Answer to Question #49381 in Macroeconomics for UDAY BHASKAR

Question

Q.) Disinvestment should be encouraged in India. Discuss the macroeconomics impact of the same in the economy.
Q.) Justify the options and features of Public Private Partnership in India.

Answer 1

1.If India wants a continuous increased growth, it has to scale to the next level of performance. This is not an option but a necessity and disinvestment is a tool to get there. Increased population, unemployment, and poverty levels are main reasons why India needs to scale. The cost of not scaling to the next level will see India eclipsed by China and other South East Asian aspirants leaving India to its internal chaos. It needs a 10% rate of growth every year in its GDP to continue to be competitive with China and potential emergent nations in South East Asia. In the context of macroeconomics, time has shown us how countries like Chile ,UK, China , New zealand ,Poland successfully used disinvestment to achieve new economic heights. Many countries used disinvestment as a sure means of restoring budgetary balance & to revive growth on a sustainable basis after facing economic crisis in 80s.Analysis of these countries before & after disinvestment shows that market-driven economies are more efficient than the state-planned economies

Disinvestment will be extremely positive for the Indian equity markets and the economy. It will draw lot of foreign and domestic money into the markets. It will allow PSU to raise capital to fund their expansion plans and improve resource allocation in the economy. It will allow the government to stimulate the economy while resorting to less debt market borrowing. Private borrowers won’t be crowded out of the markets by the government and will have to pay less to borrow from the open market. Disinvestment will allow government to have much better control over the market economy without upsetting norms of market behavior.

2.At the micro level, the change in ownership will increase domestic competition, hence efficiency; and encourage public participation in domestic stock market – all of which will promote ‘popular ‘capitalism that rewards risk taking and private initiative, that is expected to yield superior economic outcomes. Disinvestment shows that govt means business which will attract FDI, FII to finance projects in India.

Disinvestment would encourage citizens’ participation in management of public enterprises and improve the capitalization of stock markets. Listing of enterprises on the bourse adds certain economic and financial benefits to the economy. This is known as financial deepening, a term used by development economists. Financial deepening improves the efficiency of the financial system as well as contributes to GDP growth.