Table of Contents Structural Reforms and disinvestment in the Indian Economy: Is it a prudent strategy? ...................................... 2

1.1 Introduction ............................................................................................................................................................... 2

2.1 Trade Liberalization ................................................................................................................................................. 2

2.1.1 Synopsis: ................................................................................................................................................................ 2

2.1.2 Pre-liberalization v/s Post-liberalization: ........................................................................................................... 2

2.1.3 India Today: .......................................................................................................................................................... 4

2.1.4 Pros and Cons: ...................................................................................................................................................... 5

3.1 Disinvestment in PSUs .............................................................................................................................................. 6

3.1.2 Genesis of PSUs ...................................................................................................................................................... 6

3.1.3 Objectives of Disinvestment .................................................................................................................................. 6

3.1.4 Literature Review .................................................................................................................................................. 6

3.1.5 Implied Potential ................................................................................................................................................... 7

3.1.6 Historical data ........................................................................................................................................................ 7

3.1.7 Challenges and Reasons for delay ........................................................................................................................ 8

3.1.8 Effects of Disinvestments ....................................................................................................................................... 9

3.1.9 Disinvestment: Pros and Cons .............................................................................................................................. 9

4.1 Subsidies ................................................................................................................................................................... 10

4.1.1 Removing price controls and subsidies .............................................................................................................. 10

4.1.2 Subsidy scene in India at present: ...................................................................................................................... 11

4.1.3 Types of Government Subsidies : ..................................................................................................................... 12

4.1.4 Salient Features(Subsidy 2015):.......................................................................................................................... 12

4.1.5 Why are subsidy reforms important? ................................................................................................................ 12

5.1 FDI: .......................................................................................................................................................................... 13

5.1.1 Synopsis: ............................................................................................................................................................... 13

5.1.2 India Today: ......................................................................................................................................................... 13

5.1.3 Merits and Demerits of FDI: ............................................................................................................................... 14

5.1.4 Has India taken FDI seriously? .......................................................................................................................... 15

6.1.1 Tax Collection System ......................................................................................................................................... 15

6.1.2 Acquiring land and obtaining Environmental clearances. ............................................................................... 15

6.1.3 Transparency in the Government Functioning ................................................................................................. 16

References .......................................................................................................................... Error! Bookmark not defined.

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Structural Reforms and disinvestment in the Indian Economy: Is it a prudent strategy? 1.1 Introduction It is no hidden fact that Indian economy was going through its roughest phases during the latter part of the 80’s. By 1990-91, it reached its worst when the withdrawal of international credit and non-resident Indian (NRI) deposits generated the balance of payments crisis, leading to the collapse of foreign exchange reserves. At 8.4% of GDP, the gross fiscal deficit was a warning for the days to come. If one includes the losses of non-financial public sector enterprises, the consolidated public sector deficit stood at around 10.9% of GDP in 1990-91, of which nearly 4.3 percent of GDP was for interest payments on domestic and external debt. It was then that the government opted for conditional credit from the International Monetary Fund to deal with the situation, necessitating policies of stabilization, and an acceleration of 'structural reform' as well as its extension into the external and financial sectors. The results were clearly visible from the first year itself, with fiscal deficit falling to 5.9% in 1991-92 and further to 5.7% in 1992-93. Now, even after almost two and a half decades, whenever the Indian economy hits a rough patch, the one thing on the part of press and financial market participants is to say that "to improve economic growth, India needs to go through structural reform". Conference speeches, macro strategy notes and newspaper op-ed pieces feel incomplete without at least one mention of "structural reform". So what exactly is structural reform and are we in India really so deprived of this economic aphrodisiac?

1.2 Structural Reforms: The term ‘structural reforms’ came into existence during 1950s, when International Monetary Fund (IMF) and World Bank started dispensing loans to troubled economies. These loans came with certain pre-conditions, which later were termed as ‘structural reforms’ by various journalists and academics. On a broader classification based upon IMF’s and World Bank’s definition, the key aspects of structural reforms implemented in India were:

1. Trade liberalization, i.e. lifting restrictions on imports and exports; 2. Balancing budgets (rather than the overspending; disinvestments); 3. Removing price controls and state subsidies; 4. Encouraging more investment through FDI and FII flows; 5. Improving governance and fighting corruption.

It shall be wrong on our part to not appreciate the Indian Government for its commendable outlook in adopting unconventional fiscal consolidation policies during such testing times. In this report, we shall further try to explain these reforms in detail and what were their socio-economic impact.

2.1 Trade Liberalization

2.1.1 Synopsis: What is liberalization? The dictionary meaning of ‘liberalization’ is: the act of making less strict. In the economic sense, it is defined as the loosening of government regulations in a country to allow free trade between different countries. Before the economic liberalization of 1991, India was still reeling under the beliefs generated by socialism and the colonial exploitation. The government tried to close the economy to the outside world and push it towards import substitution i.e. making the market more dependent on domestic production rather than international trade. But the balance of payment crisis forced them to change their position and to take proactive measures that would help them recover.

2.1.2 Pre-liberalization v/s Post-liberalization: While the pre-liberalization era was full of tax bundles and tariff packages that hand-tied the industrialists, the post-liberalization era brought a whole lot of freedom to the entrepreneurs to establish any trade or business venture. Gradual abolishment of import licenses and most of the quantitative restrictions further eased out the process. Although these decisions received serious objections from the various fractions of the educated society, the results presented a completely different picture. The following tables show this trend in the growth of the India’s foreign trade volume from 1971-1991 (pre-liberalization) to 1992-2014 (post-liberalization).

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Table #1 India’s Trade in Pre - Liberalization Period

Year Exports % of change

Imports % of change

Total Trade % of change

1971 1608 4.76% 1825 11.69% 3433 8.33% 1972 1971 22.57% 1867 2.30% 3838 11.80% 1973 2523 28.01% 2955 58.28% 5478 42.73% 1974 3329 31.95% 4519 52.93% 7848 43.26% 1975 4036 21.24% 5265 16.51% 9301 18.51% 1976 5142 27.40% 5074 -3.63% 10216 9.84% 1977 5408 5.17% 6020 18.64% 11428 11.86% 1978 5726 5.88% 6811 13.14% 12537 9.70% 1979 6418 12.09% 9143 34.24% 15561 24.12% 1980 6711 4.57% 12549 37.25% 19260 23.77% 1981 7806 16.32% 13608 8.44% 21414 11.18% 1982 8803 12.77% 14293 5.03% 23096 7.85% 1983 9771 11.00% 15831 10.76% 25602 10.85% 1984 11744 20.19% 17134 8.23% 28878 12.80% 1985 10895 -7.23% 19658 14.73% 30553 5.80% 1986 12452 14.29% 20096 2.23% 32548 6.53% 1987 15674 25.88% 22244 10.69% 37918 16.50% 1988 20231 29.07% 28235 26.93% 48466 27.82% 1989 27658 36.71% 35328 25.12% 62986 29.96% 1990 32558 17.72% 42095 19.15% 74653 18.52% 1991 44042 35.27% 47841 13.65% 91883 23.08% Source: Reserve Bank of India.

Table # 2 India’s Trade during the Post - Liberalization Period:

Year Export % of change Import % of change Total Trade % of change 1992 53688 21.90% 63375 32.47% 117063 27.40% 1993 69749 29.92% 73177 15.47% 142926 22.09% 1994 82673 18.53% 89971 22.95% 172644 20.79% 1995 106352 28.64% 122678 36.35% 229030 32.66% 1996 118817 11.72% 138920 13.24% 257737 12.53% 1997 130101 9.50% 154176 10.98% 284277 10.30% 1998 139752 7.42% 178332 15.67% 318084 11.89% 1999 159095 13.84% 215529 20.86% 374624 17.78% 2000 201356 26.56% 228307 5.93% 429663 14.69% 2001 209018 3.81% 245200 7.40% 454218 5.71% 2002 255137 22.06% 297206 21.21% 552343 21.60% 2003 293367 14.98% 359108 20.83% 652475 18.13% 2004 375340 27.94% 501065 39.53% 876405 34.32% 2005 456418 21.60% 660409 31.80% 1116827 27.43% 2006 571779 25.28% 838048 26.90% 1409827 26.24%

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Year Export % of change Import % of change Total Trade % of change 2007 655864 14.71% 1005159 19.94% 1661023 17.82% 2008 840755 28.19% 1374436 36.74% 2215191 33.36% 2009 845534 0.57% 1363736 -0.78% 2209270 -0.27% 2010 1142922 35.17% 1683467 23.45% 2826389 27.93% 2011 1455959 27.39% 2345463 39.32% 3801422 34.50% 2012 1634318 12.25% 2669162 13.80% 4303480 13.21% 2013 1905011 16.56% 2715434 1.73% 4620445 7.37% 2014 1891645 -0.70% 2733935 0.68% 4625580 0.11% Source: Reserve Bank of India.

This international trade data for both the periods was analyzed and plotted on a separate graph as shown in Figure#3 below.

Figure # 3 - Fluctuations in the India’s Foreign Trade

The plot clearly shows that the total international trade remained fairly stagnant during the period 1971-91. However, the total trade shows almost an exponentially increasing trend post 1991.

2.1.3 India Today: It suffices to say that Indian economy has outperformed the expectations of the world. It is now the fastest growing economy, surpassing China. But to maintain such pace in this highly competitive and unified global economy, new policies have to be made and the old ones need to be tweaked. While the rate of growth had slowed down in the past 5 years due to various domestic political and world economic conditions, the change of guard at New Delhi in 2014 has brought a new ray of hope and a positive sentiment can be seen again in the market. On 1st April 2015, the BJP government came up with its new foreign trade policy for the next 5 years. Some of the salient features of this policy and post-liberalization amendments are discussed further in the report.

1. India has signed 28 Free Trade Agreements (FTAs) and Comprehensive Economic Cooperation and Partnership Agreements (CECAs) with countries like Singapore, Mauritius, Australia, Indonesia, Thailand, New Zealand, Japan, South Korea etc.

2. Demarcated strategic areas in different cities and developing them as Special Economic Zones (SEZs) to facilitate exports. Till date, 202 SEZs have been made operational and they have been divided into the following 7 zones : SEEPZ Special Economic Zone,- Kandla Special Economic Zone, - Cochin Special Economic Zone, - Madras Special Economic Zone,- Visakhapatnam SEZ, - Falta Special Economic Zone and - Noida Export Processing Zone

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3. In line with WTO recommendations, quantitative restrictions on all import items were withdrawn. 4. Apart from agricultural goods like wheat, rice, maize, urea and petroleum products like diesel and petrol,

import of the majority of the items was de-canalized through the public sector agencies. 5. Custom duty has been reduced to a maximum of 15%. 6. The exchange rate policy has evolved and now the value of the rupee is market-determined. 7. The Exim Policy 2001 introduced the concept of Agri-Export Zones (AEZs) to give primacy to promotion of

agricultural exports and effect a reorganization of our export efforts on the basis of specific products and specific geographical areas.

8. Market Access Initiative Scheme was launched in 2001- 02 for undertaking marketing promotion efforts abroad. The key features of the scheme are in-depth market studies for select products in chosen countries to generate data for promotion of exports from India, assist in promotion of India, Indian products and Indian brands in the international market by display through showrooms and warehouses set up in rental premises by identified exporters, display in identified leading departmental stores total exhibitions trade fairs, etc. The scheme shall also assist quality upgradation of products as per requirements of overseas markets, intensive publicity campaigns, etc.

9. Focus on export of services and tax benefits to Information Technology sector, the Telecommunication Sector and the Entertainment Industry. ….and many more.

It is needless to say that it has become a part of the understanding of the government and others involved in policy making to give equal importance to international market demands as it is given to the domestic market. That is why the trade policy(s) that is designed now try to touch every aspect of the market, irrespective of the local consumer demand. But as per market rules, everything comes at a price. In the next aspect of this report, we would try to weigh in the benefits and the drawbacks of trade liberalization to come to our verdict.

2.1.4 Pros and Cons: In this section we would try to enumerate the advantages and disadvantages of trade liberalization. Advantages:

1. Economic Welfare: enables the countries to produce those goods and services that have a comparative advantage, i.e. can be produced at the lowest opportunity cost.

2. Lower Prices: foreign trade facilitates reduction of prices of consumer goods as it brings scarce products in the market.

3. Increased Competition: the entry of international producers increases competition, thereby increasing efficiency and cutting costs.

4. Optimal resource utilization: trading helps in effective utilization of a country’s resources eg. Economies of Gulf countries are majorly dependent on oil export.

5. Economies of scale: as trade liberalization enables specialization in production of certain goods, it results in lower costs to customers. It is typically applicable to heavy industries.

6. Increased Employment: with more goods and services being traded in so many markets, aggregate demand increases, thereby businesses expand or new entrepreneurs turn up, therefore more employment.

7. Exchange rates: it helps in keeping a check over the value of the currency and facilitates in keeping deficits to the minimum. Therefore, in a way, it helps in saving government revenue that can essentially be utilized in various socio-economic developmental activities.

Disadvantages: 1. Balance of economy: trading shifts the balance of economy as industries have unequal growth, some

might grow while others might run of business. This further raises the issue of unemployment. 2. Exploitation of environment: as economies tend to produce natural resources at an accelerated rate, they

start exploiting these resources as well as disturb the ecosystem. 3. Industry restrictions: as more and more industries focus on the trade, developing countries become

unable to diversify into other sectors.

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Now, having assessed trade liberalization, let’s move our focus to the second aspect of structural reforms. Removing price controls and subsidies! So what exactly are subsidies and how and where are they employed in Indian economy?

3.1 Disinvestment in PSUs 3.1.1 Background and Motivation Disinvestment or divestment as the name suggests, implies the conversion of assets into cash. Indian Government is on the move to make around 70,000 crore from PSU disinvestment this fiscal. There are many reasons which impels government to take this step but what is the most prominent and broad reason is to get relief of the huge deficit burden which the country is having right now.

3.1.2 Genesis of PSUs The underlying reason for such an extensive presence of PSU in Indian economy lies in the economic policy adopted after independence. The greater thrust was given on economic development with social perspective. In order to attain this, the method of central planning was adopted. But since the targets set in the first Five Year plan (1951-56) were not attained, then the process of setting-up national champions in strategic sectors -heavy industry, steel, oil & gas, banking & insurance among others was initiated to achieve these targets. Some of the largest and most successful PSUs-BHEL, State Bank of India, ONGC, Indian Oil Corp, Oil India, Steel Authority of India and Bharat Electronics among others owe their genesis to this period.

3.1.3 Objectives of Disinvestment The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very negative rate of return on capital employed. Inefficient PSUs had become and were continuing to be a drag on the Government’s resources turning to be more of liabilities to the Indian Economy than being assets. About 10 to 15 % of the total gross domestic savings were getting reduced on account of low savings from PSUs. In relation to the capital employed, the levels of profits were too low. Hence, the need for the Government to get rid of these units and to concentrate on core activities was identified. In this direction, the Government adopted the 'Disinvestment Policy'. This was identified as an active tool to reduce the burden of financing the PSUs. The following main objectives of disinvestment were outlined:

• To reduce the financial burden on the Government • To improve public finances • To introduce, competition and market discipline • Fund growth • To encourage wider share of ownership • To depoliticise non-essential services

3.1.4 Literature Review 3.1.4.1 Overview Disinvestment in a Public Sector Undertaking (PSU) refers to the transfer of Government ownership when the dilution is beyond 51 %. Department of Disinvestment is mandated to handle all matters relating to the disinvestment of Government of India (GoI) shareholding in Central Public Sector Enterprises (CPSEs). This also includes sale of GoI shareholding through offer for sale or private placement in the erstwhile CPSEs. Since its inception in the year 1999, the Department of Disinvestment (DoD) has handled different kinds of disinvestment transactions. 3.1.4.2 Need for Disinvestment The various reasons for disinvestment include

1. More Economic Sense: To extract the locked out funds beyond 51% equity for redeployment in area where development is needed and resources for funding social sector programmes.

2. Increased Competition: All key developments in these PSUs will be closely scrutinized by the investor community and hence competitive spirits will increase in the operations of the PSUs.

3. Robust Economy: The funds help in reducing the current account deficit of the country and hence make Economy more robust and attractive for foreign investments, thereby opening doors for employment and socio-economic growth.

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3.1.4.3 Types of Disinvestments There are primarily three different approaches to disinvestments:

1. Minority Disinvestment - This ensures that the government retains a majority stake in the company, typically greater than 51%, thus ensuring management control.

2. Majority Disinvestment - The emphasis of this type of disinvestment is in favour of Strategic Sale viz. sale of a large block of shares along with transfer of management control to a Strategic Partner identified through a process of competitive bidding.

3. Complete Privatization - Complete privatization is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer.

3.1.5 Implied Potential The current value of market capitalization of CPSE’s of the country is Rs. 13,52,950.42 Crore. CPSEs constitute 13.34% and 13.68% of the total market capitalization of companies listed at BSE and NSE respectively (as on 30 June 2015). The CPSE with the highest market capitalization is Coal India Ltd. at Rs. 2,65,951 crore (BSE) and Rs. 2,66,077 crore (NSE) (as on 30 June 2015). In the current fiscal, The Finance Ministry has set a target of Rs 69,500 crore from PSU disinvestment. Of this, Rs 41,000 crore is to come from minority stake sale in PSUs and Rs 28,500 crore from strategic stake sale. 3.1.6 Historical data The Government of India has raised Rs 100,143.45 crore in the last five years through disinvestment. As on 31st March 2014, there were 290 Central Public Sector Enterprises wherein, 169 are Holding CPSEs and 121 are the Subsidiary. Out of this, 07 are ‘Maharatna’, 17 are Navaratnas and 54 mini-ratnas. ONGC Public Offer in 2003-04 has been the largest CPSE FPO, raising Rs. 10,542 crore. Coal India Public Offer in 2010-11 has been the largest CPSE IPO, raising Rs. 15,199 crore. The maximum number of applications received in a PSU IPO/FPO since 2003-04 was in CIL (15.96 lakhs). With four months of the ongoing financial year (2015-16) already over, the government has been able to raise just Rs 1610 crore through stake sale in Rural Electrification Corporation (REC) and there are apprehensions that it may miss the mammoth Rs 41,000 crore targets for the fiscal.

SUMMARY OF RECEIPTS FROM DISINVESTMENT: 1991-92 TO TILL DATE Year Total Receipts

(Rs. Crore) Transactions

1991-92 3,037.74 Minority shares sold in Dec, 1991 and Feb, 1992 by auction method 1992-93 1,912.51 Shares sold separately for each company by auction method. 1993-94 - Equity of 6 companies sold by auction method but proceeds received in 94-95. 1994-95 4,843.10 Shares sold by auction method.

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1995-96 168.48 Shares sold by auction method. 1996-97 379.67 GDR –VSNL 1997-98 910.00 GDR –MTNL 1998-99 5,371.11 GDR-VSNL; Domestic offerings of CONCOR and GAIL; Cross purchase by 3

Oil sector companies i.e. GAIL, ONGC and IOC. 1999-00 1,860.14 GDR-GAIL; Domestic offering of VSNL; capital reduction and dividend from

BALCO; Strategic sale of MFIL. 2000-01 1,871.26 Sale of KRL, CPCL and BRPL to CPSEs; Strategic sale of BALCO and LJMC. 2001-02 5,657.69 Strategic sale of CMC, HTL, VSNL, IBP, PPL, hotel properties of ITDC and

HCI, slump sale of Hotel Centaur Juhu Beach, Mumbai and leasing of Ashok Bangalore; Special dividend from VSNL, STC and MMTC; sale of shares to VSNL employees.

2002-03 3,347.98 Strategic sale of HZL, IPCL, hotel properties of ITDC, slump sale of Centaur Hotel Mumbai Airport, Mumbai; Premium for renunciation of rights issue in favour of SMC ; Put Option of MFIL; Sale of shares to employees of HZL and CMC.

2003-04 15,547.41 Strategic sale of JCL; Call Option of HZL; Offer for Sale of MUL, IBP, IPCL, CMC, DCI, GAIL and ONGC; Sale of shares of ICI Ltd.

2004-05 2,764.87 Offer for Sale of NTPC and spill over of ONGC; sale of shares to IPCL employees.

2005-06 1,569.68 Sale of MUL shares to Indian public sector financial institutions & banks and employees

2006-07 - 2007-08 4,181.39 Sale of MUL (Rs.2366.94 cr) shares to public sector financial institutions,

public sector banks and Indian mutual funds and sale of PGCIL (Rs.994.82 cr) and REC (Rs.819.63 cr) shares through Offer for Sale.

2008-09 - 2009-10 23,552.93 (Rs.2012.85 - NHPC, Rs.2247.05 - OIL and NTPC - 8480.098, REC Rs.882.52,

Rs.9330.42 NMDC, ) 2010-11 22,144.20 Rs.1062.74 SJVN, EIL 959.65, COAL INDIA 15199.44 CR; PGCIL 3721.17;

MOIL 618.75 #; SCI 582.45 2011-12 13,894.05 Rs.1144.55 PFC, Rs. 12749.5 ONGC 2012-13 23,956.81 Rs. 124.97 NBCC, Rs. 807.03 HCL, Rs. 5973.27 NMDC, Rs. 3141.51 OIL, Rs.

11457.54 NTPC, Rs.310.15 RCF, Rs.627.84 NALCO, Rs. 1514.50 SAIL 2013-14 15,819.46 Rs.571.71 MMTC, Rs.259.56 HCL, Rs.101.08 NFL, Rs.30.17 ITDC, Rs.4.54

STC, Rs.358.21 NLC, Rs.2131.28 NHPC, Rs. 1637.32 PGCIL, Rs.497.32 EIL, Rs. 1886.78 BHEL, Rs. 5341.49 IOCL, Rs. 3000 CPSE-ETF

2014-15 24,328.93 Rs.3.60 Employee OFS of NFL, Rs. 48.16 Employee OFS of NTPC, Rs.1719.54 SAIL, Rs.22557.63 COAL INDIA

2015-16 1610 Rs.1610.00 REC Total 1,78,729.42 3.1.7 Challenges and Reasons for delay 1. Bearish market - Volatile stock markets have forced the government to delay the proposed stake sales in PSUs.

2. Global economic cues - Global equity markets have been on a downslide on fears over the spiralling debt crisis in the euro zone, as well as credit crunch in the US.

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3. Soft budget constraint - Unlike private companies, many loss-making PSUs are kept afloat by either direct government subsidy or by directed bank credit from state-owned banks. In the past, even `sick' private companies have been taken over by the state, out of political considerations, creating a further drag on state finances.

4. Policy adopted by the Government - The Government does not have a well-defined disinvestment policy with a time bound programme. Lack of transparency in disinvestment process, co-operation and co-ordination between disinvestment ministry and other concerned ministries has greatly affected the disinvestment programme. Since the PSUs do not benefit monetarily from disinvestment, they have been reluctant to prepare and distribute prospectuses

5. Multiple control authorities - Unlike the private sector manager, the public sector manager is subject to control and scrutiny by different ministries, the Bureau of Public Enterprise, various parliamentary committees and investigating agencies. Result: Status quo is the safest option for the manager. No bold decision on modernisation, diversification or technological upgradation is taken.

6. Less no. of Bidders: - The number of bidders for equity has been small not only in the case of financially weak PSUs, but also in that of better performing PSUs. Besides, the government has often compelled financial institutions, UTI and other mutual funds to purchase the equity which was being unloaded through disinvestment. This leads to low valuation or underpricing of equity.

3.1.8 Effects of Disinvestments

Case Study: Bharat Aluminium Company Ltd. (BALCO) The Government of India had 100% stake in BALCO prior to disinvestment. In 1997, the Disinvestment Commission classified BALCO as non-core for the purpose of disinvestment and recommended immediate disinvestment of 40% of the Government stake to a strategic partner, and a further reduction of the Government stake to 26% within 2 years of the strategic sale through a domestic public offering. It further recommended disinvestment of the entire remaining stake at an appropriate time thereafter. Later, The Government there upon appointed M/s Jardine Fleming as advisor to assist in the sale of its 51% stake in BALCO to a strategic buyer. The strategic sale process for BALCO started in late 1997, after the first decision of the Government, and finally came to end on 2nd March 2001. The 51% stake was sold to Sterlite Industries, the highest bidder, and fetched the Government Rs. 551.50 crore. The price received was higher than the values indicated by the various methods of valuation used. The Government thus recovered Rs 827.50 crore from this privatisation against approximately Rs. 10 crore as dividend it used to get against the 51% shares during the peak Aluminium cycle. Post privatization status 1. The new management introduced VRS from 31st July 2001 to 16th August 2001. 981 applications (from 151 executives and 830 workers) were received. 694 old VRS applications were also pending. A total of 956 applications were accepted mostly where units were lying closed. 2. In spite of incurring losses to the tune of Rs. 200 crore due to the strike by the employees in 2001, an ex gratia payment of Rs. 5000 was made to all the employees. 3. Long-term wage agreement for a period of 5 years was entered on 7th October 2001 (wage revision was due since 1stApril 1999 and the earlier revision was for 10 years) as follows:

• Workmen get a guaranteed benefit at the rate of 20% of the basic pay • Increase in allowances: For ex, Night shift allowance: Rs.10 - Rs.20/shift, Canteen allowance: Rs. 400/month

(instead of subsidised canteen facilities), Education allowance: Rs. 50 - Rs. 75/month, Hostel allowance: Rs.150 - Rs.200 per month, Scholarship amount to meritorious children doubled.

4. New practices of job rotation and appraisal system were introduced. 5. The new management proposed an investment of Rs. 6,000 crore which would increase production 4 times.

3.1.9 Disinvestment: Pros and Cons Cons Pros

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Private sector cannot achieve equal distribution of resources for all classes. Private enterprises only focus on profit maximization. They won’t cater poor people. Therefore Government needs to control all or some industrial sectors.

Government controlled units cannot compete in free market economy due to political interference and price control mechanisms. Ultimately more public money is wasted in running these loss making entities.

Government’s dividend income will decline. (Because they’ll have fewer shares). Consequently, Fiscal deficit will increase.

Whatever “dividend” Government earned so far- compared to that, Government has spent far more crores rupees to revive these PSUs.

The funds received from disinvestment are used to finance fiscal deficit. This is an unhealthy practice.

Need amendments in FRBM act to ensure this doesn’t happen.

Employees of PSUs will be affected and may lose their jobs due to disinvestment

Overstaffing is one of the main reasons why PSUs don’t make optimum profit.

Disinvestment would lead to private monopolies Dragging the logic too far. Unlikely to happen in today’s world. CCI is always watching and punishing the firms that try to create monopoly or oligopoly.

To complete the disinvestment targets, Government asks one PSUs to buy shares of another PSU. In such cases, disinvestment doesn’t decrease Government control over those companies.

Need for a clear policy on disinvestment to stop this practice.

4.1 Subsidies 4.1.1 Removing price controls and subsidies Subsidies at best can be described as an instrument of fiscal policy through which government provides assistance that can be shared by the population at large, in present and in future. In India, subsidies have been dished out in many forms across various products and industries. According to a 2005 article by International Herald Tribune, subsidies in India amount to around 14% of total expenditure of central government. While loss-making state-owned enterprises have being assisted by the government, India spends relatively less on education, health, or infrastructure. Subsidies in areas such as education, health and environment have been justified on the grounds that their benefits are well spread beyond the immediate recipients. However, many subsidies shelter inefficiencies or doubtful distributional credentials.

Now the big question arises: why and how are subsidies so vital to economy that they become an indispensable part of structural reforms? The answer lies in the fact that subsidies affect decisions concerning production, consumption and allocation of resources. They account for a significant part of government's expenditures and cause a considerable draft on the already strained fiscal resources. Subsidies distinctly affect the supply or demand curves of a product by shifting one or the other to the right. The effect is to shift the supply curve to the right, leading to lower price and higher quantity demanded. In the context of their economic effects, subsidies have been subjected to an intense debate in India in recent years. Ineffective or distortionary subsidies need to be weaned out, for an undiscerning growth of subsidies can prove detrimental for a country's public finances. However, subsidy is one expenditure that the governments in India finds difficult to cut since, 33 percent of the world's poor live in India.

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Diagram of Subsidy 4.1.2 Subsidy scene in India at present: The key ingredients in India's subsidy are fuel, fertiliser, food and agriculture. While subsidy on fuel has already been reduced by government by freeing petrol and diesel prices, the other two continue to be heavily subsidised. Some economists are of the view that subsidies are a waste of taxpayer’s money since they never reach the targeted group due to leakages in the system. It is the rich who enjoy the benefits as lower priced food, fuel and fertiliser. That is the reason poverty is not getting eradicated though the subsidy spending is rising at a scorching pace. A look at the graphics below shows this contention might be true:

Over the last 10 years, subsidy pay out of the government has witnessed a steady increase from Rs 48,000 crore in FY06 to Rs 2.61 lakh crore (budget estimate) in 2014-15 - an annual increase of about 22 percent on an average. Subsidy as a percent of GDP also increased almost steadily from just 1.29 percent to 2 percent.

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Figures get much scarier when subsidies are compared against percentage of total expenditure. In FY06, subsidies accounted for approximately 9.4 percent of total government spending. This rose to a high of 18.2 percent in FY13. As per the revised estimates, this has declined to 16.09 percent in FY14. In FY15, it is likely to further fall to 14.54 percent of total expenditure, which is still uncomfortably high, 4.1.3 Types of Government Subsidies : A government can provide two basic types of subsidies to encourage the production or consumption of a certain product. For example, if the government pays car companies a certain amount of money for each environmentally conscious car produced, this is referred to as a supply-side subsidy. If, however, the government provides money or a refund to every consumer who buys an environmentally conscious car, it is called demand-side subsidy.

4.1.4 Salient Features(Subsidy 2015): • Rs 2.27 lakh crore ($37 billion) expected to be spent on major subsidies during the fiscal year starting 2015-

16. • Out of Rs 2.27 lakh crore, Rs 1.24 lakh crore ($20.11 billion) to be given in food subsidies.The subsidy bill

on food, petroleum and fertilizers is estimated at Rs 2,27,387.56 crore for 2015-16Of the total food subsidy, nearly Rs 65,000 crore is for implementation of National Food Security Act (NFSA).

• Fertilizer subsidy has been pegged at Rs 72,968.56 crore for the next fiscal, higher than Rs 70,967.31 crore estimated for this year.In fertilizer subsidy, the government has allocated Rs 38,200 crore for domestic urea and Rs 12,300 crore for imported urea. The remaining Rs 22,468.56 crore has been earmarked for sale of decontrolled P&K fertilizers.

• Petroleum subsidy has been halved to Rs 30,000 crore for 2015-16 from estimated Rs 60,270 crore in the current fiscal. Of Rs 30,000 crore for next fiscal, Rs 22,000 crore has been earmarked for LPG subsidy and the rest is for kerosene.

4.1.5 Why are subsidy reforms important?

There are several angles to subsidy reforms and its importance can be discussed from many perspectives: 1. Economic benefits of Subsidy reforms:

A. Effects on budgetary expenditure: Scrapping subsidies that are ineffective can reduce budgetary expenditures. Portfolio of government expenditure yields a higher average “Return on investment”. Eliminating incidental negative impacts from ill-conceived subsidies can achieve public benefits at cost savings.

B. Effects on sectoral efficiency and productivity: Removing a subsidy that is no longer giving the right returns as it was supposed to give when it was initially conceived, increases sectoral efficiency and

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productivity.

2. Social benefits of subsidy reforms: A. Effects on income distribution across producers and consumers: Subsidies that aim to redistribute income

expands the options of people at lower side of the income distribution. B. Effects on Social Capital: Social Capital is defined as the informal and unofficial set of connections

among members of a society. These interactions may nevertheless be supported by subsidies, for example to community centres, to amateur sports teams, to cultural exchanges, and so on. Most developed countries have a very large range of small subsidy programs devoted to such causes.

3. Environmental benefits of subsidy reforms: Very often it has been observed that the ill designed subsidies can harm the environment in indirect way. For example, subsidies given on fertilizers resulted in farmers buying and using more fertilizer on the same piece of land, which not only proved detrimental to the health of the people, but also rendered the land barren and unfit for future agriculture production.

Even though there economists having been crying loud about the much needed cuts in food and fertilizer subsidies, government favored deregulating urea prices in a phased manner .More than 20% of the cuts in budget for subsidies resulted from global oil prices rather than the much needed structural changes. Its about time that ineffective or distorted subsidies are done away with so that the goal of fiscal deficit of 3.6 percent could be realized soon. Discussion on structural reforms would be incomplete without the mention of FDI which is one of the key ingredients of structural reforms for India. 5.1 FDI:

5.1.1 Synopsis: FDI refers to capital inflows from abroad that invest in the production capacity of the economy and is usually preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology. As early as the introductory chapter of the Ministry of Finance Economic Survey for 1991, the conclusion is that “compared to domestic investment the contribution of foreign investment is bound to remain minor”, India has come of age and proved itself to be one of the sought after FDI destinations of the world. Moreover, slowly and steadily the envisioned role of FDI has evolved from that of a tool to solve the crisis under the license raj system to that of a modernizing force that has been given special agencies and extensive discourse. 5.1.2 India Today:

FDI fund inflows in last 10 years

While foreign portfolio investments to India are slowing, net foreign direct investment (FDI) inflows, which are far more stable, have touched a record high of $34.9 billion in 2014-15.In fact, net FDI inflows touched 1.7% of gross

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domestic product (GDP) in the just-ended fiscal year, up from 1.1% of GDP the previous year. Foreign investment inflows to India are predominantly to infrastructure, mainly telecom, oil and gas, mining sectors, as well as the services sector. In fact, FDI in manufacturing has remained lackluster, although there were some inflows into the auto sector. Higher FDI flows are good for India’s current account deficit and also help drive domestic investments. With the government opening up various sectors such as insurance and defence, these stable flows may continue this year as well. Inward FDI has led to the emergence of a number of industrial clusters in India, including those in the national capital region (Delhi-Gurgaon-Faridabad) in the north, Maharashtra state (Mumbai-Nasik-Aurangabad) in the west, and Tamil Nadu (Chennai-Hosur) in the south. Though considerable differences exist in the patterns of the formation of these clusters, FDI can play an important catalytic role as evident through the early entry of Suzuki (Japan) has contributed to the development of an industrial cluster in the NCR.” A sectoral analysis of FDI inflows suggests that, on average, between 2000 and 2012, more than 35% of FDI inflows have gone into services, telecom and construction sector, with pharmaceuticals, chemicals and computer sector each receiving about 5% of the country’s total FDI inflows over the corresponding period.

5.1.3 Merits and Demerits of FDI:

The benefits and shortcomings are elaborated to develop a holistic picture of FDI's contribution to the economy:

Merits : • Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and

services in India both in terms of import and export production. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country.

• Economic growth- This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country.

• Employment and skill levels- FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India.

• Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. It helps in developing the know-how process in India in terms of enhancing the technological advancement in India.

• Linkages and spill-overs to domestic firms- Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market.

Demerits: It is conspicuous that FDI can affect local communities, when larger projects come in. It also means subjecting domestic firms to foreign competition which can harm domestic firms, and this isn't necessarily due to incompetence

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of the domestic firm. Foreign firms may have technology that India has not acquired. On the other hand FDI brings those technologies to India much quicker. This might hurt the local entrepreneurial spirit and can be detrimental to the native industries.

5.1.4 Has India taken FDI seriously? There is no way we can realize the Modi government's dream of becoming an exporting nation overnight. 'Make in

India' is yet to catch the imagination of foreigners and when it indeed does, the lag between investments and exports would be at least a couple of years. Economists aver that the weakening of rupee to Rs 64 per US dollar cannot be blamed on FII withdrawals alone given the fact that the greenback is surging against almost every other currency on the back of emergence of green shoots of economic recovery in the USA and the reserve currency status of the US dollar. The only choice therefore before the Modi government is to pull all stops and welcome FDI. Though the receipts would be on capital account, one can take heart from the fact that they are not repayable unlike ECB. Modi got several IOUs from his visit to Japan, the USA, Canada and Germany. It is time for him to encash them substantially.

The government has hiked FDI limits in defence sector as well as insurance to 49 percent with the promise of further leeway for defence even upto 100 percent on case to case basis. Indeed indigenous defence production with the cutting edge technology of foreign companies can be the catalyst for growth besides bringing in the much needed foreign capital. Still there is a long way in front of India to fully extract the benefits of FDI and a lot needs to be done to exploit the benefits of FDI as a facilitator to India's behemoth economy.

6.1 Governance For decades, India had large government but less attention has been paid to quality of governance. With the advent of cutting edge technologies and for better growth prospects the Indian governments is working on improving governance to speed up development activities, curb corruption, improve quality of education, and increase efficiency of taxation system. Improving India’s growth rate and reducing unemployment requires deeper structural reforms in Governance, laws and policies in the following key areas.

• Tax Collection System. • Curb Corruption at all levels in the Government. • Acquiring land and obtaining Environmental clearances. • Transparency in the Government Functioning. • Improving Education system.

The Indian Government has enacted below key acts in last ten years to improve governance: 6.1.1 Tax Collection System Goods and Services Tax Bill The Goods and Service Tax Bill or GST Bill is Value added Tax (VAT) to be implemented in India, from April 2016. GST is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at the national level. It will replace all indirect taxes levied on goods and services by the Central and State governments. It is levied and collected on value addition at each stage of sale or purchase of goods or supply of services based on input tax credit method but without State boundaries. There is no distinction between taxable goods and taxable services and they are taxed at a single rate in a supply chain of goods and services till the goods / services reach the consumer. Exports will be zero-rated and imports will be levied the same taxes as domestic goods and services adhering to the destination principle. Thus, by amalgamating a large number of Central and State taxes into a single tax, it would mitigate cascading or double taxation in a major way and pave the way for a common national market. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%. According to a report by National Council of Applied Economic Research, GST is expected to increase economic growth by between 0.9% and 1.7%.

6.1.2 Acquiring land and obtaining Environmental clearances.

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6.1.2.1 Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (Land Acquisition Act, 2013): This act of Indian Parliament regulates land acquisition as a part of industrialization and lays down the procedure and rules for granting compensation, rehabilitation and resettlement to the affected persons in India. It has enabled private investors to acquire land easily to develop heavy industries and contribute to the development of country.

6.1.2.2 Environmental Impact assessment and granting Environmental clearance: The Indian Government has taken measures to reduce the total turnaround time to issue environmental clearance to companies. To speed up the process of Environmental Impact assessment, government bodies implement single window interaction and obtain relevant information from companies in one interaction. Also government is exempting infrastructure projects from environmental clearance.

6.1.3 Transparency in the Government Functioning Right to Information Act (RTI): The Right to Information (RTI) Act is an act to provide for setting out the practical regime of right to information for citizens to secure access to information under the control of public authorities. This act has promoted transparency and accountability in the working of every public authority, and has thus reduced red tapeism.RTI played a major role in exposing country's biggest 2G and CWG scam. Other noted scams exposed by RTI include Adarsh Scam. Appropriation of govt. and relief funds MGNREGA scam.

7.1 Conclusion & Recommendations

As we have seen through this study, India was brought on the global map of industrialization and commercial markets because of structural reforms in its economic outlook. By externally restructuring through reduced taxes, removal of tariffs, and internally restructuring by removal of subsidies and red tapism, Indian economy opened doors for international as well as private players and marshaled an era of economic development. But as Sociiete Generale rightly pointed out in one of its research note: “The economic reforms that were ushered in during 1991 have outlived their utility as catalysts for growth and the country now needs to embark on the next round of reform measures to remove the structural constraints that impact growth“, it has become imperative to reanalyze these insights in the context of further structural reforms.

If India is to get back on 8% plus growth rate track, then following recommendations can be considered:

(i) Major effort at raising the rate of domestic savings by reducing government dissaving at the central and state levels through cuts and refocusing of explicit and implicit subsidies, stricter control of non-developmental expenditure, improvement in the tax ratio through stronger tax enforcement, and strengthening incentives for savings.

(ii) Larger investment and better performance of infrastructural services, both in the public and private sector; (iii) A more vigorous pursuit of economic reforms at the center and in the states; in particular, reform of the

public sector enterprises which handle most of the country's infrastructural services and, more generally, of public administration deserves high priority.

(iv) Ending delays in environmental clearances, obtaining parliamentary approval of the complex land acquisition bill.

(v) Attract more foreign savings, especially foreign direct investment, and thus raise the investment rate.

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References: 1. http://timesofindia.indiatimes.com/budget-2015/union-budget-2015/Budget-2015-India-to-spend-2-27-lakh-crore-rupees-on-major-subsidies/articleshow/46411433.cms?

2. https://www.cbd.int/doc/case-studies/inc/cs-inc-oecd-SubsidyReform-PoliticalEconomy-en.pdf

3. IMF Report-2015

4. The Hindu Newspaper

5. The National Council of Applied Economic Research

6. www.rbi.org.in

7. Changing faces of India's International Trade before and after Liberalization period- Mr A Hari Kumar

8. http://www.firstpost.com/business/did-india-not-adhere-enough-importance-to-fdi-than-it-should-have-2235076.html

9. www.divest.nic.in

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