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Privatization in India: The Imperatives and Consequences of Gradualism

work, Entrepreneurship, and finance

For nearly a decade since the onset of economic liberalization in India, a key component—privatization—remained dormant. The usual explanation has been that weak governments could not overcome the many vested interests, from rent seeking bureaucrats and ministers to public sector trade unions. In addition, ideational resistance in India's elites has also been attributed to the virtual absence of privatization in India's economic reforms. How then does one explain the recent acceleration of privatization in India and what does it reveal both about state capabilities and the strength of societal actors? This paper argues that it was not just "vested interests" alone, but institutional structures, in particular those embedded in the judiciary, parliament and India's financial institutions, that played an important role in the long lag between the onset of economic liberalization and privatization. The time variable however, has been important in two additional ways. For one, just as the external debt crisis forced the initial round of economic reforms, the growing internal debt problem and the fiscal crisis of the Indian state has increased the opportunity cost of state owned enterprises. Second, the passage of time has also resulted in significant ideational changes in India, both with regard to the relative effectiveness of the state and markets in commercial activities, as well as assumptions of the Indian state being a "guardian of the public interest". The privatization of state owned enterprises severely underestimates the degree to which privatization ­ de jure and especially de facto—has been occurring in India, ranging from the privatization of public space to education, to privatization-like processes in the bureaucracy itself. We examine this issue briefly and some of its implications then offer some thoughts on the road ahead.

142wp.pdf (282.68 KB)
Devesh Kapur
Ravi Ramamutri
Publication Date
June, 2002