By the mid-1980s, around the globe, the pendulum of political option was swinging decisively towards the view that the proportion of the GNP due to Government economic activity should be reduced to the extent possible. This coincided with the belief that even for natural monopolies, effective regulatory surrogates for competition could be devised that would protect the consumers from the abuse of the monopoly power of these companies.

Many eminent economists argued that Government must not venture into those areas where the private sector can undertake job efficiently. Lot of emphasis was laid on market driven economies, rather than state administered economies. The collapse of socialist economy of the Soviet block convinced the policy planners, around the world, that role of the state should be that of a regulator rather than the producer. The resources deployed by the Government for undertaking commercial activities should be unlocked and deployed for the social activities.

During the 1980s, the disillusionment witnessed in the socialist economies added to the disenchantment with the public sector in the mixed economies in the world. USSR started the economic reforms under perestroika, which swept the economies of Eastern Europe. China also introduced economic reforms and it was recognized that public sector did not optimize efficiency and productivity of capital. It was realized that the large number of public enterprises working under mixed economies were victims of over centralization in decision making and excessive bureaucratization.

In India for almost four decades the country was pursuing a path of development in which public sector was expected to be the engine of the growth. However, the public sector had overgrown itself and their shortcomings started manifesting in the shape of low capacity utilization and low efficiency due to over manning and low work ethics, over capitalization due to substantial time and cost over runs, inability to innovate, take quick and timely decisions, large interference in decision making process etc.

Nobel Laureate Dr. Amartya Sen and Jean Dreze opined that " While the case for economic reforms may take good note of the diagnosis that India has too much government interference in some fields, it ignores that fact that India also has insufficient and ineffective government activity in many other fields, including basic education, health care, social security, land reforms and the promotion of social change. This inertia, too, contributes to the persistence of widespread deprivation, economic stagnation and social inequality."

The Government started to deregulate the areas of its operation and subsequently the disinvestment in Public Sector Enterprises was announced. The Industrial Policy of 1991 started the process of de-licensing and except 18 industries, industrial licensing was withdrawn. The process of deregulation was aimed at enlarging competition and allowing new firms to enter the markets. The market was opened up to domestic entrepreneurs/industrialists and foreign capital was provided free entry up to 51% equity in high technology areas.

Essential infrastructure goods and services;

Exploration and exploitation of oil and mineral resources;

Technology development and building of manufacturing capabilities in areas which are crucial in the long term development of      the economy and where private sector investment is inadequate; and

Manufacture of products where strategic considerations predominate such as defence equipment.