What is Privatization?
- Privatization can define a method as transferring ownership, property, or business from the government to the private sector. The government terminates to be the owner of the business and this publicly-traded private company or few people to run by themselves is termed as privatization.
- The government gives control of public sector organization to private players who are more efficient and have a more clear profit motive. Private companies drive in and take over the company, and give up the name ‘limited’ and start using ‘private limited’ in its last name. The main aim is to convert the company giving loss to the company performs better and pays better taxes.
- India went for privatization in the historic reforms budget of 1991, also known as ‘New Economic Policy or LPG policy’. The Atal Bihari Vajpayee government started the first and the only privatization process of India so far. They privatized many firms between 1999 and 2003.
Objective of privatization
- To provide robust strength to the inflow of FDI. Foreign direct investment (FDI) in India is a major budgetary source for economic development in India. Foreign companies invest directly in fast-growing private Indian businesses to take benefits of cheaper wages and changing the business environment of India. Privatisation will provide a strong base and expansion in the flow of FDI improves the financial strength of the economy of India.
- Privatization’s objective is to reduce the burden of government and to improve the efficiency of the public sector. This will increase competition and improve growth in public finance. Increase accountability to shareholders and better infrastructure.
- The purpose of the privatization is mainly to improve financial discipline and facilitate modernization. To reduce the government’s political interference. And to work for maximizing profit by improving customer services and goods and services standards.
Ways of privatization
- Government companies are transformed into private companies in 2 ways. Transfer of Ownership: The government converts public sector firms or companies to the private sector either by the withdrawal of government ownership or by the outright sale of companies.
- Disinvestment: This is a method of privatization for public enterprises, as a major step towards privatization and liberalization of the Indian economy. Privatisation of the public sector undertakings by selling off part of the equity of PSUs to the private sector is known as disinvestment.
- However, there are different methods of Privatisation such as the public sale of shares, public auction, public tender, direct negotiations, transfer of control of State or municipally controlled enterprises, lease with a right to purchase.
Examples of privatization companies in India
- Lagan Jute Machinery Company Limited (LJMC)
- Videsh Sanchar Nigam Limited (VSNL)
- Hindustan Zinc Limited (HZL)
- Hotel Corporation Limited of India (HCL)
- Maruti Udyog Ltd. (MUL)
- Modern Food Industries Ltd. (MFIL)
- Bharat Aluminium Company Limited (BALCO) etc.
Benefits of privatization
- To achieve an increase in output in every sector of our country, our economy can only be revived if it is completely privatized. As the world economy tends to become global, privatization helps to override political compulsions for achieving competitive efficiency and resource optimization.
- Private companies can survive only with performance. Good performance, Better economy. It frees the resources for a more productive utilization. Privatization is seen as a solution towards the enterprises as these are being transferred from public to private hands it will become less politicized which as a result will help in terminating the administrative corruption.
- Standards and facilities in every sector shall be improved under privatization. They are more responsible and answerable. This helps in keeping the customer needs uppermost; at a rapid scale, this will help in improving the quality of the products by reducing unit costs, curbing public spending, and raising cash to reduce public debt.
- The public sector employs staff based on many things but merit. There is hardly any work done. It helps in increasing long-term jobs and promotes competitive efficiency and an open market economy. In a rapidly rising economy like India, there is a need for the government to realign its priorities in mobilizing the skills and resources of the private sector in the larger task of development.
- Privatisation brings a change in fundamental structural and provides momentum in the competitive sector. It leads to work in a global environment along with better management and motivation.
- Private enterprises own state enterprises and competitively it shows better results in terms of profit, efficiency, and productivity. It gives a push to underperforming public sector companies. Lessen the government’s financial and administrative load. Effectively minimizes corruption and optimizes output and functions
- Privatization has a positive and incremental impact on the financial growth which was previously government dominated. It helps to escalate the benchmark of the performance of industries.
- Privatization helps to improve better and quick services to the clients, employees, and helps in improving the overall infrastructure of the country. Might initially have an undesirable impact but progressively in the long term, prove advantageous for the growth. Privatization will give enough space for creative and innovative thinking as well as systematic and strategic planning to realize the full potential of the organization.
Drawbacks of privatization
- Private companies mainly concentrate on the generation of profit solely and this would result in endangering the safety of the public. Less on the social objectives disparate to the public sector and that will generate socially viable adjustments in case of emergencies and criticalities.
- Encouraged services will no longer be available. With better facilities, prices will climb which will be difficult for everyone. Privatization loses the purpose with which the enterprise was established and the profit maximization program encourages malpractices like production of lower quality products, upgrading the hidden indirect costs, price escalation, etc.
- Under loss conditions, private companies cut off jobs like none other which will cause a rise in unemployment in the long run. This will increase the unnecessary increase of corruption and unlawful ways of complete licenses and business deals amongst the government and private bidders.
- This is one of the worst disadvantages of privatization which is why it is doomed in most countries. Through which the wealthy become wealthier. And also there is a lack of clearness in the private sector and stakeholders do not get comprehensive information about the functionality of the company.
- Privatization will increase or increase the number of employees according to the latest business practice that needs a lot of investments to train staff and to increase the types of tools of the latest technology.
- Privatization, a method of reallocating assets and functions from the public sector to the private sector, plays a vital role in economic growth. The Indian economy has tremendous potential for growth. The economy which used to rise at 3-4% of GDP had steadily registered rising growth from 7 to 9 percent after the introduction of reforms.
- Presently, privatization has been adopted by many different political systems in the world. The process of privatization can be a successful way to bring about basic foundation change by formalizing and establishing property rights, which directly creates strong individual motives. An open market economy mainly depends on well-defined property rights in which people make individual decisions in their interests.
- According to experts, privatization may improve efficiency, provide financial relief, boost wider ownership, and increase the availability of credit for the private sector. Privatization of some sectors could have its benefits for India, some are unavoidable.