• 14 June 2024

Why India Is Giving Priority To Privatization?

Aug 2, 2023

The Indian government has recently been proactively involved in a strategy that has triggered extensive discussions across various sectors: the prioritization of privatization. This method entails the transfer of ownership and control of state-owned assets and services to private entities. Moreover, the decision to emphasize privatization carries extensive implications that span economic growth, governance, and social welfare. Furthermore, in this investigation, we delve into the driving forces behind India’s shift towards privatization, while additionally scrutinizing the motivations and potential outcomes that underscore this noteworthy policy transition.

Fake claim  of privatization

Key Highlights and Stats:

Generally, the Indian government actively implements a disinvestment policy to curb fiscal deficit, enhance public finances, and foster public ownership of CPSEs.

Additionally, this process encompasses minority, majority, and complete disinvestments (privatization) of CPSEs. Moreover, certain CPSEs have been privatized, while others have experienced a decline in government stake.

List of Companies:

Claim: The Narendra Modi-led BJP government has sold or is planning to sell several public sector companies. Fact: Apart from Air India and North Eastern Electric Power Corporation Limited, no other public sector enterprise mentioned in the list was completely privatised by the Narendra Modi government. While some CPSEs have undergone partial privatization or stake reduction, many of the companies listed have not been fully privatized. The claim is therefore misleading.
It’s important to verify the current status of each CPSE through reliable sources or government announcements, as the situation may have evolved since my last knowledge update in September 2021.

Why Privatization?

Privatization is pursued for several reasons, with the aim of transferring ownership, management, and control of public sector enterprises from the government to private entities. 

The primary motivations for privatization include:

Efficiency:

Private companies are often more profit-oriented and efficient in their operations compared to government-run entities. It can lead to improved management practices, streamlined processes, and increased productivity.

Competition:

Privatization introduces competition in sectors that were previously dominated by government entities. Increased competition can drive innovation, better services, and lower costs.

Investment:

Additionally, private firms can introduce supplementary capital investment, advanced technology, and expertise, resulting in the revitalization and growth of industries.

Revenue Generation:

Governments can raise funds through the sale of assets, which can be used for other public projects or reducing debt.

Focus on Core Functions:

Privatization allows governments to focus on core functions like regulation and policy-making, while leaving business operations to private experts.

Reducing Fiscal Burden:

In cases where public enterprises are financially burdened or running at a loss, privatization can relieve the government of ongoing financial commitments.

Central Public Sector Undertakings (CPSUs) in India:

Growth of CPSUs:

In 1951: About 5 CPSUs with an investment of ₹29 crore.
By 2018-19: 348 CPSUs with an investment of ₹16.4 trillion.

Loses Incurred by CPSUs:

Public enterprise survey 2018-19: 70 CPSUs incurred losses of ₹0.32 trillion.
Losses accounted for about 0.16% of GDP and 1.96% of total investment.

Disinvestment Policy Evolution:

Disinvestment policy initiated in 1991-92 through the new industrial policy.
Evolution over the years in terms of objectives, methodology, and target-setting.

Strategic Disinvestment Policy-2021 (SDP21):

Furthermore, the objective is to reduce CPSU involvement and stimulate growth through the injection of private capital, technology, and best practices.

Sectors are classified as strategic, with minimal government presence, and non-strategic. This classification aids in strategic decision-making regarding privatization.

Mega Privatization Drive:

Next fiscal: Planned privatization drive of ₹1.75 trillion.
Accelerated divestment of PSBs, including Punjab and Sind Bank, Bank of Maharashtra, UCO Bank, and IDBI Bank.

Department of Investment and Public Asset Management (DIPAM):

Critical role in the success of privatization plans.
Revival of dedicated Disinvestment Commission or Ministry of Disinvestment suggested for effective implementation.

Impact of COVID-19:

Global pandemic disruptions affected disinvestment targets and plans.
Focus on infrastructure spending and privatization as a strategy for economic recovery.

Strategic Sectors for Government Presence:

Atomic energy, space, and defense.
Transport and telecommunication.
Power, petroleum, coal, and other minerals.
Banking, insurance, and financial services.

Role of Niti Aayog:

Tasked with identifying CPSUs for strategic disinvestment.
Aims to streamline the privatization process.

Future Challenges and Prospects:

Success of privatization plan hinges on effective implementation.
Need for skilled professionals and a well-structured approach.
Government commitment to privatization as a means of economic growth.

Before and after privatisation

Pros of Privatization of Public Sector Units in India:

Efficiency and Innovation:

Moreover, private ownership frequently yields enhanced efficiency, superior management strategies, and innovation. Furthermore, driven by profit incentives, private enterprises tend to optimize operations and incorporate state-of-the-art technologies.
Example: The privatization of Videsh Sanchar Nigam Limited (VSNL) led to better service quality and operational efficiency under the management of the Tata Group.

Competition and Quality:

Privatization introduces competition, encouraging companies to strive for excellence and provide better products/services to attract customers.
Example: After privatization, Delhi’s power distribution was handed over to Tata Power and Reliance Infrastructure, leading to improved electricity supply and reduced distribution losses.

Investment and Modernization:

Private investors often bring in capital, technology, and expertise, promoting the modernization and expansion of industries.
Example: Privatization of airports like Delhi and Mumbai resulted in significant infrastructure development and enhanced passenger experience.

Focus on Core Functions:

Privatization allows the government to concentrate on policy-making, regulation, and other essential functions while leaving business operations to the private sector.
Example: The privatization of Hindustan Zinc Limited allowed the government to focus on broader economic policies.

Revenue Generation:

Selling public assets generates revenue for the government, which can be used for infrastructure projects, social welfare, and reducing debt.
Example: The sale of Maruti Suzuki shares by the government generated funds for developmental projects.

Cons of Privatization of Public Sector Units in India:

Job Losses:

Privatization can lead to job cuts as private firms may implement efficiency measures and restructuring.
Example: During the privatization of Air India, concerns were raised about potential job losses among employees.

Inequality:

Furthermore, private ownership’s emphasis on profit optimization could potentially contribute to heightened inequality in accessing crucial services.
Example: Privatization of education could result in unequal access to quality education based on affordability.

Lack of Accountability:

Private companies may prioritize profits over public welfare, leading to reduced accountability.
Example: The privatization of water supply might lead to higher tariffs and inadequate services for economically disadvantaged sections.

Natural Monopoly:

Privatization in sectors with limited competition could result in monopolies, leading to higher prices and reduced consumer choice
Example: Privatization of utilities like electricity distribution could lead to monopolistic practices if not properly regulated.

Loss of Strategic Control:

Privatization might lead to loss of control over strategic sectors, which could have national security implications.
Example: Concerns were raised over the privatization of Bharat Petroleum Corporation Limited (BPCL) due to its strategic importance in the energy sector.

Instances of Privatization in India:

VSNL:

Videsh Sanchar Nigam Limited was privatized, and the Tata Group acquired a majority stake, leading to improved service quality and expansion.

Hindustan Zinc Limited:

Enhanced management and profitability marked Vedanta Resources’ transition.

Delhi and Mumbai Airports:

Delhi and Mumbai Airports experienced significant infrastructure growth and improved services through private ownership.

Maruti Suzuki:

The government sold its stake in Maruti Suzuki, generating revenue for developmental projects.

Air India:

Air India’s shift aimed at operational efficiency and financial performance.

BPCL:

Debates arose over national energy sector interests with BPCL’s proposed privatization.

IDBI Bank:

IDBI Bank sought private investment for greater efficiency.

Power Distribution:

Power distribution change in Delhi brought better electricity supply and reduced losses.

Here are some ways in which privatization can help India:

Enhanced Efficiency and Performance:

Private sector companies often bring in better management practices, technology, and innovation, leading to improved efficiency and performance. This can result in higher productivity, better quality of products and services, and increased competitiveness.
Example: After the privatization of VSNL (Videsh Sanchar Nigam Limited), the company’s financial performance improved significantly. Its revenues grew from around ₹250 crore in 2000 to over ₹10,000 crore in 2006 under the management of Tata Communications.

Attracting Investment and Capital:

Moreover, privatization has the potential to allure private investment and capital, fostering economic growth and development. Moreover, private companies may direct investments towards the modernization of infrastructure, the expansion of operations, and the adoption of cutting-edge technologies.
Example: The privatization of Delhi and Mumbai airports led to significant investments in modernization and expansion, resulting in improved airport facilities and services.

Reducing Fiscal Burden:

Generally, numerous PSUs and banks grapple with financial difficulties and losses, placing strain on government finances. Additionally, privatization can shift financial accountability to the private sector, alleviating the government’s obligation to repeatedly rescue struggling entities. Furthermore, this approach enables a more sustainable distribution of financial burdens.
Example: The privatization of Maruti Udyog Limited in the 2000s allowed Suzuki to take a majority stake and inject capital, enabling the company to modernize its operations and become a profitable and globally competitive automaker.

Promoting Competition and Consumer Choice:

Privatization can inject competition into sectors monopolized by PSUs, resulting in enhanced services, reduced prices, and expanded consumer choices.
Example: The entry of private telecom operators like Bharti Airtel, Vodafone, and Reliance Jio introduced competition in the Indian telecom sector, leading to lower tariffs, improved services, and increased mobile phone penetration.

Technology Transfer and Innovation:

Private companies often bring in advanced technologies and know-how, contributing to technological advancements and innovation within the sector.
Example: The privatization of Hindustan Zinc Limited allowed Vedanta Resources to modernize and expand operations, leading to increased production and technological upgrades.

Better Governance and Accountability:

Additionally, private sector firms adhere to market discipline and shareholder anticipations, often resulting in enhanced corporate governance, transparency, and accountability.
Example: After the privatization of Balco (Bharat Aluminium Company Limited), the company’s governance practices improved, and it became more transparent and accountable to its shareholders.

Focus on Core Functions:

Privatization allows the government to focus on its core functions, such as policy-making and regulation, while leaving operational activities to the private sector.
Example: The privatization of airports and highways has allowed the government to concentrate on policy formulation and regulatory oversight, while private companies manage day-to-day operations.

Also, read https://thelogicalpie.com/economic-crises-world-wars-and-the-global-recession/world.

2 thoughts on “Why India Is Giving Priority To Privatization?”

Leave a Reply

Your email address will not be published. Required fields are marked *