Privatization of Business and Industry

On August 15th 1947 India, got Independence. Thereafter privatization has slowly become faster and bigger industries have started cropping up in the country. But the restriction of license and capacity has rarely bogged down the speed of privatization of the industry. Then Prime Minister, Pandit Jawaharlal Nehru took initiative to open public sector industries with larger capacity under Nehruvian Socialism to create employment for people both qualified and unskilled. Ultimately some of them ended up in losses. Post liberalization in 1991, privatization accelerated and the license per capacities were also abolished.

Since 1950s, governments in many developing countries, including India, relied on the public sector to accelerate development and achieve a more equitable regional dispersal of industries. In several countries, the public sector attained commanding heights of the economy.

From late 1970s, however, serious concerns have been raised about the effectiveness and efficiency of public enterprises. As a result, a number of countries have taken steps in the direction of privatization which essentially involves transfer of ownership (generally represented by equity shares), partial or total, of public enterprises from the government to individuals and non-government institutions. It may also be referred to as people-station or de-governmentalisation or marketisation.

Rationale for Privatization

The privatization programs of various countries have been motivated primarily by one or more of the following objectives:

  1. Improvement in efficiency
  2. Generation of resources
  3. Promotion proof popular capitalism.

Improvement in Efficiency

It is generally argued that the private sector has a comparative advantage over the public sector in terms of efficiency. The right to profit in the private sector provides a strong incentive to be efficient. Owners-managers will strive for higher productivity and lower costs, as these get translated into extra profits. Even in firms where ownership and management are practically separated, the capital market and the threat of takeover prods managers to be more efficient. The sources of efficiency gains are as follows:

  • Autonomy: Distanced from political interference and bureaucratic control, the enterprise enjoys greater autonomy. This means more flexibility in investment, financing and operating decisions.
  • Accountability: Private shareholders tend to be more demanding hence the management has to assume higher responsibility for performance.
  • Employee Pride: Typically as part of privatization, employees too acquire a stake in ownership. This leads to a greater identification with the enterprises and stronger commitment to excel.



Generation of Resources: Governments in most countries are struggling to keep budgetary deficits within reasonable limits. This is true of developed countries as well as developing countries Privatization seems to be a very convenient way of raising resources for reducing fiscal deficits. Many governments may not find privatization ideologically very palatable yet they find it very appealing as a practical device to cope with fiscal problems.

Promotion of Popular Capitalism

Privatization invariably broadens the base of equity shareholders and promotes popular capitalism. Apart from the contribution it makes to he deepening of the capital market it can be politically very appealing. In the United Kingdom, for example, the privatization program received an unexpectedly enthusiastic response from investors. As one financial commentator said, It was a policy with almost everything going for it as if by a process of alchemy the dull metal of Britain’s unloved public sector was being transformed into pure gold.

Indian Experiment and What Needs to be Done

The first attempt in the direction of disinvestment was made by the Government of India in 1991-92 when it sold equity shares of about 30 public sector undertakings mainly to public sector mutual funds and realized over Rs 3000 crores. Enthused by this experience, the government planned to step up its privatization program. However, a variety of factors, most important being the lack of political will, marred this initiative. The sporadic disinvestment  that occurred between 1992 and 1999 had been an apology for privatization . It was done in a very ad hoc manner and driven mainly by the desire to generate resources and reduce budgetary deficit.

While a determined attempt has been made from 2001,with companies like CMC, BALCO, VSNL and IPCKL being privatized there seems to be a lot of internal opposition within the NDA government to the initiatives of the ministry responsible for disinvestment. Hopefully, the necessary political party will emerge to execute a more meaningful and comprehensive privatization program aimed primarily at achieving efficiency gains and ensuring a fair price to the government.