Limits to Policy Reversal: Privatization in India

Siddhartha G. Dastidar, Raymond Fisman and Tarun Khanna

Hi-Stat Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: We examine the effect of regime change on privatization using the 2004 election surprise in India. In that election, the pro-reform BJP was un-expectedly defeated by a less reformist coalition. Government controlled companies that were being studied for complete privatization by the BJP dropped by 7.5 percent relative to private firms. By contrast, government controlled firms that were not being considered for privatization, or firms that had already been fully privatized firms, did not experience significant drop relative to private firms. Firms that the BJP had slated for definite future privatization experienced intermediate declines of approximately 3.5 percent. We interpret this as evidence consistent with investor belief of policy irreversibility in privatization, where reforms may reach a 'point of no return' beyond which future regimes have difficulty reversing those policies. Taking advantage of an 'intermediate' event where policies were expected to be more heavily influenced by the communist party, we still find evidence consistent with policy irreversibility.

Date: 2006-03
New Economics Papers: this item is included in nep-cwa, nep-dev and nep-pbe
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