Privatisation in India: Case For and Against

Let us make an in-depth study of the case for and against privatisation in India.

The Case for Privatisation:

Critics of public ownership frequently begin by arguing that privatisation should take place because publicly owned firms are not efficient. They focus on efficiency and they also point out the benefits of wider share ownership.

1. Economic Efficiency:

It is argued that privatised firms would be more responsive to con­sumers’ needs. Since profits accrue to the own­ers—and sometimes to the managers in the form of incentive bonuses—the people who run private sector firms have a direct incentive to provide the goods and services which consumers want. This means that privatised firms would be more inno­vative in producing new products in response to changes in public taste and be more concerned to ensure that the goods which they produced were of a high quality.

Secondly, without the pressure of competi­tion, nationalised industries will be able to exist without pressure, content to produce in traditional ways without worrying too much about improv­ing efficiency. On the other hand, privatised in­dustries will face the disciplines imposed by the market. If they are not efficient they may be forced into bankruptcy. Even if that does not occur, poor performance will mean it is difficult to raise money for expansion.

Moreover, the price of the shares will fall, penalising not only shareholders, but also those managers who receive financial incentives related either to profits or to the price of shares. Furthermore, privatised industries will be more efficient because they will face competition. How­ever, merely privatising an industry does not in­crease the intensity of competition. It depends on other factors such as the presence or absence of competing firms, rather than the form of owner­ship of one particular firm.

2. Wider Share Ownership:

Another argu­ment in favour of privatisation is that selling na­tionalised industries increases share ownership and that this is desirable because it gives people a stake in the wealth of the nation. It, therefore, contri­butes to political stability. This argument would be attacked by Marxists and others on the grounds that individual rewards from owning a few shares are so trivial that they do not really give people a stake in the wealth of society.

Another argument in favour of privatisation is that, since the workers in privatised firms often receive shares on a preferential basis, they will have an increased motivation to work hard. Con­sequently, efficiency will improve in privatised firms.

The Case Against Privatisation:

Privately owned firms which have some mo­nopoly power—particularly those that are natural monopolies—must be regulated and this is diffi­cult to achieve. Sometimes the regulatory board has too little power and even when it has suffi­cient power it often fails to use it. This is called regulatory capture’ and occurs because the firm and those who are supposed to regulate it become very close, so that the regulators become sympa­thetic to the firm.

Critics of privatisation make a number of other points. For instance, the trade unions often make the following claims:

1. People will only buy shares in successful businesses, so it is only the profitable public en­terprises which are sold off. Hence the govern­ment is penalising successful public enterprises.

2. Privatised companies are often sold very cheaply. Moreover, the Exchequer loses the in­come from the profitable nationalised industries which it formerly received and is left to fund un­profitable industries.

3. Denationalisation is likely to break up an industry’s network of services and its ability to cross-subsidise loss-making activities, such as ru­ral postal services, with the profits made from de­livering business mail in the cities. The supporters of privatisation argue that cross-subsidisation is undesirable. In their view the price which is charged for a good should reflect its true cost of production. If rural postal services are thought to be desirable, then the cost should not be borne by other consumers, but by the community as a whole.

Finally the claim is made that by privatising some PSUs the Government sells off a country’s assets to finance tax cuts, or to reduce its budget­ary deficit.

Indian Experience:

In India, the name ‘privatisation’ has been used in the late 1980s after the success of the Brit­ish Government with this experiment in the mid- 1980s.

The Industrial Policy of 1991, therefore, limited the priority areas for the public sector in the future to the following:

(a) Essential infrastructure, goods and serv­ices;

(b) Exploration and exploitation of oil and mineral resources;

(c) Technical development and building of infrastructure capabilities in areas which are crucial for the long-term de­velopment of the economy and where private sector investment is inadequate; and,

(d) Manufacture of products where strate­gic considerations predominate—such as defence equipment.

Although there was a strong move in favour of privatisation in India, in reality it became in­creasingly difficult to put the idea into effect. First, in India, with the emergence of strong trade un­ions, privatisation in the sense of denationalisa­tion is not considered possible. This is why the Government declared that it does not intend to denationalise any of the PSUs, including loss-making ones in areas of banking, insurance, power- generation companies, coal mines, postal services, etc.

The Government made two attempts. First, it decided to transfer the ownership of Scooters In­dia Ltd. a loss-making PSU—to Bajaj Auto Ltd. Secondly, attempts were made to privatise the U.P. State Cement Corporation (UPSCC) by entering into agreement with Sanjay Dalmia Industries to transfer its ownership. However, both attempts failed largely due to resistance from trade unions.

In truth, in a democratic set-up, it would not be possible to carry out privatisation by completely ignoring the interests of the workers. This is, in­deed, a very strong issue in India where there is no social security system. This is why trade unions are often against retrenchment and voluntary re­tirement associated with privatisation. In fact, there is 25-30% overstaffing in the PSUs. So, the first axe of privatisation will fall on redundant work­ers.

As R. Datt and. K.P.M. Sundharam put it:

“The employers consider the payment of compensation to workers as a burden and they use all legal and non-legal methods to delay such payments as long as possible. This attitude of the employers and the bureaucratic delays in the State-owned enterprises have not been able to instill confidence among the workers that they would get the promised golden handshake.”