When did the Indian railways nationalize




PARTIAL DOCUMENT:



The economic policy reforms since 1991



After independence in 1947, India initially pursued a liberal, flexible and pragmatic policy towards foreign investment. At the beginning of the 1950s, state-owned companies were given an increasingly greater role in the country's economic development. This was followed by closer cooperation with the former Soviet Union in the 1960s. An increasingly extensive licensing system, combined with investment and currency controls, had a prohibitive effect on the influx of foreign capital. With the stronger regulation and domestic orientation of the economy, a technological gap has emerged in Indian industry. In addition, due to high customs barriers, Indian companies became less and less competitive internationally and ended up operating at a loss nationally as well. Since the 1960s, Indian industrial policy has been largely shaped by the following principles:

  • The principle of the originating from the Indian independence movement Self-reliance, so the attempt to achieve a high degree of economic independence favored economically less and less justifiable decoupling and self-sufficiency efforts.
  • The Indian state set binding plan targets, which prevented a quick adjustment to changed macroeconomic framework conditions.
  • The public economic sector occupied a strong position. The state reserved all essential basic industries and service sectors.
  • Small businesses (Cottage and Village Industries) received massive state funding (including extensive subsidies). In some economic sectors, modern, large-scale industrial production was made unattractive at the same time.
  • The principle of regional equilibrium in industrial development often resulted in several inefficient units in different regions when implemented through capacity sharing.
  • The rigid Indian monopoly law prevented the formation of economically optimal company sizes in almost every industrial sector.

The entire industrial investment, from the founding of the company to the change of production or location, was controlled by the state through an extensive regulatory system. Administrative leeway for decision-making left enough room for uncertainties and, in particular, for corruption.

A liberalization movement initiating structural changes arose as early as the 1980s under Rajiv Gandhi. However, it only brought a slight improvement in the investment climate temporarily. As recently as the late 1980s, two thirds of the country's resources were being used for used to maintain and expand the public sector. Much of the domestic Saving has been diverted to the state sector through the nationalized financial sector. Through one of the the Indian government massively protected domestic industry from the highest external tariffs in the world international competition. The private sector functioned essentially as a subcontractor to the state Company or the state itself.

As a result of the effects of the second Gulf War, the costs of the military engagement in Sri Lanka and the consequences of the collapse of the Soviet Union as the most important trading partner, Indian foreign exchange reserves shrank in early 1991 to such an extent that they only covered an import requirement of about 2 weeks. External debt was nearly $ 70 billion, inflation soared, and budget and current account deficits skyrocketed. The resulting balance of payments crisis set in motion far-reaching structural reforms accompanied by the International Monetary Fund (IMF) at the beginning of the 1990s, the first successes of which can no longer be reversed and make India an internationally attractive trading and cooperation partner. Despite the unstable government, one can assume that the basic direction of the reforms and thus the integration of India into the world economy will find a large majority.

The Reforms focused on the following four interrelated areas:

Reorganization of the state budget, In particular, reducing the budget deficit: As part of a structural adjustment program largely prescribed by the IMF, subsidies and military spending were reduced, and taxes and duties were increased significantly on the income side in order to reduce the budget deficit from 7 percent in 1991 to 4.8 percent in 1993.

Liberalization of industrial policy: The heavily regulated, domestically oriented economic regime of India before the reforms began brought about a number of structural characteristics of industrial growth: Import-substituting economies are generally characterized by a relatively low degree of specialization. In India, this phenomenon was particularly evident at the level of the individual company, where the product range is generally relatively broad and production is often less than optimal. The protection against excessive competition in connection with the extensive licensing system then led to the fact that many companies had almost a monopoly position in their limited product areas. The insight into these connections led, among other things, to the relaxation of controls over large industrial companies in the 1980s. After the liberalization process began in the early 1990s, the lack of specialization became a critical problem for Indian industry. In companies with unfavorable cost structures, the increasing competition added financial difficulties.

The core of the reform package, which is particularly interesting for foreign investors, is the mit liberalization of the manufacturing industry linked to an opening up to foreign trade. The Measures lead to the abolition of the extensive state requirements and serve in essential to the privatization of the economy. The former licensing system was used for the most industrial sectors abolished. Areas with strategic or environmentally relevant issues (e.g. petroleum and distillation products, tobacco products and sugar) are also licensed. The government is working to further reduce the number of licensed industries. Since the mid-1950s, 17 industrial areas were reserved for the state; meanwhile they were reduced to less than half with a primarily security and strategic nature reduced (e.g. weapons, nuclear energy, coal, mineral oil, rail transport). Most Approval requirements for new investments and changes to the production programs were introduced canceled. The strict monopoly legislation was changed in such a way that it was only effective relates to monopoly, restrictive or unfair trading practices.

Foreign participation was previously limited to a maximum of 40 percent, but it is in many industrial sectors now a foreign capital majority without approval of up to 51 percent, sometimes even on request up to 100 percent possible. The procedure for the remaining foreign countries subject to authorization Direct investment was made through the establishment of the Foreign Investment Promotion Board and since recently one too Foreign Investment Promotion Councils simplified.

Numerous other reform measures have led to considerable investment relief: E.g. Direct investments are permitted even without an associated transfer of capital. Up to 24 Percent foreign capital can also invest in small and medium-sized enterprises. With new ones Investments and production processes are now foregone on what was previously the norm Local content-Clauses that have an increasingly higher domestic Production share stipulated binding. The transfer of profits was unbureaucratised and some relevant restrictions lifted. Admittedly apply to the employment of foreign skilled workers still some restrictions, but no longer requires approval. Foreign Institutional investors can purchase previously prohibited portfolio investments or sell shares in Indian companies. Also on the local market are now allowed foreign trademarks are used. With the exception of the 23 major cities with one With a population of over one million, permits were generally abolished.

The privatization or partial privatization of state-owned companies has not yet been satisfactorily resolved. The measures announced in 1991, such as the abandonment of privileges for public companies, e.g. via market entry barriers or competition restrictions, the restructuring of potentially profitable or the liquidation of ailing state-owned companies and the introduction of more autonomy and profit orientation, were apparently only half-heartedly decided and therefore not implemented satisfactorily. Large divestments, with the exception of relatively small blocks of shares sent to the general public and mutual funds to mobilize fiscal resources, have generally not been part of the strategy for reforming public companies.

Liberalization of trade and currency policy: Significant tariff reductions and the abolition of import licenses and export subsidies served for this purpose. Before the reform, the maximum tariff was 250 percent, afterwards it was only 80 percent. The peak tariff is now 40 percent, which is still higher than in other Asian countries. By the year 2000 the tariffs are to be adjusted to the usual level in the Asian region. These measures were aimed at limiting the current account deficit through export growth. The problem arises, however, that although the liberalization of foreign trade led to an increase in imports, export growth did not meet expectations.

There was also some relief in monetary policy. After a devaluation, initially the limited convertibility of the Indian rupee (Rs) was allowed, then with the entry into force of the 1993/94 budget. The aim is for completely free convertibility by the year 2000.

Restructuring the financial sector: The big banks were nationalized in 1969. The remaining smaller private banks shied away from growth for fear of the same fate. Insurance companies had been nationalized since the 1950s so that state financial intermediaries dominated the market for deposits, long-term debt, and stocks. The poor capital structure, i.e. a high ratio of debt to equity, made the industry sensitive to fluctuations in earnings. It was relatively easy for companies to get into liquidity crises and insolvency. Bankrupt state companies were helped with higher public loans. As a rule, bankrupt private companies were denied liquidation requiring approval, so that they remained in an interim state - neither liquidation nor continuation of business - in some cases for years.

With the nationalization of banks and insurance companies, salaries became state salaries Services adjusted. In particular, the salaries of executives were lowered, which paved the way for Corruption paved the way. In addition, the management level has now largely been occupied by politicians. At simultaneous overstaffing with often unqualified staff ("over-staffing") this led to an overall quite inefficient banking system, combined with a lack of commitment and the Part of integrity too. In addition, there were forced loans to politically supported groups (small businesses, farmers, craftsmen) and cross-subsidies for interest rates, which further reduced the financial intermediaries' low income. On this basis, aided by politically motivated, broad-based debt relief among particularly promoted borrowers, the debtor's payment behavior fell rapidly and contributed to a significant amount of bad loans. This went hand in hand with ever tighter regulation of the banks. At the beginning of the 90s it was the banking system is highly centralized and by incompetent, systemically inefficient management marked. With the reforms, the Indian government wanted to make the banking system viable again. The liquidation of ailing companies was pushed ahead, further lending to bankrupt companies was stopped. State banks received additional capital and liquidity reserve requirements were reduced. In addition, government grants, capital increases and the establishment of special courts sought to facilitate the payment of non-performing loans amounting to approximately US $ 5.3 billion.

Further measures were the increase of a discount rate that had previously been fixed for a long time, which led to an increase in the general level of interest rates. In 1990 the interest rate structure still had over 20 different, state-prescribed rates. In the meantime, interest rate restrictions have largely been lifted and the interest system simplified: There are maximum limits for savings deposits and subsidized rates for small and export credits. All other sentences are no longer checked. Access to the capital market has been released. To intensify the competition, new banks were created approved and facilitated the market entry and expansion of foreign banks. The Baseler Capital adequacy standards should be implemented by the end of 1996, which is about two-thirds of the time state banks succeeded.

In 1992 the government lifted price controls that it had in the past on Indian equity issues regularly to Underpricing introduced and introduced stock exchange regulation. D.he stock exchange supervision is incumbent on Security and Exchange Board of India (SEBI). This made issues more attractive for Indian companies. In the two years that followed, the number of issues doubled and the capital raised quadrupled. In the period after 1991, companies then increasingly raised equity instead of (state) debt. In 1992 Indian was allowed Companies, foreign portfolio investments as well as security issues in Luxembourg Market. Renowned foreign financial institutions were registered with the SEBIadmitted to the Indian capital market. These openings led to an increase in share prices and did that in particular Bombay Stock Exchange (BSE) at an attractive one Emerging market.

The successes to date have led to a broad consensus to maintain the reform course - despite the continued weak government - and to tackle new areas, albeit at a slower pace. After this process almost came to a standstill in 1995 and 1996 The 1997/98 budget, which has been praised for its growth and reform orientation, has come new accents: The reduction of income taxation as well as the lowering of the Corporate taxation, the dismantling and simplification of procedures for import duties and Excise taxes, an increase in funds for infrastructure projects and an accompanying one economic policy package of measures to stimulate and stimulate the money market private investments in infrastructure projects represent a step in the right direction. The numerous, precisely specified reform goals also send a strong signal, including, for example, targeted economic growth of over 7 percent pa, the limitation of the budget deficit to a maximum of 4 percent of gross domestic product (GDP), high government investments in infrastructure (up to 6 percent of GDP) and a general opening of the insurance market.

The mood in the Indian economy was rather bad at the beginning of 1997, which was reflected in the essential to the still unstable political situation, to the slowed down reform process, the subdued growth in lending, the inadequate state of infrastructure, the low demand and the associated poor industrial production figures.


© Friedrich Ebert Foundation | technical support | net edition fes-library | May 1999