreign exchange market from government control. Now, more often than not, markets determine exchange rates based on the demand and supply of foreign exchange. Trade and Investment Policy Reforms: Liberalisation of trade and investment regime was initiated to increase international competitiveness of industrial production and also foreign investments and technology into the economy. The aim was also to promote the efficiency of the local industries and the adoption of modern technologies. In order to protect domestic industries, a regime of quantitative restrictions on imports was followed. This was encouraged through tight control over imports and by keeping the tariffs very high. These policies reduced efficiency and competitiveness which led to slow growth of the manufacturing sector. The trade policy reforms aimed at (i) dismantling of quantitative restrictions on imports and exports (ii) reduction of tariff rates and (iii) removal of licensing procedures for imports. Import licensing was abolished except in case of hazardous and environmentally sensitive industries. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from April 2001. Export duties have been removed to increase the competitive position of Indian goods in the international markets.

Privatisation Privatisation implies shedding of the ownership or management of a government owned enterprise. Privatisation of the public sector undertakings by selling off part of the equity of PSUs to the public is known as disinvestment. The purpose of sale was mainly to improve financial discipline and facilitate modernisation. It was also envisaged that private capital and managerial capabilities could be effectively utilised to improve the performance of the PSUs. The government envisaged that privatisation could provide strong impetus to the inflow of FDI. The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions. Government companies can be converted into private companies in two ways (i) by withdrawal of the government from ownership and management of public sector companies (ii) By outright sale of public sector companies. For instance, some PSUs have been granted special status as navaratnas and mini ratnas. In 1996, in order to improve efficiency of PSU, infuse professionalism and enable them to compete more effectively in the liberalised global environment, the government chose nine PSUs and declared them as navaratnas. They were given greater managerial and operational autonomy, in taking various decisions to run the company efficiently and thus increase their profits. Greater operational, financial and managerial autonomy had also been granted to 97 other profit-making enterprises referred to as mini ratnas. The first set of navaratna companies included: Indian Oil Corporation Ltd (IOC), Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL), Oil and Natural Gas Corporation Ltd (ONGC), Steel Authority of India Ltd (SAIL), Indian Petrochemicals Corporation Ltd (IPCL), Bharat Heavy Electricals Ltd (BHEL), National Thermal Power Corporation (NTPC), Videsh Sanchar Nigam Ltd (VSNL), Gas Authority of India Limited (GAIL), Mahanagar Telephone Nigam Ltd (MTNL) Many of these profitable PSUs were originally formed during the 1950s and 1960s when self-reliance was an important element of public policy. They were set up with the intention of providing infrastructure and direct employment to the public so that quality end-product reaches the masses at a nominal cost and the companies themselves were made accountable to all stakeholders. The granting of navaratna status resulted in better performance of these companies. The government partly privatised them through disinvestment.

Ways of Privatisation There are four main methods of privatisation: Share issue privatisation (SIP) - selling shares on the stock market. Share issue can broaden and deepen domestic capital markets, boosting liquidity and potentially economic growth, but if the capital markets are insufficiently developed it may be difficult to find enough buyers, and transaction costs (e.g. under pricing required) may be higher. Asset sale privatisation - selling the entire firm or part of it to a strategic investor, usually by auction. A very substantial benefit to share or asset sale privatisations is that bidders compete to offer the state the highest price, creating revenues for the state to redistribute in addition to new tax revenue. Voucher privatisation - shares of ownership are distributed to all citizens, usually for free or at a very low price. Voucher privatisations would be a genuine return of the assets into the hands of the general population, and create a real sense of participation and inclusion. Vouchers, like all other private property, could then be sold on if preferred by what companies are offering. Franchising authorizing the delivery of certain services in designated geographical areas.

Globalization Globalisation is the outcome of the policies of liberalisation and privatisation. It means integration of the economy of the country with the world economy. It is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration. It involves creation of networks and activities transcending economic, social and geographical boundaries. Globalisation attempts to establish links in a way that the happenings in India can be influenced by events happening miles away. It is turning the world into one whole or creating a borderless world. Outsourcing, a company hires regular service from external sources, mostly from other countries, which was previously provided internally or from within the country (like legal advice, computer service, advertisement, security each provided by respective departments of the company). Outsourcing has intensified, in recent times, because of the growth of fast modes of communication, particularly the growth of Information Technology (IT). Many of the services such as voice-based business processes (popularly known as BPO or call centres), record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice or even teaching are being outsourced by companies in developed countries to India. With the help of modern telecommunication links including the Internet, the text, voice and visual data in respect of these services is digitised and transmitted in real time over continents and national boundaries. Most multinational corporations, and even small companies, are outsourcing their services to India where they can be availed at a cheaper cost with reasonable degree of skill and accuracy. The low wage rates and availability of skilled manpower in India have made it a destination for global outsourcing in the post-reform period.

Evolution of the Disinvestment Policy 1. The Statement of Industrial Policy dated July 24, 1991 stated that in the case of selected enterprises, part of Government holdings in the equity share capital of these enterprises will be disinvested in order to provide further market discipline to the performance of public enterprises.Thus, disinvestment of the Governments equity in CPSUs (Central Public Sector Units) started in 1991-92, when minority shareholding of the Central Government in 30 individual CPSUs was sold to selected financial institutions (LIC, GIC, UTI) in bundles, in order to ensure that along with the attractive shares, the not so attractive shares also got sold. Subsequently, shares of individual CPSUs were sold and the category of eligible buyers was gradually expanded to include individuals, NRIs and registered FIIs. By 1997, sale through the GDR route was also initiated and MTNL (1997-98), VSNL (1998-99) and GAIL (1999-2000) all used the opportunity to access the GDR market. The number of listed CPSUs on domestic stock exchange stood at 42 as on 31.3.2006. 2. The policy on disinvestment has evolved through statements of Finance Ministers in their budget speeches. In the interim budget 1991-92, it was announced that the Government would disinvest up to 20 per cent of its equity in selected public sector undertakings in favour of mutual funds and financial or investment institutions in the public sector to broad-base the shareholding, improve management, enhance availability of resources for these CPSUs and yield resources for the exchequer. 3. The Rangarajan Committee recommended in April 1993 that the percentage of equity to be disinvested should be generally under 49% in industries reserved for the public sector and over 74% in other industries. As per statement of Industrial Policy dated 24th July 1991 the following industries were proposed to be reserved for the public sector:- Arms and ammunition and allied items of defence equipment, Defence aircraft and warships. Atomic Energy Coal and lignite Mineral oils Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond Mining of copper, lead, zinc, tin, molybdenum and wolfram Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order, 1953 Railway transport 4. In the budget speech of 1996-97, the proposal to establish a Disinvestment Commission was announced. It was also stated that the revenues generated from such disinvestment will be utilised for allocation to education and health sectors and for creating a fund to strengthen CPSUs.

Public Sector Disinvestment Commission 5. The Public Sector Disinvestment Commission was established on 23rd August 1996, for a period of three years, as an independent, non-statutory, advisory body with Shri G.V. Ramakrishna as full time Chairman, four other Members (part time) and a full time Member Secretary. 72 CPSUs were referred to the Commission. Subsequently, 8 cases were withdrawn. The Commission submitted 12 reports for 58 CPSUs, recommending strategic sale in 28 cases, trade sale in 8 cases, closure of 4 units, equity sales in 6 cases and no change (disinvestment deferred) in 12 cases. The Commission did not take up examination of the cases of six CPSUs, which were registered with the Board for Industrial & Financial Reconstruction (BIFR). The tenure of the Chairman of the Commission was extended till 30th November 1999. 6. In the budget speech of 199899, it was announced that, in the generality of cases, the Governments shareholding in CPSUs would be brought down to 26%. In the case of CPSUs involving strategic considerations, the Government would continue to retain majority shareholding. The interest of workers would be protected in all cases. 7. In the budget speech of 1999-2000, it was announced that Government's strategy towards the CPSUs would continue to encompass a judicious mix of strengthening strategic units, privatising non-strategic ones through gradual disinvestment or strategic sale and devising viable rehabilitation strategies for weak units. 8. On 16th March 1999, the Government classified the CPSUs into strategic and non-strategic areas for the purpose of disinvestment. It was decided that the strategic CPSUs would be those functioning in areas of: o Arms and ammunition and the allied items of defence equipment, defence aircrafts and warships o Atomic energy (except in the areas related to the generation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries) o Railway transport. All other CPSUs were to be considered as being non-strategic. For the non-strategic CPSUs, it was decided that reduction of the Governments shareholding to 26% would not be automatic and the manner and pace of doing so would be decided on a case-by-case basis on the following considerations: a) Whether the industrial sector required the presence of the public sector as a countervailing force to prevent concentration of power in private hands, and b) Whether the industrial sector required a proper regulatory mechanism to protect the consumer interests before Public Sector Enterprises were privatised. 9. It was also decided to establish a new Department for Disinvestment to systematize the policy approach to disinvestment and privatisation and to give a fresh impetus to this programme. The Department came into being on 10th December 1999. 10. In the budget speech of 2000-2001, it was announced that the main elements of the Governments policy were to restructure and revive potentially viable CPSUs; close down CPSUs which cannot be revived; bring down Governments shareholding in all non-strategic CPSUs to 26% or lower, if necessary; and fully protect the interests of workers. The receipts from disinvestment and privatisation will be used for meeting expenditure on social sectors, restructuring of CPSUs and for retiring public debt.

Reconstituted Public Sector Disinvestment Commission 11. The Public Sector Disinvestment Commission was re-constituted on 24th July 2001 for a period of two years with Dr. R.H. Patil as Chairman (part time) along with four other Members (part time) and a full time Member Secretary. The then Ministry of Disinvestment had informed the Commission on 23rd January 2002 that all non-strategic CPSUs, including subsidiaries, but excluding IOC, ONGC and GAIL, stood referred to the Commission for it to prioritize, examine and make recommendations in the light of the Government policies articulated earlier on 16th March 1999 and the budget speeches of Finance Ministers from time to time. The Disinvestment Commissions in 25 reports submitted between February 1997 March 2004 disinvestment through strategic sale in 59 cases; disinvestment other than strategic sale in 32 cases and closure was recommended in 4 cases. The term of the Commission was subsequently extended till 31st October 2004. The Commission ceased to exist from 1st November, 2004. 12. In the budget speech of 2001 2002, it was announced that CPSUs must be strengthened to compete and prosper in the new environment. A receipt of Rs. 12,000 crore was budgeted from disinvestment. Out of this, an amount of Rs. 7,000 crore was to be used for providing restructuring assistance to CPSUs, safety net to workers and reduction of debt burden and a sum of Rs. 5,000 crore for providing additional budgetary support for the Plan, primarily in the social and infrastructure sectors. This additional allocation for the Plan would be contingent upon realisation of the anticipated receipts. 13. The Government decided in September 2002 that CPSUs and Central Government owned cooperative societies (where Governments ownership is 51% or more) should not be permitted to participate as bidders in the disinvestment of other CPSUs unless specifically approved by the Core Group of Secretaries on Disinvestment (CGD). In December 2002 on the basis of a proposal of the Department of Fertilizers, it was decided that Multi State Cooperative Societies under the Department of Fertilizers be allowed to participate in the disinvestment of fertilizer CPSUs including National Fertilizers Limited. 14. In a suo motu statement made in both Houses of Parliament on 9th December, 2002, by the then Minister of Disinvestment, the Government reiterated the policy as The main objective of disinvestment is to put national resources and assets to optimal use and in particular to unleash the productive potential inherent in our public sector enterprises. The policy of disinvestment specifically aims at: Modernization and up gradation of Public Sector Enterprises Creation of new assets Generating of employment Retiring of public debt Government would continue to ensure that disinvestment does not result in alienation of national assets, which, through the process of disinvestment, remain where they are. It would also ensure that disinvestment does not result in private monopolies. In order to provide complete visibility to the Governments continued commitment of utilisation of disinvestment proceeds for social and infrastructure sectors, the Government would set up a Disinvestment Proceeds Fund. This Fund would be used for financing fresh employment opportunities and investment, and for retirement of public debt. For the disinvestment of natural asset companies, the Ministry of Finance and the Ministry of Disinvestment would work out guidelines. The Ministry of Finance would also prepare for consideration of the

Cabinet Committee on Disinvestment a paper on the feasibility and modalities of setting up an Asset Management Company to hold manage and dispose the residual holding of the Government in the companies in which the Governments equity has been disinvested to a strategic partner. 15. The then Ministry of Disinvestment issued guidelines regarding Management-Employee Bids in Strategic Sale on 25th April 2003 to encourage and facilitate the participation of employee participation in strategic sales. 16. In the budget speech for 2003-04, the Government announced that details regarding the already announced Disinvestment Fund and Asset Management Company, to hold residual shares post disinvestment, would be finalized early in 2003-04.

Current policy on disinvestment and programmes In May 2004, Government adopted the National Common Minimum Programme (NCMP), which outlines the policy of the Government with respect to the public sector. The relevant extracts of NCMP are: The UPA Government is committed to a strong and effective public sector whose social objectives are met by its commercial functioning. But for this, there is need for selectivity and a strategic focus. The UPA is pledged to devolve full managerial and commercial autonomy to successful, profit-making companies operating in a competitive environment. Generally profitmaking companies will not be privatized. All privatizations will be considered on a transparent and consultative case-by-case basis. The UPA will retain existing navratna companies in the public sector while these companies raise resources from the capital market. While every effort will be made to modernize and restructure sick public sector companies and revive sick industry, chronically loss-making companies will either be sold-off, or closed, after all workers have got their legitimate dues and compensation. The UPA will induct private industry to turn around companies that have potential for revival. The UPA Government believes that privatization should increase competition, not decrease it. It will not support the emergence of any monopoly that only restricts competition. It also believes that there must be a direct link between privatization and social needs like, for example, the use of privatization revenues for designated social sector schemes. Public sector companies and nationalized banks will be encouraged to enter the capital market to raise resources and offer new investment avenues to retail investors

Proposals under Implementation IPOs of Power Companies Three power companies, viz., Rural Electrification Corporation Limited (REC), Power Grid Corporation of India Limited (PGCIL) and National Hydro-electric Power Corporation Limited (NHPC), propose to make public offerings of equity equal to 10% each of their pre-issue paidup equity capital. Government has decided on 8.2.2007 to piggy-back with an Offer for Sale of 10%, 5% and 5% respectively out of its shareholding. The realisation based on book value has been estimated at Rs. 1651 crore. The actual realization is expected to be higher and would depend on the prevailing market condition. Brief on the Initial Public Offering of shares of Power Grid Corporation of India Limited (PGCIL) The Initial Public Offering (IPO) of 57,39,32,895 shares of Power Grid Corporation of India Limited (PGCIL), consisting of an Offer for Sale of 19,13,10,965 equity shares out of Governments shareholding and a fresh issue of 38,26,21,930 equity shares by the company was open for subscription from 10th September, 2007 to 13th September, 2007. The issue was oversubscribed by 64.8 times. The Issue Price was fixed at the top of the Price Band (Rs.44/- to Rs.52/- per share) viz. at Rs. 52/- per share. Accordingly, an amount of Rs.994.82 crore accrued to Government account from the sale of its shares in PGCIL. The money was credited to Government account on 3rd October, 2007 and trading in the shares of PGCIL commenced on 5th October, 2007.