Gandhi tied Indian industry in chains. She imposed capacity constraints, price controls, foreign economy. Such measures stifled the Indian economy, created a black market and increased bureaucratic corruption. The Soviet-inspired Bureau of Industrial Costs and Prices remains infamous to this day.control and red tape. India’s colonial-era bureaucracy now ran the commanding heights of the
Expect an Uneven Rebound in MENA and Central Asia
also adopted the Soviet five-year plans. A centralized economy emerged with the state controlling the media and telecom, financial, infrastructure and energy sectors. Even in seemingly private sectors such as consumer and industrial, the state handled too many aspects of investment, production and resource allocation.
Opening Up the Economy
In the 1980s,took gentle strides toward a and opened many sectors to private competition. In 1991, the Gulf War led to a spike in oil prices, causing a balance-of-payments crisis. In response, rolled back the state and liberalized its economy. The collapse of the Soviet Union that year pushed toward a more market-oriented economy.
Over the years, state-run monopolies have been decimated by private companies in industries such as aviation and telecoms. However, financial services.still retains a strong legacy of socialism. The government remains a major participant in sectors such as energy and
After years of piecemeal reforms, the Indian government is again unleashing bolder measures. These involve the opening up of several state monopolies to private competition. They are diluting state ownership of public sector units. In some cases, they are selling these units to domestic or foreign buyers. In due course, professionals, not bureaucrats, will be running this sector.
The government’s bold move to privatization is because of two reasons. First, India’s public sector has proved notoriously inefficient and been a burden on the taxpayer. Second, the has made the economy shrink and caused a shortfall in tax revenue. is a way for the government to balance its books.
As Shwweta Punj, Anilesh S. Mahajan and M.G. Arun rightly point out inToday, the country “will have to rethink how it sells” its public sector units for privatization to be a success. India’s track record is poor. The banana peels of political opposition, bureaucratic incompetence and judicial proceedings lie in waiting.
Potential Benefits of Privatization
Yet privatization, if managed well, could lead to several benefits. It will lead to more efficiently managed businesses and a more vibrant economy. Once a state-controlled firm is privatized, it could either be turned around by its new owner or perish. In case the company fails, it would create space for better players. Importantly, privatization could strengthen the government’s fiscal position, giving it greater freedom to invest in sectors like health care and education where the Indian government has historically underinvested. Furthermore, privatization could increase investable opportunities in both public and private markets.
Given India’s fractious nature and labyrinthine institutions, privatization is likely to lead to mixed results and uneven progress. One thing is certain, though.is inevitable and cannot be rolled back. Sectors in which market forces reign supreme and shareholder interests are aligned are likely to do well. State-controlled companies that prioritize policy goals over shareholder value are unlikely to do so. Similarly, sectors that have experienced frequent policy changes are unlikely to thrive.
There is a reason why savvy investors are constructing portfolios weighted toward consumer and technology sectors. So far, companies in these sectors have operated largely free of state intervention. They have had the liberty to grow and function autonomously. Unsurprisingly, they have delivered good returns.
The state-dominatedsector also offers promise. Well-managed private companies have a long runway to speed up on. Among large economies, India’s sector offers unique promise. In the capitalist US, the state has limited presence and private players dominate. This mature market offers few prospects of high growth. In communist China, state-controlled firms dominate , leaving little space for the private sector. With the Indian government planning to reduce its stake in a state-controlled life insurance company, as well as sell two state-owned banks and one general insurance company, the sector arguably offers a uniquely important opportunity for investors.
Just asdid well after its 1991 balance-of-payments crisis, the country may bounce back after the . The taxpayer may no longer need to subsidize underperforming state-owned companies holding the country back. Instead, market competition may attract investment, create jobs and increase growth.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
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