Context:- Privatization is a process where the government decreases its shareholding in the Public sector Undertaking. Government also transfers the ownership of the management from government to the private sector. The private sector is more efficient than the public sector. Progressive disinvestment of the shares of public sector undertakings in the market has been taking place over the years and through the way of actual privatisation.
History about privatization or LPG reforms:-
The economy of India had undergone significant policy shifts in the beginning of the 1990s. This new model of economic reforms is commonly known as the LPG or Liberalisation, Privatisation and Globalisation model. The primary objective of this model was to make the economy of India the fastest developing economy in the globe with capabilities that help it match up with the biggest economies of the world. The concepts of liberalization, globalization and privatization, all are actually closely related to one another.
Highlights of the LPG Policy, 1991:-
Foreign Technology Agreements
MRTP Act, 1969 (Amended)
Industrial Licensing Deregulation
Beginning of privatisation
Opportunities for overseas trade
Steps to regulate inflation
Abolition of License -Permit RaJ
Liberalisation refers to the slackening of government regulations. The economic liberalisation in India denotes the continuing financial reforms which began on July 24, 1991.
Reforms under Liberalisation:-
Deregulation of the Industrial Sector
Financial Sector Reforms
Foreign Exchange Reforms
Trade and Investment Policy Reforms
External Sector Reforms
Foreign Exchange Reforms
Foreign Trade Policy Reforms.
Privatisation refers to the participation of private entities in businesses and services and transfer of ownership from the public sector (or government) to the private sector as well.
Ways of Privatisation:-
Transfer of Ownership
The public sale of shares
Transfer of control of State or municipally controlled enterprises
Lease with a right to purchase
Globalization essentially means integration of the national economy with the world economy. It implies a free flow of information, ideas, technology, goods and services, capital and even people across different countries and societies. It increases connectivity between different markets in the form of trade, investments and cultural exchanges.
Narasimha Rao Committee’s Recommendations
Bringing in the Security Regulations (Modified) and the SEBI Act of 1992.
Launching of the National Stock Exchange in 1994.
Promoting FDI (Foreign Direct Investment) by means of raising the highest cap on the contribution of international capital.
Cutting down duties from a mean level of 85 per cent to 25 per cent.
Reorganisation of the methods for sanction of FDI in 35 sectors.
Effects of LPG reforms in India:-
Free flow of capital:- Liberalisation has improved flow of capital into the country which makes it inexpensive for the companies to access capital from investors.
Stock Market Performance:-Generally, when a country relaxes its laws, taxes, the stock market values also rise. Stock Markets are platforms on which Corporate Securities can be traded in real time.
Political Risks Reduced:- Liberalisation policies in the country lessens political risks to investors. The government can attract more foreign investment through liberalisation of economic policies
Diversification for Investors:- In a liberalised economy, Investors gets benefit by being able to invest a portion of their portfolio into a diversifying asset class.
Impact on Agriculture:- In the area of agriculture, the cropping patterns has undergone a huge modification, but the impact of liberalisation cannot be properly measured.
Improved efficiency:- The main argument for privatisation is that private companies have a profit incentive to cut costs and be more efficient
Lack of political interference:- It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense. For example, a state enterprise may employ surplus workers which is inefficient. The government may be reluctant to get rid of the workers because of the negative publicity involved in job losses.
Increased competition:- Often privatisation of state-owned monopolies occurs alongside deregulation – i.e. policies to allow more firms to enter the industry and increase the competitiveness of the market.
Increase in Employment:- There is an increase in the number of new jobs available with the opportunity of Special Economic Zones (SEZ). Including Export Processing Zones (EPZ) Centre in India is very useful in employing thousands of people.
Increase in Compensation:- The level of compensation has increased as compared to domestic companies due to the skill and knowledge a foreign company offers after Globalisation,
High Standard of Living:- Indian economy and the standard of living of an individual has increased because of the outbreak of Globalisation.
Extension of Market:- Due to globalisation any company can extend their limits the size of business.
Development of Infrastructure:- Its help in the improvement and development of infrastructure. For example, growing financial facilities, faster communication, rapid technology changes, new sources of industrial energy etc.
Development of healthy competition:- Integration of global markets reduces manufacturing costs, improves quality, reduces processing time,and business becomes dominant drivers.
Why government is considering about privatisation, Now:-
To contain Fiscal Deficit.
To increase the capital with the government so that it’s fiscal policy, public policies can be sustained.
Government wants more private sector participation on the expense of PSU.
Why government should reconsider its decision about privatisation:-
Government’s establishment provides:-
Employment to the youth.
A balanced regional development.
A sense of Social Justice by providing the reservation to the Lower strata of society.
They provide competition to the private sector thereby improving efficiency of the employee.
Currently the government procure about 25% of its procurement from MSME there by providing jobs in the MSME and also provides cushion to the regional industry.
For sick PSU:- (Why should we sell them?:- (Because Their technology, plants and machinery are obsolete. Their managerial and human resources have atrophied with no current value.)
There would be valuable land left after selling machinery as scrap, this land selling will provide land for urbanisation, good price to the government, and decrease the land prices in the urban area.
For example :- Air India and the India Tourism Development Corporation (ITDC) hotels are good examples for disinvestment, in such a case what should the government do?
Air India should ideally be made debt free and a new management should have freedom permitted under the law in personnel management to get investor interest.
Government needs a calibrated divestment to get maximum value over the medium term after considering market conditions should be the goal of the government in the current scenario.
PSU’s managements may be given longer and stable tenures with greater flexibility to achieve the dedicated outcomes, and more confidence to take well considered commercial risks.
Successful large corporations need to be encouraged to invest and grow both in brownfield and greenfield modes.
Sale at fair or lower than fair value to foreign entities or any private firms as well as funds will have adverse implications from the perspective of being ‘Atma Nirbhar’.