Privatisation
Meaning Of Privatisation
Basic sense / General Sense Practical Sense
In general sense, privatization is a narrow idea. In practical sense, Privatization is a wide idea
In this sense, Privatisation involves: In this sense, Privatisation involves:
1) Transfer of ownership of PSE from 1) Transfer of ownership of PSE from
government to private sector government to private sector and
2) Granting autonomy to the PSE in decision
making.
Rationale Of Privatisation
There have been a number of arguments which have been advanced in favour of privatization. At
the same time there are some think-takers who have advocated against the policy of privatization.
Let’s first discuss the:
Arguments In Favour Of Privatisation:
● Ideological Grounds: Privatisation started first in U.K and U.S.A, post which public sector
was confined to essential economic operations and the kind private sector wouldn’t or will
not perform. After privatization, these economies took impressive strides in the arena of
economic growth and development. This inspired other countries like West Germany,
France, Canada, Italy etc to take to Privatisation. Think-tankers thus believe that
Privatisation should be encouraged on ideological grounds in all those economies that aim
at economic growth and development.
● Improvement In managerial efficiency: It has been observed that public sector is suffering
from uncalled political pressure and government interference. There is no autonomy, no
freedom in line with economic decision making. Management is crippled, it has to seek
government’s approval. This reduces managerial efficiency. Transfer of ownership from
Public to private will establish a direct relationship between shareholders and management.
This will infuse the spirit of commercialism and improve decision-making. This in turn will
lead to an overall improvement in managerial efficiency.
● Creation of competitive environment: There is no competition in public sector. It is
somewhat a monopoly situation. Privatisation will cause many similar private enterprises
to enter the market. In order to increase market share, firms will act under the pressure of
increasing production efficiency and improving technology so as to offer the best of the
products at the least of prices possible. This in turn will create a healthy competitive
environment which ultimately benefits the ultimate consumers
● Profit- Oriented decisions: Public sector operates in line with Social welfare, whereas
private sector works with a motive of earning profits. Privatisation will push all private
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players in the market. Private firm will take profit oriented decisions since their prime goal
is to maximize profits.
● Greater flexibility in Decision making: In Public sector, there is no autonomy, no freedom in
line with economic decision making. Management is crippled, it has to seek government’s
approval before decision making. In other words there is no flexibility in decision making.
Privatisation will grant a greater autonomy to management in line with decision making.
This will cause management to be able to take quick and timely decisions and help them
grab opportunities which otherwise would be lost in the absence of prompt and prudent
decision making.
● Reduction in Burden On public exchequer: It has been so observed that most of the public
enterprises run in losses. A big part of this loss is borne ultimately by government. This
Costs very heavily on government’s exchequer. Privatisation will reduce this financial
burden on the government as government will no longer be under any obligation to provide
subsidy or make up for the losses.
● Greater attention to Consumers satisfaction: There is no competition in public sector. It is
somewhat a monopoly situation. Government produces only what its resources allow it to
produce and not what is demanded by consumers in the [Link], instead will
need to choose from whatever is made available by public sector. Privatisation will cause
many similar private enterprises to enter the market. In order to increase market share,
firms will act under the pressure of offering the best of the products at the least of prices
possible. Also they will produce only what is demanded in the market. Clearly, Private
sector will pay greater attention to consumer satisfaction for their own good.
● Greater Investment And Employment Opportunities: Privatisation will open doors for
private entrepreneurs to enter markets. This will increase overall investment. This will
eventually lead to increase in production. Increase will production will increase employment
opportunities.
● Revival of sick units: There are so many PSE which have been incurring in losses for a long
time. Transfer of ownership of such sick units from government to private sector will help
in revival of such units. This is so because once in private hands, these undertaking will be
operated with improved efficiency. History has been a testimony to that many loss
incurring units sold to private sector have eventually turned profitable. Privatisation thus
should be favoured.
● Increase in accountability: There is often a lack of accountability situation in public sector.
Personnel shift their responsibility on others. In private sector, there is no such thing. Roles
of personnel are clearly defined. One can thus always be held accountable for ones actions,
should things go south. This is why Privatization is a preferred choice.
● Increase in financial discipline: Public Sector can afford losses. Losses can easily be
financed from the government budget. This causes lack of financial discipline on part of
PSUs since they always have a backup. The case goes not the same with Private sector.
This sector relies on fund from capital market. Market offers them funds on the basis of
their performance. There is thus always a pressure to perform well. This is why there is a
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greater magnitude of financial discipline in Private sector, than when compared to public
sector.
Arguments against Privatisation:
● Lack of resources and intent: Sometimes Private sector simply lacks the resources
required for carrying out economic operations on a certain scale. Also there are some
economic operations which are not much profitable and have long gestation period. Such
operations however can be of significance from the perspective of social welfare, but
private sector is not interested. Economy thus has no choice but to let Public sector take
the lead in such cases.
● Social welfare neglected: Private enterprises work with a motive to earn profit. In this quest,
they may sometimes neglect consumers’ interest. Hence it is so argued that in economic
operations where welfare is to be prioritized over profiteering, Public sector can fare better
than Private. Privatisation ignores the aspect of social welfare and hence shouldn’t be
encouraged (as per scholars who advocate against privatization).
● Possibility Of Unemployment: Private enterprises pursue the policy of ‘Hiring and Firing’.
They hire when its profitable and they fire when it’s not. Privatisation thus may cause the
work force to go unemployed in the face of recession situation. Some think-tankers thus
advocate against privatization.
● Growth of Private monopolies: Handing over Public ownership in private hands will simply
substitute public monopolies with private monopolies, which is even worse. Consumers will
ultimately have to suffer undue high prices and compromised quality of goods and services.
Privatisation hence will do more harm than good and hence isn’t recommended.
● Possibility of corrupt practices. Privatisation may open door to corruption. There have
been times when PSUs have been sold away to Private players at throwaway prices. BALCO
was a cash rich company. It was sold at a heavily undervalued price to Sterlite group.
Privatisation thus is sometimes called an economic evil since it promotes ‘briberisation’
● Lopsided Industrial Development: There are some economic operations which are not
much profitable and have long gestation period. Such operations however can be of
significance from the perspective of social welfare, but private sector is not interested.
Thus Private entrepreneurs invest only in those projects which are very profitable with
smaller gestation period. This might retard the growth of basic and heavy industries which
have long gestation period, leading to lopsided industrial development. Many economists
thus do not advocate privatization.
Features Of Privatisation
Features of Privatization are in a way measures to reform public sector enterprises. There are 6
such measures in line.
● Policy of De-reservation: Before 1991, 17 industries were reserved for public sector. In
1991, reservation was reduced to 8 and even later to 3, namely atomic energy, specified
minerals and railways. Rest of the industrial area is open for private sector.
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● Policy of Sick PSUs: Sick industries are the ones which have been incurring heavy losses
year after year. Post 1991, the sick PSUs were brought to BIFR (Board For Industrial And
Financial Reconstruction) .This was done to revive these units. 65 cases of CPSE (Central
Public Sector Enterprises) were brought to BIFR which has sanctioned 13 cases for revival.
The present NDA government is giving priority to closure of chronically sick CPSEs. It has
decided to close down 25 such units at the earliest. The number of sick CPSEs has fallen
from 105 in 2003 to 40 in 2016.
● Policy Of Navratnas , Maharatnas And Miniratnas: Government introduced the Navratna
scheme in 1997 so as to identify high-performing and profit making CPSEs with
comparative cost advantages and granted them managerial autonomy so as to convert
them into global giants. Initially 9 such CPSEs were identified. Later 12 more were added to
the list. In 2010, government identified some Mega Navratnas which were to be called
Maharatnas. This was done to empower these CPSEs and expand their operations in both
domestic as well as foreign market. There were in total 8 Maharatnas and 16 Navratnas as
on 31 march 2018. Some CPSEs which were consistently profit-making were identified as
Miniratnas and were given greater autonomy. There were 74 such units as on Sept,2017.
● Memorandum of Understanding ( MOU): Yet another striking feature of privitasation is
MOU. Government has entered into MOU with PSUs. The goal is to improve their
performance. This government did by: (a) Granting them greater autonomy (b) reducing
controls and (c) increase accountability. Government sets targets for these PSUs for them
to achieve in a highly competitive environment. Also, government evaluates performances
of such PSUs and extend them rating on a 5 point scale. Out of the 198 PSUs that entered
into MOU with government during 2017-18, 49 were rated , 54 , 40 ,
31 and 24 .
● Disinvestment Policy: Under a broader goal of Privatisation, government pursued a policy
of disinvestment. Disinvestment refers to selling off governemnt’s equity in the PSUs to the
private sector in market. Government set up a department of disinvestment in 1990 so as
to identify the PSUs for equity disinvestment. Initially equity was offered to (a) domestic
retail investors through public issues (b) Foreign investors through Global Depository
Receipts (GDRs) (c) governments own financial institutions. Of late government has
pursued strategic sale method. Under this method government sells equity to strategic
buyers at market price and also hands over the management control to them. The present
government has disinvested from even the most profitable PSUs like ONGC, HPCL, Coal
India and BHEL.
Disquieting Features Of Disinvestment
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● The actual realization from disinvestment has been much below the target. Also it
was a way too insignificant to positively affect structure management and working
of PSUs.
● Equities of PSUs were sold at throwaway prices. BALCO When sold to Sterlite group
was immensely underpriced.
● Funds realized from disinvestment were not used appropriately. The government
used these funds largely to reduce their debts.
● The whole exercise of disinvestment has been carried out in a very hasty and
unplanned way. Also the exercised lacked maturity and transparency.
Globalisation
Meaning of globalization:
Globalization is the process of integrating the economy of the country with the other
economies of the world through (a) trade (b) capital flow and (c) technology flow
Thus channels of globalization are largely about liberalizing trade , capital flow and
technology flows:
Channels of globalization:
● Trade: The post popular way to execute globalization is to liberalize foreign trade.
This can be done by introducing import liberalization programs, removal of
quantitative restrictions, and reducing the import duties.
● Capital Flow: Yet another approach can be removal of barriers to international
investment. This can be done by liberalizing foreign direct investment (FDI).
Relaxing restrictions on entry of MNCs will encourage international investment.
● Technology Flow: Yet another effective way to globalize the economy is to
encourage free flow of technology between countries.
Globalization an Unmixed Blessing:
Every coin has two sides. Globalization is no exception. On one hand, there are several
advantages of globalization on economic and technological front, on the other hand there
are some disadvantages too.
Advantages Of Globalization:
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● Expansion of world trade: Globalisation has led to free flow of goods between
countries. This has expanded world trade in recent years. This benefits all the
economies. Domestic producers can now sell their goods worldwide. Globalization
has opened the doors of endless opportunities.
● Increased flow of international capital: Globalisation has eased the flow of capital
between countries. It has facilitated MNCs and other companies to undertake
investments in developing countries. Such capital inflows add to the overall GDP of
developing economies. This also helps in elating employment level.
● Transfer of technology: Globalisation has facilitated transfer of technology
between countries. Developing countries now have greater access to advanced
technologies. Using technologies these countries are now able to increase
productivity and produce quality goods to elate the living standard of their citizens.
● Increased information flow: There is no denying the fact that information is the real
economic power today. Globalisation has increased the flow of information
between different countries. Global mass media has brought a revolution.
Information is at ones finger’s tip. One can learn anything from anywhere. This has
diversified business portfolios, created a league of revolutionary entrepreneurs, who
are changing the economic landscape of their respective countries to the
magnitude one can’t care to imagine.
● Increase cross-cultural contacts: Globalization has brought different culture
together by reducing cultural barriers. This has made world a global village. People
now have a progressive mindset. They prefer helping each other grow, now when
they have realized that their cultural differences can do more good than harm.
● Economic prosperity: Free flow of FDIs, advanced technologies, goods and
services and information has led to increase in GDP of all the economies in the
world, especially the developing ones. This has also led to reduction in poverty and
unemployment. People now have an access to better life style. There is economic
prosperity everywhere. All thanks to globalization.
Disadvantages of Globalisation:
● Vulnerability to other countries: Almost all the countries in the world today have
become vulnerable to the development outside their domestic dominions. US
recession in 2008 and Euro Crises in 2012 are a testimony to that every economy of
the world today is prone to economic changes in the world outside. Recession and
crises in one economy is sure to transmit to the rest of the world. All because world
today is a global village.
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● Volatility of markets: Globalisation is boon to certain nations while bane to others.
resource rich nations are getting richer while the poor economies continue to suffer.
Inequality is growing across nations. Financial markets are more volatile than ever.
Features of globalization in India:
Government of India has undertaken the following policy measures to implement
globalisation:
● Exchange rate reforms: Government changed the fixed exchange
rate system to market determined exchange rate. Under market
determined exchange rate system, the foreign exchange rate is
decided by the free forces of market (demand and supply) without
any intervention by government. This policy is called convertibility
of currency.
● Foreign Investment: In a bid to attract foreign capital, the
government of India granted approval for FDI up to 51% foreign
equity. This limit was raised from 51% to 74% and subsequently to
100% for many industries. In January 2018, the government
allowed 100% FDI in single brand retail and real state broking
services as well as FDI up to 49% in Air India.
● Import liberalization: Under the policy globalization, government
took numerous measures to liberalize the imports:
a) It dismantled the system of import licensing
b) It abolished quantitative restrictions on imports.
c) Duties on imports and exports have been reduced.
● Foreign technology: Government now provides automatic approval for technology
agreements in case of high priority industries. This has eased flow of advanced technology
leading to technological development in Indian industries.
Effects of globalization
Globalization has positive as well as negative effects. Let’s first discuss some:
Positive effects:
● Inflow of MNCs: Globalisation has attracted many MNCs to Indian industries. These MNCs
have brought huge foreign investment to India. India is on track to attract $100 billion as it
received the “highest ever” foreign inflows of $83.6 billion in 2021-22.
● Emergence of IT and BPO sectors: Globalisation has led to emergence of IT and BPO
sectors in India. These sectors are providing at par outsourcing to foreigners in USA and
Europe. Income from outsourcing abroad has been contributing significantly in GDP over
the past few years.
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● Availability Of Advanced technology: Under the policy of globalization, government now
provides automatic approval for technology agreements in case of high priority industries.
This has eased flow of advanced technology leading to technological development in
Indian industries.
● Employment generation: Unemployment has been a chronic problem of Indian economy
ever since the time of independence. Post globalization, numerous foreign companies have
been set up in India. Emergence of call centers, outsourcing of BPO services and
Operations of MNCs have created tremendous job opportunities in India especially among
the skilled professionals.
● Setting up of SEZs: In a bid to attract foreign investors, government of India has used world
class infrastructure to set up SEZs (Special economic zones). SEZs have enhanced the
growth of industrialization. SEZs have also helped in generating employment and
promotion of domestic and foreign investment.
● Emergence of global giants: From steel to textiles, from cars to IT, Indian companies have
emerged very strongly in globalization. Tata, Reliance, Essars etc need no introduction on
the global business platforms today. All thanks to globalisation.
Negative effects:
● Competition from foreign companies: Globalisation has led to the advent of giant MNCs
and other foreign companies. This has increased competition in the Indian market between
MNCs and Indian industries. This competition is unequal. Indian companies have lost to
MNCs since the latter can offer better quality goods at better prices. This has reduced
profit levels of the Indian companies.
● Job-loss: Globalisation has eased flow of advanced technology into the country. With
technology replacing manpower, many have lost their jobs. Globalisation, thus is accused
of promoting job-less growth.
● Takeovers of domestic companies: Globalisation resulting in Inflow of FDI has a chronic
flip side. Most of the FDI has been used in takeovers of domestic companies. Foreigners
have greater shareholding in Indian companies today than ever.
Economic reforms introduced in 1991, did improve the performance of various sectors of the
economy. However the new economic policy has not been able to solve all the economic problems.
Thus there are both green and grey effects of LPG model: Let’s discuss both.
Changes In Indian Economy After Liberalization
Positive effects:
● Higher economic growth rate: The growth rate of Indian economy has picked up from 5%
in 1990 to about 8.9% in 2020-21. India today is the fastest growing major economy and
has emerged as the word’s fifth largest economy with a GDP of around $3.1 trillion.
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● A stimulus to Industrial sector: India is an IT hub today. Indian IT industry has a worldwide
recognition and an unparalleled global reputation. The overall industrial sector growth rate
had went up to 8% per annum post LPG policies during the period between 2004 – 2016.
● Change in composition of National Income: The share of agricultural sector is reduced
from about 29 % in 1991 to about 20.2% in 2021, where as the contribution of industrial
sector has increased from about 24% in 1991 to about 26% in 2021. Tertiary sector
accounted for about 42% in 1991 which rose to 56% in 2021. This reflects a positive
structural transformation of the Indian economy.
● Saving and Investment Performance: Post reform period marked a significant increase in
saving and investment. Gross domestic savings were 23% of GDP in 1990. This rose to just
over 28 % in 2021. Rate of investment as a percent of GDP too has risen from 26% in 1990
to around 31% in 2021.
● Growth in foreign trade: The Indian economy is drastically open today than it was in 1990.
Foreign trade was only 15% of GDP in 1991. It was recorded about 43.5% of GDP in 2021.
This shows the growing integration of the Indian economy with the world’s economy.
● Flow of FDIs: The reforms in 1991 has altered the FDI status in India. FDI has increased
tremendously, especially after the launch of in 2014 and
FDI was just $1.3 billion in 1991 as against $83.5 billion in 2021. India is now
the 7th most attractive destinations of FDI in the world today (as per World Investment
Report 2022)
● Foreign Exchange Reserves: India’s total foreign exchange reserves stand to around $532.
84 billion on Oct 07, 2022 as against $2.2 billion in 1991, just enough to finance imports for
2.5 months. This is due to improvement in India’s BOP status post the reforms. All thanks
to LPG policies.
● Overseas investment by Indian companies: Post reforms, Indian companies have been
observed to significantly invest overseas. Our overseas investments were $97 million in
1991. This rose to $82 billion in 2021. The biggest foreign investments were done by
petroleum, real state, textile, telecom and pharmaceutical companies.
Negative effects:
● There has been no significant reduction in poverty, inequality of income and wealth and
employment.
● The magnitude/degree/ extent of India’s globalization so far has been insignificant. It is
one of the lowest globalised economy in the world.
Conclusion
Regardless of the negative effects of LPG policies, India is now recognized as one of the most
emerging power in the world and there is no denying the fact that the Economic reforms of 1991
had quite a role to play here.
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