Unit 1: Basic Concepts

PRIVATIZATION
 Outline

• What is privatization?

• Causes of Privatization

• The objectives/purpose of disinvestment

• Imp. aspects of privatization in India

• What is privatization?

• Privatization (P) is closely associated with the L&G

• Privatization is the transfer of control of ownership of

economic resources from the public sector to the private
sector.

• It means a decline in the role of the public sector as there is a

shift in the property rights from the state to private ownership.
• For e.g, shedding of the ownership or management of a
government owned enterprise.
• Govt. companies are converted into private
companies by:
• (a) withdrawal of the government from
ownership and management of public sector
companies, and/or
• (b) by outright sale of public sector companies.
• Causes of Privatization

• The public sector had been experiencing various problems,

since planning, such as low efficiency and profitability,
mounting losses, excessive political interference, lack of
autonomy, labour problems and delays in completion of
projects.
• Hence, to remedy this situation, with NEP in 1991
privatization was also initiated into the Indian economy.
• Another term for privatization is Disinvestment.
• i.e, Privatisation of the public sector enterprises by
selling off part of the equity of PSEs to the public
(private sector) is known as disinvestment.
• The objectives/purpose of disinvestment, according to
the government:
• to raise efficiency of PSUs through increased
competition, increase consumer satisfaction with better
quality goods and services, facilitate modernisation
(upgrading technology) and most importantly removing
political interference.
• It was also envisaged that private capital and managerial
capabilities could be effectively utilised to improve the
performance of the PSUs.
• The govt. envisaged that privatisation could provide
strong impetus to the inflow of FDI.
• Imp. aspects of privatization in India:

• 1) Dereservation of Public Sector : The number of

industries reserved for (managed by) the public sector
were reduced in a phased manner. (Now few are left:
Railways, etc.). This has opened more areas of
investment for the private sector and increased
competition for the public sector forcing greater
accountability and efficiency.
• 2) Disinvestment Policies : Till 1999-2000
disinvestment was done basically through sale of
minority shares but since then the government has
undertaken strategic sale of it’s equity to the private
sector handing over complete management control.
• 3) Autonomy to Public sector :
• The government has also made attempts to
improve the efficiency of PSUs by giving them
autonomy in taking managerial decisions.
• For e.g., Greater autonomy was granted to
some PSUs with special status as maharatnas,
navratnas and miniratnas, to take their own
decisions.
Public Enterprise Policies and Navratnas
• In order to improve efficiency, infuse professionalism and enable
them to compete more effectively in the liberalised global
environment, the government identifies PSEs and Declare/designate
them with different status (such as maharatnas, navratnas and
miniratnas).
• A few examples of public enterprises with their status are as
follows:
• (i) Maharatnas – BHEL, BPCL, HPCL, ONGC, SAIL, NTPC,
IOCL, etc.
• (ii) Navratnas – HAL (Hindustan Aeronautics Limited), NALCO,
etc.
• (iii) Miniratnas – BSNL, Airport Authority of India, IRCTC, etc.
• Many of these profitable PSEs were originally
formed during the 1950s and 1960s when self-
reliance was an important element of public policy.
They were set up with the intention of providing
infrastructure and direct employment to the public so
that quality end-product reaches the masses at a
nominal cost and the companies themselves were
made accountable to all stakeholders.
• The granting of status resulted in better performance of these
companies.
• Scholars allege that instead of facilitating public enterprises in
their expansion and enabling them to become global players,
the government partly privatised them through disinvestment.
• Of late, the government has decided to retain them in the
public sector and enable them to expand themselves in the
global markets and raise resources by themselves from
financial markets.
• They were given greater managerial and operational
autonomy, in taking various decisions to run the
company efficiently and thus increase their profits.
• (Greater operational, financial and managerial
autonomy has also been granted to profit-making
enterprises referred to as miniratnas).