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India's Economic Reforms Set Back After Government Halts Plans to Privatize State Companies


The Indian government recently put on hold all plans to privatize state-run companies following opposition from its coalition allies. The decision could slow down the pace of economic reforms in the country.

The decision to halt the privatization of state-run businesses came just two weeks after the government announced plans to sell 10 percent stakes in two companies.

But the move was abruptly put on hold after a regional party known as the DMK (Dravida Munnetra Kazhagam) threatened to pull out of the 19-party ruling coalition if the government pressed ahead with its plans.

The DMK governs Tamil Nadu state, home to one of the companies whose shares were to be sold. It feared that any move to privatize the mining and power company would have led to job losses.

The DMK is not the only political ally opposing the sale of equity in state companies. Communist parties, which provide crucial support to the Congress-led government, also strongly oppose such moves.

Shashank Bhide, chief economist with the National Council of Applied Economic Research in New Delhi, says putting privatization on hold is a setback for efforts to open up the economy, and raise funds for much-needed projects.

"It will mean that the objective of promoting efficiency, of finding better ways to focus government efforts on the economy, they will be affected adversely," said Mr. Bhide. "The proceeds go to revive or revitalize public sector enterprises which are currently not doing so well, they will also go into areas for infrastructure development and so on."

The Confederation of Indian Industry said in a statement the latest move will also hurt the government's ability to raise revenues and fund projects in areas such as education, health care and infrastructure.

The government has sold shares in about a dozen companies since economic liberalizations began in 1991. The current government, led by Prime Minister Manmohan Singh was expected to speed up the program when it came to power two years ago, but it has not been able to make any progress in that direction.

Analysts say the move to halt stake sales is a signal that other politically sensitive reforms, such as opening up the tightly controlled insurance and retail sectors, may also be put on the backburner.