Generally the rationale for privatisation varies among various countries. It can be classified under three heads pragmatism, commercial point of view and ideology.
Pragmatism has called for privatisation especially in less developed countries. State-owned enterprises instead of accumulating surpluses or supplying services efficiently have become a drain on national exchequer.
Instead of generating adequate surplus to finance the development expenditure and lessen the tax burden of the people they have increased the tax burden by incurring losses.
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Actually they did not generate any surplus till 1971-72. Their performance in generating profit improved till the mid-seventies and then again started deteriorating.
The quanta of profit have increased in the 80’s. However, the return on investment was not appreciable. It varied between 2 and 4 per cent. Therefore, pragmatism has to replace ideology.
Secondly, despite continued efforts, the essence of the organisation culture in the public sector remains that of government management. Therefore, from a commercial point of view, in order to give more autonomy and accountability to management, privatisation seems to be a possible solution.
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Thirdly, the government is not able to discharge its role as entrepreneur and owner due to some unique features of government as an entity which is impersonal. Thus, from the ideological standpoint, privatisation is called forth.
Moreover, privatisation may be seen as a means of diluting the strength of trade unions without which there is no hope of improving productive efficiency and reducing inflationary pressures in the economy as labour and their unions are least interested in improving productivity.
Compared to privatisation programme in UK, Indian efforts are quite modest. Privatisation by contracting out of services in India is still very little.
Moreover, economic environment in India is entirely different. A well-developed capital market in developed countries is associated with the fast pace of privatisation. In India, the capital market is not well-developed.
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The champions of public sector necessarily equate private business with “capitalist vices”. But privatisation does not necessarily mean producing commodities or providing services that people cannot afford.
Nor does it mean consumerism and accumulation by means, fair or foul. In any case, Indian democratic socialism has not exactly yielded milk and honey for the Indian poor. If at all, it has debarred about 85 per cent of the population from sharing the fruits of development.
If privatisation means developing new markets, making more people ‘customers’, it would do considerable service to the economy by taking commercial activity to hitherto untapped areas.
The public sector in India, so carefully hoisted to the “commanding heights”, has not held on to its place with any degree of pride. For directions emanating from the heights has bred on inefficient, often corrupt and an essentially snail- paced vehicle of growth. Experience with privatisation would hardly make things worse, even if it does not improve them.
Privatisation or the transfer of productive activities to the private sector is believed to improve economic efficiency.
Reduction of political interference, exercise of greater autonomy by managers is supposed to contribute to greater efficiency.
It follows that if there is a gain in efficiency following privatisation, this is not because managers have suddenly become more efficient but because the environments for the exercise of managerial skills have changed.
Under the new industrial policy the government has decided to take a series of measures to unshackle the Indian industrial economy from the cobwebs of unnecessary bureaucratic control. Measures relating to the public sector are as follows:
Portfolio of public sector investments will be reviewed with a view to focusing public sector on strategic, high-tech and essential infrastructure.
Whereas some reservation for the public sector is being retained there would be no bar for areas of exclusivity to be opened up to the private sector selectively. Similarly the public sector will also be allowed entry in areas not reserved for it.
Public enterprises which are chronically sick and which are unlikely to be turned around will, for the formulation of revival/rehabilitation schemes, be referred to the BIFR. A social security mechanism will be created to protect the interests of workers likely to be affected by such rehabilitation packages.
In order to raise resources and encourage wider public participation, a part of the Government’s share-holding in the public sector would be offered to mutual funds, financial institutions, general public and workers. Boards of public sector companies would be made more professional and given greater powers.
There would be greater thrust on performance improvement through the MOU system through which managements would be granted greater autonomy and will be held accountable.
Prof. Raj Krishna has suggested that competitive dualism should be introduced in most sectors of the economy. By competitive dualism we mean that the private sector should be allowed to enter those areas which have hitherto been monopolised by the public sector.
Analysing the factors behind the successful public enterprises in recent years, V.V. Bhatt has shown how exposure to competitive environment acts as an incentive as well as pressures and compulsions for efficient functioning of public enterprises.
The public enterprises can no longer afford to be lame ducks as economic environment becomes more and more competitive in future.
Privatisation or “Peoplisation” (Sri Lanka has coined this new term) is sometimes recommended as a solution to what is described as the public sector efficiency problem. Two points should be noted.
The first is that by privatisation we would be changing the character of a public enterprise; therefore we are not really solving the public sector efficiency problem by this method but merely getting rid of the public enterprise in question.
The second point is that we are assuming that public enterprises are ipso facto less efficient than private enterprises and there is no warrant for this assumption.
Among public enterprises, as among private enterprises, there are good, bad and indifferent performers.
Hindustan Organic Chemicals Ltd., National Thermal Power Corporation, National Fertilisers etc. are a few examples of efficient public enterprises and some of these are operating under competitive conditions.
This means that managers in PEs are no less efficient than their private sector counterparts: the truth is that the former practice the art of management in a different environment than the latter.
It follows that if there is a gain in efficiency following privatisation this is not because the managers have suddenly become more efficient but because the environment for the exercise of managerial skills has changed. The private sector is able to function in a somewhat business-like manner than the public sector.
Privatisation might be worth trying in a few cases as a means of shedding some unimportant or low-priority activities which need not have been in the public sector at all and that it might also be appropriate to try privatisation as an alternative to closure in the case of loss-making enterprises for which a package of remedial measures within the fold of the public sector is not feasible.
As to privatisation being a solution to the public sector efficiency problem, it can be said that it does not solve but evade the problem.
There is no denying that public enterprises in India would continue to play an important role in the Plan but with a difference.
The question of privatisation arises only in case of sick PSUs. It is no exaggeration to say that the Indian economy would sink or swim depending on the efficiency with which these enterprises operate.
PEs still can deliver the goods provided they are manned by executives with energy, vision, imagination and dynamism and also permitted to function without too much interference from outside.