BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material
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BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material
MEANING OF PRIVATIZATION
Privatization is the process of transferring an enterprise or industry from the public sector to the private sector. The public sector is part of the economic system that is run by government agencies. Privatization may involve either sale of government-held assets or the removal of restrictions preventing private individuals and businesses from participating in a given industry. Privatization is an ongoing trend in many parts of the developed and developing world. (BCom Privatisation Globalisation and Liberalisation in India Notes Study Material)
Proponents of privatization maintain that competition in the private sector fosters more efficient practices, which eventually yield better services and products, lower prices, and less corruption. On the other hand, critics of privatization argue that some services—such as health care, utilities, education, and law enforcement should be in the public sector to enable greater control and ensure more equitable access. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
In a narrower sense, privatization implies the induction of private ownership in publically owned enterprises, but in a broader sense, it can be noted besides partnership (or even without the change of ownership), the induction of private management and control in the public sector enterprises. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
DEFINITIONS OF PRIVATIZATION
- “Privatization is a process, which can be defined as the “transfer of assets, management, functions or responsibilities previously owned or carried out by the State of private actors.” –Coomans & Hallo de Wolf
- Barbara Lee and John Nellis define privatization in this manner: “Privatization is the general process of involving the private sector in the ownership or operation of a state-owned enterprise. Thus the term refers to the private purchase of all or part of the company. It covers ‘contracting out’ and the privatization of management-through management contracts, leases, or franchise arrangements.
MEASURES OF PRIVATIZATION
Privatization covers three sets of measures:
- Ownership Measures: The set of measures that transfer ownership of public enterprises, fully or partially, led to privatization. The higher proportion of transfer of ownership to the individual, cooperative or corporate sector, the greater the degree of privatization. This can take four forms:
(a) Total denationalization,
(b) Joint venture,
(d) Management by out.
- Organization Measures: A number of organization measures are on conceived to limit state control. They include:
(a) A holding company structure
- Operational Measures: Operational measures are intended to improve the efficiency of the organization, even when full denationalization has not been undertaken. They, in fact, inject the spirit of commercialization into public enterprises. The measures include a grant of autonomy to PEs in decision making, provision of incentives for increasing the efficiency of workers, freedom to acquire certain inputs from the market by a system of “contracting” instead of producing them within the enterprise, and development of proper criteria, permitting PEs to go to the capital market to raise funds, etc. The basic purpose of these measures is to bring about a drastic reform to reduce government control over the enterprise. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
OBJECTIVES OF PRIVATIZATION
In the event of globalization, privatization has become an order of the day. Privatization can be defined as the transfer of ownership and control of public sector units to private individuals or companies. To strengthen the efficiency of the public sector and to achieve global standards government concentrates on privatization and globalization. Privatization will enable the PSUs to generate a surplus for future investments and helps in reducing the burden of foreign debts.
Privatization is advocated for various reasons as given below:
(a) Primary Objectives
The following are the primary objectives for privatization:
(i) Improve the operational efficiency of enterprises that are currently in the public sector, and their contribution to the national economy;
(ii) Reduce the burden of PEs on the Government budget;
(iii) Expand the role of the private sector in the economy, permitting the Government to concentrate public resources on its role as providing basic public services, including health, education, and social infrastructure; and
(iv) Encourage wider participation by the people in the ownership management of the business. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
(b) Secondary Objectives
In so far as their pursuit is consistent with the primary objectives, the privatization intends to ensure the following secondary objectives:
(i) To create a more market-oriented economy;
(ii) To secure enhanced access to foreign markets, capital, and to technology;
(iii) To promote the development of the capital market;
(iv) To preserve the goal of self-reliance:
(v) To develop cost-conscious and profit-oriented units;
(vi) To act as business entities without being required to carry out noncommercial;
(vii) To hold activities except when explicitly compensated by Government;
(viii) To reduce political interference in their operations;
(ix) To have boards and managements that are autonomous and accountable; and
(x) To have effective performance and monitoring systems.
ADVANTAGES OF PRIVATIZATION
The following are the main advantages of privatization:
- Increase in Efficiency and Profitability: Most Govt. industries and services are inefficient and running in losses when these will be transferred to the private sector, their administration will improve and non-development expenditures will be reduced, their efficiency will increase, and will be converted into profitable ventures. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
- Increase in Foreign Investment and Export Earnings: Privatization will increase foreign investment when foreigners will purchase them. Their production will increase which more foreign exchange and if these enterprises are set up by foreign loans, these loans will be repaid out of the sale proceeds, which will reduce the burden of foreign loans.
- Broaden the Base of Share Capital and Stock Market: The sale of enterprises through stock exchanges will broaden the base of share capital hence stock market will develop because the general public will be in a position to purchase their shares and investment opportunities for the general public will increase. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
- Decrease in Political Pressure: There is always political pressure on Govt. owned industries, banks, and other institutions for employment of political workers and loan facilities from banks. When these enterprises will go into the hands of private owners then these illegal pressures will be reduced to a great extent. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
- Use of Latest Technology and Know-How: Private domestic investors and foreign investors will adopt the latest technology and know-how for an increase in output and profits. This will result in an increase in national product, thus the national income of the country will grow. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
- Decrease in Deficit Budgeting and Increase in Infrastructure: Govt. enterprises usually run into losses and to keep them going Govt. provides funds every year. After privatization, Govt. need not resort to deficit financing and the funds provided to these enterprises will be utilized for the construction of the social infrastructure of the economy.
- Safety of Shareholders: It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state-owned firm doesn’t have this pressure and so it is easier for them to be inefficient.
- Increased Competition: Often privatization of state-owned monopolies occurs alongside deregulation, i.e. policies to allow more firms to enter the industry and increase the competitiveness of the market. It is this increase in competition that can be the greatest spur to improvements in efficiency. For example, there is now more competition in telecoms and the distribution of gas and electricity. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
PRIVATIZATION IN INDIA: AN OVERVIEW
Privatization in India is still at a minimalist level. Privatization by way of the sale of public sector enterprises is almost negligible while divestment also existent by way of selling a portion of shares of the 31 public sector enterprises. Privatization got a tremendous boost by the introduction of a new economic policy in 1991 that allowed de-licensing, relaxing entry restrictions, and equity funding. This heightened the competition in the industries that were monopolized by the public sector earlier. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
State-owned enterprises were lacking the fitness that private enterprises employed as a competitive edge. Deregulation in India was facilitated by laws like the Industries (Development & Regulation) Act, 1951 (IDRA), Monopolies & Restrictive Trade Practices Act, 1969 (MRTPA), Foreign Exchange Regulation Act, 1973 (FERA), Capital Issues Control and technical scrutiny by the Directorate General of Technical Development (DGTD). (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
Post-independence, the Indian government adopted socialistic economic strategies. It was in the 1980s, that Rajiv Gandhi initiated economic restructuring. With the help of the IMF, the Indian government commenced a sequential economic reorganization. P. V. Narsimha Rao brought in revolutionary economic developments with the help of Dr. Manmohan Singh. The results of these reforms can be assessed statistically by comparing the total overseas investment in terms of portfolio investment, FDI, and investments from foreign equity capital markets. In 1995-1996, it was $ 5.3 billion as compared to $ 132 million in 1991-92.
The highlights of the reforms included eradicating license raj for all except 18 critical sectors for licensing; tempering the control on industries; Foreign Technology Agreements; FDI & FII; amendment of MRTP Act, 1969; Deregulation; Regulation of Inflation; Tax restructuring; encouraging overseas business relations. A few examples of privatization in India are Lagan Jute Machinery Company Limited, Modern Food Industries Limited, BALCO, Hotel Corporation of India Limited, Hindustan Zinc Limited, Pradeep Phosphates Limited, BSNL, etc.
DISADVANTAGES OF PRIVATIZATION
- Services get Worse: Private companies have a legal duty to reward their shareholders, so they have to priority to making a profit. This means they may end up cutting corners, or under-investing in public services. Private companies ignore investing in infrastructure, while private company involvement in the profit-making by the cost of less expenditure. Private companies also have commercially confidential contracts, so they don’t share information with others; this makes it harder for them to work in partnership to make services better.
- Costs Go Up: Under privatization people pay more, both as a taxpayer and directly when they pay for public services. Value for money goes down because private companies must make a profit for their shareholders and they also pay their top executives more money. This means either we the people, the government, or both, end up paying more. Fares on our privatized buses are the most expensive, while people are also being hit with high energy bills.
- Less Accountability: If the local administration runs a service, we know where to go to complain. But if a private company runs a service, they are not democratically accountable. That makes it harder for people to have a voice. It reveals problems in outsourcing public services, including a lack of transparency, manipulation of contracts by suppliers, etc.
- Staff are Undermined: If you work in public services, privatization will make your life harder. A study found that privatization has largely negative effects on employment and working conditions. There are often job cuts and qualified staff is replaced with casual workers, who are paid less and have worse conditions. This has a knock-on effect on the service being provided.
- It is Risky and Difficult to Reverse: A review of outsourcing finds that the claims made about its benefits are unproven, but that potential risks are substantial. A report finds that many large companies are bringing services in-house because of the costs, complexity, and risks of outsourcing. Once our public services are privatized, it’s often difficult for us to get them back. Not only that, we lose the pool of knowledge, skills, and experience that public sector workers have acquired over many years. We also lose integration both within and across different public services. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
It refers to a process whereby there are social, cultural, and technological exchanges across the border. The term Globalization was first coined in the 1980s. But even before this, there were interactions among nations. But in modern-day Globalization has touched all spheres of life such as the economy, education, technology, cultural phenomenon, social aspects, etc.
The term “global village” is also frequently used to highlight the significance of globalization. This term signifies that a revolution in electronic communication would unite the world. Undoubtedly, it can be accepted that globalization is not only the present trend but also the future world order. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
Effects of Globalization on India
Globalization has an impact on India which is a developing country. The impact of globalization can be analyzed as follows:
- Access to Technology: Globalization has drastically, improved the access to technology. Internet facility has enabled India to gain access to knowledge and services from around the world. The use of the Mobile telephone has revolutionized used communication with other countries. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
- Growth of International Trade: Tariff barriers have been removed which has resulted in the growth of trade among nations. Global trade has been facilitated by GATT, WTO, etc. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
- Increase in Production: Globalization has resulted in an increase in the production of a variety of goods. MNCs have established manufacturing plants all over the world. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
- Employment Opportunities: The establishment of MNCs have resulted in an increase in employment opportunities in the Indian economy.
- Free Flow of Foreign Capital: Globalization has encouraged the free flow of capital which has improved the economy of developing countries to some extent It has increased capital formation.
Negative Effects of Globalization
Globalization is not free from negative effects. They can be summed up as follows:
- Inequalities within Countries: Globalization has increased inequalities among countries. Some of the policies of Globalization (liberalization, WTO Policies, etc.) are more beneficial to developed countries. The countries which have adopted the free trade agenda have become highly successful, e.g.: China is a classic example of the success of globalization. But a country like India is not able to overcome the problem. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
- Financial Instability: As a consequence of globalization there is a free flow of foreign capital poured into developing countries. But the economy is subject to constant fluctuations on account of variations in the flow of foreign capital.
- Impact on Workers: Globalization has opened up employment opportunities. But there is no job security for employees. The nature of work has created new pressure on workers. Workers are not permitted to organize trade unions.
- Impact on Farmers: Indian farmers are facing a lot of threats from global markets. They are facing serious competition from powerful agricultural industries quite often cheaply produced agro products in developed countries are being dumped into India.
- Impact on the Environment: Globalization has led to a 50% rise in the volume of world trade. The mass movement of goods across the world has resulted in gas emissions. Some of the projects financed by the World Bank are potentially devastating to ecological balance, e.g.: Extensive import or export of meat. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
- Domination by MNCs: MNCs are the driving force behind globalization. They are in a position to dictate powers. Multinational companies are emerging as growing corporate power. They are exploiting the cheap labor and natural resources of the host countries.
- Threat to National Sovereignty: Globalization results in a shift of economic power from independent countries to international organizations, like WTO United Nations, etc. The sovereignty of the elected government is naturally undermined, as the policies are formulated in favor of globalization. Thus globalization has its own positive and negative consequences. According to Peter F. Drucker, Globalization for better or worse has changed the way the world does business. It is unstoppable. Thus Globalization is inevitable, but India should acquire global competitiveness in all fields. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
Economic liberalization in India refers to the ongoing economic liberalization, initiated in 1991, of the country’s economic policies, with the goal of making the economy more market-oriented and expanding the role of private and foreign investment. Specific changes include a reduction in import tariffs, deregulation of markets, reduction of taxes, and greater foreign investment.
Indian economic policy after independence was influenced by the colonial experience which was seen by Indian leaders as exploitative in nature. Policy tended towards protectionism, with a strong emphasis on import substitution, industrialization under state monitoring, and state intervention at the micro level in all businesses, especially in labor and financial markets. The five-year plan of Indian tariffs resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants among other industries, were effectively nationalized in the mid-1950s.
Attempts were made to liberalize the economy in 1966 and 1985. The first attempt was reversed in 1967. Thereafter, a stronger version of socialism was adopted. The second major attempt was in 1985 by Prime Minister Rajiv Gandhi. In the 80s, the government led by Rajiv Gandhi started light reforms. (BCom Privatisation Globalisation and Liberalisation in India Notes Study Material)
The government slightly reduced License Raj and also promoted the growth of the telecommunications and software industries. The Vishwanath Pratap Singh (1989-90) and Chandra Shekhar Singh governments (1990-91) did not add any significant reforms. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
In response, Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated the economic liberalization of 1991. The reforms away with the License Raj reduced tariffs and interest rates, and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall thrust of liberalization has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labor laws and reducing agricultural subsidies. (BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material)
By the turn of the 21st century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalization. This has been accompanied by increases in life expectancy, literacy rates, and food security, although urban residents have benefited more than rural residents.
The fruits of liberalization reached their peak in 2006 when India recorded its highest GDP growth rate of 9.6%. With this, India became the second fastest-growing major economy in the world, next only to China. The growth rate slowed significantly in the first half of 2012. An Organisation for Economic Co-operation and Development (OECD) report states that the average growth rate of 7.5% will double the average income in a decade, and more reforms would speed up the pace. The economy then rebounded to 7.3% growth in 2014-15.
BCom 1st Year Privatisation Globalisation and Liberalisation in India Notes Study Material