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Privatisation | Meaning, Definition, Methods & Impact on Indian Industry

Contents :

  • Meaning of Privatisation.
  • Definition of Privatisation.
  • Methods of Privatisation.
  • Impact of Privatisation on Indian Industry.

What is meant by Privatisation ? 

The economic policy of 1991 introduced reforms to 'reform' the public enterprises. Government decided to reduce the number of industries reserved for the public sector and the disinvestment of shares of a selected set of public sector enterprises, Government also decided to reduce drastically the budgetary support to sick PSUs. Thus, privatisation would mean here the introduction of private ownership in PSUS, Privatisation reduces the involvement of the state in the nation's economic activities.

Meaning of Privatisation :

Privatisation means transfer of ownership and/or management of an enterprise private sector. It also means the withdrawal of the state from an industry or sector, partially or fully. Another dimension of privatisation is opening up of an industry that has been reserved for the public sector to the private sector. In a broader sense, privatisation is something more than mere transfer of ownership from Government to private people. Privatisation involves deregulation opening of the economic for a free play of the market forces and transfer of shares to the general public.

Definitions of Privatisation :

i) Barbara Lee and John Nelis :
"Privatisation is the general process of involving the private sector in the ownership or operation of a state owned enterprise."

ii) D. R. Pendse :
"Privatisation is a process which reduces the involvement of state or public sector in country's economic activity."

Methods of Privatisation :

The first major privatisation programme was implemented by the Margaret Thatcher Government in the decade of 1980s. Many public sector units were sold during this period. Later on, France and other countries in the European Economic Community implemented privatisation programmes. These countries follow one or more of the following methods for privatisation.

1) Initial Public Offer :

England and other countries in the EEC (European Economic Community) have used this method most effectively. In this method, shares of PSUs are sold to private individuals and institutions. The government can sell shares of some specific PSUs even in the international market. In countries with a strong capital market this method of Privatisation is very effective.

Advantages of Initial Public Offer :

i) Participation from Investors :
Greater participation from retail investors is assured.

ii) Employees Support :
As management continues to remain the same, there is not a great opposition from employees of the PSUs.

iii) Better Utility :
When the government wants to retain control and yet wants to raise additional resources, this method finds better utility. In this method, pricing of share poses a problem, because PSUs shares are not quoted in stock markets in most countries. Many times, such shares are sold at low prices. In countries where the capital market and financial institutions are weak, this method is found unsuitable.

2) Strategic Sale :

In this method, government makes a strategic sale of PSUs shares to a designated partner. Therefore, management is transferred to the purchaser of these shares.

Advantages of Strategic Sale :

i) Improvement In Performance and Efficiency :
As the private sector partner tries to improve the management style, performance and efficiency improve automatically.

ii) Better Price :
Government is able to realize a better price.

iii) Useful for Loss Making Units :
Loss making units are not very attractive from the government point of view. Strategic partners can, however, bring such units around.

iv) Useful in Weak Capital Market :
In small countries with weak capital markets, this disinvestment method is quite important.

Disadvantages of Strategic Sale :

Even if this method has above merits, there are certain disadvantages as well. They are as follows:

i) No Useful for Ordinary Public :
Ordinary public is unable to participate in this method.

ii) Monopolistic Situation :
If the strategic partner takes over the management fully and has a greater share of total businesses of the same kind in the country, a monopolistic situation can develop. This is harmful from the consumer point of view.

iii) Loss of Employees :
If the strategic partner decides to re-organise the business, some employees may lose their jobs. Many countries in Western Europe and the erstwhile Soviet Union greatly depended on strategic sale of their public sector units.

iv) Sale to Foreigners :
This is also a method of strategic sale, but here, the purchasing company is not indigenous but a foreign company. As small countries have limited private capital available, government sells its stake to foreign companies. While effecting such a sale, it is expected that the foreign company would bring is global-level technology and technical experts to the PSUs in question. Government of India had thus sold its Maruti Ltd. to Suzuki from Japan.

3) Equal Access Voucher Programmes :

In this method of privatisation, shares were divided amongst the public and assets of the company were also approximately equally divided amongst shareholders. The Equal Access Voucher Programme of the Government was proved highly successful. This Government transferred more than half of public sector assets to the private sectors in two successive waves of privatisation.

4) Management Employee Buy-outs :

In this method, the management and employees buy large stakes of the company themselves. One important advantage of this method is that it is easy to implement technically and politically. One important disadvantage is that employees in loss making companies get little or no share of assets while those in profit making companies can get valuable assets. Thus, there is imbalance in allocation of assets.

Impact of Privatisation on Indian Industry :

Introduction :

Privatisation of public sector undertakings has been an accepted policy throughout the world. Privatisation implies transfer of ownership and management of an enterprise from the public sector to the private sector. It also means the withdrawal of the Government from economic activity. Privatisation results in total restructuring of public sector units with an objective of making them more efficient and productive.
The impact of privatisation on Indian industry can be explained with the following points.

1) Improvement in Efficiency :
A large number of public sector enterprises were inefficient and they were incurring huge losses. The inefficiency was the result of lack of accountability of the staff and time-bound promotions irrespective of performance and security. In private sector there is accountability at every stage of production. So due to privatisation there is improvement in efficiency of the workers.

2) Increased Productivity :
The decision powers are given to the management. Productivity is increased as there is no dependency on budgetary allocation. Privatisation results in full financial and managerial autonomy. They are give freedom to incur capital expenditure without ceiling , freedom to raise money from the domestic and/or international markets, freedom to enter into technology contract or joint venture. All this resulted in increase productivity of the industries in India.

3) Competent Management :
Incompetent management was a major problem of almost all public sector units. The management did not have the liberty to take tough and effective decisions as there is government interference. Privatisation has eliminated these evils. The management of the undertakings is given in the hands of expertise management.

4) Profit Maximisation :
Industries have become more profitable. Privatisation removes confusion about the goal or objective of the unit. Profit becomes the most important social responsibility. Industries can easily achieve the goals of maximum profits of attractive rates of returns on investment.

5) Productive Utilisation of Resources :
Privatisation reduces the wastes in the industries. As the public undertakings are given in the hands of competent management there is productive utilisation of resources. Similarly, it becomes possible to use the full capacities of the business and the removal of idle capacities.

6) Increase in Competition :
In the absence of competition in the public sector, one cannot expect higher efficiency. The prices of goods and services were fixed by the government which were generally lower than the cost of production. Privatisation leads to competition and in turn, to higher efficiency.

7) Better Use of Surplus Manpower :
Most of the public sector units were over - staffed. There was surplus manpower in them and that was the result of the policy of liberal recruitment adopted by the government. Recruitment was so liberal that requirement of labour was totally neglected. It had resulted in lower productivity and losses. The problem has been solved through privatisation.

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