Privatisation in India

Privatization in India became a reality only in the early 90s. the current Prime Minister Manmohan Singh and the then PM Narsimha Rao played a crucial role in setting the ball rolling towards freeing India from the License Raj regime. And in hindsight it has paid rich dividends. The measures that were then taken by the incumbent congress government have played a huge role in driving India towards the economic prosperity we are witnessing today.

However, there is a huge debate going on in parliament as well as in government and academic circles and also in the media about the advisability of pushing for privatization of other government held industries. While privatization would definitely fill the governments coffers in the short run what would be the long-term implications of such a move. Would it be akin to killing the hen that laid the golden eggs or would it have political ramifications in terms of reduced employment opportunities and the like.

We will try and explore both sides of the story.

According to the proponents of the concept, privatization of state-owned enterprises is critical, as most of these entities are currently inefficient and loss-making firms. According to them, privatization would help turn these companies around. True, there are several loss making firms in the baggage. These firms are protected by state grants. If we look at sectors like finance, banking, insurance, infrastructure or even telecommunications, port facilities, and road building then we can see the validity of this take. Privatization could help bring in greater competition and in turn higher productivity into these sectors. The idea is that since survival is the top priority for private players they would coerced into taking steps to cut losses and turn around operations at the earliest.

From the globalization point of view, it is necessary to open up the economy further in order to attract more investments in the form of FDIs. This is crucial if India has to sustain its high economic growth rate.

India is trying to position itself as an economic superpower and an attractive destination for manufacturing. However, if India has to become an attractive destination for FDI and a major platform for labor-intensive manufacturing exports, reforms in India's labor laws and exit policies are very essential. China's experience suggests that while workers in the Chinese state sector are accorded generous job guarantees, workers in the non-state sector do not receive guaranteed employment.

By contrast, in India, workers in both the public and the private sectors, once employed, cannot be laid off without governmental permission. However, this has actually proved detrimental to the employment scenario, as private players are reluctant to hire more employees.

For instance, as a result of the liberal hiring and firing policies in China, there has been rapid growth of employment. One key reason is that firms can now hire workers without the fear of being stuck with unwanted labor in the future due to governmental restrictions on dismissals.

India, by contrast, has experienced a meager increase from 22.9 million in 1978 to 28.1 million in 2000, of which 19.3 million are employed in the public sector.

Similarly, reform to put in place an exit policy for firms is significant in the Indian context. An exit policy needs to be formulated such that firms can enter and exit freely from the market.

The opponents of privatization on the other hand voice several concerns. Are we privatizing only to create new private monopolies without a regulatory infrastructure in place? This is a possibility as most of these companies are monoliths which can try and keep other players out of the running. Also, several of these industries are profit making. So the question is why should the Government sell the enterprises even when they make profits?

The government is considering rampant privatization in order to utilize the funds thus generated for other development priorities. But are the privatization proceeds well spent, considering that they are going to the Consolidated Fund of India and not being earmarked to attain specific goals? After India’s track record has not been good with the privatization already completed. Between 1991-92 and 1997-98, the actual receipts from privatization were Rs 11,000 crore. From 1998-99 to 2001-02 the amounts raised were not much more. The total receipts during this period amounted to Rs 14,856 crore. Thus, in the decade since the reforms were implemented, approximately Rs 26,000 crore was raised through privatizations. The sum budgeted was Rs 66,000 crore. The rate of realization was just 40 per cent.

Another argument for privatization has been that it will introduce greater competition, which can only prove beneficial to the customer. But it’s not necessary to opt for privatization to introduce competition. As long as the government allows private players to participate in the same industry and ensures that similar rules apply to both the public as well as the private entity, competition is assured. The government should also desist from supporting the public entity by dipping into state coffers at the first signs of trouble. Instead it should push the public entity to evolve methods to counter this issue. At the same time it should put relaxed entry and exit policies in place for the private players. Then we can rest assured that competition will foster without the need for privatization.  

For privatization to succeed an appropriate institutional mechanism design is required. Our processes are not equipped to implement a disinvestment strategy according to global standards. A robust and dynamic free market economy requires the presence of an effective and centralized state with superior mechanism design and efficient implementation abilities.

While the activities of the government are transparent and it is committed to economic growth and a free market economy, clearly its mechanism design and implementation abilities make it a weak state. The need to create the appropriate mechanisms is perhaps necessary if any privatization is to be undertaken. However, the pressures from the market will provide enough pressures for public sector enterprises to restructure their activities, focus on key strategic parameters.