Privatization is a process in which private sector is involved in the ownership and management
of public sector or transfer of ownership and Management in the private sector and economic
democracy is been established by reducing government control in economic activities.
Privatization benefits society in several ways. The fact that privatization and important strategy
of economic rejuvenation of even the Communist Nations is a testimony to the economic role
of privatization.
Conceptualization of Privatization in India
1] Delegation: 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 service. The state will remain an active participant in this
process.
2] Divestment: 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.
3] Displacement: The first step here will be deregulation. This will allow the private players to enter
the market. And slowly and gradually the private company will displace the public enterprise. Here
the private sector will compete with public companies and ultimately outperform them, causing
the public enterprise to be displaced.
4] Disinvestment: Directly selling a portion or whole of a public enterprise to private parties.
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.
Though privatization offers numerous advantages, 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)
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.
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.
