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Saturday, 18 February 2012

Govt to auction stake in ONGC, still miss disinvestment target!India recalls 1991 economic reforms!


Govt to auction stake in ONGC, still miss disinvestment target!India recalls 1991 economic reforms!

A share sale by the government in state-run power equipment maker Bharat Heavy Electricals Ltd may happen next fiscal year, federal heavy industries minister Praful Patel said.

Foreign buying of India corporate bonds seen picking up!

Indian Holocaust My Father`s Life and

Time - EIGHT HUNDRED THREE

Palash Biswas

http://indianholocaustmyfatherslifeandtime.blogspot.com/

http://basantipurtimes.blogspot.com/


Govt to auction stake in ONGC, still miss disinvestment target!

palashbiswaslive: Long before, DISINVESTMENT Council ...

palashbiswaslive.blogspot.com/.../long-before-disinvestment-council...
29 May 2011 – Scooters India's disinvestment approved; stock jumps 5 per cent‎ ...Scooters India hits the roof on disinvestment plan‎ - India Infoline.com

Europe a drag, India business strong: Tata Steel
Feb 17, 2012   1 Comment
Tata Steel was one of the first steel companies in Europe last year to start adjusting its output and configuration to the slowdown in the recovery.
Share
http://www.firstpost.com/videos/europe-a-drag-india-business-strong-tata-steel-217006.html


Around 5% of the government's shares of oil company ONGC will be auctioned in a single day, raising Rs 12,000 crore for the exchequer. If this sale is successful - and there's no reason to expect failure - the government will sell some of its holdings in other state owned companies to raise cash.

So, disinvestment is back with a bang after many years. This is both good news and bad. The good thing is that this government has managed to shed its inhibition about selling government stake in public sector companies, an attitude it adopted to keep its Left partners mollified during the first UPA term.
The Indian business delegation led by commerce and industry minister Anand Sharma is using every opportunity to convince Pakistani businessmen and policymakers about the benefits of opening up the economy. At a meeting of the Rawalpindi Chambers of Commerce and Industry, Sharma and CII president B Muthuraman recalled the 1991 economy reforms and how it had transformed a closed economy.

"When you take a major step there will be scepticism, there will be some who will not be positive," Sharma said, detailing India's experience when it opened up the economy. He talked about the famous "Bombay Club" which had expressed reservations about opening up the economy. Sharma said opening up of the economy had led to faster economic growth and provided confidence to the Indian corporate sector to go out and acquire companies.

He mentioned Tata's acquisition of British steel maker Corus and auto brands Jaguar and Land Rover.

"We have to have confidence in ourselves. We have taken one step and we will take two or three steps," Sharma said as scores of Indian and Pakistani businessmen listened. Earlier, Muthuraman recalled the state of the Indian economy before the economic reforms.

He said tariff and non-tariff barriers which had made Indian industry uncompetitive had come down drastically after economic reforms. "Opening up of the economy has made the nation much more competitive."

He used his speech to allay the fears of some Pakistani businessmen, who feel that easing of trade relations between the two countries will swamp the Pakistani market with Indian goods and render the Pakistani industry unviable. Muthuraman said the seriousness of the Indian side for greater trade and economic relations between the two counties was evident from the fact that the delegation visiting Pakistan was the largest ever Indian business delegation to leave the country's shores.




Foreign buying of India corporate bonds seen picking up!

Data from India's stock market regulator on Wednesday showed that unused foreign institutional investor (FII) limits for non-infrastructure corporate bonds stood at Rs. 24,542 crore.

The government on Wednesday decided to auction 5% of its stake in the country's largest oil explorer Oil and Natural Gas Corp. Ltd (ONGC) to institutional investors, in a last ditch effort to get close to its Rs. 40,000 crore disinvestment target for the current fiscal.

A share sale by the government in state-run power equipment maker Bharat Heavy Electricals Ltd may happen next fiscal year, federal heavy industries minister Praful Patel said.The planned stake sale in Bhel, which had been cleared by the cabinet last year, was expected to raise about $1 billion.India had planned to raise about Rs. 40,000 ($9 billion) from share sales in state-run firms this fiscal year that ends in March, but has so far only raised about $250 million.

The government has already approved disinvestment of 10% of its stake in Rashtriya Ispat Nigam Ltd (RINL) through an initial public offer (IPO), a move that could fetch about Rs.2,500 crore to the exchequer in the next fiscal.

Foreign institutions are expected to step up buying of Indian non-infrastructure corporate bonds over the next two weeks as they take up unused debt investment allocations, but dealers said a spate of new issues will likely limit any fall in yields.

Data from India's stock market regulator on Wednesday showed that unused foreign institutional investor (FII) limits for non-infrastructure corporate bonds stood at Rs. 24,542 crore ($4.97 billion) as of 31 January.

The limit, if not used, will expire at the end of the month.

It is hard to fathom why UPA-II, without the baggage of the Left, would hesitate to divest stake, but the last couple of years have been nightmarish for the government, leaving it little room to do anything but fend off one scam allegation after another. Finance ministry officials also say that markets have been wobbly, making it tough to time sell-offs.
Well, markets have had a run-up recently, but that's no guarantee that it will continue northwards. If the government has decided to resume divestment, it's just because it has got back some of its lost gumption. The downside of this round of disinvestment is that it is prompted by fiscal trouble rather than any liberalising conviction at the top.
The government has to constantly find money for popular, but costly, anti-poverty schemes and do so without raising taxes or cutting other spending. This can work during boom years when revenues are lifted with overall growth, but gets tough when growth falls, as it has now, from 9% to 7%.
Last year, a windfall gain of more than Rs 1,00,000 crore from auctioning 3G spectrum helped Pranab Mukherjee balance his books. Disinvestment is this year's hope. But Mukherjee knows that he can't rely on windfall gains to balance his books forever.
In the March Budget, he should hike excise and service tax rates to 12% from 10% to bring them in line for the GST. Import duties on crude should go up to 5% from zero and diesel prices should be decontrolled. Diesel guzzlers should be taxed more than other cars. Extending nutrient-based sops to urea will rein in the fertiliser subsidy. These measures will help balance India's books.
It is hard to fathom why UPA-II, without the baggage of the Left, would hesitate to divest stake, but the last couple of years have been nightmarish for the government, leaving it little room to do anything but fend off one scam allegation after another. Finance ministry officials also say that markets have been wobbly, making it tough to time sell-offs.Well, markets have had a run-up recently, but that's no guarantee that it will continue northwards. If the government has decided to resume divestment, it's just because it has got back some of its lost gumption. The downside of this round of disinvestment is that it is prompted by fiscal trouble rather than any liberalising conviction at the top.The government has to constantly find money for popular, but costly, anti-poverty schemes and do so without raising taxes or cutting other spending. This can work during boom years when revenues are lifted with overall growth, but gets tough when growth falls, as it has now, from 9% to 7%.Last year, a windfall gain of more than Rs 1,00,000 crore from auctioning 3G spectrum helped Pranab Mukherjee balance his books. Disinvestment is this year's hope. But Mukherjee knows that he can't rely on windfall gains to balance his books forever.In the March Budget, he should hike excise and service tax rates to 12% from 10% to bring them in line for the GST. Import duties on crude should go up to 5% from zero and diesel prices should be decontrolled. Diesel guzzlers should be taxed more than other cars. Extending nutrient-based sops to urea will rein in the fertiliser subsidy. These measures will help balance India's books.
It is hard to fathom why UPA-II, without the baggage of the Left, would hesitate to divest stake, but the last couple of years have been nightmarish for the government, leaving it little room to do anything but fend off one scam allegation after another. Finance ministry officials also say that markets have been wobbly, making it tough to time sell-offs.
Well, markets have had a run-up recently, but that's no guarantee that it will continue northwards. If the government has decided to resume divestment, it's just because it has got back some of its lost gumption. The downside of this round of disinvestment is that it is prompted by fiscal trouble rather than any liberalising conviction at the top.
The government has to constantly find money for popular, but costly, anti-poverty schemes and do so without raising taxes or cutting other spending. This can work during boom years when revenues are lifted with overall growth, but gets tough when growth falls, as it has now, from 9% to 7%.
Last year, a windfall gain of more than Rs 1,00,000 crore from auctioning 3G spectrum helped Pranab Mukherjee balance his books. Disinvestment is this year's hope. But Mukherjee knows that he can't rely on windfall gains to balance his books forever.
In the March Budget, he should hike excise and service tax rates to 12% from 10% to bring them in line for the GST. Import duties on crude should go up to 5% from zero and diesel prices should be decontrolled. Diesel guzzlers should be taxed more than other cars. Extending nutrient-based sops to urea will rein in the fertiliser subsidy. These measures will help balance India's books.
http://articles.economictimes.indiatimes.com/2012-02-14/news/31059570_1_disinvestment-fertiliser-subsidy-windfall
As on 31 January 2012, the 50 Central Public Sector Enterprises (CPSEs) listed on the stock exchanges contributed about 21% of the total market capitalization.
Company Market Capitalisation
(Rs.crore)
OIL & NATURAL GAS CORP.LTD.
2,36,003.19
COAL INDIA LTD.
2,05,692.41
NTPC LTD.
1,41,698.31
MMTC LTD.
89,325.00
NMDC LTD.
70,908.95
INDIAN OIL CORP.LTD.
70,046.43
BHARAT HEAVY ELECTRICALS LTD.
61,324.62
POWER GRID CORP.OF INDIA LTD.
48,126.00
GAIL (INDIA) LTD.
47,295.18
STEEL AUTHORITY OF INDIA LTD.
42,007.44

Click here for Market Capitalisation of all CPSEs
http://www.divest.nic.in/
Disinvestments through Public Offers-Highlights
  • CPSEs constitute 21.17% and 21.56% of the total market capitalisation of companies listed at BSE and NSE respectively (as on 31 January 2012)
  • The CPSE with the highest market capitalisation is Oil & Natural Gas Corp.Ltd. at Rs.2,36,003 crore (BSE) and Rs. 2,36,174 crore (NSE) (as on 31 January 2012)
  • VSNL was the first CPSE to be divested by way of a Public Offer in 1999-00
  • ONGC Public Offer in 2003-04 has been the largest CPSE FPO, raising Rs. 10,542 crore

http://www.divest.nic.in/

Disinvestment Policy

The present disinvestment policy has been articulated in the recent President's addresses to Joint Sessions of Parliament and the Finance Minister's recent Parliament Budget Speeches.
The salient features of the Policy are:
(i)
Citizens have every right to own part of the shares of Public Sector Undertakings
(ii)
Public Sector Undertakings are the wealth of the Nation and this wealth should rest in the hands of the people
(iii)
While pursuing disinvestment, Government has to retain majority shareholding, i.e. at least 51% and management control of the Public Sector Undertakings

Approach for Disinvestment
On 5th November 2009, Government approved the following action plan for disinvestment in profit making government companies:
(i)
Already listed profitable CPSEs (not meeting mandatory shareholding of 10%) are to be made compliant by 'Offer for Sale' by Government or by the CPSEs through issue of fresh shares or a combination of both
(ii)
Unlisted CPSEs with no accumulated losses and having earned net profit in three preceding consecutive years are to be listed
(iii)
Follow-on public offers would be considered taking into consideration the needs for capital investment of CPSE, on a case by case basis, and Government could simultaneously or independently offer a portion of its equity shareholding
(iv)
In all cases of disinvestment, the Government would retain at least 51% equity and the management control
(v)
All cases of disinvestment are to be decided on a case by case basis
(vi)
The Department of Disinvestment is to identify CPSEs in consultation with respective administrative Ministries and submit proposal to Government in cases requiring Offer for Sale of Government equity

http://www.divest.nic.in/Dis_Current.asp

The share-sale is likely to take place in the next financial year.
The company has already initiated the IPO process and has appointed four merchant bankers --UBS Securities, Deutsche Bank, Edelweiss Capital and IDBI Capital-- as the book running lead managers (BRLMs) to manage its issue.
Earlier the IPO was scheduled for January-March quarter of the current fiscal but had to be postponed because of poor stock market conditions.
The steel ministry may now come out with the IPO after completion of the Rs.12,500-crore first phase expansion plan by the end of next month as it would improve the valuation of company's share.
The second largest steel PSU has embarked upon a major capacity expansion drive to have a capacity of 11.5 million tonnes per annum (MTPA) by 2015-16 at an investment of Rs. 45,000 crore. The expansion is to be completed in three phases.
State-run RINL has already inked a pact with the Andhra Pradesh government for Rs. 42,000 crore investment at its Visakhapatanam facility, the steel ministry had said earlier this month.
Of this, phase-I is slated to be commissioned in February this year, taking the production capacity of RINL to 6.3 MTPA from existing 2.9 MTPA, at a cost of Rs. 12,500 crore.

Defending the government's decision to hold back disinvestment due to bad stock market conditions, the Planning Commission on Monday said the process of stake sale in state-owned companies could begin after the improvement in market situation.
"Disinvestment will be decided by market conditions. So if market conditions are not normal, it is sensible for the government to hold back," Ahluwalia said in an interview to private news channel CNBC TV18.
He further said: "I don't think there is any change in the government's plans that we can realise the value of these assets over time. If the government decides not to disinvest in the certain period because it feels the stock prices are unduly low, that's not only understandable but it is actually quite a sensible decision."
The Department of Disinvestment is running against time to meet its ambitious disinvestment target of Rs 40,000 crore for the current fiscal. Till date it has been able to raise only Rs. 1,145 crore through disinvestment in PFC.
In order to fast track the disinvestment programme, the DoD had sought opinion of concerned ministries for buyback of shares and prepared a list of cash—rich PSUs in this regard.
Several ministries like oil, power, steel, coal and mines are believed to have opposed the proposal as it could impact the business expansion plans of the PSUs.
Market regulator Securities and Exchange Board of India (SEBI) has relaxed norms for buyback of shares and dilution of equity by companies.
The new norms would help the companies to complete the process of selling shares within days against the normal process which can take months, a move that will facilitate offloading of government shares in central PSUs.
Mr. Ahluwalia said that timing of the disinvestment will be decided by market conditions.
"I think we will continue with the disinvestment and the timing of the disinvestment will be decided by market conditions. Which means that whenever we put a number in for disinvestment, it assumes normal market conditions," he said.
He also brushed aside concern about the impact of failure in disinvestment front and its impact on the government's fiscal deficit target of 4.6 per cent of GDP in 2011—12.
"If, for example, a certain amount of resources get shifted from one year to the next, I don't think that the impact of that on the fiscal deficit should be a matter of great concern," Mr. Ahluwalia said.
He also said that in the next three months the government should focus on removing impediments to project implementation.



While the empowered group of ministers (eGoM), headed by finance minister Pranab Mukherjee, decided to auction stake in ONGC, disinvestment in Bharat Heavy Electricals Ltd (Bhel) has been pushed to next fiscal.

The ministers attending the eGoM did not disclose the timing of the stake sale in view of the price sensitivity involved. The panel will meet again soon to decide on the reserve or base price and the timeline.

The ONGC stake sale, however, will not help in meeting the ambitious target of Rs. 40,000 crore during the fiscal ending 31 March.

Disinvestment secretary Mohammad Haleem Khan said that meeting the budget target "is now almost impossible".

The stake sale in ONGC may fetch around Rs. 12,000 crore and together with the Rs. 1,145 crore proceeds from the Power Finance Corporation disinvestment, the government would be able to raise over Rs. 13,000 crore in the current fiscal.

Besides, a likely initial public offering (IPO) of National Buildings Construction Corp. Ltd could also bring around Rs. 250 crore to the exchequer.

"The eGoM has taken a decision to exercise the option (of auction route allowed by the Securities and Exchange Board of India (Sebi)... in respect to ONGC and Bhel. As for further decision (timing and price), the eGoM will meet shortly again. For all other decisions, we will have to wait for the next meeting," petroleum and natural gas minister Jaipal Reddy said.

While the government, according to sources, will try to push for the stake sale in ONGC in the current fiscal itself, it will wait for market conditions to improve for the 5% stake auction in Bhel.
The government currently holds a 74.14% stake in ONGC and a 67.72% stake in Bhel. A 5% stake sale in Bhel could fetch Rs. 5,000 crore.

Heavy industries and public enterprises minister Praful Patel said, "We have not taken any decision on Bhel. At this moment, we feel it is a little premature. Sentiments about the power sector are low...the approach or outlook is not bright or positive".

Besides Patel and Reddy, the eGoM was also attended by home minister P. Chidambaram, heavy industries secretary S. Sundareshan, oil secretary G.C. Chaturvedi and deputy chairman of Planning Commission Montek Singh Ahluwalia.

Disinvestment secretary Khan added that a final picture on raising funds from disinvestment in the current fiscal would emerge after the next meeting of the eGoM. "There will be one more meeting of the eGoM...The eGOM will also decide (on pricing mechanism)," Khan said. He said the government will use all available options for stake sale in the public sector units.

Earlier this month, market regulator Sebi allowed promoters to sell up to a 10% stake using the auction window of stock exchanges.

"The auction method of Sebi guidelines is now available to us. All the cases in which the cabinet committee on economic affairs has cleared disinvestment in follow-on public offer mode may use this method. But it will be a one-to-one method," Khan said.

Poor receipts from disinvestment would further aggravate government finances and push the fiscal deficit above the budgeted level of 4.6% of the gross domestic product. Experts say the fiscal deficit can escalate to 5.6% this fiscal, up from 4.7% earlier.


EGoM clears ONGC disinvestment; Stake sale in BHEL deferred *
India Infoline News Service / 13:46 , Feb 15, 2012
The high-powered panel, which is headed by Finance Minister Pranab Mukherjee, cleared the auction route for the stake sale in ONGC.
The Empowered Group of Ministers (EGoM) has reportedly approved the disinvestment of government stake in oil & gas major ONGC while deferring a move on a stake sale in state-run power equipment maker BHEL.

The high-powered panel, which is headed by Finance Minister Pranab Mukherjee, cleared the auction route for the stake sale in ONGC. Media reports said that the Oil Ministry need not go to the Cabinet for the ONGC disinvestment.

Other details like timing and pricing of the ONGC disinvestment will be decided at the next EGoM, Union Petroleum Minister, Jaipal Reddy, told reporters in New Delhi.

He added that the ONGC stake sale will take place in the ongoing financial year itself.

On BHEL, Heavy Industries Minister Praful Patel said the its disinvestment may happen in FY13.

He cited unfavourable market and business environment for putting off the stake sale in BHEL. It is premature to talk about disinvestment in BHEL now, Patel was quoted as saying.

Shares of both the companies advanced in a rising market after the announcements.

BHEL shares rose by more than 2.5% while ONGC was up by ~1.5%.

Separately, Disinvestment Secretary, Haleem Khan, said that the EGoM has, in general, approved opting for the auction route in respect of those issues where follow-on public offering (FPO) has already been approved by the Cabinet.

The EGoM was slated to take a call on stake sale in ONGC and BHEL, with a view to garnering about Rs 145bn in the current fiscal year.




"It is very likely that FIIs will try to use up the limits which they have bought in the next two weeks," said Kumar Rachapudi, a fixed-income strategist at Barclays Capital in Singapore. "The rate cycle is turning, but India is still one of the highest yielders."
Coupons on top-rated Indian corporate five-year bonds currently stand at around 9.33%. Similar bonds in the United States, for example, pay less than 2% interest.
The government sets an overall limit for debt investment by foreign institutions, which buy rights to buy the bonds through an auction conducted by the Securities Exchange Board of India (Sebi). The last auction was in November.
Historically, the institutions prefer to hold off using most of their limit until near the expiry date.
Given the high cut-off price at the auction, it is unlikely that investors will let their rights lapse, dealers said.
For corporate non-infrastructure debt, the cutoff at the auction was Rs. 0.67 per Rs. 10 million, up sharply from Rs. 0.01 for a similar-sized sale in April 2010.
Traders said they expect several companies to issue debt that would help foreign investors avoid paying withholding tax.
Some may float zero coupon bonds, on which interest is compounded and paid on maturity, as these do not attract such tax, they said.
Foreign investors in India pay withholding tax of up to 20%, depending on India's the tax treaty with the country where they are domiciled.
Some market participants, however, are less optimistic about demand, given the Sebi's recent restrictions on reinvestment.
In January, Sebi said that if an investment matures or is redeemed, the foreign institution can reinvest the equivalent of the original allocation only twice before 2 January, 2014.
Previously, they were allowed to reinvest the amount any number of times.
The current debt investment limit for FIIs is $60 billion a year, of which $45 billion is for corporate bonds.
Within corporate bonds, $25 billion is allocated for infrastructure bonds and the balance of $20 billion for non-infrastructure bonds.
The allocations for infrastructure bonds have been largely used up.
Of the non-infrastructure bond limit, Sebi auctioned $5 billion in November. However, the unused $4.97 billion may also include spill-over from the previous auction.
Foreign exchange traders said the expected inflows into corporate debt could help strengthen the rupee, which plunged to a record low of 54.30 to the dollar in mid-December, prompting the RBI to take aggressive measures to support it.
The rupee is trading at 49.28/29 per dollar on Friday.
"Dollar inflows in debt will pick up and have a positive impact on the rupee," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank, who expects the rupee to touch 48.60 in the near term.
"Though people may bring in spot dollar and mostly hedge it into the one-year forwards segment, there will be positive impact on the spot rupee," he said.
Foreign investors have bought more than $8 billion of Indian debt and equities so far in 2012, pushing up the rupee by nearly 7.7% against the dollar.
Disinvestment of India�s Public Sector Units
L M Bhole, Department of Humanities & Social Sciences
*


The role of the State vs. Market has been one of the major issues in development economics and policy. In a mixed economy such as India, historically the public sector had been assigned an important role. However, in the year 1991 the national economic policy underwent a radical transformation. The new policy of liberalization, privatization and globalization de-emphasized the role of the public sector in the nation�s economy. The faculty at IIT-Bombay has been studying various aspects of the New Economic Policy such as financial sector reforms, fiscal implications of reforms, and of globalization.
To date several arguments have been proffered by the apologists of market-oriented economic structures:
  • the government must not enter into those areas where the private sector can perform better
  • market-driven economies are more efficient than the state-planned economies
  • the role of the state should be as a regulator and not as the producer
  • government resources locked in commercial activities should be released for their deployment in social activities.

It is also contended that the functioning of many public sector units (PSUs) has been characterized by low productivity, unsatisfactory quality of goods, excessive manpower utilization, inadequate human resource development and low rate of return on capital. For instance, between 1980 and 2002, the average rate of return on capital employed by PSUs was about 3.4% as against the average cost of borrowing, which was 8.66%. Disinvestment (or divestment) of the PSUs has therefore been offered as one of the solutions in this context.
Disinvestment involves the sale of equity and bond capital invested by the government in PSUs. It also implies the sale of government�s loan capital in PSUs through securitization. However, it is the government and not the PSUs who receive money from disinvestment.
The fixation of share/bond price is an important aspect of disinvestment. Now, the Disinvestment Commission determines the share/bond price. Disinvested shares are listed, quoted and traded on the stock market. Indian and foreign financial institutions, banks, mutual funds, companies as well as individuals can buy disinvested shares / bonds.......more on next page

http://www.ircc.iitb.ac.in/~webadm/update/archives/August_2003/disinvestment1.html

17 FEB, 2012, 02.54AM IST, ET BUREAU

As PM steps in, will the economy step up? Economists speak

The economy requires focused and targeted policy measures to prevent India from hitting the skids. ET spoke to a range of economists and former top bureaucrats to bring to your table a set of policy options available with the government.

Govinda Rao, Economist, Director of National Institute of Public Finance and Policy

- Corporatise railways and give it autonomy to improve the state of infrastructure

- Ramp up the disinvestment process and use the money for capital investments

- Make the state governments accountable for SEB functions

S Narayan, Former Finance Secretary

- Make CIL accountable for delivering 70% of the coal requirement while the remaining 30% can be imported

- Provide concessions on import of road construction machinery

- Deregulate prices in the power sector and allow suppliers to pass on coal prices to consumers

RP Singh, Former Secretary, Department of Industrial Policy and Promotion

- Use revenue collected from motor vehicles tax, etc for capital investments and not for financing revenue expenditure. This will ensure infrastructure development

- Allow FDI in multibrand, especially in the agricultural sector, to address the structural problems of agri productivity
http://economictimes.indiatimes.com/news/economy/policy/as-pm-steps-in-will-the-economy-step-up-economists-speak/articleshow/11919418.cms
  1. 'Buy' ONGC; target Rs 328: FINQUEST

  2. Myiris.com - 5 hours ago
  3. FINQUEST Securities has maintained `Buy` on Oil & Natural Gas Corporation (ONGC) with a price target of Rs 328 as against the current market price (CMP) of ...
  4. ONGC waiting for approvals to speed up projects in KG basinThe Hindu
  5. ONGC, OIL to directly choose customers for gas produced from ...Economic Times
  6. ONGC to expedite work on major oil, gas project in KG BasinHindu Business Line
  7. Business Standard - Wall Street Journal
  8. all 18 news articles »
  9. *
  10. ONGC stake sale process to conclude this fiscal

  11. The Hindu - 1 day ago
  12. Oil and Natural Gas Corporation (ONGC) is hopeful that its stake divestment process will be completed before the end of the current fiscal.
  13. ONGC gets divestment nod but not BHELIndia Today
  14. Govt to sell ONGC stake via auctionTimes of India
  15. ONGC selloff this fiscal itselfEconomic Times
  16. Indian Express - Business Standard
  17. all 125 news articles »
  18. *
  19. ONGC official sentenced to 3 yrs RI in disproportionate assets case

  20. Mid-Day - 7 hours ago
  21. The Special Judge, Mumbai, has convicted IPShankaran, former Deputy Superintending Engineer (Civil), ONGC, LPG Plant, Uran Distt., in Raigad for possession ...
  22. Ex-ONGC official gets 3 years jail term in graft case

  23. Expressindia.com - 14 hours ago
  24. Mumbai A former senior official of Oil and Natural Gas Corporation (ONGC) has been sentenced by a Special CBI court to three years of rigorous imprisonment ...
  25. ONGC official sentenced to 3 years RI in disproportionate assets caseNetIndian
  26. all 5 news articles »
  27. ONGC may invoke force majeure clause for 2 KG blocks

  28. Zee News - 1 day ago
  29. Hyderabad: Oil and gas major ONGC on Thursday said three of its KG Basin NELP blocks have run into rough weather following restrictions from the Ministry of ...
  30. *
  31. Offer sops to push retail input in ONGC auction

  32. Moneycontrol.com - 1 day ago
  33. The government should consider offering discounts to retail investors so as to encourage participation in the upcoming ONGC auction, says Prithvi Haldea, ...
  34. *
  35. Force majeure plea likely by ONGC for three KG blocks

  36. Business Standard - 22 hours ago
  37. With three of its oil blocks in the Krishna-Godavari basin still to get clearances, Oil and Natural Gas Corporation (ONGC) is likely to invoke the force ...
  38. Iran crisis will affect crude prices: ONGC

  39. Zee News - 1 day ago
  40. New Delhi: With reports of Iran stopping its supply of crude oil to six European nations, ONGC CMD Sudhir Vasudeva on Thursday said that the present crisis ...
  41. Iran crude vital for India's growth engineIndia Today
  42. all 2759 news articles »
  43. *
  44. Rs 270 expected floor price for ONGC auction: Tulsian

  45. Moneycontrol.com - 2 days ago
  46. SP Tulsian of sptulsian.com tells CNBC-TV18 that he expects the floor price for the ONGCdivestment auction to be determined at Rs 270.
  47. ONGC stake sale okayed; decision on BHEL later

  48. Deccan Herald - 1 day ago
  49. The EGoM will meet soon to decide the date and the price at which divestment in ONGC will take place. At the current market price of Rs 280 a piece, ...


NEW DELHI, February 15, 2012

Centre to miss disinvestment target

SPECIAL CORRESPONDENT
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EGoM fails to reach consensus on selling government stake in ONGC and BHEL
The Centre is likely to miss the disinvestment target of Rs.40,000 crore for the current fiscal as the Empowered Group of Ministers (EGoM) on Wednesday failed to reach a consensus on selling the government's stake in ONGC and BHEL.
"The government is considering the auction route for ONGC (disinvestment)...no timeline fixed as yet. The EGoM will meet again shortly," Petroleum and Natural Gas Minister S. Jaipal Reddy said here while briefing journalists after the EGoM.
On the BHEL issue, Heavy Industries and Public Enterprises Minister Praful Patel said no decision could be taken on the issue and that the stake sale might happen in 2012-13. The EGoM had met to decide on the disinvestment in the two major government-owned firms aimed at garnering around Rs.14,500 crore in 2011-12.
So far the government has been able to garner only Rs.1,145 crore by diluting its share in Power Finance Corporation (PFC).
It is expected that a 5 per cent stake sale in ONGC would help the government fetch Rs.12,000 crore, while the BHEL disinvestment could bring in Rs.5,000 crore. Last fiscal, the government had raised around Rs.22,500 crore through stake sale in PSUs.
Meanwhile, Disinvestment Secretary Mohammad Haleem Khan said it was now almost impossible to meet the disinvestment target set for the current fiscal. "Everybody knows that Rs.40,000 crore is now almost impossible," he said.
Keywords: disinvestment target
http://www.thehindu.com/business/article2897100.ece

BOOKS

The disinvestment debate
C.T. KURIEN
Disinvestment in India Policies, Procedures, Practices by Sudhir Naib; Sage Publications, New Delhi, 2004; pages 478, Rs.700.
AFTER a great deal of initial excitement and reservations, disinvestment of public sector enterprises has become an ongoing process in the country. But the debate continues, with some enthusiastically endorsing it and others expressing apprehensions and opposition. By and large, this debate has been at the ideological level. Ideology cannot be kept out of the debate, but disinvestment has other dimensions too. The modalities of disinvestment are important. So are its consequences.

It is on these aspects that Sudhir Naib's work on disinvestment assumes significance. It is one of the few comprehensive treatments of disinvestment in India. After dealing with the evolution and rationale of the public sector in India (which may be familiar material) and a discussion of the influence of ownership on efficiency, the author moves on to an evaluation of privatisation and disinvestment in other parts of the world; in the United Kingdom in the 1980s during the prime ministership of Margaret Thatcher; in the Eastern European countries and the former Soviet Union after the collapse of communist regimes; in the East Asian countries and China; in Latin America; in West Asia and North America. The critical assessment of disinvestment in other parts of the world forms the background to Naib's detailed empirical account of disinvestments in India. (The material covered in this section of the book is not easily available to readers in India.)
Public sector enterprises (PSEs), which were given a special role in India's planned economy, grew both in terms of numbers and investment for over four decades from the early 1950s. At the commencement of the First Five Year Plan there were five PSEs with a total investment of Rs.29 crores. At the end of the Seventh Plan in 1990, there were 244 PSEs and the investment in them had gone up to Rs.99,329 crores. Although disinvestments had started from the early 1990s, at the end of the Eighth Plan in 1997, investment had soared to Rs.213,610 crores. At the end of the fiscal year 2000-01, PSEs had a total investment of Rs.274,114 crores. The PSEs made a significant contribution to industrial production, 100 per cent in lignite, over 80 per cent in coal, crude oil and zinc, almost 50 per cent in aluminium and over 30 per cent in finished steel.
In terms of profitability, the PSEs showed diverse patterns. In 2000-01, 122 enterprises made a profit with the top 10 among them - giants such as the Oil and Natural Gas Corporation (ONGC), the National Thermal Power Corporation (NTPC), the Indian Oil Corporation (IOC) and the Videsh Sanchar Nigam Limited (VSNL) - accounting for close to 70 per cent of the total net profit of Rs.19,604 crores. Sector-wise, petroleum, power and communications contributed to 60 per cent of the profits. During that year, there were 111 loss-making enterprises with a total loss of Rs.12,839 crores. The major contributors to the losses were Hindustan Fertilizer, the Fertilizer Corporation of India (FCI), Bharat Coking Coal, and some other enterprises dealing with coal. The return on investment of all PSEs taken together remained low - post-tax profitability being only about 5 per cent on capital employed. The author says: "The public sector in India, which was perceived to be the vehicle of speedy economic development, has run into rough waters. It not only failed to produce surpluses which it was expected to generate for future growth, but the return on investment remained poor." The question that is examined is whether disinvestment and privatisation can lead to better results.
According to the author, at the theoretical level the poor performance of PSEs can be attributed to three factors: they are not governed by profit maximising considerations; there is no direct equivalent of bankruptcy constraint; and since shares are not traded in the market, the discipline that the market imposes is absent. The general presumption is that these three factors adversely affect the enterprises. However, this is not a matter that can be or should be settled on a priori theoretical arguments. Since the disinvestment of PSEs has been taking place over a fairly long period, it is now possible to submit it to empirical scrutiny. The strength of Naib's work is that he reviews the empirical evidence from different parts of the world and has conducted empirical studies of his own in India.
Before moving to these decisive empirical aspects, there is another important matter to be considered: how exactly is the disinvestment of PSEs to be achieved? One possibility is strategic sale with complete transfer of management to an enterprise in the private sector. Modern Food Industries, Bharat Aluminium Company Limited (BALCO), VSNL, Centaur Hotel Airport Mumbai and a few others were sold off in this manner. A second procedure adopted was partial disinvestment whereby the government still retained effective control by holding 51 per cent or more of equity. This has been the procedure adopted in the majority of cases. This is not a simple procedure, though. A decision has to be made as to who would be eligible to acquire the shares - other enterprises, employees or the public at large - and the manner in which the shares are to be off-loaded. In Chapter 5, the core chapter of the book, the author gives a detailed and critical account of the policy decision favouring disinvestment fairly soon after the economic reforms were launched, the setting up of the Disinvestment Commission, its recommendations and the modalities adopted for disinvestment year after year, right from the beginning up to 2002-03. The chapter also touches on the difficulties in the valuation of PSEs to arrive at appropriate reserve price before placing the shares on the market.
Turning now to the performance of the enterprises after disinvestment, the treatment is in two parts. First, in Chapter 2 there is a survey of the literature dealing with this aspect at the theoretical and empirical levels. Naib points out that at the theoretical level the presumption is that public enterprises would perform less efficiently and profitably than private enterprises and that, therefore, the expectation would be that disinvestment would lead to better performance of the enterprises concerned. But the empirical studies lead to a more qualified conclusion. "First, when market power is significant... there is no systematic difference between public and private firms... . Second, in competitive markets where other allocative inefficiencies associated with market failure are not substantial, often, private firms are more efficient than public ones... . Third, the key factor driving performance is competition. When public enterprises operate in markets where they have market power, they do just as well (or poorly) as private firms operating under similar markets under regulation."
The second part of the empirical appraisal relates specifically to the Indian situation on the basis of secondary data as well as the author's own inquiries of the performance of selected PSEs after disinvestments. Apart from the fact that in the short period of a decade or less there was not enough time for the divested enterprises to make necessary adjustments, these empirical studies faced two limitations. The first was that in many instances the disinvestments were partial, with the government retaining management and control. Secondly, for reasons not related to disinvestments as such, there was an industrial recession in the second half of the 1990s and the early part of the present century, which adversely affected many enterprises making it difficult to trace the impact of disinvestment.
Out of 38 disinvested enterprises examined, six recorded losses; they include Hindustan Photofilms, Hindustan Machine Tools (HMT), ITI and the Steel Authority of India Limited (SAIL). On the other hand, ONGC, IOC, the Gas Authority of India Limited (GAIL), VSNL, Neyveli Lignite, Bharat Heavy Electricals Limited (BHEL) and several others increased their profitability. The explanation that the author offers is that the fall in profitability was in the case of enterprises operating in a competitive environment while improvement in profitability was in the case of enterprises operating in a monopoly environment. Employment levels dropped following disinvestment, but because voluntary retirement schemes were in operation, it is difficult to attribute the fall to disinvestment as such.
The author has tried, and in large measure succeeded, in examining disinvestment of PSEs taking place currently almost throughout the world without taking an ideological position for or against the phenomenon. His survey of the theoretical literature and his concentration on empirical evidence make the book a very valuable contribution to a highly contested theme.
However, at the deeper level the work reflects some conceptual confusion. The first is the assertion in the introductory chapter that "disinvestment which is a form of ownership transfer comes under the umbrella of privatisation". It can be readily granted that during the past two decades or so the term `disinvestment' has been used to refer to the transfer of ownership of public sector enterprises and hence has been associated with privatisation. But surely, transfer of ownership and disinvestments are standard and routine practices within the private sector. In fact, transfer of ownership is one of the basic premises of the corporate form of organisation and that is what is taking place everyday in the stock market. It is also common practice for private enterprises to hive off part of their activities to other enterprises. The practice of buying and selling entire enterprises is also quite common. If so, it is not correct to bring disinvestments under the umbrella of privatisation.
At the same time, it is equally important not to treat the investment and disinvestment decisions and actions of the state on a par with similar activities of other (private) enterprises in the economy. This is not because the activities themselves are different, but because the role of the state in the economy is not the same as that of other units. The role of the state in the economy as a whole in relation to other units is somewhat similar to that of the central bank in relation to commercial banks. Just as the performance of the central bank cannot be evaluated in terms of the criteria used to judge the performance of commercial banks, the function of the state, including its investments and disinvestments, calls for different procedures of evaluation. This is because the "bottom line" of enterprises in the private sector, the profitability factor, is easy to locate, but in the case of the state (as that of the central bank) the bottom line is not so specific. It may be standard practice to use the criteria of private sector enterprises (essentially some profit ratios) to judge the disinvestments of state-owned enterprises, but that is a limited, and often less than proper procedure. However, that is what the author has relied upon in the book.
http://www.frontlineonnet.com/fl2110/stories/20040521001107500.htm

Should PMO be crowing about arm-twisting Coal India?

Shishir Asthana Feb 17, 2012
PM's initiative will help power plants with an estimated capacity of more than 50,000 mw. A two-year roadblock is cleared for power sector', says a tweet from the PMO.
It cleverly does not mention the dead-end ahead after this roadblock is removed.
Not only is the proposal asking Coal India to enter into long-term fuel supply contracts with private power producers difficult to implement, it also does not make economic sense.
What the PMO's diktat essentially does is pass the onus on to Coal India for all the future woes of the sector. It is now Coal India's responsibility to make sure that power plants get their fuel over the long term and the targeted growth of GDP is achieved, as mentioned in another tweet of the PMO. The tweet says 'Coal supply resolution will help in achieving power generation capacity targets for the 12th plan and targeted growth of GDP in India'.
That little thought has gone into drafting this solution can be seen from the fact that the move would not only result in penalising Coal India, but also damage other sectors that use coal. The issue with coal as a commodity is not just its availability in the country, but its evacuation.
Take, for example, the fact that thermal power plants commissioned in financial years 2010 and 2011 totalled 11,600 megawatt. They would need 48.8 million tonnes of coal annually. Coal India has over 70 million tonnes stacked up in its inventory, waiting to be evacuated. It's the railway ministry that has to be pulled up, rather than Coal India for coal not going to power plants.
In October 2011, Coal India was asked to set aside an incremental 4 million tonnes of coal for supply to the power sector, but even this could not be picked up from the pithead, thanks to transportation bottlenecks.
Coal India has always said the only reason it has not been able to increase output is delays in environmental clearance for opening new mines.
Even if production is an issue, Coal India has repeatedly said that the only reason it has not been able to increase its output is delays in environmental clearance for opening up new mines. Here, another government ministry, the environment ministry, should be blamed for the delays.
Out of the 430 million tonne of coal dispatched by the company, around 304.8 million tonnes goes to the power sector. The steel sector gets 9.3 million tonnes, cement gets 10 million tonnes and fertilizer 2.8 million tonnes. The remaining is distributed between aluminium and and e-auctions (48 million tonnes).
Coal India sells coal at the lowest price to the power sector at government notified rates and at higher prices to other sectors. If the company will be penalised if coal is not made available to private power producers, Coal India might be forced to divert coal from other sectors who contribute the most to the operating profits. Other sectors will have to pay the price for pleasing private power producers.
As per the PMO directive and based on the power plants that have been commissioned since financial year 2010, Coal India will have to make available around 120 million tonnes of coal. This, along with its existing supply of 304.8 million tonnes to the power sector, would mean that almost the entire coal it produces would have to go to the power sector if it needs to avoid a penalty. Which also means that the incremental 100 million tonnes needed to meet the 50,000 mw target of the PMO will need to be completely imported.
Asking Coal India to import coal if it is not able to produce also overlooks the fact that the company was ready to import, but it was the same set of private players who had gone to the meet the prime minister complaining about the lack of availability of coal. They were not willing to buy it because the price was not right. It is a different matter that the PMO has no clue on how coal will be brought from the ports to the plants.
As per the existing fuel supply agreement signed in 2009, Coal India is supposed to import coal and provide it at ports. Taking it from there to the respective plants is the private power producers' responsibility.
The issue thus seems to be arm-twisting by government to provide subsidised coal. The government, on their part, has cleverly passed the buck to Coal India. As the state electricity boards are in no mood or financial strength to renegotiate their power purchase agreements (PPAs) with private power producers, Coal India is being made to pick up the tab.
http://www.firstpost.com/business/should-pmo-be-crowing-about-arm-twisting-coal-india-215456.html

Oil hits $120. Will it drown India's recovery hopes this year?

FP Editors Feb 17, 2012
Oil prices are surging again.
They threaten to derail the economic recovery that several experts are betting will start by the middle of this year. After a traumatic 2011, hopes have been growing of a turnaround on the back of cooling inflation and expectations of policy rate cuts by the Reserve Bank of India by April.
Currently, Brent crude, a global benchmark, is inching above $120 a barrel, while West Texas Intermediate, another benchmark, has tipped above the $100-a-barrel-mark, thanks in part to growing tensions in the Middle East.
Currently, Brent crude, a global benchmark, is inching above $120 a barrel, while West Texas Intermediate, another benchmark, has tipped above the $100-a-barrel-mark. AFP
Surprisingly, no one seems to be worried about the jump in prices just yet, especially not investors, who seem to be more preoccupied with trying to figure out how long the flood of liquidity that has washed over the stock and debt markets will last. Since the start of this year, foreign investors have pumped in more than $6.5 billion in India's capital markets on hopes of an economic recovery.
High oil prices, however, have to potential to check India's recovery just as it starts to gain momentum. Here's how:
One, high oil prices inflate India's import bill. Crude oil is India's biggest import. Since the country imports more than 80 percent of its requirement, it is particularly vulnerable to a hike in oil prices.
Two, a higher import bill will further widen the current account deficit (the gap between a country's total imports of goods, services and  forex payments and exports of goods, services and forex remittances), which is already set to hit 3.5 percent of GDP in the year ending March 2012, the worst in at least eight years.
Three, a widening current account deficit will put pressure on the rupee. Since imports outpace exports, we earn less in foreign currency that we receive, which leads to higher demand compared with supply of foreign currency. The value of foreign currency gets stronger, the rupee gets weaker. That increases our reliance on other foreign inflows, such as those into capital markets and remittances.
Four, higher global oil prices (and a possibly weaker rupee) can also lead to higher inflation. Higher prices for crude oil imports will inevitably lead oil marketing companies to raise fuel prices. Indeed, petrol prices are already set to jump by Rs 3 per litre next month; diesel price hikes may also become unavoidable. Fuel accounts for about 15 percent of the wholesale price index, and the inflationary impact of high oil prices will make RBI governor D Subbarao more cautious about cutting policy rates aggressively.
Five, high oil prices also threaten to keep corporate earnings under pressure. Once fuel prices (especially diesel) are raised, they affect prices throughout the economy. When input and transport costs increase, they usually lead to a hike in retail prices. Consumers react by cutting back on discretionary spending. Companies, therefore, get hit both on input costs and consumer demand, which crimps profitability.
In the past quarter, profit margins of 27 Sensex companies for which data is available declined sharply to 13.6 percent, according to a report in Mint. Rising raw material costs and elevated interest costs compressed margins, it noted. With oil prices remaining high, that situation could very well continue over the next few quarters — and snuff out any hopes of an early corporate recovery.
http://www.firstpost.com/economy/oil-hits-120-will-it-drown-indias-recovery-hopes-this-year-216367.html
Economic Reforms in India since 1991: Has Gradualism Worked?
by Montek S. Ahluwalia*

India was a latecomer to economic reforms, embarking on the process in earnest only in 1991, in the wake of an exceptionally severe balance of payments crisis. The need for a policy shift had become evident much earlier, as many countries in east Asia achieved high growth and poverty reduction through policies which emphasized greater export orientation and encouragement of the private sector. India took some steps in this direction in the 1980s, but it was not until 1991 that the government signaled a systemic shift to a more open economy with greater reliance upon market forces, a larger role for the private sector including foreign investment, and a restructuring of the role of government.
India's economic performance in the post-reforms period has many positive features. The average growth rate in the ten year period from 1992-93 to 2001-02 was around 6.0 percent, as shown in Table 1, which puts India among the fastest growing developing countries in the 1990s. This growth record is only slightly better than the annual average of 5.7 percent in the 1980s, but it can be argued that the 1980s growth was unsustainable, fuelled by a buildup of external debt which culminated in the crisis of 1991. In sharp contrast, growth in the 1990s was accompanied by remarkable external stability despite the east Asian crisis. Poverty also declined significantly in the post-reform period, and at a faster rate than in the 1980s according to some studies (as Ravallion and Datt discuss in this issue).
However, the ten-year average growth performance hides the fact that while the economy grew at an impressive 6.7 percent in the first five years after the reforms, it slowed down to 5.4 percent in the next five years. India remained among the fastest growing developing countries in the second sub-period because other developing countries also slowed down after the east Asian crisis, but the annual growth of 5.4 percent was much below the target of 7.5 percent which the government had set for the period. Inevitably, this has led to some questioning about the effectiveness of the reforms.
Opinions on the causes of the growth deceleration vary. World economic growth was slower in the second half of the 1990s and that would have had some dampening effect, but India's dependence on the world economy is not large enough for this to account for the slowdown. Critics of liberalization have blamed the slowdown on the effect of trade policy reforms on domestic industry (for example, Nambiar et al, 1999; Chaudhuri, 2002).i However, the opposite view is that the slowdown is due not to the effects of reforms, but rather to the failure to implement the reforms effectively. This in turn is often attributed to India's gradualist approach to reform, which has meant a frustratingly slow pace of implementation. However, even a gradualist pace should be able to achieve significant policy changes over ten years. This paper examines India's experience with gradualist reforms from this perspective.
We review policy changes in five major areas covered by the reform program: fiscal deficit reduction, industrial and trade policy, agricultural policy, infrastructure development and social sector development. Based on this review, we consider the cumulative outcome of ten years of gradualism to assess whether the reforms have created an environment which can support 8 percent GDP growth, which is now the government target.
Savings, Investment and Fiscal Discipline
Fiscal profligacy was seen to have caused the balance of payments crisis in 1991 and a reduction in the fiscal deficit was therefore an urgent priority at the start of the reforms. The combined fiscal deficit of the central and state governments was successfully reduced from 9.4 percent of GDP in 1990-91 to 7 percent in both 1991-92 and 1992-93 and the balance of payments crisis was over by 1993. However, the reforms also had a medium term fiscal objective of improving public savings so that essential public investment could be financed with a smaller fiscal deficit to avoid "crowding out" private investment. This part of the reform strategy was unfortunately never implemented.
As shown in Table 2, public savings deteriorated steadily from +1.7 percent of GDP in 1996-97 to –1.7 percent in 2000-01. This was reflected in a comparable deterioration in the fiscal deficit taking it to 9.6 percent of GDP in 2000-01. Not only is this among the highest in the developing world, it is particularly worrisome because India's public debt to GDP ratio is also very high at around 80%. Since the total financial savings of households amount to only 11 percent of GDP, the fiscal deficit effectively preempts about 90 percent of household financial savings for the government. What is worse, the rising fiscal deficit in the second half of the 1990s was not financing higher levels of public investment, which was more or less constant in this period.
These trends cast serious doubts on India's ability to achieve higher rates of growth in future. The growth rate of 6 percent per year in the post-reforms period was achieved with an average investment rate of around 23 percent of GDP. Accelerating to 8 percent growth will require a commensurate increase in investment. Growth rates of this magnitude in east Asia were associated with investment rates ranging from 36-38 percent. While it can be argued that there was overinvestment in East Asia, especially in recent years, it is unlikely that India can accelerate to 8 percent growth unless it can raise the rate of investment to around 29-30 percent of GDP. Part of the increase can be financed by increasing foreign direct investment, but even if foreign direct investment increases from the present level of 0.5 percent of GDP to 2.0 percent -- an optimistic but not impossible target -- domestic savings would still have to increase by at least 5 percentage points of GDP.
Can domestic savings be increased by this amount? As shown in Table 2, private savings have been buoyant in the post-reform period, but public savings have declined steadily. This trend needs to be reversed.ii Both the central government and the state governments would have to take a number of hard decisions to bring about improvements in their respective spheres.
The central government's effort must be directed primarily towards improving revenues, because performance in this area has deteriorated significantly in the post reform period. Total tax revenues of the center were 9.7 percent of GDP in 1990-91. They declined to only 8.8 percent in 2000-01, whereas they should have increased by at least two percentage points. Tax reforms involving lowering of tax rates, broadening the tax base and reducing loopholes were expected to raise the tax ratio and they did succeed in the case of personal and corporate income taxation but indirect taxes have fallen as a percentage of GDP. This was expected in the case of customs duties, which were deliberately reduced as part of trade reforms, but this decline should have been offset by improving collections from domestic indirect taxes on goods and by extending indirect taxation to services. This part of the revenue strategy has not worked as expected. The Advisory Group on Tax Policy for the Tenth Plan recently made a number of proposals for modernizing tax administration, including especially computerization, reducing the degree of exemption for small scale units and integration of services taxation with taxation of goods (Planning Commission, 2001a). These recommendations need to be implemented urgently.iii
There is also room to reduce central government subsidies, which are known to be highly distortionary and poorly targeted (e.g. subsidies on food and fertilizers), and to introduce rational user charges for services such as passenger traffic on the railways, the postal system and university education. Overstaffing was recently estimated at 30 percent and downsizing would help reduce expenditure.
State governments also need to take corrective steps. Sales tax systems need to be modernized in most states. Agricultural income tax is constitutionally assigned to the states, but no state has attempted to tax agricultural income. Land revenue is a traditional tax based on landholding, but it has been generally neglected and abolished in many states. Urban property taxation could yield much larger resources for municipal governments if suitably modernized, but this tax base has also been generally neglected. State governments suffer from very large losses in state electricity boards (about 1 percent of GDP) and substantial losses in urban water supply, state road transport corporations and in managing irrigation systems. Overstaffing is greater in the states than in the center.
The fiscal failures of both the central and the state governments have squeezed the capacity of both the center and the states to undertake essential public investment. High levels of government borrowing have also crowded out private investment. Unless this problem is addressed, the potential benefits from reforms in other areas will be eroded and it may be difficult even to maintain the average growth rate of 6 percent experienced in the first ten years after the reforms, let alone accelerate to 8 percent.
Reforms in Industrial and Trade Policy
Reforms in industrial and trade policy were a central focus of much of India's reform effort in the early stages. Industrial policy prior to the reforms was characterized by multiple controls over private investment which limited the areas in which private investors were allowed to operate, and often also determined the scale of operations, the location of new investment, and even the technology to be used. The industrial structure that evolved under this regime was highly inefficient and needed to be supported by a highly protective trade policy, often providing tailor-made protection to each sector of industry. The costs imposed by these policies had been extensively studied (for example, Bhagwati and Desai, 1965; Bhagwati and Srinivasan, 1971; Ahluwalia, 1985) and by 1991 a broad consensus had emerged on the need for greater liberalization and openness. A great deal has been achieved at the end of ten years of gradualist reforms.
Industrial Policy
  • Industrial policy has seen the greatest change, with most central government industrial controls being dismantled. The list of industries reserved solely for the public sector -- which used to cover 18 industries, including iron and steel, heavy plant and machinery, telecommunications and telecom equipment, minerals, oil, mining, air transport services and electricity generation and distribution -- has been drastically reduced to three: defense aircrafts and warships, atomic energy generation, and railway transport. Industrial licensing by the central government has been almost abolished except for a few hazardous and environmentally sensitive industries. The requirement that investments by large industrial houses needed a separate clearance under the Monopolies and Restrictive Trade Practices Act to discourage the concentration of economic power was abolished and the act itself is to be replaced by a new competition law which will attempt to regulate anticompetitive behavior in other ways.
  • The main area where action has been inadequate relates to the long standing policy of reserving production of certain items for the small-scale sector. About 800 items were covered by this policy since the late 1970s, which meant that investment in plant and machinery in any individual unit producing these items could not exceed $ 250,000. Many of the reserved items such as garments, shoes, and toys had high export potential and the failure to permit development of production units with more modern equipment and a larger scale of production severely restricted India's export competitiveness. The Report of the Committee on Small Scale Enterprises (1997) and the Report of the Prime Minister's Economic Advisory Council (2001) had both pointed to the remarkable success of China in penetrating world markets in these areas and stimulating rapid growth of employment in manufacturing. Both reports recommended that the policy of reservation should be abolished and other measures adopted to help small-scale industry. While such a radical change in policy was unacceptable, some policy changes have been made very recently: fourteen items were removed from the reserved list in 2001 and another 50 in 2002. The items include garments, shoes, toys and auto components, all of which are potentially important for exports. In addition, the investment ceiling for certain items was increased to $1 million. However, these changes are very recent and it will take some years before they are reflected in economic performance.
Industrial liberalization by the central government needs to be accompanied by supporting action by state governments. Private investors require many permissions from state governments to start operations, like connections to electricity and water supply and environmental clearances. They must also interact with the state bureaucracy in the course of day-to-day operations because of laws governing pollution, sanitation, workers' welfare and safety, and such. Complaints of delays, corruption and harassment arising from these interactions are common. Some states have taken initiatives to ease these interactions, but much more needs to be done.
A recently completed joint study by the World Bank and the Confederation of Indian Industry (Stern, 2001) found that the investment climate varies widely across states and these differences are reflected in a disproportional share of investment, especially foreign investment, being concentrated in what are seen as the more investor-friendly states (Maharashtra, Gujarat, Karnataka, Andhra Pradesh and Tamil Nadu) to the disadvantage of other states (like Uttar Pradesh, Bihar and West Bengal). Investors perceived a 30 percent cost advantage in some states over others, on account of the availability of infrastructure and the quality of governance. These differences across states have led to an increase in the variation in state growth rates, with some of the less favored states actually decelerating compared to the 1980s (Ahluwalia, 2002). Because liberalization has created a more competitive environment, the pay off from pursuing good policies has increased, thereby increasing the importance of state level action. Infrastructure deficiencies will take time and resources to remove but deficiencies in governance could be handled more quickly with sufficient political will.
Trade Policy
Trade policy reform has also made progress, though the pace has been slower than in industrial liberalization. Before the reforms, trade policy was characterized by high tariffs and pervasive import restrictions. Imports of manufactured consumer goods were completely banned. For capital goods, raw materials and intermediates, certain lists of goods were freely importable, but for most items where domestic substitutes were being produced, imports were only possible with import licenses. The criteria for issue of licenses were nontransparent, delays were endemic and corruption unavoidable. The economic reforms sought to phase out import licensing and also to reduce import duties.
Import licensing was abolished relatively early for capital goods and intermediates which became freely importable in 1993, simultaneously with the switch to a flexible exchange rate regime. Import licensing had been traditionally defended on the grounds that it was necessary to manage the balance of payments, but the shift to a flexible exchange rate enabled the government to argue that any balance of payments impact would be effectively dealt with through exchange rate flexibility. Removing quantitative restrictions on imports of capital goods and intermediates was relatively easy, because the number of domestic producers was small and Indian industry welcomed the move as making it more competitive. It was much more difficult in the case of final consumer goods because the number of domestic producers affected was very large (partly because much of the consumer goods industry had been reserved for small scale production). Quantitative restrictions on imports of manufactured consumer goods and agricultural products were finally removed on April 1, 2001, almost exactly ten years after the reforms began, and that in part because of a ruling by a World Trade Organization dispute panel on a complaint brought by the United States.
Progress in reducing tariff protection, the second element in the trade strategy, has been even slower and not always steady. As shown in Table 3, the weighted average import duty rate declined from the very high level of 72.5 percent in 1991-92 to 24.6 percent in 1996-97. However, the average tariff rate then increased by more than 10 percentage points in the next four years.iv In February 2002, the government signaled a return to reducing tariff protection. The peak duty rate was reduced to 30 percent, a number of duty rates at the higher end of the existing structure were lowered, while many low end duties were raised to 5 percent. The net result is that the weighted average duty rate is 29 percent in 2002-03.
Although India's tariff levels are significantly lower than in 1991, they remain among the highest in the developing world because most other developing countries have also reduced tariffs in this period. The weighted average import duty in China and southeast Asia is currently about half the Indian level. The government has announced that average tariffs will be reduced to around 15 percent by 2004, but even if this is implemented, tariffs in India will be much higher than in China which has committed to reduce weighted average duties to about 9 percent by 2005 as a condition for admission to the World Trade Organization.
Foreign Direct Investment
Liberalizing foreign direct investment was another important part of India's reforms, driven by the belief that this would increase the total volume of investment in the economy, improve production technology, and increase access to world markets. The policy now allows 100 percent foreign ownership in a large number of industries and majority ownership in all except banks, insurance companies, telecommunications and airlines. Procedures for obtaining permission were greatly simplified by listing industries that are eligible for automatic approval up to specified levels of foreign equity (100 percent, 74 percent and 51 percent). Potential foreign investors investing within these limits only need to register with the Reserve Bank of India. For investments in other industries, or for a higher share of equity than is automatically permitted in listed industries, applications are considered by a Foreign Investment Promotion Board that has established a track record of speedy decisions. In 1993, foreign institutional investors were allowed to purchase shares of listed Indian companies in the stock market, opening a window for portfolio investment in existing companies.
These reforms have created a very different competitive environment for India's industry than existed in 1991, which has led to significant changes. Indian companies have upgraded their technology and expanded to more efficient scales of production. They have also restructured through mergers and acquisitions and refocused their activities to concentrate on areas of competence. New dynamic firms have displaced older and less dynamic ones: of the top 100 companies ranked by market capitalization in 1991, about half are no longer in this group. Foreign investment inflows increased from virtually nothing in 1991 to about 0.5 percent of GDP. Although this figure remains much below the levels of foreign direct investment in many emerging market countries (not to mention 4 percent of GDP in China), the change from the pre-reform situation is impressive. The presence of foreign-owned firms and their products in the domestic market is evident and has added greatly to the pressure to improve quality.
These policy changes were expected to generate faster industrial growth and greater penetration of world markets in industrial products, but performance in this respect has been disappointing. As shown in Table 1, industrial growth increased sharply in the first five years after the reforms, but then slowed to an annual rate of 4.5 percent in the next five years. Export performance has improved, but modestly. The share of exports of goods in GDP increased from 5.7 percent in 1990-91 to 9.7 percent, but this reflects in part an exchange rate depreciation. India's share in world exports, which had declined steadily since 1960, increased slightly from around 0.5 percent in 1990-91 to 0.6 percent in 1999-2000, but much of the increase in world market share is due to agricultural exports. India's manufactured exports had a 0.5 percent share in world markets for those items in 1990 and this rose to only 0.55 percent by 1999. Unlike the case in China and southeast Asia, foreign direct investment in India did not play an important role in export penetration and was instead oriented mainly towards the domestic market.
One reason why export performance has been modest is the slow progress in lowering import duties that make India a high cost producer and therefore less attractive as a base for export production. Exporters have long been able to import inputs needed for exports at zero duty, but the complex procedure for obtaining the necessary duty-free import licenses typically involves high transactions cost and delays. High levels of protection compared with other countries also explains why foreign direct investment in India has been much more oriented to the protected domestic market, rather than using India as a base for exports. However, high tariffs are only part of the explanation for poor export performance. The reservation of many potentially exportable items for production in the small scale sector (which has only recently been relaxed) was also a relevant factor. The poor quality of India's infrastructure compared with infrastructure in east and southeast Asia, which is discussed later in this paper, is yet another.
Inflexibility of the labor market is a major factor reducing India's competitiveness in exports and also reducing industrial productivity generally (Planning Commission, 2001). Any firm wishing to close down a plant, or to retrench labor in any unit employing more than 100 workers, can only do so with the permission of the state government, and this permission is rarely granted. These provisions discourage employment and are especially onerous for labor-intensive sectors. The increased competition in the goods market has made labor more willing to take reasonable positions, because lack of flexibility only leads to firms losing market share. However, the legal provisions clearly remain much more onerous than in other countries. This is important area of reform that has yet to be addressed. The lack of any system of unemployment insurance makes it difficult to push for major changes in labor flexibility unless a suitable contributory system that is financially viable can be put in place. The government has recently announced its intention to amend the law and raise the level of employment above which firms have to seek permission for retrenchment from 100 workers at present to 1000 while simultaneously increasing the scale of retrenchment compensation. However, the amendment has yet to be enacted.
These gaps in the reforms provide a possible explanation for the slowdown in industrial growth in the second half of the 1990s. It can be argued that the initial relaxation of controls led to an investment boom, but this could have been sustained only if industrial investment had been oriented to tapping export markets, as was the case in east Asia. As it happened, India's industrial and trade reforms were not strong enough, nor adequately supported by infrastructure and labor market reforms to generate such a thrust. The one area which has shown robust growth through the 1990s with a strong export orientation is software development and various new types of services enabled by information technology like medical transcription, backup accounting, and customer related services. Export earnings in this area have grown from $100 million in 1990-91 to over $6 billion in 2000-01 and are expected to continue to grow at 20 to 30 percent per year. India's success in this area is one of the most visible achievements of trade policy reforms which allow access to imports and technology at exceptionally low rates of duty, and also of the fact that exports in this area depend primarily on telecommunications infrastructure, which has improved considerably in the post-reforms period.
Reforms in Agriculture
A common criticism of India's economic reforms is that they have been excessively focused on industrial and trade policy, neglecting agriculture which provides the livelihood of 60 percent of the population. Critics point to the deceleration in agricultural growth in the second half of the 1990s (shown in Table 2) as proof of this neglect.v However, the notion that trade policy changes have not helped agriculture is clearly a misconception. The reduction of protection to industry, and the accompanying depreciation in the exchange rate, has tilted relative prices in favor of agriculture and helped agricultural exports. The index of agricultural prices relative to manufactured products has increased by almost 30 percent in the past ten years (Ministry of Finance, 2002, Chapter 5). The share of India's agricultural exports in world exports of the same commodities increased from 1.1 percent in 1990 to 1.9 percent in 1999, whereas it had declined in the ten years before the reforms.
But while agriculture has benefited from trade policy changes, it has suffered in other respects, most notably from the decline in public investment in areas critical for agricultural growth, such as irrigation and drainage, soil conservation and water management systems, and rural roads. As pointed out by Gulati and Bathla (2001), this decline began much before the reforms, and was actually sharper in the 1980s than in the 1990s. They also point out that while public investment declined, this was more than offset by a rise in private investment in agriculture which accelerated after the reforms. However, there is no doubt that investment in agriculture-related infrastructure is critical for achieving higher productivity and this investment is only likely to come from the public sector. Indeed, the rising trend in private investment could easily be dampened if public investment in these critical areas is not increased.
The main reason why public investment in rural infrastructure has declined is the deterioration in the fiscal position of the state governments and the tendency for politically popular but inefficient and even iniquitous subsidies to crowd out more productive investment. For example, the direct benefit of subsidizing fertilizer and underpricing water and power goes mainly to fertilizer producers and high income farmers while having negative effects on the environment and production, and even on income of small farmers.vi A phased increase in fertilizer prices and imposition of economically rational user charges for irrigation and electricity could raise resources to finance investment in rural infrastructure, benefiting both growth and equity. Competitive populism makes it politically difficult to restructure subsidies in this way, but there is also no alternative solution in sight.
Some of the policies which were crucial in promoting food grain production in earlier years, when this was the prime objective, are now hindering agricultural diversification. Government price support levels for food grains such as wheat are supposed to be set on the basis of the recommendations of the Commission on Agricultural Costs and Prices, a technical body which is expected to calibrate price support to reasonable levels. In recent years, support prices have been fixed at much higher levels, encouraging overproduction. Indeed, public food grain stocks reached 58 million tons on January 1, 2002, against a norm of around 17 million tons! The support price system clearly needs to be better aligned to market demand if farmers are to be encouraged to shift from food grain production towards other products.
Agricultural diversification also calls for radical changes in some outdated laws. The Essential Commodities Act, which empowers state governments to impose restrictions on movement of agricultural products across state and sometimes even district boundaries and to limit the maximum stocks wholesalers and retailers can carry for certain commodities, was designed to prevent exploitive traders from diverting local supplies to other areas of scarcity or from hoarding supplies to raise prices. Its consequence is that farmers and consumers are denied the benefit of an integrated national market. It also prevents the development of modern trading companies, which have a key role to play in the next stage of agricultural diversification. The government has recognized the need for change and recently removed certain products -- including wheat, rice, coarse grains, edible oil, oilseeds and sugar -- from the purview of the act. However, this step may not suffice, since state governments may be able to take similar action. What is needed is a repeal of the existing act and central legislation that would make it illegal for government authorities at any level to restrict movement or stocking of agricultural products (Planning Commission, 2001).
The report of the Task Force on Employment has made comprehensive proposals for review of several other outdated agricultural law (Planning Commission, 2001b). For example, laws designed to protect land tenants, undoubtedly an important objective, end up discouraging marginal farmers from leasing out nonviable holdings to larger farmers for fear of being unable to reclaim the land from the tenant. The Agricultural Produce Marketing Acts in various states compel traders to buy agricultural produce only in regulated markets, making it difficult for commercial traders to enter into contractual relationships with farmers. Development of a modern food processing sector, which is essential to the next stage of agricultural development, is also hampered by outdated and often contradictory laws and regulations. These and other outdated laws need to be changed if the logic of liberalization is to be extended to agriculture.
Infrastructure Development
Rapid growth in a globalized environment requires a well-functioning infrastructure including especially electric power, road and rail connectivity, telecommunications, air transport, and efficient ports. India lags behind east and southeast Asia in these areas. These services were traditionally provided by public sector monopolies but since the investment needed to expand capacity and improve quality could not be mobilized by the public sector, these sectors were opened to private investment, including foreign investment. However, the difficulty in creating an environment which would make it possible for private investors to enter on terms that would appear reasonable to consumers, while providing an adequate risk- return profile to investors, was greatly underestimated. Many false starts and disappointments have resulted.
The greatest disappointment has been in the electric power sector, which was the first area opened for private investment. Private investors were expected to produce electricity for sale to the State Electricity Boards, which would control of transmission and distribution. However, the State Electricity Boards were financially very weak, partly because electricity tariffs for many categories of consumers were too low and also because very large amounts of power were lost in transmission and distribution. This loss, which should be between 10 to 15 percent on technical grounds (depending on the extent of the rural network), varies from 35 to 50 percent. The difference reflects theft of electricity, usually with the connivance of the distribution staff. Private investors, fearing nonpayment by the State Electricity Boards insisted on arrangements which guaranteed purchase of electricity by state governments backed by additional guarantees from the central government. These arrangements attracted criticism because of controversies about the reasonableness of the tariffs demanded by private sector power producers. Although a large number of proposals for private sector projects amounting to about 80 percent of existing generation capacity were initiated, very few reached financial closure and some of those which were implemented ran into trouble subsequently.vii
Because of these difficulties, the expansion of generation capacity by the utilities in the 1990s has been only about half of what was targeted and the quality of power remained poor with large voltage fluctuations and frequent interruptions.
The flaws in the policy have now been recognized and a more comprehensive reform is being attempted by several state governments. Independent statutory regulators have been established to set tariffs in a manner that would be perceived to be fair to both consumers and producers. Several states are trying to privatize distribution in the hope that this will overcome the corruption which leads to the enormous distribution losses. However, these reforms are not easy to implement. Rationalization of power tariffs is likely to be resisted by consumers long used to subsidized power, even though the quality of the power provided in the pre-reform situation was very poor. The establishment of regulatory authorities that are competent and credible takes time. Private investors may not be able to enforce collection of amounts due or to disconnect supply for non-payment without adequate backing by the police. For all these reasons, private investors perceive high risks in the early stages and therefore demand terms that imply very high rates of return. Finally, labor unions are opposed to privatization of distribution.
These problems are formidable and many state governments now realize that a great deal of preliminary work is needed before privatization can be successfully implemented.viii Some of the initial steps, like tariff rationalization and enforcing penalties for non-payment of dues and for theft of power, are perhaps best implemented within the existing public sector framework so that these features, which are essential for viability of the power sector, are not attributed solely to privatization. If the efforts now being made in half a dozen states succeed, it could lead to a visible improvement within a few years.
The results in telecommunications have been much better and this is an important factor underlying India's success in information technology. There was a false start initially because private investors offered excessively high license fees in bidding for licenses which they could not sustain, which led to a protracted and controversial renegotiation of terms. Since then, the policy appears to be working satisfactorily. Several private sector service providers of both fixed line and cellular services, many in partnership with foreign investors, are now operating and competing with the pre-existing public sector supplier. Teledensity, which had doubled from 0.3 lines per 100 population in 1981 to 0.6 in 1991, increased sevenfold in the next ten years to reach 4.4 in 2002. Waiting periods for telephone connections have shrunk dramatically. Telephone rates were heavily distorted earlier with very high long distance charges cross-subsidizing local calls and covering inefficiencies in operation. They have now been rebalanced by the regulatory authority, leading to a reduction of 30 percent in long distance charges. Interestingly, the erstwhile public sector monopoly supplier has aggressively reduced prices in a bid to retain market share.
Civil aviation and ports are two other areas where reforms appear to be succeeding, though much remains to be done. Two private sector domestic airlines, which began operations after the reforms, now have more than half the market for domestic air travel. However, proposals to attract private investment to upgrade the major airports at Mumbai and Delhi have yet to make visible progress. In the case of ports, 17 private sector projects involving port handling capacity of 60 million tons, about 20 percent of the total capacity at present, are being implemented. Some of the new private sector port facilities have set high standards of productivity.
India's road network is extensive, but most of it is low quality and this is a major constraint for interior locations. The major arterial routes have low capacity (commonly just two lanes in most stretches) and also suffer from poor maintenance. However, some promising initiatives have been taken recently. In 1998, a tax was imposed on gasoline (later extended to diesel) , the proceeds of which are earmarked for the development of the national highways, state roads and rural roads. This will help finance a major program of upgrading the national highways connecting Delhi, Mumbai, Chennai and Calcutta to four lanes or more, to be completed by the end of 2003. It is also planned to levy modest tolls on these highways to ensure a stream of revenue which could be used for maintenance. A few toll roads and bridges in areas of high traffic density have been awarded to the private sector for development.
The railways are a potentially important means of freight transportation but this area is untouched by reforms as yet. The sector suffers from severe financial constraints, partly due to a politically determined fare structure in which freight rates have been set excessively high to subsidize passenger fares, and partly because government ownership has led to wasteful operating practices. Excess staff is currently estimated at around 25 percent. Resources are typically spread thinly to respond to political demands for new passenger trains at the cost of investments that would strengthen the capacity of the railways as a freight carrier. The Expert Group on Indian Railways (2002) recently submitted a comprehensive program of reform converting the railways from a departmentally run government enterprise to a corporation, with a regulatory authority fixing the fares in a rational manner. No decisions have been announced as yet on these recommendations.
Financial Sector Reform
India's reform program included wide-ranging reforms in the banking system and the capital markets relatively early in the process with reforms in insurance introduced at a later stage.
Banking sector reforms included: (a) measures for liberalization, like dismantling the complex system of interest rate controls, eliminating prior approval of the Reserve Bank of India for large loans, and reducing the statutory requirements to invest in government securities; (b) measures designed to increase financial soundness, like introducing capital adequacy requirements and other prudential norms for banks and strengthening banking supervision; (c) measures for increasing competition like more liberal licensing of private banks and freer expansion by foreign banks. These steps have produced some positive outcomes. There has been a sharp reduction in the share of non-performing assets in the portfolio and more than 90 percent of the banks now meet the new capital adequacy standards. However, these figures may overstate the improvement because domestic standards for classifying assets as non-performing are less stringent than international standards.
India's banking reforms differ from those in other developing countries in one important respect and that is the policy towards public sector banks which dominate the banking system. The government has announced its intention to reduce its equity share to 33-1/3 percent, but this is to be done while retaining government control. Improvements in the efficiency of the banking system will therefore depend on the ability to increase the efficiency of public sector banks.
Skeptics doubt whether government control can be made consistent with efficient commercial banking because bank managers are bound to respond to political directions if their career advancement depends upon the government. Even if the government does not interfere directly in credit decisions, government ownership means managers of public sector banks are held to standards of accountability akin to civil servants, which tend to emphasize compliance with rules and procedures and therefore discourage innovative decision making. Regulatory control is also difficult to exercise. The unstated presumption that public sector banks cannot be shut down means that public sector banks that perform poorly are regularly recapitalized rather than weeded out. This obviously weakens market discipline, since more efficient banks are not able to expand market share.
If privatization is not politically feasible, it is at least necessary to consider intermediate steps which could increase efficiency within a public sector framework (see for example Ahluwalia 2002). These include shifting effective control from the government to the boards of the banks including especially the power to appoint the Chairman and Executive Directors which is at present with the government; removing civil servants and representatives of the Reserve Bank of India from these board; implementing a prompt corrective action framework which would automatically trigger regulatory action limiting a bank's expansion capability if certain trigger points of financial soundness are breeched; and finally acceptance of closure of insolvent public sector banks (with appropriate protection for small depositors). Unless some initiatives along these lines are taken, it is highly unlikely that public sector banks can rise to the levels of efficiency needed to support rapid growth.
Another major factor limiting the efficiency of banks is the legal framework, which makes it very difficult for creditors to enforce their claims. The government has recently introduced legislation to establish a bankruptcy law which will be much closer to accepted international standard. This would be an important improvement but it needs to be accompanied by reforms in court procedures to cut the delays which are a major weakness of the legal system at present.
Reforms in the stock market were accelerated by a stock market scam in 1992 that revealed serious weaknesses in the regulatory mechanism. Reforms implemented include establishment of a statutory regulator; promulgation of rules and regulations governing various types of participants in the capital market and also activities like insider trading and takeover bids; introduction of electronic trading to improve transparency in establishing prices; and dematerialization of shares to eliminate the need for physical movement and storage of paper securities. Effective regulation of stock markets requires the development of institutional expertise, which necessarily requires time, but a good start has been made and India's stock market is much better regulated today than in the past. This is to some extent reflected in the fact that foreign institutional investors have invested a cumulative $21 billion in Indian stocks since 1993, when this avenue for investment was opened.
An important recent reform is the withdrawal of the special privileges enjoyed by the Unit Trust of India, a public sector mutual fund which was the dominant mutual fund investment vehicle when the reforms began. Although the Unit Trust did not enjoy a government guarantee, it was widely perceived as having one because its top management was appointed by the government. The Trust had to be bailed out once in 1998, when its net asset value fell below the declared redemption price of the units, and again in 2001 when the problem recurred. It has now been decided that in future investors in the Unit Trust of India will bear the full risk of any loss in capital value. This removes a major distortion in the capital market, in which one of the investment schemes was seen as having a preferred position.
The insurance sector (including pension schemes), was a public sector monopoly at the start of the reforms. The need to open the sector to private insurance companies was recommended by an expert committee (the Malhotra Committee) in 1994, but there was strong political resistance. It was only in 2000 that the law was finally amended to allow private sector insurance companies, with foreign equity allowed up to 26 percent, to enter the field. An independent Insurance Development and Regulatory Authority has now been established and ten new life insurance companies and six general insurance companies, many with well-known international insurance companies as partners, have started operations. The development of an active insurance and pensions industry offering attractive products tailored to different types of requirements could stimulate long term savings and add depth to the capital markets. However, these benefits will only become evident over time.
Privatization
The public sector accounts for about 35 percent of industrial value added in India, but although privatization has been a prominent component of economic reforms in many countries, India has been ambivalent on the subject until very recently. Initially, the government adopted a limited approach of selling a minority stake in public sector enterprises while retaining management control with the government, a policy described as "disinvestment" to distinguish it from privatization. The principal motivation was to mobilize revenue for the budget, though there was some expectation that private shareholders would increase the commercial orientation of public sector enterprises. This policy had very limited success. Disinvestment receipts were consistently below budget expectations and the average realization in the first five years was less than 0.25 percent of GDP compared with an average of 1.7 percent in seventeen countries reported in a recent study (see Davis et.al. 2000). There was clearly limited appetite for purchasing shares in public sector companies in which government remained in control of management.
In 1998, the government announced its willingness to reduce its shareholding to 26 percent and to transfer management control to private stakeholders purchasing a substantial stake in all central public sector enterprises except in strategic areas.ix The first such privatization occurred in 1999, when 74 percent of the equity of Modern Foods India Ltd. (a public sector bread-making company with 2000 employees), was sold with full management control to Hindustan Lever, an Indian subsidiary of the Anglo-Dutch multinational Unilever. This was followed by several similar sales with transfer of management: BALCO, an aluminium company; Hindustan Zinc; Computer Maintenance Corporation; Lagan Jute Machinery Manufacturing Company; several hotels; VSNL, which was until recently the monopoly service supplier for international telecommunications; IPCL, a major petrochemicals unit and Maruti Udyog, India's largest automobile producer which was a joint venture with Suzuki Corporation which has now acquired full managerial controls.
The privatization of Modern Foods and BALCO generated some controversy, not so much on the principle of privatization, but on the transparency of the bidding process and the fairness of the price realized. Subsequent sales have been much less problematic and although the policy continues to be criticized by the unions, it appears to have been accepted by the public, especially for public sector enterprises that are making losses or not doing well. However, there is little public support for selling public sector enterprises that are making large profits such as those in the petroleum and domestic telecommunications sectors, although these are precisely the companies where privatization can generate large revenues. These companies are unlikely to be privatized in the near future, but even so, there are several companies in the pipeline for privatization which are likely to be sold and this will reduce resistance to privatizing profit-making companies.x
An important recent innovation, which may increase public acceptance of privatization, is the decision to earmark the proceeds of privatization to finance additional expenditure on social sector development and for retirement of public debt. Privatization is clearly not a permanent source of revenue, but it can help fill critical gaps in the next five to ten years while longer term solutions to the fiscal problem are attempted. Many states have also started privatizing state level public sector enterprises. These are mostly loss making enterprises and are unlikely to yield significant receipts but privatization will eliminate the recurring burden of financing losses.
Social Sector Development in Health and Education
India's social indicators at the start of the reforms in 1991 lagged behind the levels achieved in southeast Asia 20 years earlier, when those countries started to grow rapidly (Dreze and Sen, 1995). For example, India's adult literacy rate in 1991 was 52 percent, compared with 57 percent in Indonesia and 79 percent in Thailand in 1971. The gap in social development needed to be closed, not only to improve the welfare of the poor and increase their income earning capacity, but also to create the preconditions for rapid economic growth. While the logic of economic reforms required a withdrawal of the state from areas in which the private sector could do the job just as well, if not better, it also required an expansion of public sector support for social sector development.
Much of the debate in this area has focused on what has happened to expenditure on social sector development in the post-reform period. Dev and Moolji (2002) find that central government expenditure on towards social services and rural development increased from 7.6 percent of total expenditure in 1990-91 to 10.2 percent in 2000-01, as shown in Table 4. As a percentage of GDP, these expenditures show a dip in the first two years of the reforms, when fiscal stabilization compulsions were dominant, but there is a modest increase thereafter. However, expenditure trends in the states, which account for 80 percent of total expenditures in this area, show a definite decline as a percentage of GDP in the post-reforms period. Taking central and state expenditures together, social sector expenditure has remained more or less constant as a percentage of GDP.
Closing the social sector gaps between India and other countries in southeast Asia will require additional expenditure, which in turn depends upon improvements in the fiscal position of both the central and state governments. However, it is also important to improve the efficiency of resource use in this area. Saxena (2001) has documented the many problems with existing delivery systems of most social sector services, especially in rural areas. Some of these problems are directly caused by lack of resources, as when the bulk of the budget is absorbed in paying salaries , leaving little available for medicines in clinics or essential teaching aids in schools. There are also governance problems such as nonattendance by teachers in rural schools and poor quality of teaching.
Part of the solution lies in greater participation by the beneficiaries in supervising education and health systems, which in turn requires decentralization to local levels and effective peoples' participation at these levels. Nongovernment organizations can play a critical role in this process. Different state governments are experimenting with alternative modalities but a great deal more needs to be done in this area.
While the challenges in this area are enormous, it is worth noting that social sector indicators have continued to improve during the reforms. The literacy rate increased from 52 percent in 1991 to 65 percent in 2001, a faster increase in the 1990s than in the previous decade, and the increase has been particularly high in the some of the low literacy states such as Bihar, Madhya Pradesh, Uttar Pradesh and Rajasthan.
Conclusions
The impact of ten years of gradualist economic reforms in India on the policy environment presents a mixed picture. The industrial and trade policy reforms have gone far, though they need to be supplemented by labor market reforms which are a critical missing link. The logic of liberalization also needs to be extended to agriculture, where numerous restrictions remain in place. Reforms aimed at encouraging private investment in infrastructure have worked in some areas but not in others. The complexity of the problems in this area was underestimated, especially in the power sector. This has now been recognized and policies are being reshaped accordingly. Progress has been made in several areas of financial sector reforms, though some of the critical issues relating to government ownership of the banks remain to be addressed. However, the outcome in the fiscal area shows a worse situation at the end of ten years than at the start.
Critics often blame the delays in implementation and failure to act in certain areas to the choice of gradualism as a strategy. However, gradualism implies a clear definition of the goal and a deliberate choice of extending the time taken to reach it, in order to ease the pain of transition. This is not what happened in all areas. The goals were often indicated only as a broad direction, with the precise end point and the pace of transition left unstated to minimize opposition—and possibly also to allow room to retreat if necessary. This reduced politically divisive controversy, and enabled a consensus of sorts to evolve, but it also meant that the consensus at each point represented a compromise, with many interested groups joining only because they believed that reforms would not go "too far". The result was a process of change that was not so much gradualist as fitful and opportunistic. Progress was made as and when politically feasible, but since the end point was not always clearly indicated, many participants were unclear about how much change would have to be accepted, and this may have led to less adjustment than was otherwise feasible.
The alternative would have been to have a more thorough debate with the objective of bringing about a clearer realization on the part of all concerned of the full extent of change needed, thereby permitting more purposeful implementation. However, it is difficult to say whether this approach would indeed have yielded better results, or whether it would have created gridlock in India's highly pluralist democracy. Instead, India witnessed a halting process of change in which political parties which opposed particular reforms when in opposition actually pushed them forward when in office. The process can be aptly described as creating a strong consensus for weak reforms!
Have the reforms laid the basis for India to grow at 8 percent per year? The main reason for being optimistic is that the cumulative change brought about is substantial. The slow pace of implementation has meant that many of the reform initiatives have been put in place recently and their beneficial effects are yet to be felt. The policy environment today is therefore potentially much more supportive, especially if the critical missing links are put in place. However, the failure on the fiscal front could undo much of what has been achieved. Both the central and state governments are under severe fiscal stress which seriously undermines their capacity to invest in certain types of infrastructure and in social development where the public sector is the only credible source of investment. If these trends are not reversed, it may be difficult even to maintain 6 percent annual growth in the future, let alone accelerate to 8 percent. However, if credible corrective steps are taken on the fiscal front, then the cumulative policy changes that have already taken place in many areas, combined with continued progress on the unfinished agenda, should make it possible for India to accelerate to well beyond 6 percent growth over the next few years.
Acknowledgements
The views expressed in this article are those of the author and do not necessarily reflect the views of either the International Monetary Fund or the Government of India. Thanks are due to Suman Bery, Ashok Gulati, Deena Khatkhate, Arvind Panagariya, Parthasarathi Shome, TN Srinivasan, Nicholas Stern and Timothy Taylor.
References
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Table 1
India's Growth Performance
(Percent per year)





Total GDP

Growth



Sectoral Growth of GDP .

Agriculture

Industry

Services

1970-72 to 1980-81 (average)



3.2



2.0



4.0



7.2

1981-82 to 1990-91 (average)

5.7

3.8

7.0

6.7

1991-92

1.3

-1.1

-1.0

4.8

1992-93

5.1

5.4

4.3

5.4

1993-94

5.9

3.9

5.6

7.7

1994-95

7.3

5.3

10.3

7.1

1995-96

7.3

-0.3

12.3

10.5

1996-97

7.8

8.8

7.7

7.2

1997-98

4.8

-1.5

3.8

9.8

1998-99

6.5

5.9

3.8

8.3

1999-2000

6.1

1.4

5.2

9.5

2000-01

4.0

0.1

6.6

4.8

2001-02*

5.4

5.7

3.3

6.5

1992-93 to 1996-97 (average)

6.7

4.6

8.0

7.6

1997-98 to 2001-02 (average)

5.4

2.3

4.5

7.8


Source: Economic Survey 2001-02, Ministry of Finance, Government of India, 2002. Growth rates for 2001-02 are projections of the Ministry of Finance based on partial information.

Table 2

Major Macro-Economic Indicators
(percentages of GDP)





Combined Fiscal Deficit of Central and State Govts.

Gross Savings

Gross Capital Formation

Private Sector

Public Sector

Private Sector

Public Sector













1990-91

9.4

22.0

1.1

14.7

9.3

1991-92

7.0

20.1

2.0

13.1

8.8

1992-93

7.0

20.2

1.6

15.2

8.6

1993-94

8.3

21.9

0.6

13.0

8.2

1994-95

7.1

23.2

1.7

14.7

8.7

1995-96

6.5

23.1

2.0

18.9

7.7

1996-97

6.4

21.5

1.7

14.7

7.0

1997-98

7.3

21.8

1.3

16.0

6.6

1998-99

8.9

22.6

-1.0

14.8

6.6

1999-00

9.4

24.0

-0.9

16.1

7.1

2000-01

9.6

25.1

-1.7

15.8

7.1


Note: Public sector capital formation minus public sector savings does not equal the fiscal deficit because the definition of public sector for estimate of savings and capital formation includes non-departmental enterprises. Estimates of public sector savings and capital formation distinguishing general government from non-departmental enterprises are not readily available for recent years.

Table 3

Weighted Average Import Duty Rates in India





All Commodities



Peak Customs Duty 1/



No. of Basic Duty Rates 2/



1991-92

72.5

150

22

1992-93

60.6

110

20

1993-94

46.8

85

16

1994-95

38.2

65

16

1995-96

25.9

50

12

1996-97

24.6

52*

9

1997-98

25.4

45*

8

1998-99

29.2

45*

7

1999-00

31.4

40

7

2000-01

35.7

38.5

5

2001-02

35.1

35

4

2002-03

29.0

30

4

Source: Report of the Task Force on Employment, Planning Commission 2000. Estimates for 2002-03 have been provided by Archana Mathur of the Planning Commission.

1/ Includes the impact of surcharges in the years indicated by *. In 2000-01, duties for many agricultural products were raised above the general peak in anticipation of the removal of QRs. This explains why the average for all commodities exceeds the peak rate in 2001-02.

2/ Refers to ad valorem duty rates. Some items attract a specific duty and these are not included as separate duty rates.
Table 4
Public Expenditure on Social Sector and Rural Development
(Percentage of GDP)






Central Government

State Government

1990-91

1.42

5.98

1991-92

1.25

5.85

1992-93

1.29

6.72

1993-94

1.49

5.57

1994-95

1.49

6.27

1995-96

1.54

5.33

1996-97

1.56

5.13

1997-98

1.60

5.18

1998-99

1.67

5.41

1999-00

1.59

6.06

2000-01

1.58

5.46


Source: Dev and Moolji (2002).

* Montek S. Ahluwalia is at present Deputy Chairman, Planning Commission, Government of India. Prior to this, he was working as Director, Independent Evaluation Office International Monetary Fund, Washington, D.C. Prior to July 2001 he served in the Government of India as Member Planning Commission and before that as Finance Secretary in the Ministry of Finance. The article has been published in Journal of Economic Perspectives, Summer 2002.




i This approach reflects to some extent the revisionist view of the role of trade policy reforms being expressed internationally as for example by Rodrik (1999). For a critique of the revisionist view, see Bhagwati and Srinivasan (2001).

ii An increase in public savings will have some negative effect on private savings as for example, when higher tax revenues lead to a reduction in disposable income in the private sector which in turn reduces private savings but the net effect will still be positive.

iii Many countries have increased revenues substantially by switching to an integrated value-added tax covering both goods and services. This is not possible in India because of the constitutional division of taxation powers between the center (which can tax production) and the states (which can tax sales). The inability to switch to an integrated value-added tax is a major hindrance to tax reform.



iv The sharp increase in average duty rates in 2000 – 01 reflects the imposition of tariff on many agricultural commodities in anticipation of the removal of quantitative restrictions. Since these items were protected by quantitative restrictions in the mid-1990s, the combined protection provided by tariffs and quantitative restrictions was probably higher in the mid-1990s.



v India's reforms are often unfavorably compared with the very different sequencing adopted in China, which began with reforms in agriculture in 1978, extending them to industry only in 1984. The comparison is not entirely fair since Chinese agriculture faced an extremely distorted incentive structure, with virtually no role for markets, which provided an obvious area for high priority action with potentially large benefits. Since Indian agriculture operated to a much greater extent under market conditions, the situation was very different.



vi Underpricing of water and fertilizer leads to excess usage and waterlogged soil. Free electricity enables larger farmers to pump water from deep wells at relatively low cost. This encourages a much more water using cropping pattern than would be optimal and also leads to overexploitation of ground water and lowering the water table, which in turn hurts poorer farmers relying upon shallow wells.

vii The best known of these was the Dabhol project of the Enron cooperation which became mired in controversy because of the high cost of power from the project especially as a consequence of a pricing arrangement which meant that most of the tariff was U.S. dollar denominated and that the risk of rupee depreciation against the dollar was borne by the buyer.

viii These problems surfaced in a recent effort to privatize the distribution system in Delhi. The terms offered were publicly criticised as being too generous because tariff setting was based on a relatively modest pace of reduction in transmission and distribution losses. Nevertheless, all bids received were below the reserve price set by the government. This was a consequence of several factors: information on the quality of assets and the financial position of the system was very poor; private investors were expected to take on the responsibility of excess staff with inadequate information on the costs of retrenchment; enforcement of payment and disconnection for non-payment can create law and order problems in parts of the city; and there was lack of regulatory certainty about the way tariffs would be set in future. These deficiencies inevitably led to very low bids.

ix The definition of strategic for this purpose covers enterprises related to defense, atomic energy, and the railways. This would exclude only a handful of the 232 public sector enterprises of the central government.

x The Ministry of Disinvestment in its website (http://www.divest.nic.in) has made a valiant effort at explaining the case for privatizing even profit making companies on the grounds that government ownership makes it impossible to achieve commercial efficiency.

Disinvestment

From Wikipedia, the free encyclopedia
Disinvestment, sometimes referred to as divestment, refers to the use of a concerted economic boycott, with specific emphasis on liquidating stock, to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change. The term was first used in the 1980s, most commonly in the United States, to refer to the use of a concerted economic boycott designed to pressure the government of South Africa into abolishing its policy of apartheid. The term has also been applied to actions targeting IranSudanNorthern IrelandMyanmar, and Israel.

Contents

  [hide

[edit]Targets

[edit]Nations

[edit]Iran

Eighteen American states have passed laws requiring the divestment of state pension funds from firms doing business with Iran.[1]

[edit]South Africa

The most frequently-encountered method of "disinvesting" was to persuade state, county and municipal governments to sell their stock in companies which had a presence in South Africa, such shares having been previously placed in the portfolio of the state's, county's or city's pension fund. Several states and localities did pass legislation ordering the sale of such securities, most notably the city of San Francisco. An array of celebrities, including singer Paul Simon, actively supported the cause.
Many conservatives opposed the disinvestment campaign, accusing its advocates of hypocrisy for not also proposing that the same sanctions be leveled on either the Soviet Union or the People's Republic of ChinaRonald Reagan, who was the President of the United States during the time the disinvestment movement was at its peak, also opposed it, instead favoring a policy of "constructive engagement" with the Pretoria regime. Some offered as an alternative to disinvestment the so-called "Sullivan Principles", named after Reverend Leon Sullivan, an African-American clergyman who served on the Board of Directors of General Motors. These principles called for corporations doing business in South Africa to adhere to strict standards of non-discrimination in hiring and promotions, so as to set a positive example.

[edit]Northern Ireland

There was also a less well-publicized movement to apply the strategy of disinvestment to Northern Ireland, as some prominent Irish-American politicians sought to have state and local governments sell their stock in companies doing business in that part of the United Kingdom. This movement featured its own counterpart to the Sullivan Principles; known as the "MacBride Principles" (named for Nobel Peace Prize winnerSean MacBride), which called for American and other foreign companies to take the initiative in alleviating alleged discrimination againstRoman Catholics by adopting policies resembling affirmative action. The effort to disinvest in Northern Ireland met with little success, but theUnited States Congress did pass (and then-President Bill Clinton signed) a law requiring American companies with interests there to implement most of the MacBride Principles in 1998.

[edit]Cuba

Though in place long before the term "disinvestment" was coined, the United States embargo against Cuba meets many of the criteria for designation as such — and a provision more closely paralleling the disinvestment strategy aimed at South Africa was added in 1996, when the United States Congress passed the Helms-Burton Act, which penalized owners of foreign businesses which invested in former American firms that had been nationalized by Fidel Castro's government after the Cuban revolution of 1959. The passage of this law was widely seen as a reprisal for an incident in which Cuban military aircraft shot down two private planes flown by Cuban exiles living in Florida, who were searching for Cubans attempting to escape to Miami.

[edit]Sudan

During the late 1990s and early 2000s several Christian groups in North America campaigned for disinvestment from Sudan because of the Muslim-dominated government's long conflict with the breakaway, mostly Christian region of Southern Sudan. One particular target of this campaign was the Canadian oil company, Talisman Energy which eventually left the country, and was supplanted by Chinese investors.[1][2]
There is currently a growing movement to divest from companies that do business with the Sudanese government responsible for genocide in Darfur. Prompted by the State of Illinois - the first government in the U.S.A. to divest - scores of public and private-sector entities are now following suit. In New York City, Councilman Eric Gioia recently introduced a resolution to divest City pension funds from companies doing business with Sudan.
The recent divestment of assets implicated in funding the government of Sudan, in acknowledgment of acts of terrorism and genocideperpetrated in the Darfur conflict. In the United States, this divestment has taken place at the state level (including Illinois, which led the way, followed by New Jersey, Oregon, and Maine). It has also taken place at many North American Universities, notably Cornell University,Harvard University, Case Western Reserve University, Queen's UniversityStanford UniversityDartmouth CollegeAmherst CollegeYale UniversityBrown University, the University of California, the University of PennsylvaniaBrandeis University, the University of Colorado,American UniversityUniversity of DelawareEmory University, and the University of Vermont. The Sudan Divestment Task Force [3] has organized a nationwide group which advocates a targeted divestment policy, to minimize any negative effects on Sudanese civilians while still placing financial pressure on the government. The so-called 'targeted divestment approach' generally permits investment in Sudan, and is thus radically different from the comprehensive divestment that ended apartheid in South Africa. Because targeted divestment permits investment in hundreds of multinational corporate and private-equity firms that support, lend legitimacy to, and pay taxes and graft to the government of Sudan, policy experts suggest that this "feel good" approach will have little impact on the Sudanese government's sponsorship of terrorism and genocide. Because of the massive deficiencies in the so-called 'targeted divestment approach,' human rights advocates recommend the more comprehensive approach to divestment that has been taken by the State of Illinois.[citation needed] Under this approach, sponsored by State Senator Jacqueline Collins, public pensions are prohibited from investing in any corporation or private equity firm that conducts business in Sudan, unless authorized to do so by the U.S. Government.

[edit]Israel

[edit]Others

Myanmar (formerly Burma) has also been the target of disinvestment campaigns (most notably one initiated by the state of Massachusetts.) Divestment campaigns have also been directed against Saudi Arabia due to allegations of "gender-apartheid." The University of California, Riverside's Hillel chapter has a Saudi Divestment petition circulating as of 2007.
Since 2007, several major international and Canadian oil companies had threatened to withdraw investment from the province of Albertabecause of a proposed increase in royalty rates.[4][5]

[edit]Industries

[edit]Companies

  • Talisman Energy - because of its status as the main Western oil company in Sudan in the early 2000s.

[edit]Criticism

Some hold that divestment campaigns are based on a fundamental misunderstanding of how equity markets work. John Silber, former president of Boston University, observed that while boycotting a company's products would actually affect their business, "once a stock issue has been made, the corporation doesn't care whether you sell it, burn it, or anything else, because they've already got all the money they're ever going to get from that stock. So they don't care." [2]
Regarding the more specific case of South Africa, John Silber recalled:
...when the students were protesting the South African situation, I met with them, and they said BU must divest in General Motors and IBM. And I said, "Why should we do that? Is it immoral to own that stock?" Absolutely immoral to own it. And I said, "So then, we're supposed to sell it to somebody? We can't divest unless we sell it to somebody. And if we burn the stock, that just helps General Motors, because it reduces the amount of stock outstanding, so that can't be right. If we sell it to somebody, we have just gotten rid of our guilt in order to impose guilt on somebody else." [2]
The common perception about the effectiveness of divestment lies in the belief that institutional selling of a certain stock lowers its market value. Therefore, the company's networth becomes devalued and the owners of the company may lose substantial paper assets. In addition, institutional divestment may encourage other investors to sell their stocks for fear of lower prices, which in turn lowers prices even further. Finally, lower stock prices limits a corporation's ability to sell a portion of their stocks in order to raise funds to expand the business.

[edit]References

[edit]See also

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