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Can Privatization Save India’s Economy?

Post-independence India needed Public Sector Undertakings to kick-start the economy of the country and also to provide employment. Public Sector Undertakings helped in maintaining the socio-economic fabric of the country. Times have changed, now there are other players in the market. The process of privatization, though slow, had started long ago with the policies of Liberalization, Privatization and Globalization.

While there are many sectors where government interference will do more harm than good, loss- making sectors should slowly be reformed.

With PM Modi’s announcement that the government has no business, being in business– there is hope that the government is slowly focusing on its promise of maximum governance and minimum government. According to the recent announcement by finance minister Nirmala Sitharaman, the disinvestment target of the government is 2.1 trillion rupees.

Before going further, there is one fundamental difference between Privatization and disinvestment that needs to be understood. Disinvestment means offering a small amount of shares of a Public Sector Enterprise to be bought by private entities. Privatization, on the other hand, means that the government will give up most of its control over the Public Sector Undertaking.

In case of Life Insurance Corporation of India, which is actually a profit making organization, the government is planning to sell 10- 25% of its share, i.e, disinvestment, while in case of Air India, due to recurring losses the government is planning to privatize it.

Disinvestment and privatization in the right sectors can boost the economy of the country in the long run. However, Privatization in sensitive sectors like Defense and Aerospace manufacturing might be hazardous to the country.

Why is Government focusing on Privatization and Disinvestment?

Slow Economy

The first and foremost reason is to increase the revenue of the government. The economy has been slowing down for a few years now; the pandemic further bolstered the process. Years of injections and governance reforms by the government have not been able to improve the state of many Public Sector Undertakings in the country.

The Narasimham committee and the PJ Nayak committee recommended that government participation should be brought down to below 50% in Public Sector Banks.

Many PSUs have become loss making enterprises.

The issue of under performance of Public Sector Banks has been maiming the government’s funds for a long time. Constant recapitalisation to save the Non- performing assets, has only drained government money over the years.

Efficiency

PSUs have not been as efficient as their private counterparts. One reason for this might be because of the sovereign guarantee of Job, which makes the employees casual. This does not mean that all PSUs have underperformed. LIC is a statutory body which has assets of about 31 trillion rupees and draws in profits of 48,444 crores. LIC has been used as an investor in many financial sector entities to save them from sinking. Selling a small percentage of equity shares of LIC can make it one of the largest corporations in India.

However, since the private sector focuses on delivery of services, it is much more efficient, overall. The employees are constantly on their toes and much more responsible, comparatively. Since the main focus of the private sector is making profit, there is minimum chance of over-employment.

Higher productivity also results in higher market capitalisation. An example is HDFC Bank. It was established in 1994 and has a market capitalisation of 8.8 Lakh Crores; the State Bank Of India-which is supposed to be the largest bank in the country- has a market capitalisation value of only 3.5 Lakh Crores.

Advantages of Privatization

Private sector is credited with better professionalism, which improves the economy as well as the skill set of individuals. Service quality can be greatly improved if the contracts are carefully designed.

If implemented well, privatization can result in the revival of the country’s industrial sector. Maintenance will be taken care of, since private owners pay attention to preserving the asset value.

Revenue can be accrued for the government through selling of equity shares, or completely giving up control. This can then be used for development of infrastructure in areas that are underdeveloped.

It can also downsize the governments control over certain sectors and streamline the responsibilities of the government.

Tax payer’s money can be saved while new tax revenue from private corporations can be acquired.

This move is welcomed by many economists of the country because it can improve the economy in the long run. Some might be sceptical of the implementation of such large scale disinvestment. However, proper measures and planning can avert most hurdles.

Hurdles

Capitalism:

The sole objective of private sector corporations is making profit. This is the reason many economists and left-wing parties are worried that it might result in chronic capitalism. In a country which was has kept the values of socialism for so long, this can cause quite a lot of concern among the masses.

Private Sector will not take social responsibility.

Complete privatization will not help the rural communities and people in other remote areas. Since rural areas are less accessible, private organizations do not pay attention to the needs of the people there. For instance, Air India is the only airline which flew to North East when no commercial airline agreed to. When Air India will get privatized airline services to remote areas might become expensive.

If rules are not laid down properly, it might also create a hole in the pocket of the common man. An example is the healthcare sector. Although the private entities entered the market, there was no change in quality of services to the poor and middle class. At the same time, the cost of healthcare rose up. Healthcare is a necessity but more than 60% of the costs are borne by the individuals.

Merging of loss making enterprises with profit making ones will degrade the efficiency of the better performing one.

There have been many cases of consolidation of Non Performing assets with profit making financial corporations. One such example is the merging of Yes Bank with SBI.

Some senior journalists are of the opinion that sale must be carried out at the right time. If the buyers realise that the PSUs for sale are not of much value, the price might go down the book value. Carrying out the sale for any given price is not the way to go.

Impact on Employees:

With time the hiring of employees through GATE will be discontinued. The hiring process will be governed by the management of the bank.

There is fear of downsizing among the existing employees. Since, PSUs are concerned with employment generation too, many public sector enterprises might be overstaffed.

Governance

The directors and CEOs of Private Sector Enterprises can take huge advantages of their position. An example is the sacking of the MD and CEO of ICICI bank, Ms. Chanda Kocchar, for allegedly extending dubious loans to her spouse.

The Best Way Forward

The scale of Privatization

Although, it is not advisable to carry out privatization as it has been done historically in the country, the scale of privatization should be regulated so that chronic capitalism can be averted.

Board of Directors:

The directors and CEOs of the soon to be private sector enterprises should be given a clear cut timeline to avoid monopoly.

Management of Public Enterprises:

Jayant Dasgupta (former secretary, Economic Advisory Council to PM) suggests that Privatization will be better than disinvestment.

However, for enterprises which will not become completely Private, instead of appointing civil servants to the board of Directors, experienced and independant experts should be appointed so that the decision making is not influenced by the government. This helps in professionalising the management.

Moreover, private sector entities must be made to sign a social contract to make them accountable to the society.

In the case of banks, RBI should increase its regulation of the banks so that there are fewer cases of theft and embezzlement

Policies:

The quick and efficient laying down of policies is imperative to receive optimal prices for the equity shares.

Finally, it should not be made to look like a distress sale. Laying down a clear distinction between the strengths and weaknesses of the PSUs, will attract investors towards the enterprises and shares on sale.

See also  Government turning their backs to ethics and responsibilities: Here are the most corrupt department in India

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