· For any economy, privatization is important, as it creates jobs and builds a healthy competition in the market.
·
Privatizations works for maximizing profit by
improving customer services and goods and services standard.
·
Privatisation can suggest several
things, including migrating something from the public sector into the private
sector.
·
Privatisation always helps in keeping the consumer needs
uppermost, it helps the governments pay their debts, it helps in increasing
long-term jobs and promotes competitive efficiency and open market economy.
Why is India privatized?
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.
Providing strong
momentum to the inflow of FDI
- Privatisation
aims at providing a strong base to the inflow of FDI.
- Increased
inflow of FDI improves the financial strength of the economy.
Improving the efficiency
of public sector undertaking (PSU’s)
- The
efficiency of PSU’s was improved by giving them the autonomy to make
decisions.
- Some
companies were given a special category of Navratna and Mini-Ratna.
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.
Let us focus on one
such aspect of the reforms – privatization in India.
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.
In
1991 India made some major policy changes in their economic
ideologies. There were stagnation and slow
growth in the economy.
To tackle these problems ,
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.
As the definition of privatization
is so very diverse let us take a look at the
three main features of privatization.
1. Ownership Measures: The ownership of all public enterprises ultimately
shifts to private owners. The denationalization can be complete or partial.
2. Organizational Measures: 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: Public organizations and companies were running into
huge losses. So the efficiency of these companies was to be increased.
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 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.
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.
Ways of Privatisation:
Government companies are
transformed into private companies in 2 ways,
Transfer
of Ownership
- Government
companies can be converted into private companies in two ways :
- By withdrawal
of the government from ownership and management of public sector
companies.
- By outright
sale of public sector companies.
Disinvestment
- Privatisation
of the public sector undertakings by selling off part of the equity of
PSUs to the private sector is known as disinvestment.
- The purpose
of the sale is mainly to improve financial discipline and facilitate
modernization.
However, there
are six methods of Privatisation:
- The public
sale of shares
- Public
auction
- Public tender
- Direct
negotiations
- Transfer of
control of State or municipally controlled enterprises
- Lease with a
right to purchase
What is privatisation example?
Example: Before 2012, In the state of Washington,
before 2012, the liquor sales were controlled and operated by the government.
The state-regulated when and how the liquor was sold and collected the revenue.
However, in 2012, the government privatized liquor sales. After privatisation,
private businesses could sell liquor to the general public.
What
are the pros of privatisation?
The pros of privatisation are
1. Improved performance and customer experience.
2. Political does not interfere.
3. Short term outlook.
4. Encourage shareholders to invest because of return.
5. Increased competition.
6. The government will increase revenue from the sale.
What are the characteristics of privatisation?
The two characteristics of privatisation are,
1. It limits government participation in economic activities and safeguards the
private sector.
2. It establishes economic democracy and allows private sectors to operate in
economic activities freely.
What
is the main aim of Privatisation?
The main aim of Privatisation is:
1. Providing strong momentum to the inflow of FDI
2. Improving the efficiency of public sector undertaking (PSU’s)
Disadvantages of
privatisation
·
Natural monopoly. A natural monopoly occurs when the most
efficient number of firms in an industry is one. ...
·
Public interest. ...
·
Government loses out on potential dividends. ...
·
Problem of regulating private monopolies. ...
·
Fragmentation of industries. ...
·
Short-termism of firms.
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