Monday, 30 December 2013

Social Auditing - A Method of Determining Impact

What is Social Auditing?

Social auditing is a process that enables an organisation to assess and demonstrate its social, economic, and environmental benefits and limitations. It is a way of measuring the extent to which an organisation lives up to the shared values and objectives it has committed itself to.
Social auditing provides an assessment of the impact of an organisation's non-financial objectives through systematically and regularly monitoring its performance and the views of its stakeholders.
Social auditing requires the involvement of stakeholders. This may include employees, clients, volunteers, funders, contractors, suppliers and local residents interested in the organisation. Stakeholders are defined as those persons or organisations who have an interest in, or who have invested resources in, the organisation.
Social audits are generated by the organisation themselves and those directly involved. A person or panel of people external to the organisation undertakes verification of the social audit's accuracy and objectivity.

What does Social Auditing Involve?

The social auditing process requires an intermittent but clear time commitment from a key person within the organisation. This social auditor liases with others in the organisation and designs, co-ordinates, analyses and documents the information collected during the process.
Social auditing information is collected through research methods that include social bookkeeping, surveys and case studies. The objectives of the organisation are the starting point from which indicators of impact are determined, stakeholders identified and research tools designed in detail.
The collection of information is an on-going process, often done in 12-month cycles and resulting in the organisation establishing social bookkeeping and the preparation of an annual social audit document/report.

Experience has shown that it is important to provide training to the social auditor as well as mentoring during the first few years. If well facilitated, social auditors from different organisations can become self-supporting for subsequent year

Sunday, 29 December 2013

Globalization in India

Human being have travelled, traded and interacted across borders and great distances for thousands of years. Globalization is the term ascribed to the interaction of economics and societies all over the world. Globalization involves technological, economic, political and cultural exchanges made possible largely by advances in communication, transportation and infrastructure. Globalization bring people are the world more choices and opportunities and can have a significant impact in developing countries such as India. India has made a substantial amount of progress in the last two decades in terms of its economic development. Development is a qualitative measure of progress in an economy and closely linked with globalization. It refers to development and adoption of new technologies, transition from agriculture-based to industry-based economy and general improvement in living standards. Although in some cases, globalization has not held true to benefit in India’s development, it has undoubtedly improved overall economic growth and living standards since 1990. This paper will explore the following question: how has social and economic development in India been affected by the implementation of the structural adjustment program (SAP) and its policies over the past twenty years? It will examine the effects of the SAP; more specifically how its policies have benefited social and economic development. Through the exploration of foreign direct investment (FDI), I will examine how direct investment in India by other nations has allowed for growth in trade and industry and greater employment opportunities. Because the SAP has had both positive and negative effect on economic development in India, I have an opportunity to determine whether the benefits outweigh the detriments, and to discuss how the modernization theory has affected the type of policies and economic structures India has adopted.
After independence in 1947, Jawaharlal Nehru, India’s first prime minister introduced a system of industrial licensing, know as the “license raj” to control the pace and pattern of industrial development across the country. The license raj resulted from India’s decision to have a planned economy where the sate controlled all aspects of the economy granted licenses to a select few (wiki). Nehru’s advisors, which included a small group of Stalinist economists lent by the Soviet Union, advised Nehru to put this act into place in order to construct a modernized, heavy industry sector that would traverse India from its massive amount of poverty . The intent of State control over industrial development by means of licensing was to accelerate industrialization and economic growth and to reduce regional disparities in income and wealth . In 1956, following the introduction of the act, all industries fell into one of three categories: those that the state exclusively responsible for, those that were to be progressively state-owned and those left to private enterprise. However, virtually every heavy industry was included in the first two categories. Under the license raj, a license was required to establish a new factory, carry on business in an existing unlicensed factory, significantly an existing factory’s capacity, start a new product line and change location. The policies made it very difficult for new industries to enter the economy as there were indetermined waiting periods for applications to be processed. Producers were also uncertain whether they would receive approval on their license applications. The government rejected 35% of applicants between 1959 and 1960. The government also required businesses to get approval to lay off workers and shut down. When a business was losing money, the government would prevent them from shutting down in hopes that production would once again reach the levels it was at before decreasing rates began to set in. One can imagine how chaotic and unproductive a business would be under such conditions (6.50). By the 1970s it was blatantly obvious that industrial licensing had failed to bring about the rapid industrial development that was anticipated in the 1950s . It was in 1990 that the Indian government realized they were near bankruptcy. It could not meet its external debt obligations, foreign-exchange reserves were at a meager US 2.2 billion and the money supply was going to last less than two weeks. The only viable option was to completely restructure the economy and receive help of a balance of payments from the International Monetary Fund (IMF).
In 1991, India faced an unprecedented balance of payments crisis. For a decade prior to 1991, the government had borrowed heavily to support an economic strategy that relied on expansionary public spending to finance growth. During the period from 1980 to 1991 India’s external debt tripled to 70 billion . This did not leave the government with many options. Had the fiscal deficits been financed by printing notes, prices would have shot up dramatically; alternatively if the deficits were met through domestic loans, the interest rates would have skyrocketed and created a catastrophic fall in private investments. The government relied on what seemed the only realistic option, recourse to massive foreign loans. In 1991, the new government led by Prime Minister Narasimha Rao and his finance minister Manmohan Singh launched India’s first comprehensive economic policy reform program. The World Bank and IMF supported the reform program with a 500 million dollar structural adjustment plan. The government went to the IMF because they could not meet their external debt obligations .The economic crisis occurred because of a combination of factors including the economic collapse of the Soviet group of countries that had significant consequences for India’s trade. A burgeoning fiscal deficit, a large international debt, a foreign-exchange shortage and the Gulf War were also important factors that contributed to the crisis . One of the most important contributors was the Gulf War. Merchandise and the invisible trade balances worsened significantly with the skyrocketing of oil prices, sanction on Iraq and decline in the inflow of remittances all affected India’s import bill . When the IMF took over, the program of stabilization and structural adjustment placed great importance on ideological issues such as immediate opening of the economy to imports, removing restriction on foreign investments and a drastic reduction in direct tax rates. After 1991, India gradually removed bans and quantitative restrictions on many goods . The structural adjustment program had two main objectives: to assist India in addressing its immediate balance of payments crisis and to support a broad set of policy reforms aimed at liberalizing the Indian economy and opening it up to more competition both from within and abroad. The Indian government echoed the standard IMF rationale of stabilization, adjustment and liberalization . The key to improving the nation was liberalization of multiple sectors of the Indian economy. The program’s goal was to create a workable balance between economic necessity and the realities of India’s political economy .Economic reforms bore the unmistakable stamp of the Washington Consensus, introduced by John Williamson in 1989, and characterized by emphasis on both macroeconomic stabilization and structural adjustment. It described a set of ten policies that Williamson considered should be part of a standard reform package guiding crisis-wrecked developing countries. The consensus promotes initiatives such as fiscal policy discipline, tax reform and trade liberalization among other recommendations. India announced a macro-stabilization program designed to tackle the balance of payments problems and ensure longer-term budgetary viability . Within weeks of announcing the reform package, the government devalued the rupee by 23%, raised interest rates and revised the 1991-92 union budget, making sharp cuts in subsidies and transfers to public enterprise. Over the next six months it abolished the complex system of industrial and import licensing, liberalized trade policy and introduced measures to strengthen capital markets and institutions . Additional policies addressed a reduction in fiscal deficit through expenditure compression, tax reforms, privatization signals to public-sector undertakings to operate on commercial principles and granting a large measure of autonomy to the Reserve Bank of India for maintaining the country’s internal-cum-external balance . The majority of these policies were enacted in one of three different ways. First, there was a transition into a system of market driver exchange rate with current account convertibility of the rupee. Second, select India corporations received permission to raise funds from the international markets and finally, the encouragement of capital inflows by way of foreign institutional investment (FII), foreign direct investment (FDI) and nonresident Indian deposits . Once these policies were in place, the results would lead to a higher and more sustainable growth trajectory with emphasis on labor-intensive industries, thinning out of protected and resource-guzzling industries and survival or creation of globally efficient sectors of production. This would lead to an acceleration of export growth, increased employment and reduction of poverty .
These policies, which reflect portions of the Washington Consensus, also related to the modernization theory. The modernization theory explains how by incorporation internal factors along with assistance from more developed countries, traditional or developing countries can be brought to development in the same manner . The United States of America is a well-developed country. As India’s policies reflected those of the Washington Consensus, it is permissible to believe that India may have incorporated some of these policies in hopes of one day reaching the level of development the United States as currently obtained.
With the exception of perhaps the years immediately following India’s independence, never before has there been as much optimism about the Indian economy as in the last two decades . The SAP produced immediate reforms following the crisis in 1991. In the first year there was an initial decline in the GDP, however growth resumed to 5% in 1993-94 and 6.3% in 1994-95. By 1995, India moved from a regime that banned private investment in major economic sectors to one whose openness to foreign investment is as liberal as in most other Asian countries . Increase in public consumption and investment expenditure, significant cutbacks in income tax rates, exclusion of financial assets from the ambit of wealth tax and reduction in effective rates of capital gains tax have all provided a direct or indirect boost to the economy and has helped industries and services register significant growth after the crisis year . One of the most successful areas of the reforms was India’s ability to attract FDI, even more specifically FDI in the IT-sector of the economy. Within five years of reforms, FDI increased almost sevenfold over projection . There was a major spurt in India’s software export. Exports rose from 747 million in 1995 to 4.015 million in 1999 . The IT industry’s contribution to the GDP has increased from approximately 1.4% in 1998-99 to more than 3% in 2003-04, totaling an annual growth rate of 42.4% . Indian firms have made a number of acquisitions abroad and as a result attracted countries to invest in India, resulting in the ratio of FDI from India to India being 0.61. Today the private sector has became an active participant in the telecommunications sector . There has also been a significant improvement in the average export intensity of the Indian private sector increasing from about 8% in 1991 to 25% in 2007. This has enabled globalization to take place in India’s economy (8.6). Because of the greater expansion of globalization, FDI in India has allowed for increased participation in international markets. Greater participation, specifically in international markets for IT services creates more employment as businesses expand. Economic growth has increased the stands the standard of living for the citizens of India.
India is one of the fastest growing economies in the world today and is regarded as a knowledge powerhouse well on its way to becoming an important player in the international technological arena . Increases in India’s economic growth performance resulted from the process of economic liberalization set into motion in 1991. The policies implemented have contributed to India’s growth of 6+ % an average since 1992-92 . More programmers from India provide IT support to international firms for software development and maintenance, back-office operations, medical data transcription and transmission as well as telemarketing . The abundant supply of labor, low wages, cheap satellite communications and the internet have been instrumental in the decision of foreign firms to establish operations in India . The volume of India’s software exports was 2.7 billion in 1998-99, over 4 billion in 1999-2000, 6.2 billion in 2000-01 and exceeding 8 billion in 2001-02 . There are some concerns regarding the continued growth of the Indian economy. If the IT sector becomes a powerhouse, there is apprehension because the global situation has been changing over the past few years. The downtown of the US stock market that causes concern seeing as so much of India’s exports end up in North America . A reduction in imports could potentially cause a fall in production that would likely result in the layoff of employees, which would effectively over time reduce the economic and social sectors of society. When implementing the structural adjustment program, major fallout of the IMF’s conditionality was the steep rise in interest rates to curb fiscal deficits and dampen effective demand. The real interest rate on working capital loans was 2-3% in the eighties and 8-10% in the nineties . There have also been many positive developments. A reduction has occurred in external indebtedness and current account deficit from 28.7% and 3.1% to 22.3% and 0.5%. An increase in foreign exchange reserves from USD 5.8 billion to USD 42.2 billion and a fall in debt service payments as a proportion of current receipts from 35.3 to 17.1 percent . From 1992-97 not only was the average GDP growth at the highest India had ever achieved over a five year period, the period was also marked by a strengthening of government finances with a downward trend in revenue, fiscal and primary deficits . Although India’s initial export boom was in and continues to be in IT-based services, manufacturing exports are also growing very rapidly, and it is likely to play a significant role in the Indian economy in future years . The SAP has not always benefited the Indian economy, and at times may have hindered it. Nevertheless, when comparing the economy post and prior to the implementation of the SAP, it is clear that the expansion of exports, an active role in international markets and greater employment opportunities have proven to be more beneficial than harmful to the Indian economy.
Social development in India has improved through the initiatives of the SAP. The life expectancy at birth since 2003 is sixty-three years of age and the adult literacy rate of people fifteen years and over was 57% in 2000 but grew to 65% in 2001 . Employment in the organized sector, which includes all public and private sector establishments engaging at least ten employees increased from 22.9 to 26.7 million from 1981-91 and continued to expand to 28.1 million in 1999 (11.69). Furthermore, due to an increase in employment opportunities the number of people living below the poverty line has decreased from 54.9% in 1973-83 to 36.0 in 1993-94 and 23.2% in 1999-2000 . Currently, half a million people are employed in the IT sector and it is predicted that this number will grow to three million by 2015 . Although living conditions have improved for a large number of Indian citizens, a key deficiency in the nation’s growth process has been the failures of the conventional industry to pull workers out of agriculture into gainful employment as approximately 60% of workers still remain in agriculture. Poor irrigation facilities have left Indian agriculture highly dependent on the monsoon season, which contributes, to the magnified amplitude of fluctuations in the farmers’ incomes. After registering three consecutive years of high growth over 1992-95, averaging a hefty 2.1%, agriculture has fared poorly since then, with its average growth from 1995-2001 slumping to a dismal 1.05% and displaying considerable ups and downs from one year to another . Coastal states of western and southern India, regions with high urbanization rates will continue to grow at a faster rate than the northern and central states of India. However, economic reform and public-sector investments can improve conditions in India’s relatively laggard northern and central states . By introducing more urbanized methods of employment, workers will have a more reliable source of income, alleviating the number of people currently living below the poverty line. Even though India still has work to do in its agricultural sector the social conditions have improved immensely compared to what they were prior to the SAP. The performance of the economy in spheres of poverty alleviation has decreased from 36% in 1993-94 to 26.1% in 1999-2000 . The modern global economy is introducing new ideas on how to organize and govern the market so that social development will continue to increase, with hopes of one-day diminishing poverty in India completely.
Over the past two decades, India has been able to establish itself as a knowledge powerhouse and has attained the status as one of the world’s fastest growing economies. This is a result of the implementation of the SAP in 1991. More specifically a result of India opening its markets to international trade and expanding the role of globalization, India has been able to develop the economic and social sectors of society. The license Raj is obsolete because its policies caused India to enter a financial crisis in 1991. Although there has been some economic and social downfall since the SAP, the benefits certainly outweigh the costs. Overall, since the enacting of the SAP initiatives, development in India has flourished rather than declined.
While India has shown great improvement as a nation, there is still more to accomplish. For the matters of basic need and development, India still has a long way to go. Over the last few decades, inequality has been rising, regional disparities have been growing and although there has been a decrease in numbers of poverty and illiteracy, they remain high. However, there could be a reverse in these trends. An understanding of the role of culture and collective beliefs in the life of a nation can help analysts and policymakers design appropriate economic policies . A key step is to improve basic infrastructure as well as health and education systems so that the vast rural populations can take part in more rapid economic growth. Trade liberalization must proceed apace with all tariffs, reducing to 15% in the next three years. This is necessary to reallocate production toward labor-intensive products in which India has comparative advantage, and it will be salutary for poverty reduction . With the execution of the SAP, India’s leaders have acquired the organizational ability to share and exchange knowledge and to combine each with other kinds of knowledge to employ it where it is needed. If India continues to be open to new advancements and policies, it will soon be one of the world’s leading economies.
The concept of globalization is spreading very rapidly throughout the world today. It is evident that over the past two decades India has become more globalized and developed. In 1947, Indian Prime Minister Nehru enacted the “license raj”. Under this act, the economy was centrally planned and the government oversaw every business. Following the crisis in 1991, a new set of policies was initiated. These policies allowed India to exhibit greater participation in global markets and completely restructure their economy in order to better the life of the nations citizens. Through increased FDI and the growth of the IT-sector of the economy, India will continue to grow and develop both economically and socially.

Globalization in India

For a long time since Nehru's days, India followed the model of 'mixed economy'. Its economic philosophy was 'democratic socialism'.
For a long time since Nehru's days, India followed the model of 'mixed economy'. Its economic philosophy was 'democratic socialism'. As Nehru himself believed in socialism, he did not have faith in rich people. He was of firm view that the rich exploited the poor. Therefore, his government laid stress on the development of poor, and the state was given the main responsibility for this.
Nehru viewed state as the main agency of economic development. In the regime of mixed economy, security of country, social welfare and economic development were mainly the responsibility of government. The public sector was under government control. Other industries were in the hands of industrialists.
Nehru's mode! Of economic development lasted long. But in course of time it became clear that the industries in the public sector were incurring heavy losses while private industries were making big profits. The weakness of Indian economy was exposed in the middle of 1980s. The government faced a serious foreign exchange reserve crisis. It miserably failed to repay the debts taken from the World Bank and the IMF.
Against this background the Narasimha Rao government, adopted the New Economic policy in July 1991. The main elements of this policy were liberalisation and privatisation which were also the elements of globalization. The Finance minister in the Rao government was an eminent economist, Dr. Manmohan Singh who is now the Prime Minister of India.
The introduction of New Economic Policy by the Rao government was part of India welcoming globalization. Free economy and market economy received boost. Thelicense raj was discarded. The government control over economy largely loosened.
The importance of public sector decreased, and that of private sector increased. As a result of this, India's economy had a turnaround within a short period. The foreign exchange reserve crisis was successfully tackled, inflation decreased and the rate of economic growth increased.
The economic growth that globalization gave to India was praised not only in India, but also abroad. The fear of Indian industrialists and business people that they would be great losers because of globalization did not prove to be true.
On the other hand, some of them successfully competed at the international level and took over some major industries and business concerns of other countries.
But, in course of time, some bad consequences of globalization were felt. These harmful effects were:
1. The importance of state in the economic field decreased. Capital was withdrawn from many industries in the public sector.
2. Market economy was encouraged and private sector became more influential.
3. The ordinary people suffered a lot as the state largely withdrew from the field of social welfare. The poor suffered most as MNCs and other private companies entered the fields of education, health, insurance and banking etc.
4. Many small industries and cottage industries were closed. They could not compete with big industries - either MNCs or other big private industries.
5. There took place increase in unemployment. As big industries in the private sector got many of their works done through mechanized machines, many employees were fired from jobs, and there was hardly any fresh recruitment.
6. Women, in particular, suffered a lot. More than male employees, female employees lost their jobs, and the small number of employees who were recruited was mostly males.
Globalization is capitalism in its globalized form. In fact, capitalism enriches itself only when it makes the globe or a number of countries its field of operation.
The end of the cold war marked the victory of capitalism over communism. Capitalist democracy has decisively won, and communism has accepted defeat. This, Fukuyama claims, marks the 'end of history'.
For the time being capitalism has come to stay, and there is no alternative to capitalism. Those who until the other day, bitterly criticized capitalism have willy-nilly accepted it. Now the choice is between neoliberal capitalism advocated by neo-conservatives of the west and regulated capitalism, advocated by liberal democrats of many developing countries.
As it seems, globalization is irreversible. The challenge is to force it to have a 'human face'. Globalization will be universally acceptable only when it brings freedom, rights, peace, security and economic benefits to the vast number of people across the globe that have remained poor, weak and deprived.


The term privatization has come into vogue since the middle of the 1970s. There is no single universally accepted definition. The term may be interpreted in a narrow sense or a wide sense. In a narrow sense the term privatization implies advertisement. If means the sale by the state of whole or part of its holding of the equity shares of a government-owned enterprise to private shareholders. Total change of ownership from the public to the private sector is known as denationalization.
In a wider sense privatization may also mean Liberalization. Liberalization implies derecognition, decontrol, delicensing expansion of economic activities in the private sector etc. There may be liberalization of economic policies in the field of foreign trade, fiscal and monetary policies and industrial development. Under the Industrial Policy Resolution of 1956, certain industries were exclusively reserved for development in the state sector. Any relaxation in respect of such an exclusive reservation could be a part of the privatization process. For example, in India in the recent years the private sector has been allowed to enter into fields like telecommunication, power, defense items etc.
Privatization may take place by way of leasing of a public enterprise to a private sector party, or contracting out economic activities to private parties. In the U.S. certain public services like garbage collection, waste disposal, etc., were leased out to private parties. In India also leasing of catering in the railways or contracting out 17 defense items are instances of privatization.

Privatization: It’s Feasibility in the Indian Context

The Indian economy has developed to the extent that public investment is to be considered as the last option when other alternatives are unavailable. But Privatization may not be feasible or practical: in all areas and its viability need's to be studied on a case by case basis
Development of Thought:
Privatization has become a fashionable subject. The literature is full of discussions of methodologies and techniques of privatization and the experience of various countries in undertaking privatization.
However, it is essentiality and efficiency that remains the test for any policy and strategy and hence a pragmatic point of view needs tube; adopted to examine the scope of privatization in the Indian context. Privatization has plenty of scope to grow but it may not be feasible to do away with public enterprises completely.
Various studies show that privatization may not be feasible in organizations such as STC and Coal India Ltd. Privatization hash would entail many problems in actual practice. The very magnitude of public enterprises that need to be privatized will require some kind of selectively approach-but selectivity on what criteria?
Ultimately, what is needed is privatization in the stem of functioning of public enterprises; this is even more important than attempts to privatize ownership in certain cases.
In the last few years the entrepreneurial base in the country has considerably widened and the professional management capabilities have expanded toil significant extent. It is no longer true that the private sector will fight shy of investments involving large magnitudes or long gestation periods.
A reasonable well-developed capital market has come into existence. Both, severe constraint on resources for the public sector and the desirability of keeping it with in manageable and monitor able limits, clearly demand that in future we stall regard public investment not as a preferred option but as a course of the last resort, to be considered only if alternatives are not available.
Such an approach need not be confined to certain non-core or low-priority sectors. While significant public investments may continue to be necessary in the infrastructure areas, we could also think of a role for the private sector in fields such as power, oil and natural gas, steel, etc.
However, such acceptance of an enlarged role for the private sector is based on the assumption that the investment would be genuinely private.
If the private entrepreneur contributes or raises only a fraction of the investment resources needed and depends for the bulk of the resources on public financial institutions, this would not be genuine private investment.
We shall have to insist on a larger mobilization of resources by the entrepreneurs and a much smaller draft on the; public financial institutions.
The term privatization is normally used in the context of existing public enterprises, and we shall now consider the scope for privatization in that context.
If we were to formulate certain criteria or principles for public investment such as essentiality from the point of view of policy or strategy or the difficulty of bringing about the desired development in the private sector and then carry out a review of the existing configuration of public enterprises from a 'zero base' approach, we may find that many of them really do not qualify by such criteria.
The fact, nonetheless, remains that, these exist and some of them have struck roots in the economy; and in the aggregate they represent a massive investment. The question is: what is the scope for privatization of some or many of these?
There are some organizations in the public sector whose activities have strong public policy content. This would be true, for instance, of organizations established essentially for acting as an agency of the government in undertaking market interventions for bringing about stabilization of prices or supplies.
The Food Corporation of India, the Futon Corporation of India, and the National Dairy Development Board (in so far as it is concerned with edible oils), are examples.
State trading organizations like the STC and MMTC have the objectives of promoting exports, bulking imports for obtaining better terms, exploring counter trade possibilities and the stabilization of supplies and prices in the case of certain commodities.
It is difficult to think in terms of privatization of such organizations. We can go into the need for the State to intervene in the interest of some of the objectives mentioned above, and may well come to the conclusion that in a particular case, here is no such need and that the operations can be abandoned; or even that an entire organization can be wound up.
Theoretically, it may be possible to think of a private organization undertaking such market intervention operations as an agency of the government on an agreed remuneration; however, in practical terms this seems very doubtful. The scope for privatization here seems to be very limited.
Let us consider next what are generally regarded as 'core' or 'infrastructure' public enterprises such as Coal India Ltd., Oil & Natural Gas Commission, Oil India Ltd, the Railways, the power generation organizations (NHPC, NTPC, the State Electricity Boards), and so on.
It seems rather difficult to think in terms of privatization in the case of coal -mining. It was because of the unscientific mining of this natural resource (slaughter-mining) and the severe exploitation of the workers by private owners that coal mining was nationalized in the seventies, leading eventually to the establishment of Coal India Ltd.
Not all the objectives have been achieved, though massive investments have taken place and coal production has gone up substantially.
Coal India faces many problems and a major package of rehabilitation measures, including the shutting down of some uneconomical operations, rationalization of the work force, and so on, is clearly called for. However privatization does not seem to be one of the options available in this context.
Considering the scarcity and importance of oil and natural gas resources, major role that these play in the national economy, such as the need for imports and the implications thereof on balance of payments, the rationale of cross subsidization of certain products.
The importance of ensuring availability in re- areas, any large scale privatization in this sector as well does not seem feasible. However, under the coordination and control of an umbrella public enterprise such as ONGC, it seems possible to contract out some parts of the explorer and development efforts to the private sector, Indian or foreign.
There is also scope for allowing some degree of private sector participation in the refining marketing of hydrocarbons without seriously undermining the Governor control over the management of the energy economy of the country. Prop for joint-sector refineries are, in fact, in existence but have not made much progress for a variety of reasons.
Allowing the private sector a role in power generation is again an accepted idea which has not made much progress, appears that while there are a scope for some degree of private participation these crucial infrastructural sectors, our experience so far has not been very promising.
Turning to the Indian railway system, which is the national freight carrier foil the economy, the need for coordination, the massive investments needed for the modernization and the up gradation of the system and the relatively low profitability of this activity, would seem to rule out any scope for privatization here.
In so far as the state road transport corporations are concerned (including the Delhi Transport Corporation), there is certainly a good face for privatization.
It must, however, be borne in mind that many of the state road transport corporations have come into existence through the nationalization of activities which were earlier in the private sector, which was aimed at bringing about a more extensive communication network and providing better service.
If we now think in terms of privatization of some of these services, we shall have to consider two crucial questions: (i) If it is desired to subsidize road transport for passengers (as is being done through the DTC), can this be done through a private agency? (ii) How can we ensure that private transport operators who are essentially profit- seeking will provide a satisfactory transport linkage to remote areas?
It is possible that the operators may concentrate on what they regard as more profitable routes and ignore many localities and pockets which do not offer them much cope for making money; such areas will then be very poorly served or not served at all, is not impossible to find solutions to such problems, but any privatization effort would need to go into such matters, which were in fact the considerations which led to the development of public transport.
Similarly, with banking and insurance, postal services and telecommunications, urban areas and economically better-off sections of population will probably receive greatly improved service under privatization. The question then is: will the needs of the poor sections and the remoter areas be adequately taken care of?
There is no particular reason why a significant part of the production of steel or petrochemicals or fertilisers or automobiles should be in the public sector. Whatever the historical reasons for public investment in these areas, we ought to re-examine the matter.
However, the public enterprises in this sector exist and some have existed for a long time. If they are doing well (e.g., National Fertilisers Limited, IPCL, Hindustan Organic Chemicals Ltd., Maruti Udyog Ltd., BHEL is there any special reason other than ideological why they should be privatized?
Several arguments can be advanced in favour of privatization: recouping a part of the invested resources; getting out of some unimportant or low-priority activities; exposing the public enterprises to questioning by private shareholders; subjecting them to the discipline of the capital market.
Purely from the point of view of policy or strategy, there is clearly no serious objection to these activities being in the private sector. However, we have to consider "scope" in the other sense, namely, feasibility- and the problems that will have to be faced in any such efforts at privatization.
The 244 Central public enterprises accounted for a massive investment of Rs. 99,315 cores at the end of March 1990. Even if no attempt is made to revise that past investment figure into current terms, and even if only a part of that figure is taken as equity, raising funds of this order from the capital market seems unthinkable.
Wholesale privatization is, therefore, not a feasible or a practical proposition. Even if only profit-making enterprises are taken up for privatization, the figure would still be very large. A selective approach seems inevitable.
But selectivity on what criteria? The Government may wish to get rid of loss-making enterprises, but would those be readily saleable? If only profit- making enterprises are privatized, the Government will be left with the loss making enterprises, and might be worse off. Some kind of a mix will have to be tried, taking care to see that policy objectives are not adversely affected.
In this context, we must take note of the announcement made by the Government of a partial disinvestment programme: the idea was to disinvest 20 per cent of the equity in selected enterprises.
No indication has been given of how the selection would be made. The equity was proposed to be disinvested in favour of mutual funds and public financial institutions, and an amount of Rs.2, 500crores was expected to be raised in this manner.
Essentially, this was one of the devices which the Government had in mind to reduce the budgetary gap; it was not really addressed to the problems of public enterprises and was not a well thought-out privatization programme. It does not appear that the Government has considered the implications disinvesting in favour of mutual funds and public financial institutions.
In first place, it would be wrong for the Government to tell the mutual funds invest in specific enterprises; that would be a serious abridgement of autonomy in the management of the funds that they have collected from the; number of people.
Secondly, there is a certain commitment to the public their funds would be invested in a manner which ensures maximum possible return; and the portfolio management by the mutual funds has to keep view. They would need to consider how precisely their portfolio would be affected if they were to invest in certain public enterprises at the behest of the Government.
As regards the public financial institutions will they be able to take up equity public enterprises of this magnitude without cutting into the funds meant equity/term-loans for the private sector?
In any case, how can a transfer of equity in selected public enterprises from the government to government-owned final institutions be described as "privatization" in any sense?
If a part of the equity were to be offered to the general public, that certainly would be partial privatization. However, if the offered equity were to be taken up by a few large houses, would this really be in public interest? Apart from question of increased concentration of economic power in certain groups, would this kind of privatization improve competition?
How will the equity of the selected public enterprises be priced? There some very difficult issues here. It may be recalled that there has been a severe criticism in Britain of the under-pricing of assets in certain cases.
If a part of the government equity in a profit-making public enterprise is disinvested, the dividend income of the Government will be reduced to some extent. A comparison of the one-time capital inflow with the reduction in the recurring stream of dividends would be necessary.
Moreover, public enterprises are being repeatedly exhorted to increase their generation of internal resources so as to maximize their contribution to the financing of their plan programmes and to minimize the draft on the government budget for investment funds, could be said that the Government is willing to accept a lower rate of dividend provided a public enterprise makes a substantial contribution of internal resources towards its investment programmes.
This situation will change if there is private equity. Private share-holders will insist on a much higher rate of dividend. If the dividend rare is stepped up because of this, then the generation of internal resources by a public enterprise for plan outlay purposes may be affected.
Lastly, if the proceeds realized from the disposal of shares is used by the government to reduce the budget deficit or to avoid the imposition of additional taxes, it will be a case of using capital receipts towards current expenditures.
This, in fact, is what Britain has been doing, and such a course has been criticized in that country as "selling the family silver". Selling capital assets to finance current expenditures is not a course of action which can be sustained for long.
Some of the sick private undertaking should never have been taken over as no restoration to health was possible. In such cases, the closure of the enterprise file only sensible course of action.
Examples of public enterprises which fall (this category will include Scooters India, the Surgical Instrument Plant of IDPL at Madras, the Tannery and Footwear Corporation. Privatization may be an alternative to closure in certain cases if a private industrial group is interested in sing it for whatever reasons.
Some of the loss-making or problematic public enterprises can, indeed, be militated given time and funds. However, there are difficult political and financial decisions involved, such as the shutting down of uneconomic activities or plants, the rationalization of the work-force and shedding the surplus, investing in modernization or balancing facilities.
Among the public enterprises which fall category are the National Textile Corporation, the sick engineering companies taken over from the private sector and grouped under Bharat Yantra Nigam and Bharat Bhari Udyog Nigam Ltd., the Indian Iron and Steel Co. Ltd.
Bengal Chemicals, and Bengal Immunity Ltd. Fertilizer Corporation of India and Hindustan Fertilizer Corporation. The crucial question which arises in such cases whether the rehabilitation effort is worthwhile, whether the Government can the funds needed and whether the investment will be justified or will it be only a case of throwing good money after bad.
A very careful appraisal of the possibilities of rehabilitation and the economic results which will follow would be required. There may be cases in which the activity involved is not so important as to warrant a major effort at rehabilitation (for instance, the manufacture of bicycles, the production of prefabs).
In any case, what is needed is a very quick appraisal and an urgent decision. If a labialization package seems viable, it should be put through with urgency; if labialization does not seem feasible or worthwhile, the unit should be closed down promptly.
If a sick unit is successfully turned around by whatever means and becomes healthy, we may have to consider the question whether we need to privatize a rehabilitated unit. Some of the difficulties and complexities mentioned above not arise in regard to the financing of new projects (expansions, 'diversifications) of existing public enterprises.
In such cases, public enterprises are already under pressure to minimize the draft on the Government for fresh investment funds and to maximize internal and other extra-budgetary resources, including funds from the general public.
There is no reason why some of this mobilization of resources from the public should not be in the form of equity, is will introduce a measure of private participation and also bring the enterprises to some extent under the discipline of the capital market. This seems to be a/ sound proposition without regard to any doctrine of privatization.
It needs to be recognized that even if a certain number of public enterprises are partially or wholly privatized, a large number of public enterprises will remain.
Their role will continue to be important and the efficiency of their operations will be a matter of major consequence to the economy, improvement of the performance of public enterprises.
Therefore, is a matter of great importance, and it is urgently necessary to put through a package of reforms aimed at this objective. We should not allow ourselves to be distracted from in our preoccupation with privatization.
Through all these means, it should be possible to bring about privatization in style of functioning of public enterprises; this is even more important than attempts to privatize ownership in certain cases.


Privatization in generic terms refers to the process of transfer of ownership, can be of both permanent or long term lease in nature, of a once upon a time state-owned or public owned property to individuals or groups that intend to utilize it for private benefits and run the entity with the aim of profit maximization. In other words, it is a route from public or state ownership to private players or a group. From the other point of view, it is a strategy that provides advantages to a few at the price of many. However, this is always subjected to the circumstances involved. In this paper, the aim is to understand the major advantages and disadvantages of privatization in this country.
Privatization is a managerial approach that has
attracted the interest of many categories of people-
academicians, politicians, government employees,
players of the private sector, and public on the
whole. As per the opinion by the subject experts,
privatization can be advantageous in terms of the
higher flexibility and scope of innovation it offers
along with cost savings, many a times. However,
other specialists defiantly debate that privatization
has an adverse impact on the employee morale and
generate fear of dislocation or termination. More
likely it also adds on to the apprehensions
pertaining to accountability and quality. Experts
both advocate and criticize privatization making it
more or less a provocative decision that calls for a
diligent scrutiny by the decision makers in
assessment of pros and cons attached to the
concerned policy 
In India, privatization has been accepted with a lot
of resistance and has been dormant initially during
the inception period of economic liberalization in
the country [8]. The article intends to analyze the
present status of privatization in India and
summarize its advantages and disadvantages in
context with the Indian Economy.

Privatization indeed is beneficial for the growth
and sustainability of the state-owned enterprises.
The advantages of privatization can be perceived
from both microeconomic and macroeconomic
impacts that privatization exerts.
A. Microeconomic advantages:
• State owned enterprises usually are outdone by
the private enterprises competitively. When
compared the latter show better results in terms of
revenues and efficiency and productivity. Hence,
privatization can provide the necessary impetus to
the underperforming PSUs .
• Privatization brings about radical structural
changes providing momentum in the competitive
sectors .
• Privatization leads to adoption of the global best
practices along with management and motivation of
the best human talent to foster sustainable
competitive advantage and improvised management
of resources.
B. Macroeconomic advantages:
• Privatization has a positive impact on the
financial health of the sector which was previously
state dominated by way of reducing the deficits and
debts .
• The net transfer to the State owned Enterprises is
lowered through privatization .
• Helps in escalating the performance benchmarks
of the industry in general .
• Can initially have an undesirable impact on the
employees but gradually in the long term, shall
prove beneficial for the growth and prosperity of
the employees .
• Privatized enterprises provide better and prompt
services to the customers and help in improving the
overall infrastructure of the country.
Privatization in spite of the numerous benefits it
provides to the state owned enterprises, there is the
other side to it as well. Here are the prominent
disadvantages of privatization:
• Private sector focuses more on profit
maximization and less on social objectives unlike
public sector that initiates socially viable
adjustments in case of emergencies and criticalities .
• There is lack of transparency in private sector
and stakeholders do not get the complete
information about the functionality of the
enterprise .
• Privatization has provided the unnecessary
support to the corruption and illegitimate ways of
accomplishments of licenses and business deals
amongst the government and private bidders.
Lobbying and bribery are the common issues
tarnishing the practical applicability of
privatization .
• Privatization loses the mission with which the
enterprise was established and profit maximization
agenda encourages malpractices like production of
lower quality products, elevating the hidden
indirect costs, price escalation etc. .
• Privatization results in high employee turnover
and a lot of investment is required to train the
lesser-qualified staff and even making the existing
manpower of PSU abreast with the latest business
practices .
• There can be a conflict of interest amongst
stakeholders and the management of the buyer
private company and initial resistance to change
can hamper the performance of the enterprise .
• Privatization escalates price inflation in general
as privatized enterprises do not enjoy government
subsidies after the deal and the burden of this

inflation affects the common man.

Liberalization and Its Impact on the Indian Economy

The Economic reforms currently underway in India represent both continuity and a break with India's post-independence development. Its main objective is to restore sustained high growth to alleviate poverty and raise the standard of living.
Development of Thought:
Changes in the policy packages towards deregulation, liberalization and opening up of the economy were initiated in the late 70s and early 80s but it was not until 1991 that major economic reforms were undertaken. The major changes in India's economic reforms fall broadly under five heads-industrial, trade, financial, fiscal and monetary.
However these measures of stabilization are not by themselves enough. The main impetus for sustainable economic growth has to originate with efficiency and productivity growth brought about through the expansion of investment and exports.
Another important aspect to be considered is the large number of people in the country living on the poverty line. To make any reform process socially acceptable a poverty alleviation programme must be in. In the context of resource constraints, a serious thinking has to be done as to the extent and pace of economic reforms.
India has to go through a painful period of adjustment before the liberalization can have its fruitful impact upon the economy. In liberalizing the economy the government must not forget to protect the poor and the needs of human development.
The present bout of economic reforms in India-those started in the nineties- marks both continuity and a break with India's post-independence development strategy.
India's development strategy after independence was largely influenced by reservation regarding the ability of the market forces to bring about, on their own, an optimum allocation of resources, thus balancing the country's two main "Objectives "growth' and 'equity'.
A realization has since dawned on policy-makers, based on India's own experience and the experience of other countries, that: The domestic economy has now reached a threshold where for better utilization of resources the benefits of the market forces can be harnessed, by proper market-friendly macro and micro- economic policies helping both in higher growth and more equity.
This has initiated a serious debate in the country on our development strategy for opening up the economy and allowing more market orientation, by removing major Government interventions and regulations.
Since 1977, and specially after 1985-86, the Government has embarked upon a series of economic reforms leading towards liberalization and deregulation Subsequently, there has been a significant improvement in the growth rate of the country-from the long existing, low rate of income growth of 3.5 percent to an average growth rate of 5.5 per cent and above.
As noted, the changes in the policy packages towards deregulation, liberalization and opening up of the economy had been initiated in the late 70s and early 80s. These changes were not systematic and were never integrated into an overall framework.
According to many economists, these changes were rather slow but not monotonic, until July 1991 when the new Congress Government came to power. Since then the change in the policy packages have picked up momentum. There have been major changes since July 1991.
The present Man Mohan Singh led Congress Government came into power in 2004. It has further extended the liberalization policy started in 1991. In its 2004-2005 and 2005-2006 budgets, the government has brought along with almost simultaneous changes in trade and finance announced outside the Budget.
These changes are primarily confined to Central Government activities and have not been given an} general policy directive to integrate with the overall policy packages of the State Government.
The major changes in India's economic reforms fall broadly under five heads-industrial, trades, financial, fiscal and monetary. The Government's key economic objective is to restore sustained high growth which is essential to alleviate poverty and raise the standard of living.
In pursuit of these objectives the Government's reform strategy aims at achieving over the course of the next five years:
(1) a liberalized trade regime characterized by tariff rates comparable to other industrializing developing countries and the absence of discretionary import licensing (with the exception of a small negative list);
(2) an exchange rate system which is free of the locative restrictions of trade;
(3) a financial system operating in a competitive market environment and regulated by sound prudential norms and standards;
(4) an efficient and dynamic industrial sector subject only to regulations relating to environmental security, strategic concerns- industrial safety and unfair trading and monopolistic practices; and
(5) an autonomous, competitive and streamlined public enterprise sector geared to the provision of essential infrastructure goods and services, the development of key natural resources and areas of strategic concern.
It involves taking every step necessary to ensure that the burden of adjustment is fairly distributed and that the very poor are protected. As a first step in this direction the Government has established a National Renewal Fund to provide social safety net.
The thrust of the reform programme would initially be on casing the country's extremely tight external payments situation and reducing inflation. In this context, the Government intends to pursue a. stab le exchange rate policy geared to maintain the rupee constant in nominal terms- and to rely on fiscal adjustment accompanied by a tight monetary policy to contain inflation.
But this is an initial phase. Stabilization by itself is not enough. As traditional demand impulses originating from fiscal policy will remain constrained in the next two to three years, the main impetus for sustainable economic growth has, to originate with efficiency and productivity growth brought about through the expansion of investment and exports.
Under-pinning such a path of growth must be a consistent and comprehensive structural reforms strategy designed to promote exports, to improve the relationship between the return on investment and the cost of capital, and to increase the degree competition between firms in the domestic and external markets so that there are adequate incentives for upgrading the technology, improving efficiency and reducing costs.
The main emphasis of the fiscal policy is to reduce the Central Government's fiscal deficit, within the broader context of adjustment of the overall public sector budget.
Reducing the overall public sector budget will require increased financial discipline by the State Government as well, and the Central Government will encourage the State Government to take steps to improve their fiscal performance and to streamline the working of the enterprises.
In this context a comprehensive tax reform is proposed. It will improve:
(i) the elasticity of tax revenue through identification of new areas and increasing the share of direct tax a proportion of total tax revenue,
(ii) a more equitable and broad based system particularly with regard to commodity taxation and personal taxation,
(iii) the removal of anomalies that distort economic incentives and simplification and rationalizations of customs, tariffs, elimination of exemptions as well as a reduction the average level of tariffs and finally improve compliance of direct taxes and strengthen enforcements.
In this context also, the need for rationalization and reduction of subsidies and for moving to a more objective system of administered price has been emphasized.
Regarding exchange rate policy it emphasized the adjustment of exchange so as to provide a significant real depreciation, to improve export incentives and international competitiveness. In this context the Government intended to keep the nominal exchange rate stable by a suitable fiscal and monetary policy.
In the immediate future, to achieve stabilization. Government visualizes a tightening of credit and monetary policies, free higher interest rates and higher cash reserve ratios. It also proposes, by declining the recourse to financial savings the Government, a larger volume of supply of domestic credit to the private sector.
The Government recognizes that trade reform is an essential element securing supply response to facilitate the overall restructuring of the economy and to restore external payment viability.
There are five key medium term objectives in the Government's trade policy agenda:
(1) The broadening and implication of export incentive measures and the removal of restrictions on exports:
(2) The elimination of quantitative restrictions on imports;
(3) Substantial retail in the tariff rates;
(4) The decanalisation of exports and imports with the exception of a few items and finally moving to a foreign exchange system which is free of locative restrictions for trade.
The Government also recognizes that the temporary restriction on import which had to be imposed by the Reserve Bank of India no to be relaxed.
The Government recognized that a major restructuring of Indian economy, implied by its agenda, will very much depend on the success of its industrial policy reforms.
In this context a large number of sick firms which constitute drain on the Government budget, with their unpaid outstanding loans, weaken the financial system, in many cases with the firms closing down leaving their creditors unreimbursed, have to be taken care of.
For the restructuring of existing sick and loss-making companies, both in the public and private sector, Government will review the existing provisions of various laws governing labour relations, the State and the local government's role in restructuring regulation governing transfer of land, the procedure of liquidation under the Companies ACT and other relevant aspects.
The Government is aware that the prerequisite of having a safety net or social insurance scheme is to provide support for displace workers in the organised sector. The Government's industrial policy strategy marks a major step forward towards changing the regulatory structure of industries.
It initiated major changes, including comprehensive deli censing, abolition entry controls related to the MRTP Act and automatic approval of foreign technology agreements and foreign investments, among others.
The changes policies concerning foreign technology and foreign investment will enable Indian industries to forge much more with foreign investors and suppliers of technology than has been possible in the past.
The Government's ownership of the financial and banking institutions enabled it to achieve the multiple objectives of mobilization of resources integration of the rural population into the financial mainstream, enhancement availability of long-term loans to all levels of industry and agriculture and increased access to credit to small industrialists, farmers and weaker sections of sock.
However, there are weaknesses and imbalances. The statutory liquidity ratio and cash reserve ratio levels are high, which implies low return for commercial banks on their funds. This reduces the reserves available to non-priority borrowers and raises their costs in moving to market based operations of the financial institutions.
Measures have been taken to strengthen the capital markets, the rates for debentures have been freed, and mutual funds have been opened to the private sector and the full statutory powers are to be given to independent agencies to regulate security markets. The high level Narasimham Committee had been established to review the structure.
In line with the recommendations of the Narasimham Committee further reforms of the financial sector will be formulated to increase the efficiency of the financial intermediation.
The measures required to meet these objectives would particularly involve a phased reduction of priority lending schemes towards the targeted deserving groups and eventual elimination of the subsidies involved, formulation of prudential norms and standards to guide efforts in recapitalization of the banking sector and full decontrol of deposit rates.
India's severely constrained budgetary circumstances create both the need and the opportunity for placing greater reliance on the private sector for resources mobilization and investment. Public enterprises provide many of the basic and critical inputs in India.
It is a matter of serious concern that inadequate attention has been paid to improving their efficiency. In the context of public enterprise structuring it will be important to assess the social cost involved, with the closure of sick units, and to develop options and measures for compensation of retrenched labour.
Enterprises in areas judged appropriate for continued public sector involvement will be provided with greater degree of managerial autonomy along with a progressive reduction in budgetary transfers and loans. Sale of selected firms or partial divestment for specific sectors is being increasingly, pursued.
The Government recognizes that adjustment programmes entail significant transitional cost. This cost includes potential loss of output, employment and consumption due to the deflationary impact of fiscal consolidation and frictions in the restructuring process which must be equitably borne by all sections of the society.
However, a large proportion of India's population continues to be subject to malnutrition and ill health. For this group, the Government is committed to minimise their share of the burden of adjustment.
Thus the Government should provide higher outlays on elementary-education, rural drinking water supply, assistance to small and marginal farmers, programmes for women and children, programmes for welfare of scheduled caste and scheduled tribes and the weaker sections of the society, and increased expenditure on infrastructure and employment generation projects in rural areas.
Further steps have to be taken to re-allocate social expenditure, particularly in health and education for the poor. Additional cost-effective compensatory programmes, particularly in the areas of nutrition and employment, should be strengthened and broadened.
In this context the establishment of a National Renewal Fund has been proposed. Against this backdrop of proposed policy changes, the first set of changes introduced by the Government comprises increasing of taxes and reduction in Government expenditure, in order to reduce the deficit.
Simultaneously, there have been adjustments in the exchange rates to make exports more attractive and to control imports to narrow the balance of payment gap. Along with this a tight monetary policy was followed. Subsequent assessments however revealed that these measures were insufficient to reduce excess demand for imports.
Consequently, the Government imposed emergency credit restrictions on imports. Unfortunates although the Government took timely measures in the field of trade, industrial policy and fiscal measures, it took a comparatively longer time to introduce financial liberalization measures, public enterprise reform and measures affecting the mobility of labour and capital which are normally known as entry/exit policy.
By introducing all these changes, the Government has been successful in its stabilization attempts to a certain extent. For instance, the foreign exchange reserve has reached 128.9 billion $ on 4 February, 2005, increasing by $31 billion from 2003-04, though it should be realized that this benefit is only a one time gain, resulting primarily from multilateral aids.
Thus a major part of multilateral aid has been used for debt servicing. Even NRI outflow which increased $10.2 billion in 2002-03 to $14.3 billion in 2003-04. Thus, the net inflow is still positive. There are differences of opinion as to the potential adverse effect of attaining stabilization by this method.
For example, to reduce the gap the contribution of export growth has long term stable implications, but resorting to too much import compression, will affect adversely the possibility of export growth, and may prove to be self-defeating, especially if the import component of non-tradition exports is very high.
The 2005-06 budgets further has accelerated the reform process by reducing the deficit to 4.3 per cent of GDP but again by a modest increase in revenue and a heavy reduction in expenditure, especially expenditure on capital formation and on human development. For further reduction in fertilizer subsidy, nothing has been worked out.
With regard to the impact of economic reforms on social expenditure and poverty alleviation it is noted that the reforms have affected public expenditure and many of the key social services areas like health, sanitation, water supply etc. which contribute to the welfare of the poor.
It does not mean that there is no scope for economizing these expenditures but it implies that it should be done carefully. Any across the board reduction may be politically and administratively easy but would be harmful to the poor.
The essence of the present economic reforms, understandably, is to resort to the market and make price corrections according to the relative scarcity values and rates of returns for all inputs in the productive system.
But experience shows that in the long run, when the economy is not growing at a fast pace (i.e., under a concretionary stabilization phase) these price shifts results in the reduction in the reduction in the welfare of some sections of the society while benefiting other sections, both in absolute and relative terms.
The fall in real consumption per has resulted in a significant increase in the level of poverty ratio and accordingly the number of people below the poverty line. A conservative estimate using Planning Commission methodology and database shows that nearly 6 to 7 Billion people went down the poverty line during this period.
This is a contrast with an annual improvement of nearly 10 to 15 million moving above the poverty line over the last decade. Thus overall, it makes a difference in terms of a in the poverty alleviation pace by nearly 20 millions, with reference to the trend values.
This scenario has high political and social sensitivity. In order make the reform process morally and socially acceptable and politically feasible, conscious positive programme on poverty alleviation will be needed. The need for such a programme will be more felt if the message is that the present structural adjustment phase will last for more than 3 to 4 years.
The economic reform process also breeds a class of "new poor". These are the people who will be affected by the restructuring process through 'closures', many of them are at the higher and middle income level, mostly in the organised or and easy to identify.
They are the target groups which can be covered by the National Renewal Fund. In this context it should be noted that already there has been a significant increase in the percent of unemployed.
To provide a cushion to the poor against high price increase, the Government uses the Public Distribution System (PDS); however its effectiveness needs to be improved. For lance:
(I) The inter-State PDS's allocation is made on a per capita basis regardless of income;
(2) within a given area the poor-income groups are not functionally the most important beneficiaries of the PDS. In West Bengal, for ample, the PDS financed 54 per cent of wheat consumption of the rural highest income groups;
(3) the PDS is grossly inadequate, especially in areas with high poverty intensity. The income of the poor is much too low to take advantage even of the PDS; and finally, the whole approach towards impact on the vulnerable section of the society should be reviewed in the light of reduced public expenditure on social programmes.
For example, cuts in the health programme could lead to increase in India's already high incidence of tropical diseases. In addition, a poor location programme has its impact not only on the rural wage of the poor but also in the drive for export growth and adoption of better technology, by making the labour force more illiterate.
The stabilization package is giving the anticipated results: it has also skillfully combined some of the structural adjustment changes. However, the adequacy of the structural adjustment elements and the growth factors in the stabilization programme of the Government has been questioned by many economists.
It is that many of the measures taken are on the soft side, as it does not remove many implicit subsidies. In this context, measures to contain the Government wages bill have not been given proper priority. With regard to taxation, it is felt that even now, the indirect tax rates in India, particularly on imports, are very high compared to other LDCs.
Of the measures on adjustment that have bet implemented, almost all are in the Central Government sector; whereas substantial fiscal deficit exists in the States, almost close to that of the Centre of nearly 1.8 per cent of GDP. More exhaustive measures need to be taken to curtail the States' expenditure pattern.
With regard to the cut in the capital expenditure, is rightly realized that there are many wasteful expenditure items in the present composition of public investment.
One should, however, be cautious not to reduce them indiscriminately, since in this process, along with the unproductive, productive sectors, also may suffer a cut.
The 'exit rules' constraining firms from liquidating their assets or retrench workers, remain major hindrances to improving their efficiency and new investments in the organised sector. Any postponement of a policy in this arc does not fit with the basic philosophy of structural reform and efficiency.
As to the role of foreign investment, they should be given more open-ended facilities since even now there remain a large number of constraints in the form Government restrictions on remittances of profit, and Government's approval required for some major productive sectors.
In the field of financial liberalization a quicker action is needed on the Narasimham Committee's Report. Without a sound financial superstructure the passage to the market system may result problems, as was observed in the stock market debacle very recently.
The financial reforms would strengthen the prudential financial recoveries and allow private banks, foreign and domestic, to bring competition to the financial sector. In the field of agriculture, no specific action has been taken for its betterment.
This is the area where coordination with the States Rector would be required. Public sector needs greater positive reforms in addition to reduction in the capital expenditure as given in the last two Budgets.
The public sector should be allowed to adjust to the new policy frame by focusing on issues like: (i) privatization and (ii) closure of enterprises that would not survive in a competitive environment.
Finally, although India has successfully diversified and expanded its export base, the major contribution in India's export growth has come from the demand pull of the receiving countries (especially the developed countries). Only a vet; small portion can be accounted for by changes in market composition and price competitiveness.
Indeed it is only the price factor and a prudent spread over different markets which can help in further increasing India's exports, in future. This is true especially when the international trade buoyancy does not give rise to much optimism.
However, for increasing exports, apart from reducing domestic costs, the country will-need better links, with the international market. For this efficient transport and communication links will be needed to back our trade an investment policy.
It is the experience of most countries that in the process of reducing costs and improving quality of products the role of literate labour force and skilled manpower should get high priority. Indeed, absorbing higher technology needs a correspondingly well-trained, literate and healthy labour force.
In this context the heavy cut in human development expenditure under the recent budget and the low emphasis on domestic R&D (needed to improve the ability to absorb and indigenize foreign technology) are disappointing.
India initiated the process of economic reforms with several handicaps. A high poverty ratio with nearly 32 to 40 per cent of the population living below the poverty line. A very low foreign exchange reserve and level of confidence about India's credit worthiness.
An unfavorable world scenario with its projected low income growth and increasing regionalism and a substantial loss in RPA trade (Former USSR and Post European countries) for India.
India's hang-up with anti -market socialistic development strategies and people's shaken confidence arising from unsatisfactory sporadic liberalization attempts since 1990s. The existence of a large but inefficient public sector with its own vested interest.
All these, in the light of inter-country experiences, forewarn of a longer gestation period with heavy social costs and raise doubts as to the tolerance level of Indian society for withstanding such less impending social cost.
However, there are plus points: The liberalization package is preceded by the minimum essential political setup: India's democratic form of society. In the transformation of economy into a highly efficient one, moving towards a market economy, India can benefit from her past experience of a mixed economy.
Indeed, this places India on a better footing vis-a-vis China, East Europe and other centrally planned economies. India has a very good track record of fulfilling international commitments, with a comparatively low debt service ratio compared to Latin American and some of the African countries.
India has a large supply of skilled manpower and cheap labour. India has a reasonably good basic infrastructure.
It is against this backdrop, that India's stabilization measures should be assessed. In the short run, it has fulfilled the specific stabilization objectives i.e., reducing the balance of payments and the budgetary gaps and recouping all the losses in the foreign exchange reserves.
However, a word of caution is needed, from the experience of other countries it has been observed that a short-term success in the stabilization phase often tempts policy-makers to sit back and prolong the phase of stabilization process. In a number of cases this has led to stagflation.
The continuance with too high a foreign reserve ratio (as in India) against a heavy import compression requires a warning. Indeed, a large part of the present problem is due to India's lack of proper foreign exchange reserve management.
This warning is specially needed when stabilization is achieved through soft option (import and expenditure compressions and heavy foreign exchange borrowings) regardless of the needs for growth and productivity (as observed in number of other countries).
This may retard and render difficult the desired transition to growth. To avoid this, the adjustment process could be slowed down if necessary, specially in certain areas of reform (for example, the rate of decline in the budget deficit as percentage of GDP). The therapeutic approach of a shock treatment in the reform process may not work in India.
As observed in the case of other countries, a structural adjustment process is much more complex than the stabilization process, and therefore should not be left only with the bureaucrats and politicians. There is no standard recipe for the structural adjustment phase, although there is a far degree of commonality in the stabilization phase.
In choosing proper sequencing a very strong financial and banking infrastructure is a pre-requisite to establishing appropriate market codes of conduct. Therefore financial liberalization should not be postponed for too long.
Moreover, in tune with the spirit of present economic reform, decisions on privatization and exit policy should follow early in the game. Although a high rate of inflation is a problem the key issue is to revamp the real growth of the economy by suitable investments and incentives.
In the context of improving productivity and international competitiveness, technology improvement should be the buzz word. The attempts to reduce the costs exclusively through fiscal. Monetary, financial and trade policies have their limits. Ultimately, it is the technological progress which matters.
Imports of technology via foreign direct investment should accordingly feature at the centre as a necessary condition for increasing efficiency. However, the absorption and indigenization of foreign technology alone will satisfy the requisite condition for success.
This will be made possible by the growth of research and development in the domestic economy. Reforms, therefore, the research and development policy, must provide a clear strategy and sufficient resources.
To conclude, when Liberalization reforms were initiated the economy was suffering with the heavy foreign exchange constraints and import compression and a relatively unfavorable international scenario but India will have to go through a painful prolonged period of adjustment.
Thus, the country must prepare itself to meet this challenge by first protecting the poor and second by protecting the infrastructure and human development needs.