Daily Answer Writing GS Paper 3

DAILY ANSWER WRITING QUESTIONS- 5TH NOVEMBER,2020

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Q . Pushing for privatization has not been free from criticism. Critically discuss its pros and cons. 5TH NOVEMBER,2020    (15 marks, 250 words, GS-3)                                                                                           

   

Answer-

Approach-

  • The first para could be about what is privatization and why in demand.
  • The next para about the arguments in favour.
  • The third para could be about the arguments against.
  • Final concluding para could include the implications, way forward and governmental measures.

Recently announced major reforms for Public Sector Undertakings, as a result of which many sectors are likely to see large-scale consolidation and divestment of State-run firms. The government will soon announce a new PSU policy, which will focus on privatising PSUs in non-strategic sectors based on feasibility. The policy will, in parallel, specify certain strategic sectors in which the “presence of PSEs in public interest” will be mandatory.

Privatisation can suggest several things, including migrating something from the public sector into the private sector. It is also seldom used as a metonym for deregulation when a massively regulated private firm or industry becomes less organised. Government services and operations may also be (denationalised) privatised; in this circumstance, private entities are tasked with the application of government plans or execution of government assistance that had earlier been the vision of state-run companies. Some instances involve law enforcement, revenue collection, and prison management.

Privatisation of the public sector companies by selling off part of the equity of PSEs to the public is known as disinvestment.

Objectives of Privatisation:

  • Providing strong momentum to the inflow of FDI
  • Privatisation aims at providing a strong base to the inflow of FDI.
  • Increased inflow of FDI improves the financial strength of the economy.
  • Improving the efficiency of public sector undertaking (PSU’s)
  • The efficiency of PSU’s was improved by giving them the autonomy to make decisions.
  • Some companies were given a special category of Navratna and Mini-Ratna.
  • Minimise the administrative cost of the Central Government
  • Boost the CPSE Disinvestment programme of the central government
  • More disciplined labour force.
  • Accountability to shareholders
  • To reduce unnecessary interference.

The private sector has effective policies in solving the problem of externalities, through costless bargaining, driven by individual incentives. According to the Coase Theorem, individual parties will directly or indirectly take part in a cost-benefit analysis, which will eventually result in the most efficient solution.

Privatization’s experience:

  1. India’s attempt at dismantling the PSUs over the years has seen little success, with the last big-ticket privatization taking place between 1999 and 2004.
  2. Since then, most governments have tried to disinvest and privatize. But this has led only to incremental progress, with no big-ticket privatization taking place since then. A good example is Air India, the national carrier that the Centre has repeatedly tried to privatize. However, it has met with limited success.
  3. Stiff opposition from unions, concerns of allegations of graft and criticism of the sale of “family silver” act as major hurdles to the drive for privatization.
  4. A good example of privatization and its effect on the enterprise is Hindustan Zinc. The Atal Bihari Vajpayee-led BJP government sold 45% of Hindustan Zinc for ₹769 crore in 2002. The 30% stake the government retained was valued at over ₹20,000 crore. The company became the world’s second-largest zinc-lead miner and one of the top 10 silver producers. Management change and privatization can thus raise shareholder wealth through improved efficiency.

Why not disinvest, rather privatize?

  • The Centre has had some success with disinvestment over the years. Of late, most of the disinvestments are funded by the Life Insurance Corporation of India.
  • The problem in disinvestment is that it does not ensure a change in management of the enterprise. To make PSUs efficient, there is a need to bring in private management that runs it with the aim of maximizing profit.

Thus, privatization is important and disinvestment a second-best alternative that yields revenues for the Centre, but does not improve the condition of the enterprise.

Challenges:

  1. Loss making units don’t attract investment so easily.
  2. Government has mostly used it for fiscal reasons rather than growth objectives.
  3. Most firms are not clear with their legal land rights.
  4. Process is not favoured socially as it is against the interests of socially disadvantaged people.
  5. Over the years the policy has increasingly become a tool to raise resources to cover the fiscal deficit with little focus on market discipline or strategic objective.
  6. Sometimes with the emergence of private monopolies consumer welfare will be reduced.
  7. Mere change of ownership from public to private does not ensure higher efficiency and productivity.
  8. It may lead to retrenchment of workers who will be deprived of the means of their livelihood.
  9. Private sector governed as they are by profit motive has a tendency to use capital intensive techniques which will worsen unemployment problem in India.

Currently,

  • The government has already set in motion privatisation plans for large PSU companies.
  • These include BPCL, Air India, Container Corporation of India, and Shipping Corporation of India.
  • Budget 2020-21 had announced plans –
    1. to sell part of the Centre’s stake in Life Insurance Corporation (LIC) through an initial public offer (IPO)
    2. On the sale of equity in IDBI Bank to private, retail and institutional investors.

Proposed changes

  • The government had announced the Atmanirbhar Bharat economic support package in May 2020.
  •  list of strategic sectors will be notified.
  • These would require the presence of at least one state-owned company along with the private sector.
  • In all other sectors, the government plans to privatise public sector enterprises, depending upon feasibility.
  • The number of enterprises in strategic sectors will be only one to four, to minimise wasteful administrative costs.
  • Others would be privatised/merged/brought under a holding company structure.
  • The policy will put out a “general framework.”
  • Specific decisions, on which company is to be privatised, merged, or put under a holding company structure, would be taken later on.
  • This is expected to be a long-term process rather than a one-time move on the privatisation of companies.
  • After inter-ministerial consultations to finalise strategic sectors, the policy will be put up before approval of the Union Cabinet.

Disadvantages:

  1. Private sector mainly focuses more on profit maximization and less on social objectives dissimilar to public sector that initiates socially viable adjustments in case of emergencies and criticalities.
  2. There is lack of clearness in private sector and stakeholders do not get the complete information about the functionality of the enterprise.
  3. Privatization has provided the unnecessary support to the corruption and unlawful ways of accomplishments of licenses and business deals amongst the government and private bidders. Lobbying and bribery are the common issues corrupting the practical applicability of privatization.
  4. Privatization loses the mission with which the enterprise was established and profit maximization programme encourages malpractices like production of lower quality products, elevating the hidden indirect costs, price escalation etc.
  5. Privatization results in high employee turnover and a lot of investment is required to train staff and even making the existing manpower of PSU abreast with the latest business practices.
  6. There can be a conflict of interest amongst stakeholders and the management of the buyer private company and initial resistance to change can impede the performance of the enterprise.
  7. Privatization intensifies price inflation in general as privatized enterprises do not get government subsidies after the deal and the burden of this inflation affects the common man.

Endnote: In short, privatization is the process of transfer of ownership, can be of both permanent or long term lease in nature, of a once upon a time state-owned or public owned property to individuals or groups that intend to utilize it for private benefits and run the entity to generate revenues. Privatization is overriding process to enhance productivity and competitiveness, as well as attracting foreign direct investment.


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