Here, in this lesson, we will discuss the important step in the economic reform policy, that is, privatization in India.
What is Privatization?
Privatization refers to the process of increasing the involvement of the private sector in the ownership or operation of a state-owned enterprise. In other words, privatization refers to the gradual transfer of ownership or management of state-owned enterprises from the public sector to the private sector enterprises. It implies assigning a greater role to the private sector undertakings in the growth and development process. Privatization can take place in the following manner.
- Sale of Public Sector Undertakings (PSU’s) or Government Sector Undertakings to the Private Sector.
- Withdrawal of ownership by the government from the enterprises jointly owned and managed by the government and the private sectors.
- Allowing the entry of the private sector into the industries that are exclusively reserved for the public sector.
- Limiting the expansion of the existing PSUs.
- Sale of a part of equity or share of the PSU’s to the private investors
Difference between Privatization and Disinvestment
Privatization refers to a greater role or involvement of the private sector in the functioning of the economy. As against this, disinvestment refers to selling off only part of equity or share by the Public Sector Undertakings (PSU’s) to the private investors. In other words, disinvestment refers to a transfer of a part of the ownership of the public
sector enterprises to the private sector.
It can be said that disinvestment is one of the ways of privatization. In other words, disinvestment leads to privatization. It should be noted that while disinvestment necessarily leads to privatization, on the other hand, privatization does not necessarily imply disinvestment.
Need for Privatization in India
In the process of industrialization in India, the public sector was accorded high priority. In fact, it was the development of heavy and capital industries by the public sector that initiated the process of industrialization. However, the functioning of the public sector enterprises suffered from grave inefficiencies arising out of corruption and red-tapism. As a result, a majority of the state-owned enterprises suffered huge losses.
Accordingly, in the New Economic Reforms of 1991, privatization was initiated as an important measure. It was decided to gradually phase out the public sector and pave the way for privatization. Except for a few strategic industries such as railways, defense, etc., all other services were decided to be opened up for the private sector.
Case for Privatization in India
Privatization is said to provide an impetus to the overall growth and development process of an economy. Under the reform policy, India too followed the path of privatization. The following are some of the arguments that were given in favor of privatization in the context of India.
Curb high budget deficits: With a continuous rise in government expenditure that fell short of the receipts of the government, the budget deficit was rising to a high level. Privatization was seen as a way for reducing the soaring budget deficit.
The dismal performance of PSU’s: The operation of the public sector enterprises suffered from serious inefficiencies. They faced mounting losses over the years. In such a situation, it was decided to follow disinvestment for the PSU’s. It was assumed that the private entrepreneurs, working under the profit motive would be more efficient in their operations.
Consumer sovereignty: Privatisation promotes the efficiency and competitiveness of an organization. The sole motive for the private sector enterprises is to earn profit through consumer satisfaction. Thus, privatization promotes consumer sovereignty.
Technological up-gradation and modernization: Private enterprises work in a competitive environment. To survive in the competition, they constantly work towards technological upgrades and modernization so as to improve efficiency. Such modernization and upgrades foster economic growth.
Diversification of products: Due to their efficient and competitive working, private enterprises are able to generate huge profits. These profits are in turn, used for expansion and diversification. Thus, it leads to improved growth.
The impetus to FDI: It was assumed that privatization would make the Indian market more conducive for investment. In other words, it would attract FDI in the economy and thereby, push up the growth process. Thus, emphasis was put on promoting FDIs.
Policy Measures for Privatization in India
In an attempt towards privatization, India adopted various policy measures. The following are some of the policy measures adopted for privatization in India.
Reducing the role of the public sector: As we know that earlier public sector held a monopoly in various industries, therefore, only a few industries were opened up for the private sector. Moreover, the private sector was functioning under a strict licensing and control system. Under privatization, the number of industries that were exclusively reserved for the public sector was reduced considerably from 17 to 8. At present, only 3 industries are exclusively reserved for the public sector, namely, railways, atomic minerals, and atomic energy. Thus, the private sector has crept into the operation of almost all industries.
Disinvestment: For disinvestment, the government adopted the following two methods.
- Selling-off a part of the equity of the PSU’s: Under privatization, a large portion of the equity of the PSUs was sold to the private sector.
- Strategic sale of PSU’s: Strategic sale of a number of companies such as Modern Foods India, Bharat Aluminum Company (BALCO), Maruti Udyog Ltd., etc. was undertaken.
Memorandum of Understanding (MOU): With a view of improving the performance of the public sector undertakings, the government entered an MOU with them. Under this, the PSU’s were given clear targets, and to achieve these targets the PSU’s were given autonomy in the decision-making process. Based on their performance, the PSU’s were rated as excellent, very good, good, and fair.
Navratna Policy: To improve efficiency, infuse professionalism, and enable PSUs to compete effectively in the market, the government awarded the status of ‘Navaratnas’ to the following nine high-performing PSUs.
- Indian Oil Corporation Ltd. (IOCL)
- Bharat Petroleum Corporation Ltd. (BPCL)
- Hindustan Petroleum Corporation Ltd. (HPCL)
- Oil and Natural Gas Corporation Ltd. (ONGC)
- Steel Authority of India Ltd. (SAIL)
- India Petro-chemicals Corporations Ltd. (IPCL)
- Bharat Heavy Electricals Ltd. (BHEL)
- National Thermal Power Corporation (NTPC)
- Videsh Sanchar Nigam Ltd (VSNL)
Later, GAIL (Gas Authority of India Limited) and MTNL (Mahanagar Telephone Nigam limited) were also awarded the status of Navratnas.
These corporations were granted a greater degree of financial, managerial, and operational autonomy. This boosted their efficiency and effectiveness. Consequent to their better performance, the government retained them under the public sector and enabled them to grow themselves not only in the domestic market but also in the international market. They became highly competitive and today, some of them are among the giant global players.
Case Against Privatization in India
Although privatization is said to greatly boost the process of growth and development of an economy, excess privatization can also have certain negative consequences. The following are some of the probable disadvantages of privatization.
Loss of socialist pattern: With privatization, the economy moves away from the socialist pattern. Under a socialist pattern, the government plays a dominant role with the aim of enhancing social welfare along with growth. However, the private players work with the main motive of earning high profits and during this process, often, social justice and welfare are lost.
Rise in inequality: Private sector operates only in those areas that are profitably viable. In other words, they have a tendency to produce goods and services for only that section of the society that has the purchasing capacity. In the process, the weaker section gets neglected and the inequalities rise.
Neglect of strategic areas: The development of the areas that require huge investment or have long gestation periods (such as infrastructure) are not taken up by the private sector. However, such areas are strategic (that is, essential) from the point of view of the growth and development of the country. These areas remain neglected under complete privatization.
Thus, it can be said, that under the reform policy, the Indian economy embarked on the path of privatization, and various policy measures were introduced in this regard. However, caution must be taken so as to avoid its probable negative impacts.
Economic reforms refer to a set of tools and policies initiated in an economy in order to facilitate the process of growth and development. After going through this lesson, you will understand the Economic Reforms in India