Privatisation in India

Upon achieving independence from British rule in 1947, India pursued policies that sought to assert government planning over most sectors of the economy and strove to promote relative economic self-sufficiency. These policies included extensive government spending on infrastructure, the promotion of government-owned companies, pervasive regulatory authority over private sector investment, and extensive use of trade and investment barriers to protect local firms from foreign competition. While these policies
achieved some economic goals (such as rapid industrialization), the overall effect was to promote widespread inefficiency throughout the economy (e.g., unprofitable state-run firms and a constrained private sector) and to greatly restrict the level of foreign direct investment (FDI) in India. India’s real GDP growth was relatively stagnant during the 1970s, averaging about 2.7%. Piecemeal economic reforms and increased government spending during the 1980s helped boost average real GDP growth to 6.0%.

As late as 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies of major trading partners. India started having balance of payments problems since 1985, and by the end of 1990, it was in a serious economic crisis. The government was close to default and its foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports. The Government of India headed by P. V. Narasimha Rao decided to usher in a slew of reforms that are collectively termed as liberalisation in the Indian media. This event marked a tremendous shift in India's economy since independence - it assumed an outward-shift of encouraging exports instead of the inward focus that stressed on import substitution till then. The reforms brought changes in three broad areas, collectively known as liberalisation, privatisation and globalisation. Liberalisation did away with regulatory hurdles and minimised licensing requirements. Privatisation reduced the role of the state and public sector in business. Globalisation made it easier for the MNCs to operate in India. P. V. Narasimha Rao was ably supported by his finance minister Manmohan Singh and other officials such as C. Rangarajan, Montek Singh Ahluwalia, Shankar Acharya and Y. Venugopal Reddy. The initial period culminated in 1996 with the government getting voted out of power. This brought coalition politics to centre-stage and the pace of reforms slackened.

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