Privatization in India

What is Privatization

Post-independence India had adopted a very conservative economy that was

practically shut to the outside world. But as time went by, Indian leaders and
economists recognized the need to merge with the global economy. So in 1991,
India went through some very major economic reforms. It made some major
policy changes in their economic ideologies. There were stagnation and slow
growth in the economy. To tackle these problems the, then Finance Minister Dr
Manmohan Singh introduced some major economic reforms. Now, we call it the
Liberalization of the Indian Economy and the LPG reforms. Privatization has a
very broad meaning in economics. Everything that ranges from the introduction
of private capital to selling government-owned assets to transitioning to a
private economy.

The move to privatize began in the UK and New Zealand in the 1980s; it
spread to continent in the 1990s and now taking a front seat in the large
number of less developed countries. The US was a significant absentee from
this trend, mainly because it has very few nationalized industries to privatize.
World-wide revenue from privatization amounted to $600 billion between
1990 and 1999.

It has now become a familiar feature of new consensus economic policy.

It is defined as the transfer of state owned resources to private control.

This can be achieved through direct sale of the assets to the private sector.

The move to privatize began in the UK and New Zealand in the 1980s; it
spread to continent in the 1990s and now taking a front seat in the large
number of less developed countries. The US was a significant absentee from
this trend, mainly because it has very few nationalized industries to privatize.
World-wide revenue from privatisation amounted to $600 billion between
1990 and 1999.

 CONCEPT AND MEANING OF PRIVATISATION

Privatisation refers to the transfer of ownership, management and control

o f public sector enterprises to the entrepreneurs in the private sector.
It implies greater role of the private sector in the economic activities of the
economy.

Definition of Privatization :--

1. Acc. to World Bank. “Privatization is the transfer of state owned enterprises

to the private sector by sale of going concers or by sale assets following their
liquidation.”

2. Acc. to Stave H. Hanke, “the process whereby the public operations are
transferred to the private sector.”

3. Acc. to D.R.Pentse. “any process which reduses the involvement of the state
or the public sector in the economic activities of a nation is a
privatizationprocess.”

4. Barbara Lee and John Nellis ,defines, “Privatization is the general process of
involving the private sector in the ownership or operation of a state owned
enterprise. Thus the term refers to private purchase of all or part of
company. It covers “contracting out” and the privatization of management
through management contract, leases or franchise arrangement.”
 5. Acc. to Collins Dictionary of sociology, “ the sale or transfer of “
nationalized “, publicly owned industries into private ownership and
control.”

There are three main features of Privatization.

1. Ownership Measures: (SWAMITTAWA KE UPPAY)

The ownership of all public enterprises ultimately shifts to private owners. The
denationalization can be complete or partial.

2. Organizational Measures: ( Sangadhnattmak uppay)

This is where we limit the control of the state in public companies. Some
methods include holding company structuring, leasing. Restructuring of the
enterprises etc.

3. Operational Measures: ( Parichalan uppaya)

Public organizations and companies were running into huge losses. So the
efficiency of these companies was to be increased.

Major causes of Privatization are:

– To reduce the burden on Government

– To strengthen competition

– To improve Public finances

– To fund infrastructure growth

– Accountability to shareholders

– To reduce unnecessary interference

– More disciplined labour force.

The private sector have effective policies in solving the problem of externalities, through costless
bargaining, driven by individual incentives. According to the Coase Theorem, individual parties will
directly or indirectly take part in a cost-benefit analysis, which will eventually result in the most
efficient solution .

When comparing with public sector, the private sector responds to incentives in the market. On the
other hand, public sector often has non-economic goals. The public sector is not highly driven to
maximize production and allocate resources effectively, causing the government to run high cost,
low-income enterprises. Privatization directly shifts the focus from political goals to economic
goals, which leads to development of the market economy . The down-scaling aspect of
privatization is an important one since bad government policies and government corruption can
play a large, negative role in economic growth . Through privatizing, the role of the government in
the economy is condensed, thus there is less chance for the government to negatively impact the
economy .

Privatization may have a positive impact on a country’s economic situation. Privatization should
not be used to finance new government expenditures and pay off future debts. Instead,
privatization enables countries to pay a portion of their existing debt, thus reducing interest rates
and raising the level of investment. By reducing the size of the public sector, the government
reduces total expenditure and begins collecting taxes on all the businesses that are now
privatized. This process can help bring an end to a vicious cycle of over-borrowing and continuous
increase of the national debt .

Nations around the world have adopted different methods of privatizing state assets depending on
the initial conditions of the country’s economy and the economic principles of the political party in
charge.
Major method of privatization is the sale of state-owned enterprises to private investors. The state
would simply decide which institutions should be privatized and through the use of market
mechanism, private investors are able to buy shares of each organization. Advantage of this
method of privatization is that it creates badly needed revenues for the state while putting
privatized firms in the hands of investors who have the incentives and the means of investing and
reformation.

Other method of privatization is called voucher privatization. The government universally

distributes vouchers to its eligible citizens, which can be sold to other investors or exchanged for
shares in other institutions being privatized. Although this method does not create profits for the
state, it does privatize state-owned firms in a short period of time.

Next method of privation is called internal privatization, also known as “employee or management
buyout”. State-owned enterprises are sold to managers (for an extremely low price) who are
already familiar with the particular firm and its structure, but there are minimal revenues created
for the state. This method creates some incentives but the incentives are much stronger when
firms are sold to strategic investors. Furthermore, new owners often do not have the resources to
invest and restructure, which is badly needed in a large percentage of state-owned firms in
underdeveloped countries.

One of the noticeable feature of privatization is the improved competitive characteristics it provides
to the enterprises which prove to be fruitful for the business as well as the country. Nonetheless,
privatization contracts are greatly influenced by merger variables and even global issues and are
structured on the basis of manipulation of the government and the private actors along with the
administering jurisdiction.

Policies Of Privatization

The private sector have effective policies in solving the problem of externalities, through costless
bargaining, driven by individual incentives. According to the Coase Theorem, individual parties will
directly or indirectly take part in a cost-benefit analysis, which will eventually result in the most
efficient solution .

When comparing with public sector, the private sector responds to incentives in the market. On the
other hand, public sector often has non-economic goals. The public sector is not highly driven to
maximize production and allocate resources effectively, causing the government to run high cost,
low-income enterprises. Privatization directly shifts the focus from political goals to economic
goals, which leads to development of the market economy . The down-scaling aspect of
privatization is an important one since bad government policies and government corruption can
play a large, negative role in economic growth . Through privatizing, the role of the government in
the economy is condensed, thus there is less chance for the government to negatively impact the
economy .

Privatization may have a positive impact on a country’s economic situation. Privatization should
not be used to finance new government expenditures and pay off future debts. Instead,
privatization enables countries to pay a portion of their existing debt, thus reducing interest rates
and raising the level of investment. By reducing the size of the public sector, the government
reduces total expenditure and begins collecting taxes on all the businesses that are now
privatized. This process can help bring an end to a vicious cycle of over-borrowing and continuous
increase of the national debt .

Methods Of Privatization

Nations around the world have adopted different methods of privatizing state assets depending on
the initial conditions of the country’s economy and the economic principles of the political party in
charge.

Major method of privatization is the sale of state-owned enterprises to private investors. The
state would simply decide which institutions should be privatized and through the use of market
mechanism, private investors are able to buy shares of each organization. Advantage of this
method of privatization is that it creates badly needed revenues for the state while putting
privatized firms in the hands of investors who have the incentives and the means of investing and
reformation.

Other method of privatization is called voucher privatization. The government universally

distributes vouchers to its eligible citizens, which can be sold to other investors or exchanged for
shares in other institutions being privatized. Although this method does not create profits for the
state, it does privatize state-owned firms in a short period of time.

Next method of privation is called internal privatization, also known as “employee or

management buyout”. State-owned enterprises are sold to managers (for an extremely low price)
who are already familiar with the particular firm and its structure, but there are minimal revenues
created for the state. This method creates some incentives but the incentives are much stronger
when firms are sold to strategic investors. Furthermore, new owners often do not have the
resources to invest and restructure, which is badly needed in a large percentage of state-owned
firms in underdeveloped countries.

One of the noticeable feature of privatization is the improved competitive characteristics it provides
sprivatization contracts are greatly influenced by merger variables and even global issues and are
structured on the basis of manipulation of the government and the private actors along with the
administering jurisdiction.

Conceptualization of Privatization in India

(Bharat mei nigikaran ki awdharna)

Privatization can be categorized into three parts:
1] Delegation: ( Pratinidhi Mandal)—

Here via a contract or franchise or lease or grant etc. the government keeps the
ownership and the responsibility of an enterprise.

But the private company will handle the daily activities and deliver the product or
Here the private sector will compete with public companies and ultimately
outperform them, causing the public enterprise to be displaced.

2] Divestment (Bhandaaphod, Pardafhas) Or disinvestment (Vinivesh ,Lagaya

gaya paisa wapas lena)- (Bhandaaphod, Pardafhas)—

The government will sell a majority stake of the enterprise to one or more
private companies. It may keep some ownership but will be a minority
stakeholder in the enterprise. Means Government surrenders the
responsibility. Directly selling a portion or whole of a public enterprise to
private parties.

(Sahi dhang se ek hisse ya poore saarvajanik upakramo ko niji parteeo

mei bechna)

3] Displacement: ( Visthaapan) ---

The first step here will be deregulation. This will allow private players to enter

the market and slowly and gradually the private company will displace the public

enterprise Means the private enterprise expands and gradually displaces

the government entity. Privatization certainly is beneficial for the progress
and sustainability of the state-owned enterprises. Here the private sector will
compete with public companies and ultimately outperform them, causing the
public enterprise to be displaced.

Major impact of Privatisation on Indian Economy are

as under:
It frees the resources for a more productive utilisation.

– Private concerns tend to be profit oriented and transparent in their functioning as private owners
are always oriented towards making profits and get rid of sacred cows and hitches in conventional
bureaucratic management.

– Since the system becomes more transparent all fundamental corruption are minimised and
owners have a free reign and incentive for profit maximisation so they tend to get rid of all free
loaders and vices that are inherent in government functions.

– Gets rid of employment inconsistencies like free loaders or over employed departments reducing
the strain on resources.

– Lessen the government’s financial and administrative load.

– Effectively minimises corruption and optimises output and functions.

– Private firms are less tolerant towards capitulation and appendages in government departments
and hence tend to right size the human resource potential befitting the organisations needs and
may cause resistance and disgruntled employees who are accustomed to the benefits as
government functionaries.

– Permit the private sector to contribute to economic development.

– Development of the general budget resources and diversifying sources of income.

In short, privatization is the process of transfer of ownership, can be of both permanent or long
term lease in nature, of a once upon a time state-owned or public owned property to individuals or
groups that intend to utilize it for private benefits and run the entity to generate revenues.
Privatization is overriding process to enhance productivity and competitiveness, as well as
attracting foreign direct investment.

Impact of Privatization
When we say privatization, a lot of things come to one’s mind. They are both
positive and negative. It basically refers to the shift of control from the public
sector to that of private. The first world countries brought this concept first after
which the developing nations caught on the trend.

In other words, it mainly aims to enhance the conditions of the services which
people get. In addition, it also lowers the burden of the government by taking over
certain industries. Privatization has no doubt made quite an impact on the world.
Like there are two sides to a coin, over here also comes with benefits as well as
drawbacks.

Benefits of Privatization
Privatization has created quite a positive impact on the world. Firstly, it has
reduced government debts. Similarly, it has lessened the burden of the
government. Furthermore, the quality of services has enhanced by a great margin.
As there is increasing competition in the private sector, everyone is competing to
give their best.

Moreover, there are now new products that are entering the market on a daily
basis to help people get innovative goods. This helps in mixing creativity with
private making and it also benefits the consumers greatly. In addition to that,
political interference in various sectors has stopped which is a great sigh of relief.

Most importantly, the scenario of rates has increased. Due to the ever-growing
competition in the industry, everyone is trying to make the most out of their
goods. In order to do that, they offer competitive rates so that everyone can
benefit. This brings profits to consumers as well as business owners.

Microeconomic advantages:
1. State owned enterprises generally are outdone by the private enterprises
competitively. When compared the latter, it shows better results in terms of profits
and efficiency and productivity. Therefore, privatization can provide the necessary
push to the underperforming PSUs.
2. Privatization brings about fundamental structural changes providing momentum in
the competitive sectors.
3. Privatization leads to implementation of the global best practices along with
management and motivation of the best human talent to foster sustainable
competitive advantage and improvised management of resources.

Macroeconomic advantages:
1. Privatization has a positive impact on the financial growth of the sector which was
previously state dominated by way of decreasing the deficits and debts.
2. The net transfer to the State owned Enterprises is lowered through privatization.
3. It helps in escalating the performance benchmarks of the industry in general.
4. It can initially have an undesirable impact on the employees but progressively in the
long term, shall prove advantageous for the growth and prosperity of the employees.
5. Privatized enterprises provide better and quick services to the clients and help in
improving the overall infrastructure of the country.
 It has many disadvantages:
1. Private sector mainly focuses more on profit maximization and less on social
objectives dissimilar to public sector that initiates socially viable adjustments in case
of emergencies and criticalities.
2. There is lack of clearness in private sector and stakeholders do not get the complete
information about the functionality of the enterprise.
3. Privatization has provided the unnecessary support to the corruption and unlawful
ways of accomplishments of licenses and business deals amongst the government
and private bidders. Lobbying and bribery are the common issues corrupting the
practical applicability of privatization.
4. Privatization loses the mission with which the enterprise was established and profit
maximization programme encourages malpractices like production of lower quality
products, elevating the hidden indirect costs, price escalation etc.
5. Privatization results in high employee turnover and a lot of investment is required to
train staff and even making the existing manpower of PSU abreast with the latest
business practices.
6. There can be a conflict of interest amongst stakeholders and the management of the
buyer private company and initial resistance to change can impede the performance
of the enterprise.
7. Privatization intensifies price inflation in general as privatized enterprises do not get
government subsidies after the deal and the burden of this inflation affects the
common man.

There are many examples of privatization of

companies in India such as:
– Lagan Jute Machinery Company Limited (LJMC)

– Videsh Sanchar Nigam Limited (VSNL)

– Hindustan Zinc Limited (HZL)

– Hotel Corporation Limited of India (HCL)

– Bharat Aluminium Company limited (BALCO)

Advantages of Privatization
 Private companies always have a better incentive than public companies.
The managers and officials of a private company have skin in the game, i.e. their
income is related to the performance of the company. In public companies, such
an incentive is not present. So privatization usually leads to higher efficiency in
the company.

 In a public company, there is a lot of political interference. This may dissuade

the company from taking economically beneficial decisions. However, a private
company will not let political factors affect their performance.

 In public companies, at times the government can only think about the
upcoming elections. So all their goals may be short-term in the process of trying
to gain favours of the voting public. But a private company does not have such
restrictions. They have long-term goals and ambitions and steer the company in
the right direction.

 Privatization will also increase competition in the market. Consequently, this

has proved to be very beneficial to consumers. Healthy competitiveness in an
economy will push efficiency and performances.

 Analysis of private Sector with reference

to the Indian Economy:
 Government of India chose for a mixed economy in which both public and private sectors
were permitted to operate. The private sector had to operate within the provisions of the
Industries (Development and Regulation) Act. 1951 and other relevant legislations. In this
framework, the Industrial Policy Resolution 1956 stated, Industrial undertakings in the
private sector have necessarily to fit into the framework of the social and economic policy
of the State and will subject to control and guideline in terms of the Industries
(Development and Regulation) Act and other relevant legislation. The Government of India
recognizes that it would be desirable to allow such undertakings to develop with as much
freedom as possible, consistent with the targets and objectives of the national plan.
 Reports indicated that in spite of speedy progress of the public sector in the period of
planning, private sector is the principal sector in the Indian economy.
 Since many decades, numerous modern industries have been established in the private
sector. Important consumer goods industries were set up in the pre-Independence period
itself. Examples include cotton textile industry, sugar industry, paper industry and edible oil
industry. These industries were set up in response to the opportunities offered by the
market forces. They were highly suitable for private sector since they ensured good returns
and required less capital for establishment. Though the engineering industries were not
established in the pre-Independence period, yet Tata had initiated in the field of iron and
steel industry at Jamshedpur. After Independence, a number of consumer goods industries
were set up in the private sector. Presently, India is practically self-reliant in its
requirements for consumer goods. According to the 1956 resolution, “industries producing
intermediate goods and machines can be set up in the private sector.” As a result,
chemical industries like paints, varnishes, plastics etc. and industries manufacturing
machine tools, machinery and plants, ferrous and non-ferrous metals, rubber, paper, etc.
have been set up in the private sector.
 In India, there is a need of privatization of companies to enhance economic status. Though
the PSUs have contributed a lot to develop the industrial base of the country, they continue
to suffer from a number of inadequacies such as;
 Many PSUs have been incurring and reporting losses on a continual basis. Consequently,
a large number of PSUs have already been referred of loss giving units.
 Multiplicity of authorities to whom the PSUs are accountable. Delay in implementation of
projects leading to cost escalation and other consequences.
 There is Ineffective and extensive inefficiency on management.
 Many PSUs are over-staffed resulting in lower labour productivity, bad industrial relations.
 Privatisation in infrastructure sector started with the modification of relevant legislation to
permit private enterprises to enter power generation in October 1991. Reforms have been
much successful in telecommunications sector. Value added services were opened to
private sector in 1992, followed by the enunciation of the National Telecom Policy in 1994-
95 which opened up basic telecom services to competition. Foreign equity participation up
to 49% was permitted in case of a joint venture between an Indian and a foreign firm.
 The Telecom Regulatory Authority of India (TRAI) was established in 1997. In order to
separate the service-providing function of publicly owned telecom enterprises and policy-
making function, both of which were initially with the Department of Telecommunications, a
 separate Department of Telecom Services was set up in 1999- 2000. The two public sector
service providers were corporatised in 2000-01. International long-distance business,
which was a public sector monopoly, was opened to unrestricted entry in 2002-03.
 In roads sector, there are also infrastructure reforms. Major reform was the creation of a
major new source of funding for national, state and rural road construction, called the
Central Road Fund (CRF) under the Central Road Fund Act of2000. The National Highway
Development Project funded by the CRF is one of the largest single highway projects in
the world. It includes the nearly 6,000 km of Golden Quadrilateral (GQ) connecting the four
metropolitan cities of Chennai, Delhi, Kolkata and Mumbai and 7,300 km of North-South
and East-West Corridor.

Objectives of Privatization
Q: What were the two main objectives of privatization?

In 1991 the primary objectives of privatization in India were,

Raise the revenue in the market because the fiscal crunch was becoming a

real problem.

Improve the profitability and efficiency of Public enterprises.

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Suggested Questions:

Q.1 How did privatization benefit us?

A.1 Privatization has a lot of benefits. It reduced the government’s debts,
improved the services and also helped in introducing innovative products.
Moreover, it also stopped any political interference plus brought competitive rates.

 Q.2 What are the drawbacks of privatization?

A.2 Privatization also has some major drawbacks. Its main aim is to make a profit
with little care to consumer wellness. There was also a price rise plus corruption
rise after privatization. Moreover, it also created a lack of transparency and
ambiguity in society.

Q.3 Write an essay on Privatization in India?

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