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PRIVATIZATION OF PSUs, Pros and Cons of Privatization of PSUs, Will privatization help the economy?


The privatization of any organization mainly refers to transferring the power of authority from the Government to the private hands. If the same happens in the case of Public sector undertakings(PSUs) then it is called the privatization of PSUs. Disinvestment in PSUs in India is a process of public asset sales done by the President of India on behalf of the Government of India. It can be directly offered for sale to the public or indirectly done through a bidding process. The PSUs are running in India for approximately 58 years but now many renowned personalities of India are suggesting the Indian Government to step up towards the privatization of these PSUs

In India, privatization has been accepted with a lot of resistance and has been dormant (1) initially during the inception(2) period of economic liberalization in the country.

While announcing economic reforms in light of the Covid-19 impact on businesses and Governance, India’s Finance Minister(Nirmala Sitharaman) has made a big announcement: Every PSU in India will be privatized, except 4 in strategic sectors. PSUs in India are Govt owned entities, focusing on either strategic sectors or non-strategic sectors. In a big decision, Govt has now announced that all PSUs in non-strategic sectors will be privatized, while in the strategic sector, there will be only one to maximum 4 PSUs fully owned by Govt.

In the current fiscal year 2020, months before the coronavirus pandemic happened, the Govt had already committed disinvestment of Rs 2.1 lakh crore via privatization of PSUs, and Rs 1.2 lakh crore via privatization of CPSEs. As of October 2019, there were 10 Maharatnas PSUs, 14 Navratnas PSUs, and 74 Miniratnas PSUs. Besides, there are nearly 300 CPSEs (central public sector enterprises).

Some of the biggest privatization moves which have already been made include that of Indian Railways, 100% privatization efforts for Air India, and even oil and gas companies like Bharat Petroleum, besides SAIL, Shipping Corp of India (SCI), THDC India and NEEPCO and more.

By 1991 when the country embarked on the policies of liberalization, privatization became a natural cult. Selling off unviable PSUs and phasing out those from areas where the private sector can provide better and cheaper goods and services was imperative. Governments since then have sold several units either fully or partially. 

There always has been a rational justification in disinvestments(3) so far. For instance, it was argued, and rightly so, that the government need not be in tourism, hotel industry, consumer goods manufacturing, automobiles, and such sectors where private players can provide consumers with abundant choice. The argument was the government could utilize the money gained by selling off PSUs to improve services in public goods like infrastructure, health, and education.

Confronted with an unprecedented fiscal deficit and worried by an economy in crisis, the government has to find resources. Disinvestment is a preferred option for ideological and practical reasons. But when a sterling company like Bharat Petroleum Corporation Ltd (BPCL) is also being offered for ‘strategic disinvestment’ along with Shipping Corporation of India and Container Corporation of India, the nation naturally expects to know the strategy behind it. A few more PSUs have been selected by the government where its shareholding will be brought to less than 51 percent.

 Contrary to the accepted rationale of privatization, we have seen the government withdrawing from the health and education sectors, leaving the citizens with almost no choice but to seek costly education and unaffordable health care offered by the private sector.


Why do governments divest stake in public sector undertakings?

Some political parties that come to power believe that “the government has no business being in business”. That is, the government’s role is to facilitate a healthy business environment but the core competence of a government does not lie in selling fuel or steel at a profit. That is one reason that divestment is often a priority item in the election manifesto of such parties. 

 


Why sell a profitable public sector unit?

One counter to this question would be: why would a buyer pay a premium, or even be interested in a loss-making unit? Air India is a case in point. The government has been unsuccessfully trying to sell the debt-laden and loss-ridden airline for a while now. Bharat Sanchar Nigam Limited, which made a loss of ₹7,500 crores for the first half of this fiscal, may not find a buyer easily, even if it were on the block.


Pros of Privatization

   The privatization of PSUs is the need of the time and is very necessary for the growth of the nation. The privatization has many strong favors and thus seems to be profitable for the country. Some of the advantages of privatization of PSUs are as follows:


> Improved Efficiency

The PSUs in India are suffering from the problem of inefficiency and privatization would be the best tool to remove this inability. The main argument for privatization is that private companies have a profit incentive to cut costs and be more efficient. If you work for government-run industry managers do not usually share in any profits. However, a private firm is interested in making a profit, and so it is more likely to cut costs and be efficient. 


> Lack of political interference

The privatization of PSUs will free them from Governmental and political interference. Privatization will help in removing the bureaucracy from the Enterprise. 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.


> Short term view

A government many think only in terms of the next election. Therefore, they may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term because they are more concerned about projects that give a benefit before the election.


> Shareholders

It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state-owned firm doesn’t have this pressure and so it is easier for them to be inefficient.


> Increased competition

The privatization of PSUs will bring competitiveness and thus increase their productivity, it will bring them in the international markets. Often privatization 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. It is this increase in competition that can be the greatest inspiration to improve inefficiency. 


> Government will raise revenue from the sale

The privatization of PSUs will reduce the burden of the Government and will also help in generating financial resources. Selling state-owned assets to the private sector raised significant sums for the government. However, this is a one-off benefit. It also means we lose out on future dividends from the profits of public companies.


Cons of Privatization

Although privatization will bring many positive changes in the economy, yes it has some dark side too. None of them can be ignored. Though we have prepared to move towards privatization, it is very important for us to know its cons and should work in reducing its effects. Some of the disadvantages of privatization of PSUs are as follows:



> Privatization loses the mission with which the enterprise was established and the profit maximization agenda encourages malpractices like production of lower quality products, elevating the hidden indirect costs, price escalation, etc.


> The privatization of PSUs will reduce the opportunity of employment.

> Natural monopoly

A natural monopoly occurs when the most efficient number of firms in an industry is one. For example, tap water has very significant fixed costs. Therefore there is no scope for having competition amongst several firms. Therefore, in this case, privatization would just create a private monopoly that might seek to set higher prices that exploit consumers.

 

> Public interest

As the PSUs work with the motive of social welfare, the private enterprises will be mostly concerned about the profit of the enterprise. There are many industries that perform an important public service, e.g., health care, education, and public transport. In these industries, the profit motive shouldn’t be the primary objective of firms and the industry. The private sector focuses more on profit maximization and less on social objectives, unlike the public sector that initiates socially viable adjustments in case of emergencies and criticalities. 


> Government loses out on potential dividends

Many of the privatized companies in the country are quite profitable. This means the government misses out on their dividends, instead of going to wealthy shareholders.


> Problem of regulating private monopolies

Privatization creates private monopolies, such as water companies and rail companies. There is a lack of transparency in the private sector and stakeholders do not get complete information about the functionality of the enterprise. These need regulating to prevent abuse of monopoly power. Therefore, there is still a need for government regulation, similar to under state ownership.


> Short-termism of firms

As well as the government is motivated by short term pressures, this is something private firms may do as well. To please shareholders they may seek to increase short term profits and avoid investing in long term projects.


> Although the main goal of privatization is to increase the efficiency of the Enterprise, yet the inefficiency to a certain extent is found in private organizations too.


So these are some important Pros and Cons of the privatization of  PSUs. Neither any Pros nor any Cons can be avoided and the Government must think over these points seriously. There are some more Pros and Cons apart from these which can affect the economy.


So we see that the PSUs are a major part of the Indian economy. They have been running for a long time in India and are now being captured by some drawbacks. The Government of India has taken serious concerns on them and is planning to privatize the PSUs but before applying the rule of privatization, it must be thought if these problems can be removed without privatizing them. If the answer is ‘Yes’ then I think improving the services of PSUs is a better way than privatization. Sectors that showed tremendous success after privatization are insurance, banking, civil aviation, telecom, power, etc.


Shailendra


1. dormant - निष्क्रिय 2. inception - आरंभ 3. disinvestments - विनिवेश

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