An Introduction to Privatisation | Economic Reforms in India | RBI Grade-B Exam

TPrivatisation refers to the transfer of ownership of any enterprise from the government to the private sector. By implementing it, the government then ceases to be the sole owner of the entity or business. Privatisation, implemented through various levels and phases,is considered beneficial for the growth & development of a country, as it brings more efficiency and objectivity to business. India adopted Privatisation as a part of the New Economic Policy or the LPG reforms.

This topic falls underthe ‘Economic Reforms in India’section of the Economic & Social Issues paper for RBI Grade-B Main. Economic Reforms, or the New Economic Policy, that was adopted under it, comprising the LPG reforms, marks a significant shift in the Indian economy, making it an extremely important topic from the exam point of view. Not only is it pertinent while preparing for RBI Grade B Main exam, but also for interview, where you can be asked questions about the implementation and advantages of privatisation.

Let’s first understand the basic concepts related to Privatisation.

What Is Privatisation?

The process wherein a publicly-traded company is taken over by private enterprises is called privatisation. Hence, the stock of the previously publicly-owned company is no longer traded in the stock market; and the general public is also barred from holding a stake in such a company. After privatisation, the company gives up the name 'limited' and starts using 'private limited' in its name.

Concepts of Privatisation in India

Some of the important concepts pertaining to privatisation in India are discussed below:

Delegation

Delegation refers to the process in which the government delegates responsibilities via lease, franchise, contract, or grant to a private sector company. In delegation, the government retains the ownership and responsibility, but the private company handles all the daily activities; and plays an instrumental role in delivering the end product or service. The state, however, remains an active participant in the entire process.

Divestment

Divestment refers to the process in which the government sells the majority of the stakes of its enterprise to one, or more, private companies. However, it still retains some ownership; and remains a minority stakeholder in the company to remain a participant in the decision-making process.

Displacement

The process of displacement begins with certain deregulations. These deregulations allow the private companies to enter into a sector that was hitherto controlled and regulated only by the government. After the private companies compete with the public-owned enterprises, slowly and gradually, the public enterprises are displaced from that sector.

Disinvestment

Disinvestment refers to direct sale or liquidation of assets of publicly owned enterprises to the private sector. The government undertakes the disinvestment process mainly to reduce the financial burden, or to raise money for specific needs. Although in some cases, disinvestment is done to privatize the assets, but not all disinvestment involves complete privatisation. Some of the benefits of disinvestment are:

  1. It allows the company (or the government) to reduce the fiscal burden on the exchequer.
  2. It fosters the long-term growth of the company.
  3. It encourages private ownership.
  4. It helps in maintaining and promoting competition in the market.

Advantages of Privatisation in India

Now, that you are aware of the concepts of privatisation, let us take a look at some of the advantages and benefits of undertaking privatisation

  1. Increased Efficiency: The model of working of the private sector is always performance-oriented. Hence, privatisation usually leads to higher efficiency of professionals, as well as of the company as a whole.
  2. Political Independence: A lot of times, the public sector has to mend its ways of working because of political interference, whichmay, at times dissuade companies from making decisions that are profit-oriented. However, a private limited company never lets political factors affect its performance.
  3. Long-Term Goals: Since the elected representatives in the government keep changing at regular intervals, sometimes policy-making is done with a short-term goal to lure the voters. Such is not the case with the private sector. A consistent managerial team allows the enterprise to take decisions to attain long-term goals.
  4. Increase in Competition: Privatisation increases competitiveness in the market allowing all the companies to enhance their efficiency; which, in turn, is beneficial both for the consumers and the economy.

These are some of the important concepts related to privatisation. You should also read up about the recent mergers and acquisitions, disinvestment, or privatisation for the current affairs portion.

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