India took a sharp turn towards socialism with the Industrial Policy Resolution of 1956. Many new public sector companies were established and a large number of companies in sectors such as coal, airlines, banking and insurance were nationalized. Industrial licensing was introduced mimicking the Soviet Union – prescribing what the private sector could produce. The license-raj combined with inefficient public enterprises nurtured inefficiency and corruption. During this period, public sector investment exceeded 50 per cent of total investment. As a result, India’s GDP growth remained low averaging only 3.5 per cent between 1950 and 1980, in the first three-decades after independence with per capita GDP growing at only 1.3 per cent on average. It was famously called the “Hindu growth rate”. India’s poverty rose during this period and India fell behind many countries on social and economic indicators. Some internal liberalization was pursued in the 1980’s, but it was insufficient to address the growing problems in the economy. It eventually took a balance of payments crisis in 1991 to force the political establishment to accept the need for reform. India introduced a new industrial policy in the 1990s that emphasized delicensing, greater independence for profitable PSUs, and restructuring of loss-making firms through the Bureau of Industrial Financing and Restructuring (BIFR). Other elements of the liberalization involved: i) Free entry to private sector firms in industries reserved exclusively for PSUs; ii) Disinvestment of a small part of the government’s shareholding (while still holding majority stocks) and listing PSUs on the stock exchanges. Bhagwati and Srinivasan (1993) were among the few that recommended outright privatization. But between 1992 and 1998, privatization was not pursued aggressively. One PSU was sold to another PSU but this was more like consolidation rather than outright privatization. The BIFR was created to track performance of the PSUs and advise them – especially the sick ones – on investment and restructuring. Three categories of PSUs were formed and named; Maharatna’s, Navratna’s, and Miniratna’s, and performance contracts (memorandum of understanding, MOU) were signed with government and several of them to create incentives for better performance (Figure 1). The NDA government followed an aggressive privatization policy but faced political and bureaucratic hurdles. The Ministry of Disinvestment was created in 1999 and the objective of disinvestment under it was not just to raise revenue but also improve efficiency. Over 30 companies were either fully privatized or 50 per cent of their stock divested. But there was considerable criticism of how this disinvestment was carried out (e.g. Arun and Nixson, 2000).