Economic Environment And Policy

- Assignment - MBA Sem 2

Question : Define Nation Income. Explain it's
components and estimation methods.
Answer :

National Income refers to the total value of all goods and services produced by a country
over a specific period, typically one year. It reflects the overall economic performance of a
nation and serves as a crucial indicator for policymakers, economists, and analysts.

Components of National Income

1. Gross Domestic Product (GDP):

Definition: The total market value of all final goods and services produced within a
country's borders in a specific period.

Types of GDP:

Nominal GDP: Measured at current market prices, without adjusting for

inflation.

Real GDP: Adjusted for inflation, providing a more accurate reflection of

economic growth.

2. Net National Product (NNP):

Definition: The total value of goods and services produced by the residents of a
country (both domestically and abroad) minus depreciation (wear and tear on capital
goods).

Formula: NNP=GNP−Depreciation
NNP=GNP−Depreciation\text{NNP} = \text{GNP} - \text{Depreciation}

3. Gross National Product (GNP):

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 Definition: The total value of goods and services produced by the residents of a
country, including income from abroad, but excluding the income earned by
foreigners within the country.

Formula: GNP=GDP + Net income from abroad

GNP= GDP + Net income from abroad\text{GNP} = \text{GDP} + \text{Net
income from abroad}

4. Net National Income (NNI):

Definition: The total income earned by the residents of a country after subtracting
depreciation.

Formula: NNI=NNP−Indirect taxes + Subsidies

NNI=NNP−Indirect taxes + Subsidies\text{NNI} = \text{NNP} - \text{Indirect taxes
+ Subsidies}

5. Personal Income (PI):

Definition: The total income received by individuals and households in a country

before personal taxes are deducted.

Formula: PI=NNI−Undistributed corporate profits−Social security contributions +

Transfer payments

PI=NNI−Undistributed corporate profits−Social security contributions +

Transfer payments\text{PI} = \text{NNI} - \text{Undistributed corporate profits} -
\text{Social security contributions} + \text{Transfer payments}

6. Disposable Personal Income (DPI):

Definition: The total income available to individuals and households after personal
taxes are deducted, which can be used for consumption or savings.

Formula: DPI=PI−Personal taxes

DPI=PI−Personal taxes\text{DPI} = \text{PI} - \text{Personal taxes}

Methods of Estimating National Income

1. Product (Output) Method:

Description: Calculates the total value of all goods and services produced in a
country.

Process:

Estimate the value of output in different sectors.

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 Subtract the value of intermediate goods to avoid double-counting.

Use: Commonly used for GDP calculation.

2. Income Method:

Description: Measures the total income earned by individuals and businesses,

including wages, profits, rents, and interest.

Components:

Wages and Salaries

Profits of private enterprises

Rent from land and buildings

Interest on capital

Use: Reflects the distribution of income among factors of production.

3. Expenditure Method:

Description: Measures the total expenditure on final goods and services produced
within a country.

Components:

Consumer spending (C)

Investment by businesses (I)

Government spending (G)

Net exports (Exports - Imports) (X - M)

Formula: GDP=C+I+G+(X−M)

GDP=C+I+G+(X−M)\text{GDP} = C + I + G + (X - M)

National Income is a comprehensive indicator of a country’s economic health, encompassing

various components like GDP, GNP, and NNP. Estimation methods such as the product,
income, and expenditure approaches provide different perspectives on economic activity,
making National Income a critical tool for economic analysis and policy-making

Economic Environment And Policy - Assignment - MBA Sem 2 3

 Question : Define Inflation. Discuss types and
controlling measures of Inflation.

Answer :

Inflation is the rate at which the general level of prices for goods and services rises, leading
to a decrease in the purchasing power of a nation's currency. When inflation occurs, each unit
of currency buys fewer goods and services, which can erode the value of money over time.

Types of Inflation
1. Demand-Pull Inflation:

Definition: Occurs when the demand for goods and services exceeds the economy's
capacity to produce them, leading to higher prices.

Causes:

Increased consumer spending due to higher income.

Expansionary fiscal policies, such as tax cuts or increased government spending.

Expansionary monetary policies, like lower interest rates or increased money

supply.

2. Cost-Push Inflation:

Definition: Arises when the cost of production increases, leading to a decrease in the
supply of goods and services, pushing up prices.

Causes:

Rising costs of raw materials or labor.

Supply chain disruptions.

Increased taxation on products or production processes.

3. Built-In Inflation (Wage-Price Spiral):

Definition: Occurs when wages increase, leading to higher production costs, which
are passed on to consumers in the form of higher prices, creating a cycle where
rising prices lead to further wage demands.

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 Causes:

Strong labor unions demanding higher wages.

Inflation expectations where workers demand higher wages to keep up with

expected future inflation.

4. Hyperinflation:

Definition: An extremely high and typically accelerating rate of inflation, often

exceeding 50% per month.

Causes:

Excessive printing of money by the government.

Severe economic crises, loss of confidence in the currency.

Examples: Zimbabwe in the late 2000s, Germany in the early 1920s.

5. Stagflation:

Definition: A situation where inflation occurs simultaneously with high

unemployment and stagnant demand in the economy.

Causes:

Supply shocks, such as a sudden increase in oil prices.

Poor economic policies that stifle growth while still fueling inflation.

Example: The 1970s oil crisis led to stagflation in many developed countries.

Controlling Measures of Inflation

1. Monetary Policy:

Interest Rate Adjustments:

Increasing Interest Rates: Central banks, such as the Federal Reserve, can
raise interest rates to reduce money supply, making borrowing more expensive
and cooling off demand.

Open Market Operations:

Selling Government Bonds: Central banks can sell government securities to

reduce the amount of money circulating in the economy.

Reserve Requirements:

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 Increasing Reserve Requirements: Central banks can require commercial
banks to hold more reserves, reducing the amount of money they can lend.

2. Fiscal Policy:

Reducing Government Spending:

Decrease Public Expenditure: By cutting back on government spending, the

overall demand in the economy can be reduced, which may help control
inflation.

Increasing Taxes:

Raise Taxes: Higher taxes can reduce disposable income, leading to lower
consumer spending and reduced demand.

3. Supply-Side Policies:

Improving Productivity:

Invest in Technology and Education: Enhancing productivity can help lower

production costs and increase supply, counteracting cost-push inflation.

Deregulation:

Reduce Business Regulations: Lowering the regulatory burden can reduce

costs for businesses, leading to lower prices for consumers.

Encouraging Competition:

Promote Market Competition: Reducing monopolies and encouraging

competition can help keep prices in check.

4. Income Policies:

Wage and Price Controls:

Government Interventions: Direct controls over wages and prices can be

implemented to prevent excessive price and wage increases, though these are
often temporary measures.

5. Exchange Rate Policy:

Currency Appreciation:

Strengthening the Currency: Central banks can intervene in foreign exchange

markets to appreciate the currency, making imports cheaper and reducing
inflationary pressures from imported goods.

6. Expectations Management:

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 Communication:

Central Bank Announcements: Clear communication from central banks

about their commitment to controlling inflation can help manage inflation
expectations, reducing the likelihood of wage-price spirals.

Inflation is a complex economic phenomenon with various types and underlying causes.
Controlling it requires a combination of monetary, fiscal, and supply-side policies, tailored to
the specific type of inflation an economy is facing. Effective management of inflation is
crucial for maintaining economic stability and ensuring sustainable growth.

Question : Discuss phases of Industrialization in

India with special reference to " Five Year Plans
" in India.
Answer :

Industrialization in India has evolved through several phases, closely linked to the country’s
economic planning efforts, particularly the Five-Year Plans. These plans, introduced after
India gained independence in 1947, were a series of centralized economic programs aimed at
boosting industrial growth, improving infrastructure, and addressing social issues. The
process of industrialization in India can be broadly divided into several key phases:

1. Pre-Independence Phase (Before 1947)

Colonial Industrialization: During British rule, industrialization was minimal and
focused mainly on resource extraction and export-oriented industries. The colonial
economy was primarily agrarian, with limited development in sectors like textiles, jute,
and iron and steel (e.g., Tata Iron and Steel Company in 1907).

Limited Industrial Base: The industrial base was underdeveloped, with few industries,
mainly in textiles and jute, catering to the colonial economy's needs.

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 2. Early Post-Independence Phase (1947-1966)
First Five-Year Plan (1951-1956):

Focus on Agriculture and Infrastructure: The primary focus was on agriculture,

irrigation, and infrastructure development. Industrialization was not the main focus,
but the foundation was laid for future industrial growth.

Hydroelectric Projects: Significant investments were made in infrastructure, such

as the Bhakra-Nangal and Hirakud dams, which would later support industrial
activities.

Second Five-Year Plan (1956-1961):

Mahalanobis Model: This plan marked the beginning of a strong push towards
industrialization, guided by the Mahalanobis model, which emphasized heavy
industries and capital goods. The aim was to build a strong industrial base to achieve
self-reliance.

Public Sector Dominance: Major industries like steel, coal, and machinery were
developed in the public sector, with the establishment of steel plants at Bhilai,
Rourkela, and Durgapur.

Development of Heavy Industries: The focus was on sectors such as steel, heavy
machinery, and machine tools. Institutions like the Indian Institutes of Technology
(IITs) were established to support technical education and innovation.

Third Five-Year Plan (1961-1966):

Continued Industrial Growth: This plan continued the focus on heavy industries
but also aimed at diversification by encouraging the development of small-scale
industries.

Challenges: However, this period faced challenges such as the Sino-Indian War
(1962) and Indo-Pakistan War (1965), which strained the economy and affected
industrial growth.

3. The Crisis and Consolidation Phase (1966-1980)

Plan Holiday (1966-1969):

Economic Crisis: Due to economic instability, wars, and droughts, the government
declared a "plan holiday" where no new five-year plans were introduced. Instead,
three annual plans were implemented to stabilize the economy.

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 Focus on Agriculture: Emphasis shifted back to agriculture with the Green
Revolution, but industrial growth slowed down.

Fourth Five-Year Plan (1969-1974):

Revival of Industrialization: This plan aimed to revive industrial growth with a

focus on self-reliance. The government encouraged the growth of the public sector
and small-scale industries.

Mixed Results: Although there was progress in industrial production, economic

challenges like inflation and shortages continued to pose problems.

Fifth Five-Year Plan (1974-1979):

Focus on Employment and Poverty Alleviation: The plan aimed to address

unemployment and poverty while continuing industrial growth. Industrialization was
seen as a means to create jobs.

Public Sector Expansion: The public sector continued to play a dominant role, but
inefficiencies and over-regulation began to hamper growth.

4. Liberalization and Structural Adjustment Phase (1980-1991)

Sixth Five-Year Plan (1980-1985):

Shift in Focus: The focus began shifting from heavy industries to sectors like
electronics, telecommunications, and consumer goods. There was also an emphasis
on modernizing industries.

Emergence of the Private Sector: The private sector started to play a more
significant role in industrial growth, particularly in consumer goods and services.

Seventh Five-Year Plan (1985-1990):

Technology and Modernization: Emphasis was placed on technological

upgradation, productivity improvement, and the modernization of industries.

Beginning of Economic Liberalization: Although limited, this period saw the

beginning of economic liberalization, with some relaxation in industrial licensing
and foreign investment norms.

5. Economic Reforms and Liberalization Phase (1991-Present)

Eighth Five-Year Plan (1992-1997):

Liberalization, Privatization, and Globalization: This period marked a significant

shift with the introduction of economic reforms in 1991. The focus moved towards

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 liberalizing the economy, reducing the role of the public sector, and encouraging
private sector and foreign investment.

Industrial Growth: Industrial growth accelerated, driven by sectors like IT,

telecommunications, pharmaceuticals, and automobiles. The plan aimed to integrate
the Indian economy with the global economy.

Ninth and Tenth Five-Year Plans (1997-2007):

Sustained Industrial Growth: Continued focus on liberalization, infrastructure

development, and export-oriented industrial growth. The IT and services sector
emerged as a key driver of industrialization.

Eleventh and Twelfth Five-Year Plans (2007-2017):

Inclusive Growth: Emphasis was on inclusive growth, with efforts to spread the
benefits of industrialization across different regions and sectors of society.
Infrastructure development, energy, and manufacturing were key areas of focus.

Challenges: Despite growth, challenges such as inadequate infrastructure,

regulatory bottlenecks, and skill shortages persisted.

India's industrialization journey, guided by the Five-Year Plans, has evolved from an initial
focus on heavy industries and self-reliance to embracing liberalization, privatization, and
globalization. Each phase of industrialization has contributed to the country's economic
transformation, laying the foundation for its current status as a major global economy. The
shift from a state-controlled industrial policy to a more market-oriented approach has been
pivotal in driving growth and development in various industrial sectors.

Unit II :

Question : Explain non banking financial

institution and money market.

Economic Environment And Policy - Assignment - MBA Sem 2 10

 Answer :

Non-Banking Financial Institutions (NBFIs)

Non-Banking Financial Institutions (NBFIs) are financial entities that provide various
financial services and products, similar to banks, but do not hold a banking license and do not
provide traditional banking services like accepting deposits from the public. Instead, they
focus on activities such as lending, leasing, insurance, investment, and asset management.

Key Characteristics of NBFIs:

1. No Deposit Acceptance: Unlike banks, NBFIs do not accept deposits from the general
public. They primarily raise funds through market borrowings, issuing bonds, or from
institutional investors.

2. Diversified Financial Services: NBFIs offer a wide range of financial services,

including:

Loans and Advances: Providing credit to individuals, small businesses, and

corporations.

Leasing and Hire Purchase: Offering leasing options for assets and hire purchase
services.

Insurance: Providing life and non-life insurance products.

Investment Services: Managing portfolios, offering mutual funds, and other

investment vehicles.

3. Regulation: NBFIs are regulated by different regulatory bodies depending on their

specific functions. For example, in India:

The Reserve Bank of India (RBI) regulates NBFIs involved in financial services like
lending.

The Securities and Exchange Board of India (SEBI) regulates NBFIs involved in
capital markets.

The Insurance Regulatory and Development Authority (IRDA) regulates those

involved in insurance.

4. Contribution to Financial System: NBFIs play a crucial role in the financial system by:

Economic Environment And Policy - Assignment - MBA Sem 2 11

 Providing Credit: They serve sectors or borrowers who may not have easy access to
bank credit.

Supporting Economic Growth: By offering credit and financial services, they

support economic activities, particularly in sectors like housing, infrastructure, and
small and medium enterprises (SMEs).

Financial Inclusion: NBFIs contribute to financial inclusion by reaching out to

underserved or unbanked populations.

Examples of NBFIs:
Finance Companies: Provide loans for vehicles, housing, or personal needs.

Investment Firms: Manage investments in stocks, bonds, and mutual funds.

Insurance Companies: Offer insurance products to protect against various risks.

Pension Funds: Manage retirement savings and provide pensions.

Microfinance Institutions (MFIs): Offer small loans to low-income individuals or small

businesses, often in rural areas.

Money Market
The Money Market is a segment of the financial market where short-term borrowing,
lending, buying, and selling of financial instruments with maturities of one year or less take
place. It plays a crucial role in ensuring liquidity in the financial system, allowing businesses,
governments, and financial institutions to meet their short-term funding needs.

Key Features of the Money Market:

1. Short-Term Maturities: Instruments traded in the money market have short maturities,
typically ranging from overnight to one year.

2. High Liquidity: The instruments are highly liquid, meaning they can be quickly
converted into cash with minimal loss of value.

3. Low Risk: Money market instruments are generally low-risk, making them attractive for
investors seeking safety and liquidity.

4. Large Denominations: Transactions in the money market are usually conducted in large
denominations, often by institutions like banks, corporations, and governments.

Key Instruments in the Money Market:

1. Treasury Bills (T-Bills):

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 Description: Short-term government securities issued at a discount to face value and
maturing in 91 days, 182 days, or 364 days.

Issuer: Central governments.

Purpose: Used to raise funds for short-term government needs.

2. Commercial Paper (CP):

Description: Unsecured, short-term promissory notes issued by corporations with

high credit ratings to meet short-term liabilities.

Maturity: Typically ranges from 7 days to 270 days.

3. Certificates of Deposit (CDs):

Description: Time deposits issued by banks with a fixed maturity date and specified
interest rate.

Maturity: Ranges from a few weeks to one year.

Issuer: Commercial banks.

4. Repurchase Agreements (Repos):

Description: Short-term borrowing agreements where one party sells securities to

another with an agreement to repurchase them at a predetermined price on a
specified date.

Maturity: Overnight to a few days.

5. Bankers’ Acceptances:

Description: A short-term debt instrument issued by a company that is guaranteed

by a commercial bank. Commonly used in international trade.

Maturity: Typically ranges from 30 to 180 days.

6. Call Money:

Description: Short-term funds borrowed and lent between financial institutions for a
very short period, usually overnight.

Purpose: Used by banks to meet temporary liquidity requirements.

Functions of the Money Market:

1. Facilitating Liquidity Management: The money market allows financial institutions
and corporations to manage their liquidity efficiently by borrowing or lending short-term
funds.

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 2. Implementing Monetary Policy: Central banks use money market operations, such as
open market operations (OMO) and repo transactions, to control money supply and
interest rates in the economy.

3. Supporting Financial Stability: By providing a platform for short-term borrowing and

lending, the money market helps maintain financial stability and reduces the risk of
liquidity crises.

4. Pricing Benchmark: Money market rates, like the LIBOR or the overnight call money
rate, often serve as benchmarks for pricing other financial instruments.

Non-Banking Financial Institutions (NBFIs) and the Money Market are integral parts of
the financial system, each playing distinct roles. NBFIs provide specialized financial services
and contribute to financial inclusion and economic growth, particularly in sectors underserved
by traditional banks. The money market, on the other hand, ensures liquidity in the financial
system, supports the implementation of monetary policy, and offers safe investment options
for short-term funds. Together, they contribute to the overall stability and efficiency of the
financial system.

Question : Discuss various components in

monetary policy.

Answer :

Monetary policy refers to the actions taken by a country's central bank or monetary authority
to control the money supply, manage interest rates, and achieve macroeconomic objectives
like controlling inflation, managing employment levels, and ensuring economic stability. The
central bank, such as the Federal Reserve in the U.S. or the Reserve Bank of India (RBI), uses
various tools and components in implementing monetary policy.

Components of Monetary Policy

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 1. Open Market Operations (OMOs):

Description: OMOs involve the buying and selling of government securities in the
open market by the central bank to regulate the money supply.

Mechanism:

Buying Securities: When the central bank buys government securities, it injects
money into the economy, increasing the money supply and typically lowering
interest rates.

Selling Securities: Conversely, when the central bank sells securities, it

withdraws money from the economy, reducing the money supply and often
raising interest rates.

Objective: OMOs are used to manage liquidity and control short-term interest rates.

2. Policy Interest Rates:

Description: Central banks set key interest rates that influence the overall cost of
borrowing and the level of economic activity.

Types of Policy Rates:

Repo Rate: The rate at which commercial banks borrow funds from the central
bank by selling securities with an agreement to repurchase them. Lowering the
repo rate makes borrowing cheaper, stimulating economic activity, while raising
it discourages borrowing, slowing down the economy.

Reverse Repo Rate: The rate at which the central bank borrows money from
commercial banks. It is used to absorb liquidity from the banking system.

Discount Rate: The rate at which commercial banks can borrow directly from
the central bank. It serves as a lender of last resort to banks in need of liquidity.

3. Reserve Requirements:

Description: These are regulations on the minimum amount of reserves that banks
must hold against their deposits, either in their vaults or as deposits with the central
bank.

Types of Reserve Requirements:

Cash Reserve Ratio (CRR): The percentage of a bank’s total deposits that
must be held in reserve and cannot be lent out. An increase in CRR reduces the
money supply, while a decrease allows more funds to be available for lending.

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 Statutory Liquidity Ratio (SLR): The percentage of a bank’s total deposits
that must be invested in liquid assets like government bonds. Adjusting the SLR
can influence the amount of funds banks have available to lend.

Objective: Reserve requirements are used to control the money supply and ensure
financial stability.

4. Marginal Standing Facility (MSF):

Description: A facility under which banks can borrow additional funds from the
central bank overnight against their approved government securities beyond the limit
of the repo rate.

Purpose: The MSF is intended to provide banks with a safety valve against
unanticipated liquidity shocks and to ensure that the banking system remains stable.

5. Quantitative Easing (QE):

Description: A non-traditional monetary policy tool used when interest rates are
near zero and the central bank wants to stimulate the economy by increasing the
money supply.

Mechanism: The central bank purchases longer-term securities, such as government

bonds or mortgage-backed securities, to inject liquidity into the financial system,
lower long-term interest rates, and encourage lending and investment.

Objective: QE is used to support economic growth when conventional monetary

policy tools are ineffective.

6. Inflation Targeting:

Description: A framework in which the central bank sets a specific inflation rate as
the primary goal of its monetary policy.

Mechanism: The central bank adjusts interest rates and other policy tools to achieve
and maintain the targeted inflation rate, ensuring price stability.

Objective: Inflation targeting provides transparency and predictability, helping to

anchor inflation expectations and build credibility for the central bank.

7. Monetary Policy Committee (MPC):

Description: In some countries, monetary policy decisions, such as setting interest

rates, are made by a committee rather than by the central bank governor alone. The
MPC typically includes members from the central bank and external experts.

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 Objective: The MPC aims to ensure a more balanced and deliberative approach to
monetary policy decision-making, often focusing on maintaining price stability and
achieving other macroeconomic objectives.

8. Forward Guidance:

Description: A communication tool used by central banks to provide indications

about the future direction of monetary policy, such as the likely path of interest rates
or other policy measures.

Objective: Forward guidance aims to influence expectations and financial

conditions, thereby guiding economic decisions by businesses, consumers, and
investors.

9. Moral Suasion:

Description: The central bank uses persuasion or informal requests to encourage or

discourage certain actions by financial institutions, such as lending practices or
interest rate settings.

Objective: While not legally binding, moral suasion can effectively influence
market behavior and complement formal monetary policy measures.

10. Liquidity Adjustment Facility (LAF):

Description: A tool used by the central bank to manage liquidity in the banking
system through repo and reverse repo operations.

Mechanism: Banks can borrow money from the central bank (repo) or deposit
excess funds with the central bank (reverse repo) on a short-term basis, usually
overnight.

Objective: The LAF helps maintain liquidity and stability in the financial system by
ensuring that short-term interest rates remain within a target range.

Monetary policy is a crucial instrument for managing a country’s economy. The various
components—such as open market operations, policy interest rates, reserve requirements, and
others—allow the central bank to influence the money supply, control inflation, stabilize the
currency, and promote economic growth. By adjusting these tools, central banks aim to
achieve macroeconomic objectives like price stability, full employment, and sustainable
economic growth.

Economic Environment And Policy - Assignment - MBA Sem 2 17

 Question : Discuss disinvestment policies in
India with special reference to modern
developments.

Answer :

Disinvestment in India refers to the process of selling or liquidating a portion of the

government's stake in public sector undertakings (PSUs). This policy is part of the broader
economic reforms aimed at reducing the fiscal burden on the government, increasing public
sector efficiency, and encouraging private sector participation in the economy.

Evolution of Disinvestment Policies in India

1. Early Phases (1991-2000):

Economic Liberalization (1991): The economic crisis in 1991 led India to adopt
liberalization policies, marking the beginning of systematic disinvestment. The
government recognized the need to reduce its role in commercial activities and
invited private sector participation.

Initial Disinvestment Efforts: The focus was on partial disinvestment, where

minority stakes (up to 49%) in PSUs were sold. The objective was to raise revenue
without transferring management control.

Formation of Disinvestment Commission (1996): The Disinvestment

Commission, headed by G.V. Ramakrishna, was set up to advise the government on
disinvestment strategies and identify PSUs for disinvestment.

2. Strategic Disinvestment Phase (2000-2014):

Strategic Sale: During the early 2000s, the government shifted its focus from mere
revenue generation to strategic disinvestment. This involved selling a significant
portion (50% or more) of government equity along with the transfer of management
control to private entities.

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 Notable Disinvestments: Major strategic sales during this period included Bharat
Aluminium Company (BALCO) and Hindustan Zinc Ltd (HZL). The idea was to
unlock the potential of these companies by bringing in private sector efficiency.

Public Sector Restructuring: The government also focused on restructuring and

revitalizing PSUs, where feasible, rather than outright disinvestment.

3. Moderation and Consolidation Phase (2014-2019):

Focus on Minority Stake Sales: The period saw a shift back to selling minority
stakes in PSUs to raise funds, primarily through the stock market. This was done
without relinquishing management control.

Exchange Traded Funds (ETFs): The government introduced ETFs, such as the
CPSE ETF and Bharat 22 ETF, as a method of disinvestment. These funds allowed
the government to monetize its holdings in multiple PSUs simultaneously.

Listing of PSUs: To enhance transparency and accountability, the government also

focused on listing unlisted PSUs on stock exchanges.

Modern Developments in Disinvestment Policy (2019-Present)

1. Aggressive Disinvestment Targets:

Union Budgets: The Union Budgets of recent years have set ambitious
disinvestment targets, often exceeding ₹1 lakh crore (₹1 trillion). The focus has been
on monetizing government assets to reduce fiscal deficits and finance development
projects.

Disinvestment of Major PSUs: Key PSUs targeted for disinvestment included Air
India, Bharat Petroleum Corporation Limited (BPCL), and Container Corporation of
India (CONCOR).

2. Strategic Disinvestment Policy (2021):

New Public Sector Enterprise (PSE) Policy: In February 2021, the government
announced a new PSE policy, which categorizes PSUs into strategic and non-
strategic sectors.

Strategic Sectors: These include defense, atomic energy, transport, and

telecommunications. The government aims to maintain a bare minimum
presence in these sectors, with the remaining PSUs being privatized, merged, or
closed.

Non-Strategic Sectors: In non-strategic sectors, all PSUs are open to

disinvestment or closure, indicating a clear intent to reduce the government’s

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 footprint in commercial enterprises.

3. Privatization of Air India:

Air India Sale (2021): After several failed attempts, the government successfully
privatized Air India in 2021, selling it to the Tata Group. This was one of the most
significant disinvestment achievements, ending years of financial losses for the
government in the airline sector.

4. Asset Monetization Program:

National Monetization Pipeline (NMP): Launched in August 2021, the NMP aims
to monetize operational public assets, such as roads, railways, and power
transmission lines, over a four-year period (2021-2025). The program is expected to
generate significant revenue for the government.

Objective: The goal is not to sell these assets outright but to unlock their value
through private sector participation via lease, rent, or concessions, with the
government retaining ownership.

5. Initial Public Offerings (IPOs) of PSUs:

Life Insurance Corporation of India (LIC) IPO (2022): The government launched
the IPO of LIC, the country's largest insurer, marking one of the biggest IPOs in
India's history. This move was part of the broader strategy to unlock the value of
government assets and raise funds.

Other PSU IPOs: The government has continued to list PSUs on stock exchanges to
increase their market transparency and efficiency.

6. Privatization of Banks and Insurance Companies:

Banking Sector Reforms: The government has expressed intent to privatize two
public sector banks and one general insurance company as part of its broader
disinvestment strategy, though specifics are still being worked out.

Rationale: The aim is to strengthen the banking and insurance sectors by bringing in
private sector efficiency and reducing the financial burden on the government.

7. Challenges and Criticisms:

Political Resistance: Disinvestment, especially in strategic sectors and major PSUs,

often faces political and public resistance due to concerns over job losses, loss of
government control, and undervaluation of assets.

Market Conditions: The success of disinvestment depends heavily on market

conditions. For example, global economic uncertainty or market volatility can affect

Economic Environment And Policy - Assignment - MBA Sem 2 20

 the timing and valuation of disinvestment efforts.

India’s disinvestment policy has evolved from merely raising revenue to strategically
privatizing PSUs and monetizing public assets to achieve broader economic goals. Modern
developments, particularly since 2021, indicate a more aggressive and structured approach
toward reducing the government’s role in commercial enterprises and enhancing private
sector participation. While significant progress has been made, challenges remain, requiring
careful balancing of economic objectives and public sentiment.

Economic Environment And Policy - Assignment - MBA Sem 2 21