privatization

Should Indian Economy be Privatized? Pros & Cons

Post-independence India has mainly remained a conservative economy that allowed only restricted and conditional entry of the outside world. But now the Indian economists have understood the importance of coming together with the global economy for growth and efficacy. India is a mixed economy where Private and Public Sectors co-exist in leading sectors like Banking, Telecom, Road Transport, Education, Healthcare and Manufacturing, etc.

In recent years India has witnessed major economic reforms as there is momentum towards privatization. Privatization can be demarcated as the transfer of state owned enterprises (SOEs) to the private owners. Privatization can address issues like income inequality, inflation, etc. that have been negatively contributing to the growth of India.

Privatization is a burning topic at present, all the more because it is like two sides of a coin. India is reforming slowly towards privatization but the previous unfulfillment of expectations from the reforms has reinforced the critics claim.

India started liberalization drive in 1991, but the political climate has not been too favorable for privatization. The initial regime to privatization started with some PSUs like Bharat Aluminium Co. Ltd. but there were disruptions to this and the strategic sales wherein question. The United Progressive Alliance (UPA)government did not place much confidence in privatization and decided not to privatize.

The control remained with the government but the NDA government has been a supporter of this doctrine and pepped up the activities in favor of disinvestments and privatization.

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What Is the Objective of Privatization in India?

In India, the disinvestment strategies of the government primarily aim at reducing the financial burden on the government. Taking back the stake from the poorly functioning PSUs and inefficient management of sick units will help improve public finance. Privatization will lead the way to the optimization of resources to deliver maximum returns.

Indian government has blocked nearly Rs. 2 lakh crores in PSUs. Hence disinvesting the government stakes will be far too significant for Indian economy. This money can be utilized in financing India’s increasing fiscal deficit, for infrastructure projects, minimizing debt, and implementation of social programs.

PSUs are making losses with the money of taxpayers. There needs to be better utilization of taxpayers’ money. In fact, the government needs to ensure that this revenue from taxes is explicitly invested for the development of the economy without being trashed. Selling such PSUs generate non-tax revenue as well as tax revenue for the government.

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Private Sector with Reference to Indian Economy

In India private sector operates under Industries (Development and Regulation) Act 1951. The industries in private sector need to fit the structure of social and economic policy laid down by government. They are dependent on State controls and guidelines. But the latest approach of Indian Government allows such undertakings to develop with freedom and inconsistency with the nation’s plans.

Pros and Cons

India wants to undertake privatization to reduce the burden on Government, build a competitive market, finance infrastructural growth, increase accountability to shareholders, and have a better labor force. The private sector normally answers back quickly to incentives in the market because the public sector’s goals are not money oriented while private players are profit driven.

This transfer of ownership will ensure that the government is not running at a high cost. This will give growth to the market economy and role of government will be minimized. Bad governmental policies and corruption can have a negative role in economic growth which can be curbed in a market-led economy.

By reducing governmental intervention and transferring its responsibilities government reduces total expenditure and can collect taxes on these businesses. Over-borrowing and national debts can be put to an end as well.

The other side of the coin is that privatization should not be used as a tool to finance government expenditures; rather it should be able to pay off a part of countries debts. While India is on the privatization path, many argue that the concept of a welfare state may cease to exist as the Private sector is driven by profits.

The public sector undertakes to do social work simultaneously but the private players will allot lesser funds towards social obligations.

Taking back governmental control may result in the retrenchment of employees as performance pressure and meeting deadlines /targets are much rigorous in private firms than public sector firms. 

The problems of disinvestment are not easy to overcome. The issues like opposition from PSE employees, pricing of assets, how much to disinvest, the mode used to sell, etc. make it a complicated process.

India in particular has witnessed corruption and unlawful ways of getting licenses and business deals even when privatizing. In fact, we have also seen a rise in lobbying and bribery that has put the practical applicability of privatization in question. Privatization mission lost its objectivity when the enterprises established for-profit maximization gave way to malpractices like elevating the hidden indirect costs and price escalations etc.

There can also be intensified price inflations due to the culmination of government subsidies after disinvesting, which affects the common man.

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India’s experience with privatization

Public Sector Disinvestment Commission started under the Chairmanship of Shri G.V. Ramakrishna. The committee was formed in 1994 with the objective to draw a long-term disinvestment plan. The commission advised prior restructuring of PSUs before disinvestment to enhance the share value. Disinvestment began in India 1991-92, as 31 PSUs disinvested for Rs.3,038 crore. G V Ramakrishna advised, supervised, monitored disinvestments in India. However, the Disinvestment Commission ceased to exist in May 2004.

In 1999 department of disinvestment, came into being under the Ministry of Finance. Government targeted 54,300 crores from PSU disinvestments till 2000-01, but could, manage only Rs. 20,078.62 crore and it was lesser than even half. Interestingly, the government was able to meet its annual target in only 3 (out of 10) years. In 1993-94, the proceeds from PSU disinvestment were nil over a target amount of Rs. 3,500 crore. 

From 2001-02 – 2003-04, a lot of disinvestments took place. There were planned sales and offers for sale to the public, with the government still retaining control of the management. A few companies that were sold during this time were BHARAT ALUMINIUM CO.LTD., CMC LTD., HINDUSTAN ZINC LTD., INDIAN PETROCHEMICALS CORP.LTD., MARUTI SUZUKI INDIA LTD. In this for target disinvestment of Rs. 38,500 crores government raised Rs. 21,163.68 crore.

2009-10-2019-20 The Government disinvested by way of selling minority stakes in listed and unlisted profit-making PSUs like NHPC Ltd., Oil India Ltd., NTPC Ltd., NMDC, etc.

In later years the disinvestment re-energized and some steep improvement was seen by the year 2017 -18. The government raised Rs. 1,00,642 crore against Rs. 72,500 crores. But the year 2019-20 got the target dropped to Rs. 49,828 crore while the milestone was Rs. 90,000 crores.

In the biggest privatization drive ever, in the year 2019 Union Cabinet approved the sale of government stake in Bharat Petroleum Corporation Ltd (BPCL), Shipping Corporation of India, on land cargo mover Container Corporation of India, THDC India, and North Eastern Electric Power Corp Ltd (NEEPCO) and more, with the transfer of management control.

Finance Minister also publicized approval for a reduction in stake in a few government companies to below 51 percent, holding back management control. These firms are Indian Oil, Engineers India, GAIL, etc.

What is the way forward?

The initiative must be dutifully followed and should not be carried out at a lesser price than expected. A proper judgment of the value is of utmost importance. There may be PSUs like Railways and BPCL where proper pricing is difficult due to its potential for future growth being high. From past experiences, it has been observed that there were issues with the way we utilize the earnings from disinvestment. Gapping the revenue deficit and undermining the needs of modernization and asset creation have been a few missteps by the government.

The process must be fair and transparent with a third-party evaluation of assets and a minimum number of bidders.  The private players must be held responsible for socio-economic functions also. This is vital as we must balance the socio-economic needs with market requirements. Also considering the ongoing issues, a fool-proof policy to regulate Privatization needs to be undertaken.

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Conclusion

Privatization in India is a long-term process, lagging for so many years. It is an important step towards growth and good governance. With the pandemic, more responsibility rests with the government for taking the privatization drive in the right direction and fetching good results also.

The need to privatize will also enhance economic status. PSUs have contributed to development of the country but they have a lot of shortfalls. Privatization has advantages and disadvantages both.  Government should undertake full and partial privatization, to enhance efficiency. But at the same time, social justice is necessary and must not be neglected while introducing reforms.

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