Arguments For Privatisation:

Neo-liberal economic theories recommend privatisation as it aims at increasing efficiency, output and profitability as compared to the situation of state-owned enterprises.

Thus, the arguments for privatisation are based on the economic grounds and poor performance of PSEs. In this section, we will put forward economic arguments in favour of privatisation of PSEs.

(i) Dismal Performance of PSEs:

One of the strongest arguments in favour of privatisation aired by its supporters is the dismal performance of the PSEs and, thus, its inefficiency can be removed if these enterprises are privatised. PSEs in India are overcontrolled and overregulated causing inefficiency to grow upwards.

Further, accountability of these enterprises is minimal and no one is held responsible for the ineffective functioning of these enterprises. Political interference also has a telling effect on the performance of the PSEs. Most PSEs operate with manager having less or no expertise on the affairs of the concern. Decision-making again is a lengthy process. In fact, managerial inefficiency is one of the greatest banes of the PSEs.


As a result of all these, PSEs chronically suffer from losses leading to a drainage of state resources. Most of the public sector undertakings fail to generate revenues. On the other hand, subsidies and grants are often given to these enterprises. In other words, PSEs in India— instead of generating revenues—have become white elephants—’a monumental waste and liability for taxpayers’.

Against such a backdrop, it was argued in 1991 by some people that high-cost uncom­petitive PSEs of India would not be able to compete with the globalised world. Under the circumstances, privatisation is the best answer to the ills of PSEs. If the private sector is al­lowed to grow and function in a liberalised economy, the benefits of efficiency in terms of resource allocation could be reaped. This is because of the following reasons:

(ii) Accountability of the Private Sector Raises Efficiency:

First, privatisation will usher in an improvement in efficiency and as improved performance is concerned with ‘profit-oriented’ decision-making strategy, accountability is strictly ensured in a private sector enterprises and some people are held responsible for any failure. Accountability and responsibility will definitely tone up the efficiency and greater output of the private sector.

(iii) Development of Social and Economic Infrastructures by the Government:

Secondly, government resources for keeping up PSEs may be utilised for the purposes of social sector development as this sector is starved of financial resources. Modern governments should spend more on this sector as well as economic infrastructures as these are the two essential pillars of growth.

(iv) LPG Mantra against Anti-Competitive Behaviour:


Thirdly, the current buzzwords are liberalisation, privatisation and globalisation i.e., LPG. To move in tune with the global situation, privatisation seems to be the better answer. Hitherto, Indian private industrialists performed in a sheltered market and remained insulated from any kind of external competition. This made Indian private sector an inefficient one. Goods produced by this sector were far below international standards. Private industrialists kept themselves busy competing among themselves domestically.

Privatisation will promote private sector culture by introducing competition so that Indian industrialists can compete with their foreign counterparts and, hence, generate greater output and improved efficiency. All these trigger a chain of favourable movements in many direct and indirect directions.

(v) Absence of Governmental Interference:

Fourthly, Indian PSEs are subject to too much governmental and political interference thereby making them operationally in­efficient. Private sector is free from such unavoidable interference.

(vi) Production of Non-Priority Items by PSEs Lacks Reasoning:

Finally, over the years, the Indian PSEs have branched out in all directions, as their operations must not only consider economic objectives, but also social welfare objectives. In the name of enlarging public sector enterprises, the government has moved into the production of many unimportant consumer goods (producing food products like bread, fruit juice, entertainment business, and so on). No economic logic is forwarded for producing these commodities, even the welfare objective does not hold here. This kind of distortion needs to be corrected through privatisation.

Arguments Against Privatisation:

Despite its avowd goal of expanding PSEs in India the private sector, in terms of number, employment, value added, gross output, invested fixed capital is the most dominant sector. Its role in economic development is undeniable. However, all is not well with India’s private sector. It is not the cure for all the ills from which it suffers. There are some equally convincing economic grounds that may discourage one to go for privatisation.

(i) Private Sector is Inefficient too:


Firstly, the premise on which privatisation of PSEs was built in 1991 centred around the miserable performance of PSEs. It is also believed that the private sector in India is an epitome of efficiency. Public sector enterprises are inefficient due to multiplicity of reasons like lack of accountability, political interference in the day-to-day functioning, wrong pricing policy, cost escalation, etc. Most of these pitfalls can be corrected by adopting suitable policies instead of privatisation.

In fact, despite these snags, there are some good number of PSEs that are not loss-making enterprises; instead, some of them generate revenues. If PSEs are allowed to grow in an independent way, managers of these enterprises are expected to respond according to the changed requirements.

Further, there is no evidence that can sug­gest that the Indian private sector performs satisfactorily. Private sector is inefficient too. During 1950-1990, India’s private industrial­ists functioned under the protective umbrella without putting much effort in increasing fac­tor productivity. These industrialists felt no urgency in modernising their industries; they used old and obsolete technology. All these made this sector an inefficient one.

In addi­tion, there are so many private industries that are lying sick. Sometimes, private industrial­ists deliberately make their organisations ‘sick’—so that they can receive financial help from public sector institutions to tide over the crisis. Anyway, it is hard to believe that pri­vatisation will promote efficiency.

There is no statistical evidence that can show a positive relationship between ownership and perform­ance. In fact, performance is not be related to the ownership of industries. What is needed is the competitive environment in which any sector public sector and private sector can grow.

(ii) Infrastructures may not Grow in Abun­dance:

Secondly, economic growth crucially depends on the growth of infrastructures. In­frastructures both economic and social and economic growth are positively linked to each other. Since infrastructure investments are lumpy in character, private capital shies away from such investments and thrives on state- support infrastructures. Therefore, move to­wards greater and greater privatisation means country’s slow and haphazard growth of infrastructural facilities.

(iii) Peripheral Social Responsibility:

Thirdly, private sector is completely guided by the profit motive. This sector will invest in those areas that yield quick return the low priority industries. Above all, social responsibility or welfare objective of business is sidelined by the private industrialists.

(iv) Danger of Employment Loss:

Finally, employment loss seems to be another argument against privatisation as far as present employment scenario is concerned. The country needs to address the problem of poverty and inequality. In the name of more and more profit, private industrialists have adopted ‘hire and fire’ policy of employment as well as labour-saving technologies.


Further, private businessmen exploit workers in many forms (like extending working hours or increasing work load, sabotaging the power of the workers to negotiate with the employers, etc.). All these impact on wages. Income inequality, thus, gets widened.

During the reform period (1991-2008), a higher economic growth caused by various structural adjustment programmes has been achieved but employment situation has deteriorated. Thus, what the country experiences is the ‘jobless growth’ the growth that does not create more employment. Some call it ‘job loss growth’.