“Is Privatization a boon to India?”

Privatization is sometimes used for the term ‘deregulation’ when a private company or industry which is heavily regulated becomes less stewarded but here we will be discussing privatization as the term that is used for describing the transfer of a government industry, business or a service to private control and ownership. This strategy is used by the Government of India to reform the economy.

The term ‘privatization’ incorporates basic three features:

1. Measures related to Ownership: Limiting the sides of the public sector by transferring their ownership to private sectors.

2. Measures related to Organization: Limiting the control over the public owned companies by the state.

3. Measures related to Operations: Increasing the efficiency of the public organizations running in losses by incorporating this strategy.

Post independence, in 1991, India adopted some major policy changes due to slow growth and stagnation in the economy. As the time passed by, the need to merge with the global economy was recognized and hence, the, then Finance Minister Dr. Manmohan Singh introduced some economic policy reforms that emerged as the LPG reforms and liberalization of the Indian economy.

Privatization in India came into effect with the concept of 3D’s:

1. Displacement:- Privatization allows private organizations to enter the market, outperform them and slowly & gradually displace the public enterprises.

2. Disinvestment:- Under privatization, majority of the stakes of the public enterprises are sold to one or more private companies.

3. Delegation:- The state remains an active participant in the process of participation but all the activities are handled by the private companies.

Will privatization do any good?

The major question that arose about this economic reform was if privatization would turn out to be a boon or bane for the country. No policy is free from the loopholes because it is rightly said that every coin has two sides. But the concern is whether this loophole is that big which will soon turn to prove this policy reclusive or just a small pit, which on getting support of other policies, turns out to be favorable.

Now let’s discuss and evaluate some benefits of this policy.

1. Higher Efficiency: It has been proven that private companies always have an edge over public companies when it comes to efficiency because the incentives in the private sector is determined on the basis of the performance of the company and if we talk about the public enterprises, there lacks the efficiency because of the absence of these incentives.

2. Independent in Decision- Making: Unlike the public sector, the private companies are independent to make the decisions as there is no political interference whereas, in the government enterprises, this political factor affect the performance that end up dissuading them to make any decision that might be beneficial economically.

3. Long- term Goals: The ambitions and goals of the private companies are set up for the long- term to steer the company in the appropriate direction. Many a times, public companies, in the process of gaining votes in their favor for upcoming elections, restrict their goals for short-term.

4. Healthy Competition: The economic reform of the privatization proves to bring the healthy competition in the market which subsequently benefits the customers. It further helps the firms to increase efficiency in their performances.

5. Effectiveness: The pressure from the shareholders supports the private sectors, which help them to increase the efficiency and further in timely completion of their projects and goals.

6. Increase in Revenue: Government can also raise the revenue from selling the state- owned companies to the private sector which may raise the significant sums.

7. Accountability: Managers of private companies are accountable to their owners/ shareholders and to the customers, and may only exist and thrive where the needs are met. But managers of publicly- owned companies are required to be more accountable to the broader community and to the political “stakeholders”. This will reduce their ability to directly and specifically serve the requirements of their customers, and may this bias investment decisions faraway from otherwise profitable areas.

Looking at the opposite sides of the coin, privatization also has some loopholes.

1. Abuse of the public interest: It may be harmful when it comes to the public interest as in some private sectors like- the public transport, healthcare, education, etc., profits might be kept above the public interest which may go against the favor of the public.

2. Natural Monopoly: Giving power in the hands of one private firm may cause the situation of the natural monopoly, which consequently would exploit the consumers by aggregating the prices.

3. Unclear Fragmentation: This may result in the unclear fragmentation of the industries in some area due to which they may be left unattended.

4. Cuts in the essential services: If a government- owned company which provided an important service (example- water supply) to the citizens is privatized, its new owner/ owners could result in the abandoning of the social obligation to those who have the ability of paying less, or to regions where this service is unprofitable.

5. Unemployment: Due to the excess financial burden placed on the privatized companies to succeed with no government assistance, unlike the generalized public- owned companies, jobs might be lost to earn additional money within the company.

Impact of Privatization on the Indian Economy:

- Privatization made sure that the resources are used for a more productive utilization.

- The system tends to become more transparent and all fundamental corruption is minimized and owners have a free reign and incentive for profit maximization.

- Obviate the employment inconsistencies like- the free loaders or over employed departments to reduce the strain on resources.

- Lessen the government’s financial and load of the administration.

- Effectively optimizes the output and the functions.

- Permit the private sector to contribute towards the economic development.

- Development of the overall budget, optimum utilization of the resources and diversifying different sources of income.

In short, Privatization is overriding process to reinforce productivity and competitiveness, also as attracting foreign direct investment.

To conclude, on analysis we can finally evaluate that the privatization has more benefits over the disadvantages and also the impact varies from industry to industry. It may be a boon for the education sector but might turn into a bane for the healthcare sector depending on the methods of the regulation. Hence, any policy can withstand the loopholes of it only if they are supported by the strong pillars.

Written by Pranay Kapoor for Young Engine.