Academic journal article Journal of International Affairs

Retreating from the Commanding Heights: Privatization in an Indian Context

Academic journal article Journal of International Affairs

Retreating from the Commanding Heights: Privatization in an Indian Context

Article excerpt

The question today being asked [regarding the

public sector] is commanding heights of what?

Red-tapism. Inefficiency. Absurdity.

Antiquity....There is no alternative to a

thorough-going privatization.

--S. Pandey (italics original)

The idea of transferring the ownership from

public sector to private sector for India is too

immature, rather wrong...the state is more

knowledgeable and objective and the market is

imperfect and short-sighted.(1)

--K. Das


In the period between 1988 and 1993, about 2,700 state-owned enterprises (SOEs) were privatized in 95 countries, excluding large-scale voucher privatizations.(2) By 1995, the total value of privatization deals exceeded $300 billion. None of these major deals have been in India. There are two main reasons for this. First, in contrast to former communist countries, the government controlled less of the economy, meaning there was simply less to sell. Second, India's open political system has meant that the strong sentiments aroused by the issue of privatization--exemplified by the quotes above--have tended to cancel each other out, reducing the incentive for elected officials to act.

Up until now, India has pursued a unique approach that I call "parallelization." This includes encouraging the development of private sector competition for state-owned firms--known as Public Sector Undertakings (PSUs) in Indian parlance--while at the same time slowly establishing independent regulatory agencies to oversee the newly established players. However, a realignment may be taking place. The once dominant Congress Party, after a strong challenge by the Bharatiya Janata Party (BJP), has been replaced in government by the United Front, made up of regional and left-of-center parties that exclude both the BJP and the Congress.(3) This may allow for further evolution of privatization policies.

Parallelization is not the result of a premeditated, publicly articulated strategy. Instead, the term describes a bureaucratic response to multiple and contradictory pressures: low returns from SOEs, lack of funds for modernization, inability to fire workers, and demands from consumers to improve service. Nonetheless, it has helped India avoid the pitfalls faced by privatization programs in other emerging economies. Creation of private-sector employment alternatives allows for the gradual absorption of workers from overstaffed SOEs and lays a foundation for future sell-offs. Rapid growth in sectors formerly monopolized by the government means that labor, a potent opponent of privatization efforts worldwide, may eventually be co-opted by the availability of higher-paying opportunities in the private sector. Controlling the pace of private-sector involvement allows time for regulatory institutions to mature. These developments will in time emphasize the superfluity of SOEs to the Indian economy. This in turn will make it more politically acceptable to use proceeds from full denationalization to contribute to eliminating the fiscal deficit (at least in the short term) without making drastic cuts in social services.

Denationalization vs. Parallelization

It is important to define what is meant by the term "privatization. The International Finance Corporation (IFC) notes that,

...a generous stance would admit any transfer of

ownership or control from public to private sector. A

more exacting definition would require that the transfer

be enough to give the private operators or owners

substantive independent power. This will often though

not always imply majority ownership. Transfer

techniques can include trade sales to a strategic

investor, public offer, closed subscription, joint venture,

liquidation, concessions, auctions, voucher or certificate

based transfers, employee or management buyouts, or

most combinations of all of these. …

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