Privatisation In Indian Essay


The gigantic economic growth of India over the last two decades has been much talked about and analysed. It has been surprising for many because its image reflecting orientalism, orthodoxy and thus, resistant to any kind of change. Much has been written about the dynamics of this rise of India and its placement and recognition on the world map. After the advent of the New Economic Policy (1991), the overall “rate of economic ‘growth’ (of the Gross Domestic Product) of the country as a whole has somewhat speeded up in the 1990s in comparison with the 1980s” (Dreze & Sen, 2002, p. 317). The GDP growth rate of India rose from 3.7% (1950-60) to 6.0% (1990-2000) to 8.2% (2011-12), which is substantially high (source: government of India’s Economic Outlook report, p.20). The economic policy of liberalisation, privatisation and globalisation has altered the Indian economic and social landscape.
“Privatization of public enterprises has generated much debate; developing economies, which had previously opted for planning as a strategy and system for national socio-economic development. Under the Five Year Plans, the Indian state took upon herself the responsibility to undertake investments in basic and strategic economic activities and to control and direct private sector through a network of regulatory institutions. After pursuance of planned development for nearly half a century, a stage was reached when questions were raised about the relevance and the need to continue the planned development strategy. There is an ideological position that asserts to ‘end all direct and indirect state interventions in the economy’. The state should, according to this viewpoint, roll back and occupy the minimum possible space. The market forces instead of the arbitrary decisions undertaken by bureaucrats and politicians should decide all economic decisions. The contrary viewpoint is that since the Indian economy is ridden with extreme disparities in incomes, wealth and consumption, macroeconomic decisions cannot be left to the operation of the free market system. Third World economies suffer from so many socio-economic limitations that it is obligatory on part of the state to operate from the ‘commanding heights’ and aim at the highest level of socio-economic good for the largest numbers.”
(Goyal, 2009, p. 1)
In this essay, India would be considered as a case of developing country, given its categorisation as a country with medium level of human development and its HDI ranking as 134 out of 193 countries. The HDI is computed to be 0.547

[source 1="(United" 2="Nations" 3="Development" 4="Programme," 5="2011)" language="website:"][/source]

. The discussion would be introduced with India as a developing country followed by an explanation of the concept and context of ‘development’ in this essay. Keeping this background in mind, we shall move to the new economic policy of India and its features, narrowing it down to privatisation. After looking at the advent and spread of privatisation in India, there will be a critical analysis of its effect on development, followed by a conclusion and future prospects of privatisation as a probable causal factor of development in India.


India was traditionally an agrarian economy with agricultural sector being the prime employer too. during the British Raj (British-rule) from 1858 to1947, it started developing a few industries of prime importance such as iron and steel industry, railways, postal services and a few manufacturing units. This epoch marked the beginning of industrialisation in India. Owing to colonial restrictions, none of the sectors of the economy could optimally grow, until 1991. Despite all the glossy representations of India’s economic prosperity, social progress leaves much to be desired. The ‘development’ levels according to any of the development indices (accepted internationally) are abysmally low in the country.
“Despite a booming economy and a $9 Billion jobs programme, India ranks poorly on the poverty indicators- 41.6% of the country’s population lives below US $1.25 per day.” (Report, 2005, p. 28). It ranks 45th on the Global Hunger Index among 29 leading countries with hunger crisis and the country has one third of the world’s poor. It lags behind China, Pakistan and Sri Lanka, its neighbours. (international food policy research institute, 2011)
So, in this regard, evidently India can be classified as a developing country as opposed to a developed one.
Development is defined by Mahbub ul Haq (1934-1998), the father of Human Development Report of the United Nations, as follows:
"The basic purpose of development is to enlarge people's choices. In principle, these choices can be infinite and can change over time. People often value achievements that do not show up at all, or not immediately, in income or growth figures: greater access to knowledge, better nutrition and health services, more secure livelihoods, security against crime and physical violence, satisfying leisure hours, political and cultural freedoms and sense of participation in community activities. The objective of development is to create an enabling environment for people to enjoy long, healthy and creative lives."
This definition is not ultimate and the idea of development in itself is highly contested because of its nature. It is a term which encompasses almost all aspects of life and is the overlapping concern of every field of study. Similar approach is given by Amartya Sen for understanding development (Dreze & Sen, 2002). It should be understood that there is a distinction between ‘growth’ and ‘development’. It would be misleading and dangerous to equate the two concepts. A country which is economically prosperous “may fare poorly on some of the commonsense indicators of development, such as literacy, access to drinking water, low rates of infant mortality, life expectancy” (Ray, 1998, p. 25), poverty, employment, inequality and so on. So, contrary to the ‘GDP as a measuring rod’ (Dasgupta, 2007, p. 30) for development, a more holistic view of the concept must be understood.
Since it is beyond the scope of this essay to consider the impact of privatisation on the development as a whole, I am considering the main development indicator to be HDI (Human Development Index), which is the universally accepted measure of Human Development. There are of course other measures like the Inequality index, Happy Planet index, Gender inequality index, Global Hunger Index and so on but they all cover specific parts and not a totalistic view. Human Development Index was devised by Mahbub ul Haq in 1990. The UNDP adopted this measure to measure development levels across nations. It is a mathematical value and the organisation defines it as follows:
“The education component of the HDI is measured by gross enrolment ratio and expected years of schooling. The life expectancy at birth is the second component of the HDI. For the wealth component, GDP per capita is considered. The scores for the three HDI dimension indices are then aggregated into a composite index using geometric mean.”
Source website: (United Nations Development Programme, 2011)
The value of HDI for any country lies between the value of 0 and 1. For India, the value is 0.547 and its rank is 134 according to the latest Human Development Report. On a careful absolute and comparative analysis, it has not changed much since last two decades.
So, in the essay, although HDI would be an indication of the level of development in India, we would also be looking at development in general- instances of poverty and underdevelopment.

India was traditional an agrarian economy i.e. - based on agriculture. During the British Raj (colony rule), there was a shift towards industrialisation, at least in the basic heavy industries like iron & steel industry, textiles industry, railways and so on. According to Leon Trotsky’s “law of uneven development, the wealth and power of the great powers is maintained only by the exploitation and impoverishment of the colonies. In their search for sources of cheap labour and raw materials, the imperialist powers distort and stunt the development of culture in the colonies. These colonies do not simply “lag behind”, but rather their development is the “other side of the coin” of the advanced conditions enjoyed in the great powers. The law of combined development flows directly from that of uneven development: while blocking their normal development, the imperialist powers introduce into the dominated countries the most advanced techniques and relations of production, side by side with the most primitive” (Hymer, 1972, p. 38). This was exactly what happened in the Indian context. But even after independence, entrepreneurship in India was a challenging task as the licensing was in the government and it was extremely difficult to accumulate capital and other resources (which again was government owned), which was needed to enter into the market as a manufacturer. The services sector was not as what it is today. The IT sector only boomed in the 1990s, after coming of the New Economic Policy in India (1991) consisting of major neo-liberal reforms.
A senior research analyst at the Institute of International Trade, India summarized the reforms- ‘The 1991 Balance of Payment (BOP) crisis was the “tipping point” in India’s economic history. India was forced to procure $1.8 billion loan from the International Monetary Fund (IMF). The bailout wounded India’s pride and thwarted the country’s policies of “self-sufficiency”. India’s policy failures were now glaring across the Indian policymakers and the world. In response to the crisis, the government immediately introduced stabilization measures to reduce the fiscal deficit. Fiscal tightening and devaluation of the rupee by 25% adequately reduced the current account deficit. Though the foreign exchange reserve recovered quickly and ended effectively the temporary clout of the IMF and the World Bank, reforms continued in a stop-go fashion. The government has since initiated a reversal of the historic policies of regulation and government intervention. The economic liberation reform, initiated by Dr. Manmohan Singh in 1991, is considered to be one of the milestones of Indian economic reform as it changed the market and financial scenario of the country. Foreign Direct Investment was encouraged, public monopolies were stopped, and service and tertiary sectors were developed. It was not until 1991 that the government signaled a systematic shift to a more open economy with greater reliance upon market forces, a larger role for the private sector including foreign investment, and a restructuring of the role of the government. In the 10 year period from 1992-93to 2001-02, the average growth rate of the country was around 6%, which puts India amongst the fastest growing developing economies of the 1990’.
Source: (Diwan, 2011, p. 5)
Broadly the new reforms consisted of the LPG policy- Liberalisation, Privatisation and Globalisation.
Dr. Ajay Verma provides a rationale for privatisation in India:
“One basic rationale for privatisation in the concept that private ownership leads to better use of resources and their more efficient allocation. Throughout the world, the preference for market economy received a boost after it was realized that the State could no longer meet the growing demands of the economy and the State share holding inevitably had to come down. The ‘State in business’ argument thus lost out and so did the presumption that direct and comprehensive control over the economic life of citizen from the Central government can deliver results better than those of a more liberal system that directly responds according to the market driven forces. Another reason for adoption for privatization policy around the globe gas been the inability of the Governments to raise high taxes, pursue deficit / inflationary financing and the development of money markets and private entrepreneurship. Further, technology and W.T.O. commitments have made the world a global village and unless industries, including PSEs do not quickly restructure, they would not be able to survive. Public enterprises, because of the nature of their ownership, can restructure slowly and hence the logic of privatisation gets stronger. Besides, techniques are now available to control public monopolies by regulation/competition and investment of public money to ensure protection of consumer interests is no longer a convincing argument”
(Verma, 2009, p. 2)
Professor S.K. Goyal, (Institute for Studies in Industrial Development, New Delhi) explains privatisation: “Privatization, in its broader sense, stands for policies to reduce the role of the state, assign larger role for the private sector pursuing the logic of the market in all economic decisions. Viewed in this perspective departure from the policy of reservations of certain economic activities for exclusive development by the public sector (de-reservation) implies a reduction in the relative position of the state sector and larger role for the private sector. The entry of new private sector enterprises could introduce competition where public sector enjoyed monopoly. The existing public enterprises (PSEs) would be forced to go commercial and respond to the market discipline. The de-reservation process has sometimes been described as ‘Parallelization’ in the privatization framework. Privatization is also witnessed when governments take a decision to reduce their obligations to regulate and direct the behaviour of private actors in the economy. Pursuance of deregulation policies is aimed to make the restrictive regulatory system less important. In India, deregulation would imply loosening such statutes like the Industries (Development & Regulation) Act, 1951 (IDRA), Monopolies & Restrictive Trade Practices Act, 1969, (MRTPA), Foreign Exchange regulation Act, 1973 (FERA), Capital Issues Control and technical scrutiny by the Directorate General of Technical Development (DGTD)”.
Privatisation, however, is most often associated with transfer of public sector enterprises and services to private ownership, management and control. The privatization process for public enterprises can involve steps ranging from dilution of state-held equity, to adoption of practices like franchising, award of lease and management contracts, sub-contracting of select activities and tasks, down-sizing of workforce, and changes in the process of decision-making even without change in ownership, so that business decisions are guided by market and commercial principles of profit maximisation than vague societal concerns.”
Privatization in India has been carried out in several stages; such as, deregulation, de-reservation, privatisation and disinvestment.
Privatisation in simple terms means- to partially or wholly sell government equity to a private party. There are broader theories on privatisation and one of them is as follows:
“By privatisation we mean a combination of two changes undertaken by a reformer. The first is turnover of control from spending politicians to managers, often referred to as corporatisation. The second change that is usually part of most privatisations is the reduction of the cash flow ownership by the Treasury and the increase of cash flow ownership of managers and outside shareholders. The Treasury can sell its shares for cash, or it can give them away through vouchers or some other allocation scheme” (Boycko, Shleifer, & Vishny, 1996, p. 21). It is very evident that privatisation is a hard-core neo-liberal policy of capitalism. Philosophers like Heilbroner have looked at capitalism as a regime, as a “social order whose organising principle is the ceaseless accumulation of capital cannot be understood without some appreciation of the historic changes that bring about its appearance” (Heilbroner, 1987). He further explains the expansion of capitalistic regime- “….transfer or the organisation and control of production from the imperial and aristocratic strata of pre-capitalist states into the hands of mercantile elements” and goes on to illustrate how the neo-liberal policies are becoming threatening for the position of state ‘under the garb of free market economics’ (Heilbroner, 1987, p. 41).
Neo-liberal policies are often accused of diminishing the self-sufficiency of a country, especially in relevance to developing countries. As Vakulabharanam (2009) noted that “the neo-liberal regime ensured that the supported non-capitalist institutions such as families, state, and community structures in otherwise largely capitalist social formations were all wrenched open and destroyed….any stable phase of capitalist accumulation witnesses a stable but unequal relationship between the capitalist and non-capitalist institutions in a social formation”.

Before the LPG reforms, there were 17 major industries which did not allow for the private players to enter including- Arms and ammunition and allied items of defence equipments, defence aircraft and warships, Atomic energy, Iron and steel, Heavy castings and forgings of iron and Steel, Heavy plant and machinery required for iron and steel production, for mining, for machine tool manufacture, Heavy electrical plant including large hydraulic and steam turbines, Coal and lignite and others. After the reforms, only 8 could make it to the same list. All the sectors which were privatised are doing extremely well, especially the telecom sector which now ranks 3rd in the world in terms of network size.
The government website of the telecom sector reflects on its growth and developmental achievements:
“Efforts are being continuously made to develop affordable technology for masses. Emphasis is being given to technologies having potential to improve rural connectivity. Also to beef up R&D infrastructure in the telecom sector and bridge the digital divide, cellular operators, top academic institutes and the Government of India together set up the Telecom Centres of Excellence (COEs). Their development measures are as follows-
Secure Information Infrastructure that is vital for country’s security, Capacity Building through Knowledge for a sustained ‘growth’, Support Planned Predictive Growth for stability, Reduce Rural Urban Digital Divide to reach out to masses, Utilize available talent pool and create environment for innovation and Management of National Information Infrastructure (NII) during Disaster, An expanding Indian economy with increased focus on the services sector, Population mix moving favorably towards a younger age profile, Urbanization with increasing incomes..”
(indian telecom sector)
Now, if we consider the components of HDI and transpose the effect of privatisation on it, we see that in the terms of education and health, privatisation has pushed its way through and a unforeseen surge of private health and educational institutions has emerged.
There have been higher education colleges in huge numbers which have provided the people with skilled knowledge and have prepared them for industries. But the statistics show that rural to urban privatised schools “ratio is 2/25 i.e., for every 2 private educational institutions in villages, there are 25 urban ones”

[source 1="Sixth" 2="All" 3="India" 4="Education" 5="Surveys" 6="(NCERT," 7="1998)" language=":"][/source]

. Thus, the privatisation in this sector is still nascent and has penetrated only higher education sector as the profit-making can occur only in the case of technical colleges. They did not venture much into primary education which is left for the government to look after and even in the cases where private schools do exist, they are mostly backed by the government

[source 1="(Govt" 2="backs" 3="private" 4="schools," 5="2007)" language=":"][/source]

There is a similar case in the health sector.
“The private health sector in India is the most dominant sector in terms of financing and utilization of health services. There has been a tremendous amount of growth in physical size, investments, expenditures and utilization. The share of the private health sector is around 4 % of the Gross Domestic Product as compared to the government spending which is around 1 %. The share of the private health sector at today's prices works out to between $ 4,571 million and $ 5,714 million per year”
(Nandraj, 1997, p. 2)
But even today, before the privatisation of insurance sector, hospitals were a far reach for the masses in India. Privatisation of Insurance sector has raised the standard of living of people by providing them with security and stability and it has done very well.
There are numerous other examples of privatisation leading to economic growth and growth trickling down to the citizens but as I had discussed in the essay before- growth does not always lead to development. As I had mentioned before, there has been no recognizable change in the HDI values of India since these neo-liberal reforms. It appears as a heavily polished and manicured concept which brings about growth, evidently, but does not transform it into development.
Privatisation has reduced social security which came about with Public Sector Units. The nine major PSUs, called the navratnas, are doing better than their private counterparts. One should not forget that the ultimate aim of capitalist private units is to maximize profit. Their aim is not to bring about development by providing employment and reducing poverty. Whatever development has taken place because of these reforms has been short-lived and a need for state intervention is being felt again. Is private and corporate the main sector for development as many lobbyists of neo-liberalism have pointed out? R. Nagaraj analyses the much hyped services sector growth of the 1990s and his research led to “skepticism which somehow muddies the picture of the recent growth significantly enough to cast doubt on the optimistic scenarios portrayed” (Nagaraj, FDI in India in the 1990s, p. 61).

There have been more severe criticisms against Public Sector Units of lacking market discipline, lack of competitive production, corruption and many more. Privatisation has changed the economy for good, which is easy to establish if see the India now and compare it with previous decades. But this growth should not be expected to trickle down to the poor, more than 41% of the Indian population. Paul A. Baran, a Marxist, stresses on the fact that “..only a large-scale enterprise would be in a position to finance the outlays called for by modern technology…only big business could afford to maintain the research facilities that are indispensable for the advance of technology” and although this growth of large private firms, of monopoly and in some cases, oligopoly, owing to neo-liberal reforms was “a progressive phenomenon furthering the advance of productivity and science, the very same phenomenon tends to turn economically, socially, culturally, and politically into a retrograde force hindering and perverting further development” (Baran, 1957, p. 95). I conclude by saying that privatisation should not be reversed because it has boosted the economy and brought about changes which have provided the PSUs with an example of professionalism and competitiveness but it should not be expected to play the role of mediator-for-welfare. That would against the principles of its neo-liberal foundations.

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