Privatization: Meaning, Rationale and Major Reforms
Privatization is the process oj involving the private sector in the ownership or operation of a state owned enterprise.
It implies gradual withdrawal of government ownership/management from the public sector enterprises. It may happen in two ways:
- Outright sale of the government enterprises to the private entrepreneurs or
- Withdrawal of the government ownership and management from the mixed enterprises (the enterprises jointly owned and managed by the government and the private entrepreneurs).
Disinvestment is the policy instrument to promote Privatization. It happens when the government sells off its share capital of PSUs (public sector undertakings) to the private investors. Argument in favor of disinvestment is the same as in case of Privatization. It is taken as a remedial measure to improve production and managerial efficiency, as well as to facilitate modernization and also as a means to curb fiscal deficit of the government.
Background of Privatization
The process of industrialization was initiated during Second Five Year Plan assigning a key role to PSUs. The Industrial Policy Resolution (1956) clearly and categorically stated the significance of PSUs in the process of growth and development. And, it is beyond doubt that it was through the spread of PSUs that India could diversify its industrial base between the period 1951-1991. It was on account of the spread of PSUs that the Indian economy underwent a structural transformation: people started shifting from agriculture to industry as their source of livelihood, and there was a gradual increase in the percentage contribution of industry to CDP. PSUs gave us Navratnas (nine jewels of the Indian industry, besides a host of mini-ratnas).
But gradually, most public sector enterprises turned into as social dead-weight (or a social liability). Mounting losses of PSUs became unsustainable. Leakage, pilferage, inefficiency and corruption had become so rampant in PSUs that their Privatization was considered as the only remedy. Accordingly, in 1991, the government decided to phase out public enterprises by selling its equity to the private entrepreneurs.
Privatization was to replace public ownership of a large number of enterprises. However, in view of their efficient performance, Navratnas were to be retained as public sector enterprises. Indeed, the government decided to upgrade their functional freedom with a view to enhancing their competitive strength.
Gains from Privatization
- Privatization implies supremacy of ‘self-interest’ over ‘social interest’. When ‘selfinterest’ prevails, the entrepreneurs work with 100 per cent commitment, and ‘efficiency’ becomes the condition of survival for the workers. High productivity is the obvious result.
- Privatization expects private enterprises to work in a competitive environment -both domestic as well as international. Competition induces upgradation and modernization. These are the essential conditions of growth and development
- Privatization promotes diversification of production. Unlike PSUs, private enterprises invariably generate high profits. These are used for expansion and diversification of production. MNCs (Multinational Corporations) are a testimony to the fact that private sector enterprises are capable of redefining the benchmark of growth.
- Privatization promotes consumers’ sovereignty. Higher degree of consumers’ sovereignty implies wider choice and better quality of life.
Losses from Privatisation
Socialistic pattern of the society (in which ‘social interest’ is accorded top priority) is left to survive only as food for thought. It loses its practical relevance once PSUs are sold off to the private players. Secondly, privatization encourages the free play of market forces. But in the process, goods are produced only for those who have the means to buy them. When prices rise (which is an obvious tendency in a system driven by the free play of market forces), weaker sections of the society suffer deprivation.
