By Bhasker Assoldekar
Privatization is the transfer or sale of government-owned assets or institutions to the private sector. Generally speaking privatization is a way of altering the relationship between the state and the private sector to enhance the role of the private sector in the functioning of the national economy as a whole.
Accordingly, privatization broadly means any process that reduces the state’s dominant role in directly owning and running the economic activities of a nation. Many countries like China, with state controlled economies have in the recent past, gone far enough to open the doors of economies to invite private players to achieve faster growth rate.
The craze for privatization has risen manifold after the ideological defeat and disintegration of the state controlled economy of the socialist bloc. In a country like India, privatization in today’s concept is seen as a means of increasing output, improving quality, reducing unit costs, curbing public spending and raising cash to reduce public debt.
Privatization is most of the time associated with improved efficiency due to the profit incentive. Private companies will ensure they improve their operational efficiency in order to reduce their costs and improve on profits.
Privatization reduces the government’s political interference. The government sometimes seems incapable of making hard decisions especially when they impact their political footing such as layoffs and pay cuts which are bound to attract negative publicity. The move also urges improvements in the company through competition. When a state owned entity is privatized it loses its government protection and is forced to adapt to the market by providing better services or products in order to survive and thrive.
Some of the fears expressed against privatization of certain state entities such as railway may just create single monopolies. These may eventually seek to increase prices to the detriment of the consumer.
There is also that fear that the government loses dividends after privatization as seen with most successful companies that are developed through privatization. These dividends are instead channelled to wealthy individuals.
However, as the world economy tends to become one global village, privatization as a policy norm seems to override political compulsions as an instrument for achieving competitive efficiency and resource optimization. Following the trend of privatization across the world, the Indian government in the 1990s also introduced privatization amid hue and cry from many of the political and social groups.
To achieve an increase in the output of the country there is a need for privatization at a rapid scale which will help in improving quality of the products by reducing unit costs, curbing public spending and raising cash to reduce public debt.
In a rapidly rising economy like India there is a need for the government to realign its priorities in mobilizing the skills and resources of the private sector in the larger task of the development.
Nowadays privatization is being seen as a solution towards the problems of public enterprises as these enterprises on being transferred from the public to the private hands will become less politicized which as a result will help in ceasing the administrative corruption. It will also help in increasing the tax revenues from profits and strengthening the public treasury. The advantages of privatization can be perceived from both microeconomic and macroeconomic impacts that privatization exerts.
Indian economy has a tremendous potential for growth. The economy which used to rise at 2.5-3 per cent of GDP had steadily registered rising growth to 5-6 per cent after introduction of reforms. Privatization will give ample space for creative and innovative thinking as well as systematic and strategic planning to realize the full potential of economy
To look at the wisdom of privatisation of national air carrier, Air India for which the approval came in recently, according to Air India’s audited accounts, at the end of 2019 it had debts totalling Rs 583.51 billion including the sum already sent to the SPV and assets worth Rs 280 billion.
Currently Air India has more than Rs 50,000 crores debt due to maintenance expenses. The carrier’s market share in the aviation industry is just 14 per cent. So it is certainly not a wise idea to spend Rs 50,000 crore public money on the airline when its market share is shrinking by the year.
Privatization of Air India will increase competition and hence the quality of services will be improved. Air India Employee unions do have their concerns that privatization will lead to job losses especially for those who fall in the reserved categories as private sector has no obligation to follow the reservation policy.
Air India has also to clear the salaries due to its staff. The major fear is privatization move without clearing these dues will create uncertainty. However, it is better to privatize commercial enterprises and government should concentrate on welfare schemes. One of the fears expressed is that there can be high price rises due to privatization. But such fears need not be there since central government can certainly impose restrictions on rates.
Privatisation is certainly the need of the hour, if we aspire to achieve US $ 5 trillion economy in the next four years. *The author is M.Sc.(Tech), MBA (IIM-A), and managing director of Vibha Natural Products Ltd., Mumbai