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Privatisation- Economic Transition In India

   Posted On :  04.05.2018 04:30 am

Privatisation, which has become a universal trend, means transfer of ownership or management of an enterprise from the public sector to the 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.


Privatisation, which has become a universal trend, means transfer of ownership or management of an enterprise from the public sector to the 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.

Privatisation is an inevitable historical reaction to the indiscriminate expansion of the state sector and the associated problems. Even in the ‘communist’ countries it became a vital measure of economic rejuvenation.

Ways Of Privatisation

  1. Divestiture or privatisation of ownership through sale of equity.
  2. Reprivatisation or denationalisation.
  3. Franchising.
  4. Contracting
  5. Leasing

1. Divestiture

Allowing the private sector to participate in the equity of government held company or public sector unit is one more form of privatisation. In this case the government widely announces its intention of selling the equities of a public sector unit by inviting the private sector to buy these equities and become partner in the ownership, management and control of the unit.

2. Denationalisation

Those units which were nationalised in the past, to enable the government to have management and control over them, are handed over to the private sector for continued operation. For example, suppose a commercial was nationalised by taking it over from a private management, under privatisation, the government voluntarily reduces its hold in the bank by disposing of its ownership equities to the private sector

3. Franchising

The government may provide the technical know-how and the name and brand name may be provided by the private sector. For example, the millions of STD/ISTD telephone booths are owned by the private parties and the telephone link is provided to them by the government. In this case the private parties are franchised to use the telecommunication links provided by the government. Before this, the postal and telegraph departments were completely providing this service.

4. Contracting

Government may contract out its service and make the service available to the common public through private bodies. For example, railways or airways may contract the catering service to an outside hostel or restaurant for a fixed period.

5. Leasing

Leasing of facilities provided by the government is yet another form of privatisation. For example, a shopping complex built by the government may be leased out to private parties for a specified period against the payment of lease rentals.


The objects are:

  • To improve the performance of psus, so as to lessen the financial burden on taxpayers.
  • To increase the size and dynamism of the private sector, distributing ownership more widely in the population at large.
  • To encourage and to facilitate private sector investments, from both domestic and foreign sources.
  • To generate revenues for the state.
  • To reduce the administrative burden on the state.
  • Launching and sustaining the transformation of the economy from a command to a market model.

Privatisation Routes

The important ways of privatisation are:

  • Divestiture, or privatisation of ownership, through the sales of equity.Denationalization or reprivatisation.
  • Contracting – under which government contracts out services to other organizations that produce and deliver them.
  • Franchising – authorizing the delivery of certain services in designated geographical areas – is common in utilities and urban transport.
  • Government withdrawing from the provision of certain goods and services leaving them wholly or partly to the private sector.
  • Privatisation of management uses leases and management contracts
  • Liquidation, which can be either formal or informal. Formal liquidation involves the closure of an enterprise and the sale of its assets. Under informal liquidation, a firm retains its legal status even though some or all of its operations may be suspended.


The benefits of privatisation may be listed down as follows:

  • It reduces the fiscal burden of the state by relieving it of the losses of the soes and reducing the size of the bureaucracy.
  • Privatisation of soes enables the government to mop up funds.
  • Privatisation helps the state to trim the size of the administrative machinery.
  • It enables the government to concentrate more on the essential state functions
  • Privatisation helps to accelerate the pace of economic developments as it attracts more resources from the private sector for development.
  • It may result in better management of the enterprises.
  • Privatisation may also encourage entrepreneurship.
  • Privatisation may increase the number of workers and common man who are shareholders. This could make the enterprises subject to more public vigilance.


Some of the important arguments against privatisation are as follows:

  • The public sector has been developed with certain noble objectives and privatisation means discarding them in one stroke.
  • Privatisation will encourage concentration of economic power to the common detriment.
  • If privatisation results in the substitution of the monopoly power of the public enterprises by the monopoly power of private enterprises, it will be very dangerous.
  • Privatisation, many a time, results in the acquisition of national firms by foreign firms.
  • Privatisation of profitable enterprises, including potentially profitable, means foregoing future streams of income for the government.
  • Privatisation of strategic and vital sectors is against national interests.
  • There are well managed and ill-managed firms both in the public and private sectors. It is not sector that matters, but the quality and commitment of the management.
  • The capital markets of developing countries are not developed enough for efficiently carrying out privatisation.
  • Privatisation, in many instances, is a half-hearted measure and therefore it is not properly carried out. As a result, that the expected results may not be achieved.
  • In many instance, there are vested interested behind privatisation and it amounts deceiving the nation. In many countries privatisation often has been a “garage sale” to favored individuals and groups.

Conditions For Success

  •  Privatisation cannot be sustained unless the political leadership is committed to it, and unless it reflects a shift in the preferences of the public arising out of dissatisfaction with the performance of other alternatives.
  •  Replacement of a government monopoly by a private monopoly may not increase public welfare. There must a multiplicity of private suppliers and freedom of entry to provide goods and services.
  •  Public services provided by the private sector must be specific or should have measurable outcome.
  •  Lack of specificity makes it more difficult to control services provided by the private sector. Service delivery by non-governmental organisations or local governments may be more appropriate under these conditions.
  •  Consumers should be able to link the benefits they receive from a service to the costs they pay for it, and then they will shop more wisely for difficult services.
  •  The importance of educating consumers and disseminating information to the public are necessary.
  •  Privately provided services should be less susceptible to fraud than government services, if they are effective.
  •  Equity is an important consideration in the delivery of public services. Broadly speaking, the benefits of privatisation can accrue to the capital owner, to the consumer and to the public at large.

Privatisation In India

In india, although there were some isolated cases of privatisation, no definite policy decision was taken until the new economic policy was been ushered in. The accumulated loses of many SOEs, including some state transport corporations, are larger than the capital invested in them. Privatisation of certain sectors and enterprises are, therefore, necessary to reduce the budgetary burden on the public, in order to make more resources available for the developmental activities, and to enable the government to concentrate more on the essential and priority areas.
The new industrial policy, which has abolished the public sector monopoly in all but a very few industries, is a significant step towards privatisation. The new policy also proposes privatisation of enterprises by selling shares to mutual funds, workers and the public. The central government has been reviewing the existing portfolio of public investment with a view to offloading public investment.

The disinvestments commission was set up by the government of india in august 1996 for suggesting the modalities for undertaking disinvestments of equities for selecting psus. The commission has recommended disinvestments at varying levels for a number of psus
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