Introduction:
Privatization- the transfer of ownership, both in permanent and long-term lease, of a prior state or public property to individuals or groups who intend to use it for private purposes and manage the business with the objective of maximizing profits. It is a management approach that has attracted the interest of many categories of academics, politicians, government employees, private sector actors, and the general public. One of the distinctive features of privatization is the improvement of the competitive characteristics it provides to companies, which are proving fruitful for both the company and the country. Before independence, the public sector played a minor role in the Indian economy. Due to the poor performance of public sector companies, there is a growing consensus to privatize them. In India, privatization was accepted with great resistance and initially rested on the initial phase of the country's economic liberalization.
Earlier examples of privatization in India:-
Privatization in the infrastructure sector began with a change in legislation that allowed private companies to start producing electricity in October 1991. Reforms in the telecommunications sector have been very successful. Value-added services were opened to the private sector in 1992, followed by the enactment of the National
Telecommunications Policy in 1994-95, which opened basic telecommunications services to competition. In a joint venture between an Indian and a foreign company, foreign ownership of up to 49 per cent was allowed.
The Telecommunications Regulatory Authority of India (TRAI) was established in 1997. In order to separate the service delivery function of public telecommunications companies and the political decision-making functions, which were originally part of the Department of Telecommunications. During 1999-2000, an independent Department of Telecommunications Services was established. The two public service companies were corporatised in 2000-01. Long-distance international transport, which was a public monopoly, was opened to unrestricted access in 2002-03.
There are also infrastructure reforms in the road sector. A major reform was the creation of a major new source of funding for road construction at the national, state and rural levels, known as the Central Highway Fund (CRF) under the Central Highway Fund Act of 2000. The National Highway Development Project, funded by CRF, is one of the largest individual highway projects in the world. It comprises the nearly 6,000 km long Golden Quadrilateral (GQ), which connects the four metropolises of Chennai, Delhi, Kolkata and Mumbai, as well as the 7,300 km north-south and east-west corridor.
Next, we see the latest trends in privatization.
SOURCE:- Department of Investment and Public Asset Management
This curve shows the year wise total receipts by stake sales through disinvestment in PSUs. The curve suggests maxima in the period 2017-18 and then a decrease. With further announcements of disinvestment in PSUs, we can expect a sharp increase in the curve in the coming future.
Let’s take the example of the energy sector- one of the most important sectors contributing to the
economy, and analyze the private participation over the years.
Private participation in the energy sector increased dramatically in the early 2000s until 2010-11 and then declined until 2018-19. Lately, we see a growing trend in the plot. The government proposed the 2020 Electricity Amendment Bill to revitalize the country's electricity sector and attract foreign investment. The pandemic made things worse for the industry, which is already grappling with operational and financial inefficiencies. The reforms aim to revitalize the sector by proposing the privatization of electricity distribution and inviting national and international actors to explore its potential. Hence, it is expected that we shall see another dramatic increase in the curve in the coming years after these privatization reforms are completely implemented.
POSITIVE IMPACTS:-
Role of Entrepreneurs: The role of entrepreneurs is promoted in the private sector, as they have the freedom to make their own decisions for the company. You are not under pressure from the government.
Increase in FDI: Private companies cause foreign direct investment to enter the country. Since India has a large market and consumer base, today's consumers are increasingly demanding foreign products. As more and more companies are privatized, people from all over the world come to invest their money in these companies.
Reduced financial burden on the state: With the privatization of the country, this financial burden on the state has been considerably reduced. Private sector companies, unlike public sector companies, do not spend large sums of money in non-development sectors. By doing more, private companies also helped the government pay taxes.
Diversification of Products: With systematic and structured management, private companies are known to satisfy the infinite wishes of consumers. Therefore, there is a diversification of the products. Buyers are offered a wide range of options in the market.
Unnecessary formalities are avoided: Private companies are more focused on increasing the efficiency of their management so that they can achieve their goals on time or temporarily before the deadline. In this way, you avoid unnecessary formalities.
Eliminate workplace irregularities: Eliminate workplace irregularities, such as opportunists or over-employed departments, and reduce the burden on resources.
Reduce the financial and administrative burden on the government.
Efficiently minimize corruption and optimize performance and functions.
Chapter 9 of Economic Survey 2019-20 compared the economic status of 11 CPSEs before and after the strategic disinvestment using certain indicators such as net worth, net profit, gross margin, etc. According to the data provided there, many of these 11 CPSEs saw a very huge improvement in these indicators after strategic disinvestment suggesting that disinvestment had a positive impact in the case of these companies. This success motivates disinvestment in other loss-incurring companies too in the coming future.
Let's compare some of the parameters of these CPSEs before and after the announcement of the strategic disinvestment.
In the figure above, the net worth of the 11 CPSEs being considered is compared before and after the announcements of disinvestment. While most of the CPSEs show a large increase and profit after disinvestment, some CPSEs like HTL and Modern Food India showed a slight decline in their net worth. Next, we compare the net profit of these CPSEs.
Similarly, on comparing the gross revenue, we obtain the following comparison:
A more specific Example:
The figure above shows the stock prices of two CPSEs namely, BPCL and HPCL before and after the announcement of disinvestment in BPCL. The curve suggests that the BPCL stock prices(blue curve) showed a significant increase after the announcement of disinvestment.
Negative Impact on the Economy
Private sector companies can have a great impact on the business market. You can raise or lower the price of a product based solely on your preferences. This leads to a monopoly control of private companies in the market.
With the emergence of more and more private companies, the social interest has been persistently neglected. The main objective of any private sector industry is to make a profit. In this process of making more and more profits, these industries are ignoring society.
With the advent of 4,444 increasingly private companies, the social interest has been persistently neglected. The main objective of any private sector industry is to make a profit. In the process of making more and more profit, these industries ignore society.
The term "voluntary retirement" refers to a situation in which the employee voluntarily leaves his job and retires. When public sector units were sold to private investors, many people found it difficult to work under the conditions of private investors. As a result, the majority opted for voluntary retirement.
At a time when private companies have to spend more on equipment and production processes to cut costs, they can lay off one or more workers, causing unemployment in the economy.
When private sector companies enter the economic market, they can significantly increase the price of a product. The consumer may or may not have the purchasing power to consume this product. The demand for that particular product then drops significantly. And if this continues, the economy will enter a state of inflation.
Conclusion:
The Indian economy is a dynamic economy with enormous growth potential. Globalization, liberalization and privatization are the central strategic mandates of economic policy.
Market-oriented reforms are sustainable and gaining acceptance, and resistance to privatization is diminishing due to advantages such as greater efficiency through targeted management and the provision of public funds in the country's social and physical infrastructure.
Over time, Indian politicians have shed their inhibitions on privatization and formulated liberal reforms to divest the huge capital investments in PSUs and increase the efficiency and profit generation of state-owned companies.
Privatization has shown great results in developing sectors such as banking, insurance, telecommunications, energy, civil aviation, etc. However, lobbying in domestic circles has been weakened by the surprising turn of the Indian economy today.
Full privatization remains a far-fetched dream. In most of the liberalized sectors, state control is still evident and there are more delegations or joint ventures between the public and private sectors like Maruti Suzuki, etc.
Disinvestment should be preferred in those companies where they are facing huge losses. Private participation might improve the situation as we saw in the case of the 11 CPSEs in the report. In other cases, this policy might not be very beneficial since the public sector enterprises don’t look after profit maximisation only- they look after employment generation and the welfare of the society too.
Written by: Hitesh Anand and Dhesingu S.
