Privatization: Implications and Effects with Examples

01/05/2020 0 By indiafreenotes

Privatization occurs when a government-owned business, operation, or property becomes owned by a private, non-government party. Note that privatization also describes the transition of a company from being publicly traded to becoming privately held. This is referred to as corporate privatization.

How Privatization Works?

Privatization of specific government operations happens in a number of ways, though generally, the government transfers ownership of specific facilities or business processes to a private, for-profit company. Privatization generally helps governments save money and increase efficiency. In general, two main sectors compose an economy—the public sector and the private sector.

Privatization in India

In 1991 India made some major policy changes in their economic ideologies. There were stagnation and slow growth in the economy.

To tackle these problems the, then Finance Minister Dr. Manmohan Singh introduced some major economic reforms. Now, we call it the liberalization of the Indian Economy and the LPG reforms.

Privatization has a very broad meaning in economics. Everything that ranges from the introduction of private capital to selling government-owned assets to transitioning to a private economy.

As the definition of privatization is so very diverse let us take a look at the three main features of privatization.

  • Ownership Measures: The ownership of all public enterprises ultimately shifts to private owners. The denationalization can be complete or partial.
  • Organizational Measures: This is where we limit the control of the state in public companies. Some methods include holding company structuring, leasing. restructuring of the enterprises etc.
  • Operational Measures: Public organizations and companies were running into huge losses. So the efficiency of these companies was to be increased.

Conceptualization of Privatization in India

  1. Delegation

Here via a contract or franchise or lease or grant etc. the government keeps the ownership and the responsibility of an enterprise.

But the private company will handle the daily activities and deliver the product or service. The state will remain an active participant in this process.

  1. Divestment

The government will sell a majority stake of the enterprise to one or more private companies. It may keep some ownership but will be a minority stakeholder in the enterprise.

  1. Displacement

The first step here will be deregulation. This will allow private players to enter the market. And slowly and gradually the private company will displace the public enterprise.

Here the private sector will compete with public companies and ultimately outperform them, causing the public enterprise to be displaced.

  1. Disinvestment

Directly selling a portion or whole of a public enterprise to private parties.

Impact of Privatization on Indian Business Environment

  • Private companies always have a better incentive than public companies. The managers and officials of a private company have skin in the game, i.e. their income is related to the performance of the company. In public companies, such an incentive is not present. So privatization usually leads to higher efficiency in the company.
  • In a public company, there is a lot of political interference. This may dissuade the company from taking economically beneficial decisions. However, a private company will not let political factors affect their performance.
  • In public companies, at times the government can only think about the upcoming elections. So all their goals may be short-term in the process of trying to gain favours of the voting public. But a private company does not have such restrictions. They have long-term goals and ambitions and steer the company in the right direction.
  • Privatization will also increase competition in the market. Consequently, this has proved to be very beneficial to consumers. Healthy competitiveness in an economy will push efficiency and performances.