CIAO DATE: 12/02

Privatization: From Policy Formulation to Implementation: The View from the Inside

Montek Singh Ahluwalia

CASI Working Paper
April 2002

Center for the Advanced Study of India

 

Abstract

It is both a privilege and a pleasure for me to deliver this year's Annual Fellows Lecture at the Center for Advanced Study of India. For many years in India, I used to receive an annual update on the activities of the Center when Dr. Francine Frankel visited Delhi and it is therefore particularly pleasant to visit the Center in person.

Since much of the work of the Center is inter-disciplinary, I thought it would be appropriate to speak on privatization in India, a subject which should be of interest not only to economists, but also to political scientists and more generally to anyone interested in the way policy is made in India. As an economist, I am naturally inclined to respect the laws of comparative advantage, so I will stick to economics as much as possible. However, I will point occasionally to issues that lie in the field of expertise of the non-economists, more in the hope of stimulating others to think more deeply on them than pronouncing definitively myself.

India's policy towards privatization reflects some features that have characterized many of India's reforms. India was a late convert to economic reforms in general and this is true for privatization. The evolution of policy in this area also reflects the very special type of gradualism that has characterized many other reforms in India. I describe it as a "special type of gradualism" to distinguish it from the more conventional definition of gradualism which would imply that the goal is clearly defined, but a deliberate choice is made to approach it over an extended time period to ease the transition. There are examples of this conventional type of gradualism in some of India's reforms, e.g. in trade policy or price decontrol. However, there was also a different kind of gradualism in policy evolved in a "one step at a time process" in which the full extent of change envisaged was not clearly spelt out initially. Indeed even the intention to take further steps was at times denied. At times, it was also a reflection of political expediency, i.e. policy makers may have intended to go further in due course, but it was felt politically inconvenient to spell out all the stages at the beginning. At times, this reflected genuine uncertainty about the extent of change envisaged. Indian leaders have often talked of the "middle path" implying a willingness to go thus far and no further.

This type of gradualism has some special disadvantages in addition to those associated with conventional gradualism that is that the change takes place over a long period of time, which dilutes the flow of benefits and also gives time for opposition to harden. One-step at a time gradualism also creates confusion about the ultimate intent of policy, which can lead to sub-optimal outcomes because the consensus built at each stage is based on an assumption that the change contemplated is limited. This encourages some participants to take decisions based on this assumption, which may not be optimal if further changes are intended, and which can become an obstacle to making further changes. Some of these problems are evident in the case of privatization and I will draw attention to these features. The advantage of this approach is that it makes it easier to develop a gradually moving political consensus in what is otherwise a highly pluralist and noisy democracy. This has certainly happened with privatization. Successive governments, representing different ends of the political spectrum, having opposed privatization when in opposition nevertheless ended up pushing the policy forward step by step. As we shall see, a process which began in 1991 with limited dilution of government equity combined with firm declarations denying any intention to weaken government control evolved ten years later into the adoption of full fledged privatization, involving transfer of management to new private sector partners: no small achievement in retrospect.

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