Let us make an in-depth study of the Rationale for Privatisation of the Public Sector Industries in India.

Over the last 58 years or so, the performance of India’s public sector enterprises has been severely criticised.

Truly speaking, the public sector enterprises have been set up not merely out of ideological considerations of building a socialistic pattern of society.

In truth, the necessity for creating adequate infrastructural facilities was the most important consideration leading to the expansion of the public sector.


This is in view of the fact that the private sector is not only hesitant, but also incapable, of building social overhead capital. In a mixed economy framework, the two sectors are expected to play a complementary role. But what happened in India during the planning period was that the public sector acted as a feeder to the private sector, in spite of inefficiencies of the former.

Furthermore, loss of public sector helps private sector to accumulate profits. That is why, in the early 1990s, a question cropped up in the minds of our national leaders: How long public sector industries should bear losses by merely playing the complementary role?

An argument often advanced by them is that, over time, private sector industries in India have attained a fair degree of maturity. Investment potentiality, as well as managerial efficiency, of these industries are no less inferior to those of public sector industries. Hence, the necessity for expansion of the private sector.

In the light of failure of the public sector and success of the private sector industries, demand for privatisation of the public sector came to the forefront when the Cong. (I) Government under the leadership of P.V. Narasimha Rao came to power in 1991. This was the time when the then socialist country U.S.S.R. embarked upon economic reforms under the banner ‘Perestroika’ (meaning ‘reconstruction’ or ‘restructuring’ of the economic system) aimed at dismantling socialist stance and introducing privatisation.


This wave of privatisation swept all over India. International financial institutions also preached the gospel of privatisation. The World Bank, in its 1991 report, clamored for the introduction of ‘market- friendly’ approach and advised us to deregulate and decontrol the public sector. It is argued by these institutions that the market will take care of all problems. The market mechanism is the ‘open sesame’ for all sorts of economic ills. Is it really so? To answer this question, we must first know the meaning of privatisation.

The term ‘privatisation’ is used in different ways, ranging from ‘transition to private legal forms’ to ‘partial or complete denationalization of assets.’

In India, privatisation is sought to be achieved through two measures:

(i) The disinvestment of the government’s equity in public sector undertakings, and


(ii) The opening up of hitherto closed areas to private participation.

The issue of privatisation has come to the forefront due to the poor performance of several public sector enterprises and the consequent huge fiscal deficits faced by the government. Since the government has to give fiscal support to losing public concerns, the fiscal deficit of the government kept on mounting year after year. One specific step that has been taken to reduce the deficit was privatisation, through an act of disinvestment, i.e., selling of public sector equity to mutual funds, financial institutions and the private sector.

The privatisation process began in 1991-92 with the sale of minority stakes in some PSUs. From 1999-2000 onwards, the focus has been shifted to strategic sales. As a part of strategic sales, the government plans to ensure that at least for a period of one year after privatisation there would be no retrenchment of employees.

Another major shift in disinvestment policy was made in 2004-05 when it was decided that the government may “dilute its equity and raise resources to meet the social needs of the people”— a distinct departure from strategic sales.

The Government has been able to realise nearly Rs 51,573 crore by way of disinvestment of PSEs over the period 1991-92—March 2007- 08. Till 1990-2000, disinvestment was primarily through the sale of minority shares in small lots. Between 1999-2000 and 2003-04, the emphasis on disinvestment changed in favour of strategic sale. At present, the policy is to list large, profitable CPSEs on domestic stock exchanges.

One can conclude from this move of the Government that the private sector industries in India are not inefficient as public sector industries. Administrative and managerial inefficiency are the hallmarks of public sector industries. Government is unable to run these high cost public sector industries. Unable to correct this situation, the Government went for privatisation. So, it was a forced privatisation.

The current direction of privatisation policy has been spelt out in December 2002. Government has announced in the Parliament its policy that the main objective of disinvestment is to put national resources and assets to optimal use and in particular to unleash the productive potential in our public sector enterprises.

The policy of disinvestment now aims at:

(i) Modernisation and up-gradation of PSEs;


(ii) Creation of new assets;

(iii) Generation of employment;

(iv) Retiring of public debt.



Mishra and Puri have rightly commented: “In fact, there seems to be no clarity regarding the objectives of such privatisation. Instead of revamping the public sector enterprises, the entire way in which disinvestment has been undertaken gives the impression that it is an exercise to bridge the budgetary deficit.” Critics have argued that privatisation does not necessarily lead to better economic performance.

In feet, there is hardly any correlation between ownership and operational efficiency (performance). No doubt competitive markets are necessary to achieve an efficient and vigorous economy, but full-scale private ownership is not necessary for the successful operation of competitive markets (i.e., for keeping competition alive and markets free).

The fact is not that all public sector enterprises are models of inefficiency or loss- making concerns and that all units in private sector are efficient in their operation. There are both efficient and inefficient enterprises in both the sectors—private and public. Thus, it appears, on balance, that in order to improve the performance of inefficient units the creation of a competitive market environment is absolutely essential. The crux of the matter is that it is a competitive environment, rather than ownership, which ensures an efficient allocation of society’s productive wealth i.e., its capital.

Critics also point out that if shares of public sector enterprises are offered for sale to the private sector, the latter will naturally be interested only in the shares of profit-making concerns. This would virtually amount to transferring public profit to the private pockets. This cannot be justified by any rational economic canon.


It may be reminded that the disinvestment policy has wide fiscal ramifications. It is observed that disinvestment plans did not run as it was derived; it led to low resource mobilisation in most of the years. Further, it has not been successful in addressing fiscal difficulties.

Finally, one may note that the sale of real assets of large enterprises like the SAIL or Coal India Ltd. is likely to weaken the very base of the economy by creating infrastructural deficiency. If the new owners of these companies (the replacement values of the assets of which are in the neighbourhood of Rs 25,000 crore each) enjoy the discretion of using the resources as they deem fit, this will virtually amount to giving control over the vast resources at throwaway prices.

Ours is a mixed economy. In the name of liberalisation, private sector is being pampered. Market principles are being allowed to play freely. What is needed at this juncture is the de-bureaucratisation of the public sector, instead of privatisation. Public sector industries in India are plagued with inefficiencies due to excessive bureaucratisation. Instead of removing the ills of the public sector industries, the Government went for privatisation. To achieve the goals of social justice public sector investment has to be stepped up.

A logical question that will arise is the question of financing public sector industries. Resources must be garnered to step up investment in the public sector. However, to this problem we have an answer. The Government should have disinvested its share of luxury hotels and restaurants, bakery, etc. By disinvesting shares of these luxury goods producing public sector industries, the Government could have raised a great deal of financial resources.

Furthermore, loss- making public sector industries should not be allowed to function unless they improve their performance. However, the Government thought it proper to disinvest shares of profit-making public sector enterprises. But, experts firmly believe that privatisation is not the solution to the problems from which our economy is suffering.