Page 73 - DMGT401Business Environment

Business Environment

Notes Co-operation and Development (OECD) report states that the average growth rate 7.5% will
double the average income in a decade, and more reforms would speed up the pace.
Indian government coalitions have been advised to continue liberalization. India grows at
slower pace than China. McKinsey states that removing main obstacles "would free India's
economy to grow as fast as China's, at 10 percent a year".
Indian economic policy after independence was influenced by the colonial experience (which
was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian
socialism. Policy tended towards protectionism, with a strong emphasis on import substitution,
industrialization, state intervention in labor and financial markets, a large public sector, business
regulation, and central planning. Five-Year Plans of India resembled central planning in the
Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical
plants, among other industries, were effectively nationalized in the mid-1950s. Elaborate licenses,
regulations and the accompanying red tape, commonly referred to as Licence Raj, were required
to set up business in India between 1947 and 1990.

Notes The impact of these the economic reforms may be gauged from the fact that total
foreign investment (including foreign direct investment, portfolio investment, and
investment raised on international capital markets) in India grew from a minuscule US
$132 million in 1991-92 to $5.3 billion in 1995-96.

Cities like Bangalore, Hyderabad, Pune and Ahmedabad have risen in prominence and
economic importance and have become centres of rising industries and destination for
foreign investment and firms.

2.5.2 Privatisation

Privatisation is the process of involving the private sector in the ownership or operation of a
state-owned or public sector undertaking. In a broader sense, it connotes private ownership (or
even without change of ownership) the induction of private control and management in the
PSUs. Barbara Lee and John Nellis (1990) describe it thus: "Privatisation is the process of involving
the private sector in the ownership of operation of a state-owned enterprise. Thus the term
refers to private purchase of all or part of a company. It covers the contracting out and
privatisation of management – through management contract, leases or franchise arrangement."

Privatisation can take these following forms:
1. Ownership Measures: The degree of privatisation is judged by the extent of ownership
transferred from the public enterprise to the private sector. It can take the following
forms:
(a) Total Denationalisation: It is a complete transfer of a public enterprise to the private
sector.

Example: As done in BALCO, which was acquired by Sterlite industries. Modern Foods
was acquired by Hindustan Lever.
(b) Joint Venture: This implies partial introduction of private ownership. The range of
private ownership can vary; it can be as low as 25% and even as high as 75% or more.
As in the case of Maruti Suzuki where earlier the majority share were with Maruti
but after liberalisation, Suzuki increased its stake and became the majority stake
holder.

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