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Privatisation | Measures, Causes, Objectives, and Advantages


In the late 20th century, many countries, including India, saw a shift towards privatization, moving away from socialist economic models. This shift was influenced by the economic troubles faced by countries like Russia. In India, the public sector historically received more attention and investment than the private sector.

By 1993-94, India had numerous public sector enterprises, with a significant amount of capital invested in them. However, many of these enterprises were running at a loss, leading to overall losses for the country. In 1991, new economic reforms were introduced, aiming to reduce the public sector’s size and promote the private sector. Privatization, which involves transferring public sector industries to private ownership, became a central part of these reforms.

This global trend towards privatization began in 1979 when the UK’s Prime Minister, Margaret Thatcher, privatized British Telecommunication. Other countries like the US, France, Italy, and successful economies in Asia also embraced privatization as a strategy for economic growth. This policy continued to be emphasized in India’s Eighth Five-Year Plan.

Meaning of Privatisation

Privatization of industries means opening the gates of the public sector to the private sector. It enhances the importance of the private sector because the private sector comes to play a significant role in the economic development of the country. Thus, the transferring of public sector industries to the private sector is called privatisation and may manifest itself wholly or partially. Accordingly, the term privatisation is used in two senses:

(1) Narrow Meaning of Privatisation: In a narrow sense, privatisation implies the private ownership of public enterprises.

(2) Broader Meaning of Privatisation: In a broad sense, privatisation implies transferring the ownership of the public sector to the private sector or managing and controlling the public sector by the private individual without transferring the ownership Some of the definitions of privatisation in broader same are as follows-

(i) In the words of Barbara Lee and John Nellis, “Privatisation is the general process of involving the private sector in the ownership or operation of a state-owned enterprise.”

(ii) According to J.N.Goodrich “Privatisation refers to any process that results in the transfer of activity, asset or organization in whole or in part which is owned or controlled either directly or indirectly by a Government to a Non-government body, generally speaking, any change from public to private boards.”

(iii) In the words of Dr. A. Peter “Privatisation is the transfer of function or activity or organization from public to the private sector.”

It is clear from the above description that privatisation does not mean passing ownership rights of public sector enterprises to the private sector. Even when, public enterprises are managed and operated by the private sector, without having its ownership, this situation will also be called privatisation.

Measures of Privatisation

Three measures of privatisation are (i) Ownership Measures, (ii) Organisational Measures, and (iii) rational Measures.

1. Ownership Measures: Ownership measures of privatisation are those measures by which full-on partial ownership of a public enterprise is vested in the private sector. It has four forms:

(a) Total Denationalisation or Full Ownership: It implies transferring full ownership of a public enterprise to the private sector. Thus, the private sector becomes the full owner of the public sector.

(b) Partial Ownership or Joint Venture: It implies partial ownership of or partnership in public by the private sector. Both public and private sectors are joint owners of that enterprise. The percentage of the private sector depends upon the policy of the government.

(c) Liquidation: It implies the sale of public sector assets to the private sector. The latter may utilize these leads for the same purpose or any other purpose.

(d) Management Buy-Out: It implies selling the public sector enterprise to the workers employed in it. These workers form a cooperative society, get loans from banks, and become owners of the public enterprise.

2. Organizational Measures: By these measures, government control over public entities is restricted. Its different forms are under:

(a) Holding Company: The government forms a holding company. Managers are given the freedom to operate it. Decisions are taken by the managers based on market conditions.

(b) Leasing: Ownership of the enterprise remains vested in the government but its management is added to the private sector for a given period.

(c) Restructuring: It implies that the management of public enterprise is conducted according to the discipline. Restructuring may be of two kinds:

(i) Financial Restructuring: The loss of the enterprise is fully borne by the government and new capital is invested in the enterprise to keep it going. Debt-equity of the enterprise is changed.

(ii) Basic Restructuring: Under it, change is made in the functions informed by the enterprise.

(iii) Operational Measures: These measures are concerned with the Improvement in the efficiency of the public enterprise. Management is allowed to have its way. Workers are allowed to participate in management and decision-making. Any other measures likely to increase the efficiency of the enterprise are also taken in hand.

Causes of Privatisation

Inefficiency and low productivity of the public sector account for the increasing tendency of privatisation in recent years. The main causes of privatisation are listed below:

(1) Disintegration of Socialist Economies: The most crucial sector of Russia and other socialist economies was the public sector. Taking these economies as a model, almost all under-developed countries gave excessive importance to the public sector. However, on account of the lack of decision-making power on the part of management and excessive political interference, public enterprises turned inefficient and proved to be the signal factor responsible for the failure of these economies.

In Russia, under Perestroika, liberal policy was adopted to some extent, but these economies disintegrated soon thereafter. As a result, other economies may also lose confidence in the efficiency of the public sector. On the other hand, the economies of the USA, Japan Germany, etc. were making rapid progress in the private sector. Thus, economies of the rest of the world were attracted to the market economy and private sector because of their efficiency.

(2) Inefficient Public Sector: Organisers of the public sector do not have the independence to make decisions. Most of the decisions of public sector enterprises are taken by the Ministers. Their decisions are politically motivated Decisions are taken after a long delay. As a result, production capacity is not fully utilized and there is a fall in productivity. All these factors render the public sector inefficient.

(3) Uneconomic Price Policy: Prices of public utility services like electricity, irrigation, and transport water. etc. are not determined based on economic principles These are determined on the basis of political, social, and other non-economic considerations. In most cases, prices are deliberately kept less than the cost of production. Consequently, public sector enterprises suffer losses. Privatisation advocates to advocated to avoid such losses.

(4) Burden on the Government: Losses incurred by public sector enterprises are not borne by their organizers or any other person. Losses are made good by the government revenue. Organizers are therefore indifferent to profits earned or losses incurred. No heed is paid to the productivity and efficiency of the enterprise. There is no spirit of competition among these enterprises for want of accountability Quality of production deteriorates and consumers are the losers. It is to remove this shortcoming that the tendency of privatisation has gathered momentum.

In short, the concept of privatisation has been gaining ground due to increasing losses and the inefficiency of public sector enterprises.

Objectives of Privatisation

The main objectives of privatisation are to increase efficiency and competitiveness among industries to augment private profit and to increase the productivity and efficiency of enterprises. The main objectives are described as under:

(1) To increase the efficiency and competitive power of the enterprises.

(2) To reduce deficit financing and public deficit.

(3) To strengthen industrial management.

(4) To earn more and more foreign arrange

(5) To make optimum use of economic resources and diffuse their ownership.

(6) To achieve rapid industrial development of the country.

Merits or Advantages of Privatisation

The main advantages of privatisation are as follows:

(1) Reduction in Economic Burden: The economic burden on the government is reduced because the private sector also makes its contribution to the heavy capital investment by the government.

(2) Increase in Efficiency: Privatisation of the ownership of public sector industries increases their productivity, profitability, and effectiveness.

(3) Reduction in Sense of Irresponsibility: Wide-spread bureaucracy, red-tapism, and sense of irresponsibility in the public sector have been removed to a large extent with the advent of privatisation.

(4) Scientific Management: As a result of privatisation management of industries becomes more scientific, conscious, and responsive to needs.

(5) Reduction in Political Interference: One gets rid of political interference to some extent as a result of privatisation. There is no delay in making industrial decisions. Industries are run on sound economic principles. Investigations into the functioning of the industries by experts become possible.

(6) Encouragement to New Inventions: Privatisation encourages new inventions and the entrepreneur feels inspired.

Demerits or Disadvantages of Privatisation

The main demerits of privatisation are as follows:

(1) Industrial Sickness: Privatisation does not necessarily add to efficiency. Widespread industrial sickness in India is a glaring example. Currently, there are about 2.34 lakh sick industrial units in India. Bank loans amounting to Rs. 10,767 crore are outstanding against them.

(2) Lack of Social Welfare: Under privatisation, private entrepreneurs are keen to invest their capital in those industries in which the margin of profit is very high. Profit motive militates against maximum social welfare.

(3) Class Struggle: Privatisation implies class struggle. Capitalists and labourers have conflicting interests that adversely affect the smooth functioning of the economy.

5) Increase in Unemployment: Privatization can lead to more people losing their jobs. Private businesses often use advanced technology that requires fewer workers, leading to unemployment. These businesses aim to make more money, so they focus on making luxury goods rather than essential items.

(6) Ignores Weaker Sections: Profit motive is the guiding principle of privatisation. Production at maximizing profit. Entrepreneurs are more inclined to produce goods that cater to luxuries and emforts. The needs of weaker sections of society are ignored.

Frequently Asked Questions (FAQs)

  1. What is Privatisation?

    Privatisation is the process of transferring government-owned assets, services, or functions to the private sector, often through the sale of state-owned enterprises to private entities.

  2. What are 2 arguments for privatisation?

    1. Efficiency: Privatization can lead to increased efficiency and cost savings as private companies often operate more competitively and innovatively than government-run entities.
    2. Economic Growth: Privatization can stimulate economic growth by attracting private investment and fostering competition, which can result in job creation and improved services.

  3. Which is not the benefit of privatisation?

    One potential drawback of privatization is the risk of reduced accessibility or affordability of essential services for certain segments of the population, as private companies may prioritize profit over public welfare.

  4. What is a real-life example of privatisation?

    A real-life example of privatization is the sale of government-owned telecommunications companies, such as British Telecom (BT) in the United Kingdom or the privatization of AT&T in the United States. These were formerly state-owned entities that were transferred to private ownership.

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