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MASSIVE PRIVATISATION DRIVE IN INDIA- NEEDED?

The government of India is on a drive to reduce the number of state-owned enterprises known as public sector enterprises(PSU) to around two dozen, from 334 at present, following the new policy that focuses on privatization in non-core sectors, while shutting down loss-making state-run enterprises.




This is a step taken by many developing countries over the years, more so in recent covid times as an immediate recovery from a covid hit economy.


Is Privatisation the right step for current India?

To give a yes or no answer- yes.

Reasons- 1. Socialism didn't work here. Won't work anymore.

2. We need the cash to flow to recover from a punctured economy.


Does the new India not require any PSU anymore?


PSUs were the initial endeavor of independent India to bring India to stand on its feet.

The major consideration for the setting up of PSUs was to accelerate the growth of core sectors of the economy; to serve the equipment needs of strategically important sectors, and to generate employment and income.


Since we are standing firmly enough, now is the time to compete. To suit the narrative of today, I believe a step towards liquefying assets is needed.


What all should be sold off?


There is a growing concern among the opposition that the Government is selling off profit-making enterprises. Those who not only contribute massively towards the GDP but also giveaway a good dividend to the Government regardless of their numbers each year.


The state-run and owned business is such in India, that it expands far and beyond in length from the key strategic sectors. By key sectors, I mean sectors that require Government intervention like Health and certain resources.

The state runs a leading coal company and a petrochemical company with the same hands.


The point is Government should be the regulatory body, not a profit-driven business group.



Disinvestment or Privatisation?


Strategic Sector: Bare minimum presence of the public sector enterprises and remaining to be privatized or merged with others closed.


Following 4 sectors to come under it :

  1. Atomic energy, Space and Defence

  2. Transport and Telecommunications

  3. Power, Petroleum, Coal, and other minerals

  4. Banking, Insurance, and financial services


Non- Strategic Sector: In this sector, enterprises will be privatized, otherwise shall be closed.


While the list here is huge and vague, I would give the lines along which I believe they should be chosen.


1. It depends on the industry in question. An industry like telecoms is a typical industry where the incentive of profit can help increase efficiency. However, if you apply it to industries l like health care or public transport the profit motive is less important.


2. It depends on the quality of regulation. Do regulators make the privatized firms meet certain standards of service and keep prices low?


3. Is the market contestable and competitive? Creating a private monopoly may harm consumer interests, but if the market is highly competitive, there is greater scope for efficiency savings.


4 Can you create incentives in a nationalized firm? For example, performance related pay could replace the profit incentive.


Profitable to Private players?


A conducive environment for private players is indeed under process as very evident from the recent ease of worker laws, geospatial data restrictions, and a spree of anti-capitalism protests as seen in the country.


Ho does this step facilitate it?



1. With the government out of the business of business and no PSU in an industry, the private sector can be more confident of not being driven out by a competitor that has no constraints on access to capital. This principle may contribute to increased investment from the private sector.


2. sector companies face unfair competition from the presence of PSUs. Unlike the private sector, where capital is limited, PSUs have a virtually infinite source of capital: the tax revenues of the government.

3. Further, the cost of capital for PSUs from the market is also lower as they enjoy an implicit government guarantee. Competing with such a giant is fraught with risk for the private sector.

4,. Another problem arises from a conflict of interest. Where there are PSUs, the government acts both as a player and a regulator in the market. The government will always be tempted to tilt the rules in favor of its PSUs.


The regulatory role Government should play-


The government should first provide a better regulatory and institutional framework, including a well-functioning capital market and the protection of consumer and employee rights.


In other words, context matters: ownership reforms should be tailor-made for the national economic circumstances, with strategies for privatization being adapted to local conditions.


The traditional privatization objective of improving the efficiency of public enterprises also remains a major goal in India, as does reduce the subsidies to state-owned enterprises



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