EARLY REFORMS – Disinvestment In India

How Did I Get into This? 5
e case of Durgapur Alloy Steel plant was interesting. It used
to lose heavily each year, mainly due to its ine ciencies. In the
Steel Ministry, we always argued in favour of very high duties to
protect the poor indigenous public sector producer and got away
with these arguments. A er all at the other end of this argument
was the multinational wanting to import its products into India
at cheap prices to the detriment of the indigenous manufac-
turer. Again, the consumers who paid huge prices did not matter.
ey were too dispersed to be heard. I remember in 1987, when
Durgapur Alloy Steel plant was losing heavily, I routinely marked
a  le to the Steel Minister, based on the Steel Authority of India
Limiteds (SAILs) proposal, to propose to the Ministry of Finance
to raise the duty on alloy steel from 125 per cent to 150 per cent,
so that the company could break even. Back came Mr K. C. Pant’s
query, “Why not 200 per cent?  e company would then make
pro ts.” I was amazed at the remark and took the  le back to the
minister for discussion. It was only a er some discussion that I
realized that the minister was mocking at our proposal and was
not even prepared for 150 per cent, stating that we could not cre-
ate a high-cost economy to protect our ine ciencies and that such
tendencies will only lead to smuggling of alloy steel, as used to
happen massively in case of gold all the time, creating a big vested
interest in not reducing golds import duty.  e main rent-seekers
in this case were the smugglers of gold. It was only the reforms in
1991 and the decisions of the government that changed everything
in favour of ushering in a competitive economy.  ese were small
steps to open up the economy since 1985 and later the big changes
in 1991 that led to our 3 per cent to 3.5 per cent Hindu annual
growth rate, gradually changing to 9 per cent today.
V
EARLY REFORMS
I must recall the impact of small changes of the 1980s and particu-
larly those that impacted the sectors I was working in.  e Green
Revolution of the late 1960s increased the fertilizer demand and
we had to import huge quantities of fertilizer in the 1970s.  is
price was higher than the indigenous price and led to the setting
6 Disinvestment in India
up of a Fertilizer Price Equalization Fund to mop up huge prof-
its of the indigenous manufacturers consequent to the increase in
prices of fertilizers, and the indigenous producers readily agreed to
contribute to this fund. Subsequently, to encourage investments in
new fertilizer plants, the government decided on Retention Pricing
Policy, giving cost-plus returns to the manufacturers. Due to intro-
duction of cost-plus pricing and also other reasons, the indigenous
price soon became higher than the controlled price of fertilizer
and the only contributor to this fund was then the Government
of India, that is, the taxpayer. By the early 1980s the outgos to the
fund were huge and the Government of India started looking for
ways to reduce the fertilizer subsidies. One huge component of
the fund was the cost-plus handling and transportation charges of
the monopoly fertilizer importer, the Food Corporation of India
(FCI). Since the charges were cost plus, there was no incentive for
aggressive sale and by the early 1980s, despite shortages in some
areas, FCI held huge stocks.  is led to payment of higher han-
dling, storage and interest charges and all kinds of add-ons to these
charges imposed by the states, ports, railways, etc., since everyone
knew that they would be ultimately paid for in the form of fertilizer
subsidy by government. Since FCI stocks were not moving fast
enough to areas where they were required and since the handling
charges became very high, competition was introduced by giving
the business to public and private fertilizer companies as well.  is
competition led to miraculous results and the charges of the new
entrants came down to less than half of FCI’s monopoly handling
and import charges. Yet, since the payments were still on cost-plus
basis, the stocks with FCI remained stagnant and the Government
of India found it pro table to dispose o these stocks through the
fertilizer companies, even a er giving a price discount of 10 per
cent on the stagnant stocks.  e price discount was a win-win situ-
ation with 100 per cent of the stocks reaching the farmers on 10
per cent price discount and the Government of India saving huge
storage charges of FCI during the year 1983–1984. Fertilizer com-
panies have handled majority of this business since the 1980s with
handling charges much lesser than that of the earlier monopoly
importer FCI.
e delicensing of the cement industry in 1984 was an eye-
opener. Within 3 years cement production increased 2.5 times and