Privatization: Need of the hour?

'Privatization came on slowly. When something very big happens, like privatization, historians and economists like to think you must have had very big causes. That is not how it happened.' - Kenneth Baker

Privatization, described as the transfer of state owned enterprises (SOEs) to the private owners, has become a common economic policy tool around the globe. Findings of many studies demonstrated that privatization did not contribute to growth but helped to reduce income inequality, inflation contributed negatively to both economic growth and income equalization. On the other hand, several economists stated that Privatization, a method of reallocating assets and functions from the public sector to the private sector play vital role for economic growth. Recently, privatization has been adopted by many different political systems and has spread to every region of the world. A free market economy mainly depends on well-defined property rights in which people make individual decisions in their own interests. According to experts, privatization may improve efficiency, provide financial relief, boost wider ownership, and increase the availability of credit for the private sector.

Strategic disinvestment in India has been guided by the basic economic principle that the government should not be in the business to engage itself in manufacturing/producing goods and services in sectors where competitive markets have come of age, and economic potential of such entities may be better discovered in the hands of the strategic investors due to various factors, e.g. infusion of capital, technology up-gradation and efficient management practices etc.

Government of India chose for a mixed economy in which both public and private sectors were permitted to operate. The private sector had to operate within the provisions of the Industries (Development and Regulation) Act, 1951 and other relevant legislations. In this framework, the Industrial Policy Resolution 1956 stated, industrial undertakings in the private sector have necessarily to fit into the framework of the social and economic policy of the State and will subject to control and guideline in terms of the Industries (Development and Regulation) Act, 1951 and other relevant legislation. 

Microeconomic advantages:

1. State owned enterprises generally are outdone by the private enterprises competitively. When compared the latter, it shows better results in terms of profits and efficiency and productivity. Therefore, privatization can provide the necessary push to the underperforming PSUs.
2. Privatization brings about fundamental structural changes providing momentum in the competitive sectors.
3. Privatization leads to implementation of the global best practices along with management and motivation of the best human talent to foster sustainable competitive advantage and improvised management of resources.

Macroeconomic advantages:

1. Privatization has a positive impact on the financial growth of the sector which was previously state dominated by way of decreasing the deficits and debts.
2. The net transfer to the State owned Enterprises is lowered through privatization.
3. It helps in escalating the performance benchmarks of the industry in general.
4. It can initially have an undesirable impact on the employees but progressively in the long term, shall prove advantageous for the growth and prosperity of the employees.
5. Privatized enterprises provide better and quick services to the clients and help in improving the overall infrastructure of the country.

Though privatization offers numerous advantages, it has many disadvantages:

1. Private sector mainly focuses more on profit maximization and less on social objectives dissimilar to public sector that initiates socially viable adjustments in case of emergencies and criticalities.
2. There is lack of clearness in private sector and stakeholders do not get the complete information about the functionality of the enterprise.
3. Privatization has provided the unnecessary support to the corruption and unlawful ways of accomplishments of licenses and business deals amongst the government and private bidders. Lobbying and bribery are the common issues corrupting the practical applicability of privatization.
4. Privatization loses the mission with which the enterprise was established and profit maximization programme encourages malpractices like production of lower quality products, elevating the hidden indirect costs, price escalation etc.
5. Privatization intensifies price inflation in general as privatized enterprises do not get government subsidies after the deal and the burden of this inflation affects the common man.

Since many decades, in India numerous modern industries have been established in the private sector. Important consumer goods industries were set up in the pre-Independence period itself. Examples include cotton textile industry, sugar industry, paper industry and edible oil industry. These industries were set up in response to the opportunities offered by the market forces. They were highly suitable for private sector since they ensured good returns and required less capital for establishment. In India, there is a need of privatization of companies to enhance economic status. Though the PSUs have contributed a lot to develop the industrial base of the country, they continue to suffer from a number of inadequacies.

Major impact of Privatisation on Indian Economy are as under:

1. Privatisation frees the resources for a more productive utilisation. Since the system becomes more transparent all fundamental corruption are minimised and owners have a free reign and incentive for profit maximisation so they tend to get rid of all free loaders and vices that are inherent in government functions.
2. Privatisation gets rid of employment inconsistencies like free loaders or over employed departments reducing the strain on resources, it lessen's the government's financial and administrative load.
3. Privatisation effectively minimises corruption and optimises output and functions.
4. Private firms are less tolerant towards capitulation and appendages in government departments and hence tend to right size the human resource potential befitting the organisations needs and may cause resistance and disgruntled employees who are accustomed to the benefits as government functionaries.

Privatization is the process of transfer of ownership, can be of both permanent or long term lease in nature, of a once upon a time state-owned or public owned property to individuals or groups that intend to utilize it for private benefits and run the entity to generate revenues. Privatization is overriding process to enhance productivity and competitiveness, as well as attracting foreign direct investment.