24

Industrial Sector in India and Economic Liberalization

Sunil Mani

The new economic policy, set into motion since 1991, was primarily targeted at the industrial sector. The main rationale for this policy change was to make India’s industrial sector, consisting of the manufacturing and utility-oriented industries (such as electricity and water), more efficient not only in the domestic sense of the term but also from the external or international point of view. The main facet of this policy change consisted of increasing the competition between the firms, not only domestically but also from the external sources (as from imports and by allowing MNCs to operate domestically). The New Industrial Policy Statement (NIPS) of 1991 adopted two major policy instruments for promoting this competition. First, it reduced the height of the main barrier to entry, viz., licensing to almost zero through a complete delicensing of all the industries, except for a small group of industries; and second, it adopted a much more welcoming attitude towards the entry of the MNCs to our industrial sector.

It is now nearly 20 years, since India has embarked on a reform of its economy, which is characterised by reducing the role of the government, either explicitly or implicitly, from a number of areas of economic activity. An area where reforms have been significant, from the point of view of both its depth and coverage, is the industrial sector. This chapter gives in detail an analysis of the effect of these reforms on various dimensions of the industrial sector. The issues covered are—the growth performance of the industrial sector; the structure of the manufacturing sector, the state of domestic competition between firms since delicensing; the foreign investments in the industrial sector, the foreign technology imports and the domestic technology generating efforts in the Indian industries; and the public sector enterprise reforms.

24.1 Growth Performance of Manufacturing Sector

India’s manufacturing sector had registered a growth rate of 6.74 per cent per annum, during the pre-liberalization period (1981–82 through 1991–92). This was considered to be very respectable, considering the statistically significant decline in the rate of growth of the sector, since mid-1960s. One of the major objectives of the liberalization process was to raise the growth performance of the industrial sector, by removing various constraints and, especially, the requirement of an industrial license. In the following, we present some data on the growth performance of the manufacturing sector, before and after the reform period. For this purpose, the 11-year period from 1981–82 to 1991–92 is defined as the prereform period, and the 19-year period between 1992–93 to 2010–11 as the post-reform period (Table 24.1). The average rate of growth of the manufacturing sector was 6.74 per cent per annum, during the pre-liberalization period, but has since remained more or less constant at 7.13 per cent, during the post-liberalization period. However, the coefficient of variation in the growth rates has reduced from 54 per cent during the pre-reform period to 46 per cent during the post-reform.

Within the manufacturing sector (Table 24.2), there has been an across-the-board fall in the growth rates barring the intermediate goods and the consumer goods sectors. The one industry whose growth rate has declined sharply is the basic goods, followed to a certain extent by the capital goods sector. The two industries—intermediate and consumer goods industries—have registered some sharp increases. In fact, the ever-growing middle class and the increase in disposable incomes have fuelled the market for consumer goods, leading to its improved performance. On the contrary, the lack-lustre performance of the basic and capital goods industries requires some careful analysis.

Paradoxically, it is also the industry that has contributed, in a significant manner, to the overall rate of growth especially in 1994–95 and 1995–96 (Table 24.1). This so-called spectacular growth of the capital goods sector for the two years, which too in the context of large-scale imports of capital goods, have prompted some commentators to reach, albeit, a hasty conclusion that Indian capital goods industry has become efficient. However, this is not a valid conclusion to reach for these two reasons. First of all there has been an inverse relationship between the rate of growth of the domestic output of capital goods and its imports. Second, the data on domestic output is based on the Index of Industrial Production (IIP), and therefore refers to a specific group of capital goods; while the data on imports is from the Director General of Commercial Intelligence and Statistics, and refers to a group which is much more encompassing. In other words, the two databases do not refer to the same group of capital goods. And, therefore, one has to be very cautious in drawing inferences about the efficiency of the domestic capital goods sector, from a mere relationship between the growth rates of domestic output and imports to one of the consumer goods industries that has experienced high growth rates.

Any discussion of the industrial growth performance of the country must also devote some attention to the database of this sector. Of late, the only indicator that is used is the IIP. As is well known, the primary database for computing the IIP—the principal ‘leading indicator’ of the nation’s industrial progress—has become increasingly scarce and shaky as factories and firms, especially those in the organized private sector, do not care to report their production data to official agencies, though as per law they are expected to do so.

TABLE 24.1 Rate of Growth of the Manufacturing Sector: Pre- and Post-liberalization Periods

TABLE 24.2 Growth Performance of the Manufacturing Sector (Annual Average Growth Rates in per cent)

The situation is none the better for the small-scale industry, which reportedly accounts for 40% of the manufactured exports. This sector is in effect not covered by the IIP. Every time the base year for the IIP is revised, a considerable technical expertise goes into estimating the representation of the small-scale sector, in the weighting diagram of the index. However, when it comes to computing the monthly IIP the Small Scale Industry (SSI) items are dropped altogether, as the agency responsible for supplying the data is not able to do so.

Finally, along with the fact that the manufacturing growth has remained more or less consistent over the entire period of liberalization, the phase has also not seen any growth in the manufacturing employment. See Table 24.3 for the growth in organized manufacturing employment during pre- and post-liberalization periods. In fact the manufacturing employment has registered a negative growth during the post-liberalization period, leading many commenters to refer to this period as a ‘job-less growth’ phase.

So, in short, if one takes the period since liberalization as a whole, the rate of growth of the manufacturing sector has remained more or less constant since liberalization. Second, there has been considerable fluctuations in the growth rates of the specific industries, such as the capital goods sector. The real reasons for these are not discussed in this chapter. The oft-cited reason for the decline in the growth rates is the poor performance of the infrastructure sector and lack of availability of cheap credit.

TABLE 24.3 Trends of Employment in the Organized Manufacturing Sector in India (in Millions)

24.2 Structure of the Manufacturing Sector

The most important policy pronouncement, on liberalizing the economy from the shackles of government intervention, is contained in the NIPS of 1991.

The NIPS has proposed to do away with the main barrier to entry, viz., capacity restriction through licensing, in almost the entire industrial establishment except for about 18 major industry groups. A run through these lists of18 would show that they are basic goods like coal, other energy inputs like petroleum, food products like sugar, hazardous chemicals and explosives, defence industries of all types, drugs and pharmaceuticals, and a whole host of luxury durable consumer goods, like motor cars, TVs, VCRs, domestic refrigerators, washing machines and microwave ovens. If any of these items are reserved exclusively for the small-scale sector, then they are not covered by this compulsory licensing. This, more or less across-the-board delicensing, has considerably reduced the height of barriers to entry in the Indian manufacturing sector. However, this does not appear to be so, as we shall argue that an earlier policy (i.e., in 1985–86) of fixing the Minimum Economic Scale (MES) of output in a large number of industries has in a sense erected a capital barrier to the entry. This is further elaborated upon as follows. In 1985–86, the government fixed the MES in about 72 industries. In the licensing regime, this meant that any future capacity creation in those specific industries will have to conform to the MES pre-determined by the government.

There are two aspects of the MES that need to be spelt out. Firstly, for all the industries, the MES has been fixed at a unique point. Implicit in this is the unrealistic assumption that the long run average cost curve of a typical firm is L-shaped, as suggested by the traditional neo-classical theory, so that there is a unique point when the costs are minimized. Second, it also makes the added assumption that there are significant economies of scale in all the chosen industries. Supposing both these assumptions were proved to be counter-factual, then the policy of fixing the MES at unique levels of capacity is highly questionable. For instance, it has been shown through empirical studies that the long run average cost curve is L-shaped, meaning thereby that this is a range of output for which the costs are minimum. If this was so, the government ought to have fixed the MES within a range, and not at a unique point. Second, technological changes, which have been quite central to most of the industries of the modern world, have rendered the existence of economies of scale in most industries less significant. In fact, in certain industries, there are no economies of scale at all. It should, of course, be added that this proposition will hold good only for a select number of industries. If both these propositions are true, then placing the MES at such unique and often at very high levels is tantamount to erecting a capital barrier to entry (albeit only) in those industries where economies of scale do not exist, or are not significant enough. This is because, at such pre-determined capacities, the cost of setting up or creating such plants is so high that only a few entrepreneurs can enter, that too only with the support of the public financial institutions. It is easier for the existing units to expand to such capacities, than for a fresh unit to come up. This would mean a persistence of concentration in the already concentrated sectors. In other words, this policy of across-the-board delicensing, coupled with fixing the capacities at the predetermined levels, is bound to be contradictory, and it may not result in any significant increase in competition among the firms.

The second aspect of the barrier to entry is the repealing of certain provisions of the MRTP act, which deals with the growth of the large business houses. The act, which was promulgated in 1970, was supposed to prevent the concentration of economic power by keeping a check on the relative growth of what is called the MRTP undertakings. There are essentially two types of undertakings which fall under this category. While the criterion for deeming the former is based on the assets held by a single large undertaking, alone or together with its inter-connected ones, the latter one is based on an asset-cum-market share of an enterprise alone or together with its inter-connected ones. Less than one per cent of the cases have been referred to the commission, and absolutely no references to it have been made since 1984. From the evidence presented, it is abundantly dear that the MRTP act has never been implemented seriously. The commission had a minimal role and a number of important aspects like the definition of concentration of the economic power, and the criterion for deciding the cases to be referred to the commission have been kept quite vague. The net result has been very logical—an increase in both the aggregate and the disaggregate concentration in the industrial sector. The aggregate concentration ratio, defined as the ratio of assets of the top 20 business houses, to the assets of the entire private corporate sector has increased from about 61.45 in 1972 to about 71 in 1983. It is thus abundantly clear and not too unreasonable to assume that the MRTP Act has failed miserably in carrying out its primary objective of reducing the concentration. As seen above, this has been primarily because the government never armed it properly. The act has literally existed only on paper, which through the NIPS has been done away with altogether.

The second major objective of the act has been to prohibit monopolistic, restrictive and, after a recent amendment, unfair trade practices; or, in other words, the market behaviour of all kinds of enterprises and not just the monopoly undertakings. Here too the performance of the act has been quite dismal, because its punitive powers have been limited; consequently, most of the erring companies have continued with their old practice. It should, of course, be added that the activities of the commission in this sphere seem to have gone some way towards making the consumers aware of their rights. The NIPS seeks to strengthen this aspect of the MRTP Act further—this attempt should very clearly manifest itself in the form of bestowing punitive powers on the commission, and freeing it from the crucial legal wrangles (to the extent possible). However, the NIPS is far too unclear along these lines.

Now that the major objective of the MRTP Act has been given up, one wonders what is the institutional mechanism that the government is contemplating to introduce ‘to abolish the monopoly of any sector or any individual enterprise, in any field of manufacture . . . and open all manufacturing activity to competition.’ In fact, to promote the competition and check the concentration, a mere delicensing will not be of much help. Because of the policy on MES, a large number of manufacturing industrial sectors will continue to remain concentrated, as ever before. Finally, in 2002, the Competition Act, 2002 was passed by the Parliament. This was the institutional replacement for the MRTP Act and commission. It was subsequently amended by the Competition (Amendment) Act, 2007. In accordance with the provisions of the Amendment Act, the Competition Commission of India and the Competition Appellate Tribunal have been established. The idea of the competition commission is to make the markets work better, rather than control it, as the MRTP attempted to do and failed. The commission thus has an important responsibility to promote competition between the firms operating in various industries. In the light of the arguments presented above, we are not all that clear whether the NIPS has really reduced the height of the barriers to entry in the Indian manufacturing sector.

The important question before us is, whether these changes have increased the domestic competition between the firms in India’s manufacturing sector. This does not appear to be so as indicated in Table 24.4, where we present industry-wise data on the Herfindahl Indices (HI).¹ It is seen that for majority of the industries, the degree of competition, as indicated by the HI index, has remained more or less the same, except for the beverage and tobacco industry, and the automotive industry, although the HI-defined aggregate industry levels are not that easy to be interpreted.

TABLE 24.4 Degree of Competition in Indian Industries, 1985–2001 (Based on Herfindahl Index of Sales)

We now turn our attention to the second component, viz., Foreign Direct Investments (FDI) and the policy on technology imports. These are essentially two broad types of foreign technical collaboration—the former involves participation in the equity of the host company by the collaborator and the latter is merely a technology licensing agreement between the two companies. The conditions governing the acquisition of both the technology and the capital have been eased in the NIPS. We discuss first the implications of the conditions governing the acquisition of the foreign capital and thereafter, licensing the agreement.

24.3 Foreign Direct Investment

At the outset it is essential to clarify the concept of the FDI, as there are considerable variations in its definition across various countries. In India, the FDI is defined as investments in:

1. Indian companies, which are subsidiaries of the foreign companies;
2. Indian companies, in which 40 per cent or more of the equity capital is held outside in any one country; and
3. Indian companies, in which 25 per cent or more of the equity capital is held by a single investor abroad.

The companies defined in the first point are called branches or subsidiaries of the MNCs, while those in the next two points are called the Foreign Controlled Rupee Companies (FCRC).

Though there were exchange control restrictions in India since the passing of the Foreign Exchange Regulation Act (FERA), 1947, the regulation of FDI was made explicit only since the enactment of a more comprehensive FERA in 1973. As per the provisions of this act, the foreign equity holding in any Indian company should not exceed 40 per cent. There were, of course, exceptions to this general rule—investment can also be made with repatriation rights up to 74 per cent of the equity (without any minimum limit), provided the industry is export-oriented or is in the core sector. Later to provide more flexibility, the government decided to introduce a level of 51 per cent. This level of foreign equity was permitted in cases where the company had a turnover of at least 60 per cent in the core sector activities, and exported at least 10 per cent of their output. In the extreme cases of 100 per cent export-oriented units, the foreign equity share could even increase to 100 per cent. In addition to prescribing these limits on the foreign equity participation, the government at various points of time, beginning 1969, published four lists of industry groups specifying the roles allotted to foreign capital in each group. The details of these lists are as follows.

1. The first list enumerated the industries where foreign investment would be permitted with or without technical collaboration.
2. The second list consisted of those industries where only foreign technical collaboration and not investment would be permitted.
3. The third list comprised those where no foreign participation, neither financial nor technical, would be considered necessary.
4. The fourth was mainly an exception to the above, and consists of a list of 19 priority industries in basic and intermediate goods, where foreign investment above 40 per cent was permitted.

The NIPS 91 has simplified the various tiers of regulation, by publishing a list of 34 broad industry groups (spread over industries), where the FDI up to 51 per cent of the total equity is allowed, without any prior permission. This list not only consists of the high priority industries mainly in the manufacturing sector but also includes the hotel and tourism-related industries. The luxury consumer durables, which are still under the regime of the industrial licensing, are not covered in the above list. In short, the NIPS makes out a concerted effort to bring in more FDI into the industrial sector. The rationale for this more transparent policy on FDI can be traced to at least three reasons—(1) FDI would bring attendant advantages of technology transfer, marketing expertise and introduction of modern managerial techniques; (2) it would bring in new possibilities for the promotion of exports; and (3) would also result in non-debt creating financial flows.

The first proposition is that the FDI would bring in substantial investment flows into the country’s industrial establishment. This proposition can be tested against two grounds. First, against the past trends in such flows, especially during the 1960s, when we had a free attitude towards foreign investments and, second, against the background of global changes in the sectoral distribution of the FDI flows. We have seen above that FDI refers to investments on (1) branches or subsidiaries of the foreign multinational companies operating in India; and (2) the FCRC. The flow of the FDI during a specific period would therefore, include:

1. Net lending by the parent company to its affiliate.
2. Reinvested earnings.
3. Fresh equity capital.

We see that, of the three components, the most important one is reinvested earnings of the existing foreign-controlled enterprises. In fact, the fresh equity inflows especially in cash form are very limited, especially in the period up to the early 1970s. This has shown a massive increase since 1981–82. However, one should add a caveat to the above data. The data on fresh equity inflows during 1980–81 through 1988–89 refer only to the approved investment flows (except 1986–87) and not the actual investments. Second, these approved flows are inclusive of the portfolio and the NRI investments. One should not therefore, strictly speaking, analyse its level over time, but should use it only as a broad indicator of the investment intentions. In any case, though there has been some increases, the fresh equity inflow forms only a small portion of the total equity raised by the private sector units from the domestic capital market.

Based on the past trends, we cannot say that the FDI should be looked upon as a means of obtaining substantial investment inflows into our domestic corporate sector. However, it can be argued that the fresh foreign equity inflows have been very low, because our policies have not been particularly favourable, and therefore such equity inflows, during a period of restrictive regime, cannot be used as an indicator of future trends. Then we argue, that given the sectoral distribution of the FDI inflows in the 1990s, the equity inflows into India may still not be very large. This point can further be amplified as discussed below.

It is increasingly seen that the FDI accounts for the single largest source, accounting for about 35 per cent (1989) of the aggregate long-term net resource flows, to the developing countries as a whole. However, there is a considerable concentration in such FDI flows—during the 1980–85 period, 18 countries and territories (this exclude India) accounted for 86 per cent of the flows of FDI to the developing countries. Second, an analysis of the sector-wide distribution of the outward stock of FDI of the selected developed market economies in the 1980s showed that the share of services in the outward stock has increased substantially in all those countries. Thus, the service sector in general and the banking and financial-related services have been one of the predominant recipients of the FDI. The NIPS has not made any pronouncements regarding the liberalization of our service sector (excepting hotels and tourism-related services). In fact, the available public pronouncements also tend to suggest that the government does not have any plans to open up the banking-related services sector to FDI. This is primarily because the net foreign exchange inflow into the service sector is likely to be the lowest compared to the other sectors. The second objective of having a freer attitude towards the FDI is that it would bring in new possibilities for promoting exports. There are a large number of studies that are now available comparing the export intensities (defused as percentage share of exports to the total sales) of the foreign-controlled and the local-controlled enterprises. A detailed survey of the studies on the relative export performance of the domestic and foreign companies has reached to the conclusion that ‘where foreign firms export a higher proportion of their output than local firms, this may simply reflect the fact that foreign investment was only permitted where a large share of output was destined for the foreign markets.’ One of the most recent of such studies on India, after a careful analysis of the foreign and local firms in Indian manufacturing, has reached to the conclusion that there are no statistically significant differences in the export performance of the foreign-controlled enterprises and their local counterparts. Not only are the export intensities for these foreign-controlled enterprises quite low, the foreign exchange balance of these enterprises has also been negative. We adduce some evidence on this count during the 1980s, when the FDI inflows have reached a peak as a result of the various liberalization measures. We do not have a comparable data on the Indian-controlled private enterprises. However, it is seen that in the 1980s, which has been a period of liberalization and export promotion, the export intensities have been virtually stagnant at about 5.90 per cent. Second, the net foreign exchange earnings rate has been negative all throughout, implying therefore relatively larger outflows rather than inflows. It has also shown an increasing tendency (with the exception of 1984–85) during the period.

Low export intensities are partly explained by the fact that the propensity for a firm to export rather than to sell in the domestic market depends to a large extent on the relative profitability rates of the exports to the domestic sales. During the earlier regime of the protected markets, the profitability rates in the domestic sales were considered to be higher than the exports and, therefore, both the foreign and the Indian firms preferred to sell in the domestic market. Even in the liberalized regime, we are not sure whether with the degree of competition between firms the profitability rates in the domestic sales will be less than the export sales result.

The third objective of welcoming FDI is linked to the fact that by giving a higher degree of control over ownership and decision-making, it would entice the foreign collaborator to part with the state-of-the-art technology. We do not yet have a large number of case studies, which would prove that the foreign companies are more innovative than the Indian companies. The few industry-specific studies that are available provide evidence to the contrary that it is the pure Indian companies which are more innovative. Also, the literature on technology spillovers from the FDI does present us with a mixed picture in the sense that there are both evidences of the positive and the negative spillovers from the existence of the foreign companies.

The major facet of technological changes in most of the industries, now, is that the duration of the product cycle has been considerably reduced. Consequently, it is perhaps easier to obtain modern technology (which may not exactly be state-of-the-art) much more quickly than ever before. However, it is not exactly clear whether that can be obtained without increasing the share of the foreign equity. One could obtain modern technology even with the licensing agreements, in which the foreign collaborator does not have any share in the equity of the domestic company. For this, one has to relax the conditions on purchasing technology through licensing agreements. This has been attempted in the NIPS. The major policy changes envisaged are that of the two components of the price of purchasing disembodied technology through the licensing agreements, the royalty rate (which is the first component) for the domestic and export sales has been retained at 5 and 8 per cent, respectively, but made net of taxes. Hitherto, there has been a gross of what is known as withholding tax of 30 per cent of the actual royalty outgo, which was supposed to have been paid by the foreign collaborator. However, in actuality, the collaborator used to force the host company to pay the withholding taxes. So the NIPS has proposed, basically, a legislation of a not-so-legal practice that has been in vogue for quite some time. The duration of the royalty payments has been increased, from five to seven years. Second, the limit on the other main component, viz., lump sum payments has been hiked to Rs 1 crore from an earlier combined royalty-cum-lump sum payment ceiling of Rs 50 lakh (gross of taxes). The NIPS is silent, as to whether the lump sum payment too is net of the withholding tax (which used to be 30 per cent earlier). The second major change is that the government earlier had a ‘negative’ list, where the foreign technical collaboration was not allowed at all. This list has been abolished, and a new list published (same as the one where a hike in foreign equity up to 51 per cent is given automatic approval) where the foreign technical collaboration agreements, which fulfil the above conditions, are given an automatic approval. The list is supposed to contain, by and large, hi-tech basic, capital and intermediate goods, where no local commercialisable technologies are available. This policy on technology collaboration agreement may not adversely affect the domestic in-house R&D efforts, because in any case domestic R&D is primarily directed towards adapting the previously imported technologies. Very rarely does the Indian corporate sector indulge in the kind of in-house R&D that results in the release of new products and processes, as recent studies have shown that the innovative activities in India’s industrial establishment are restricted to a few industries such as the pharmaceuticals and the automotive industries.

Against this background, it is interesting to note that the country has started attracting increasing amounts of FDI (Table 24.5).

TABLE 24.5 Trends in Net Foreign Direct Investment to India, 1991

TABLE 24.6 Trends in Inward and Outward FDI to India (Millions of US$)

An interesting dimension is that the Indian companies are now investing abroad, and that too in a significant manner essentially through the channel of takeovers and mergers of the going concerns. In fact over time, the outward FDI from India is working out to almost 60 per cent of the inward FDI (Table 24.6). The motive of the Indian companies going abroad are many, such as securing the markets and technology abroad. Most of these investments are in the manufacturing sector, and almost the entire outward FDI is in the developed economies, such as the United States, Germany and UK.

24.4 Privatization

At the outset, it is essential to clarify the concept of privatization, as the term has been used in various ways in literature. Privatization, in an informal sense, is a way of altering the relationship between the state and the private sector, and also helps in enhancing the role of the private sector. There are at least three discernible connotations of it. They are:

1. Denationalization, which involves changing the ownership of the public sector assets to the private sector. This may either be partial or full so that some of the activities of the former enterprise may be hived off, or some or even the whole of the company’s equity may be sold.
2. Deregulation or liberalization, which involves opening up of the areas or sectors that were hitherto reserved exclusively for the public sector.
3. Contracting out, which involves franchising to private firms the production of goods and services that are under the financial control of the government.

Much of the discussions on privatization have narrowly come down to equatingit with the first variant of it, viz., the sale of assets or off-loading of a portion of the equity of a going public sector concern to the private investors.

Though, there are several reasons for privatization, the major rationale for it is based on the fact that private sector enterprises are more profitable, than the public sector ones, notwithstanding the fact that such comparative studies are fraught with severe empirical difficulties. Second, public sector deficits have been making deep dents into the government’s budgets. Privatization policies are, therefore in progress the world over, in some variant or the other.

So the trend towards privatization (of the deregulation variety) occurred in India around the mid-1980s. The NIPS has proposed two kinds of privatization, deregulation as well as denationalization. If one accepts the view that the ownership does not really matter in explaining the performance of a firm, then privatization of the latter variety is preferable; and this seems to be the dominant view in NIPS. We discuss each of these two components of privatization below.

24.4.1 Deregulation

Many areas which were hitherto reserved exclusively for the public sector have been opened up for investments by the private sector. The exclusive list of industries, which was meant only for the public sector, was pared down from 17 to a mere 8 industry groups.

Most of the industries deregulated have been further de-licensed and opened up for the FDI. This way of privatizing is quite welcome, as it would result in more competition between the firms (between the existing public enterprises and the new private enterprises that may enter consequent to the deregulation). This is because it is increasingly shown that the public ownership is not inherently less efficient than the private ownership and that competition rather than ownership per se is the key to efficiency. An excellent example of this is the Indian telecommunications industry, which after its deregulation has grown significantly.

24.4.2 Partial Denationalization

The government has, for the first time, articulated on the first variant of privatization, viz., selling a portion of the shares of the going public sector enterprises. Though the NIPS is silent on the extent of equity to be sold, it is made clear in the union budget for 1991–92 that about 20 per cent of the equity of certain selected public enterprises, will be offered to the mutual funds, financial institutions, general public and the workers. Admittedly, the policy statement is silent on the details of such a sale like the list of such enterprises and the issue price. However, it is explicitly stated in the NIPS that such a sale is based on the desire to raise resources, rather than to improve the performance of public enterprises through privatization.

TABLE 24.7 Divestiture Proceeds in India

If raising resources is the prime reason for such a sale, then the government can think in terms of selling only its most profitable enterprises, a majority of which includes the petroleum companies, as there are likely to be no takers for the loss-making enterprises, which are in any case nationalized private sector companies. Second, the NIPS has also not spelt out how much of the shares that are being offered would go to the general public and workers, and the price at which these shares are going to be offered.

Under the circumstances, we can argue that the partial denationalization that is envisaged in the NIPS, may not have any perceptible impact on the future performance of these enterprises, as the shares are, by and large, going to remain with the public sector financial institutions.

The other explicitly stated measures in NIPS to enhance the performance of the public enterprises, like professionalization of the boards of the enterprises, improving the interface between the government and public enterprises and through signing of memorandums of understanding (MOU), etc., depends very much on its successful implementation, as these measures have been an integral component of the various earlier policy measure or pronouncements.

It is a moot point whether privatization in India has been a success. Since the government has basically divested its shares in profitable companies, it did not have the desired effect of improving the performance of loss-making firms. The other motive of raising resources for the budget has also been satisfied, as Table 24.7 indicates. Except for 2007–08, in most of the years the divestiture proceeds have barely been about 0.1 per cent of the country’s GDP.

24.5 Conclusions

The industrial sector in India is one sector that has been subjected to a fair amount of reforms. This is articulated well in the New Industrial Policy Statement of 1991. Our analysis has shown that the reforms do not appear to have increased the growth rates of the overall manufacturing sector, although some sub segments of it such as the consumer goods and the intermediate goods sector has shown some significant increases in the growth performance. It is not very clear whether the reforms have increased the extent of domestic competition between the firms, although there has been a significant reduction in one of the barriers to entry. The country has attracted substantial FDIs, although the evidence on the foreign companies promoting exports and bringing in modern technology and improving overall productivity levels through technology spillovers is not clear. Finally, the policy on privatization, as expressed through deregulation, has produced some wonderful results in certain industries, such as the telecommunications services industry. However, privatization as manifested in divestiture has resulted in fluctuating proceeds.

References

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Nagaraj, R. (2003). Industrial policy and performance since 1980: Which way now? Economic and Political Weekly, 38(35) 30 August 30–05 September.

Puspangadan, K., and Shanta, N. (2009). The dynamics of competition, understanding India’s manufacturing sector. New Delhi: Oxford University Press.

Reserve Bank of India, Database on Indian Economy, Accessed February 21, 2011, http://dbie.rbi.org.in/InfoViewApp/listing/main.do?appKind=InfoView&service=/InfoViewApp/common/appService.do