BCom Privatisation Globalisation & Liberalisation Notes Study Material
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BCom 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 the part of the economic system that is run by government agencies. Privatization may involve either sale of government-held assets or 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. Proponents of privatization maintain that the competition in the private sector fosters more efficient practices, which eventually yield better service 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.
In narrower sense, privatization implies the induction of private ownership in publically owned enterprises, but in a broader sense, it can notes besides partnership (or even without change of ownership), the induction of private management and control in the public sector enterprises.
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 the 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 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.(Privatisation Globalisation & Liberalisation Notes)
MEASURES OF PRIVATIZATION
Privatization covers three sets of measures:
- Ownership Measures: The set of measures which 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 is 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 efficiency of organization, even when full denationalization has not been undertaken. They, in fact, inject the spirit of commercialization in public enterprises. The measures include grant of autonomy to PEs in decision making, provision of incentives for increasing the efficiency of worker, freedom to acquire certain inputs from the market by a system of “contracting” instead of producing them within the enterprise, 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.
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 public sector and to achieve global standards government concentrates on privatization and globalization. Privatization will enable the PSUs to generate surplus of 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 of 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 Government to concentrate public resources on its role as provide basic public services, including health, education and social infrastructure; and
(iv) Encourage wider participation by the people in the ownership management of business.(Privatisation Globalisation & Liberalisation 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, to 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
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 private sector, their administration will improve and non-development expenditures will be reduced, their efficiency will increase and will be converted into profitable ventures.(Privatisation Globalisation & Liberalisation 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 will 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: Sale of enterprises through stock exchanges will broaden the base of share capital hence stock market will develop, because general public will be in position to purchase their shares and investment opportunities for general public will increase.
- 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 in the hands of private owners then these illegal pressures will be reduced to a great extent.(Privatisation Globalisation & Liberalisation Notes Study Material)
- Use of Latest Technology and Know-How: Private domestic investors and foreign investors will adopt latest technology and know-how for the increase in output and their profits. This will result in the increase in national product, thus national income of the country will grow.
- 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 to resort to deficit financing and the funds provided to these enterprises will be utilized for construction of 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 what can be the greatest spur to improvements in efficiency. For example, there is wow more competition in telecoms and distribution of gas and electricity.(Privatisation Globalisation & Liberalisation Study Material)
PRIVATIZATION IN INDIA: AN OVERVIEW
Privatization in India is still at a minimalist level. Privatization by way of sale of public sector enterprises is almost negligible while divestment is also existent by way of selling of a portion of shares of the 31 public sector enterprises. Privatization got tremendous boost by the introduction of 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. State owned enterprises were lacking the fitness that private enterprises employed as the 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).
Post independence, the Indian government adopted socialistic economic strategies. It was in 1980s, that Rajiv Gandhi initiated economic restructuring. With the help of IMF, Indian government commenced a sequential economic reorganization. P. V. Narsimha Rao brought in the 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 including 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. 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 to invest in infrastructure, while private company involvement in the profit making by 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.(Privatisation Globalisation & Liberalisation Notes)
- 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, or 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 staffs are 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, its 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.
It refers to a process whereby there are social, cultural, technological exchanges across the border. The term Globalization was first coined in 1980s. But even before this there were interactions among nations. But in the modern day Globalization has touched all spheres of life such as 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 revolution in electronic communication would unite the world. Undoubtedly, it can be accepted that globalization is not only the present trend but also future world order.(Privatisation Globalisation & Liberalisation Notes)
Effects of Globalization on India
Globalization has its 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. Use of Mobile telephone has revolution used communication with other countries.
- 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.(Privatisation & Liberalisation Notes)
- Increase in Production: Globalization has resulted in increase in the production of a variety of goods. MNCs have established manufacturing plants all over the world.(BCom Privatisation Globalisation & Liberalisation Notes)
- Employment Opportunities: Establishment of MNCs have resulted in the increase of employment opportunities in Indian economy.
- Free Flow of Foreign Capital: Globalization has encouraged free flow of capital which has improved the economy of developing countries to some extent It has increased the 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 the 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 success of globalization. But a country like India is not able to overcome the problem.
- Financial Instability: As a consequence of globalization there is 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 employee. 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 threat from global markets. They are facing a serious competition from powerful agricultural industries quite often cheaply produced agro products in developed countries are being dumped into India.
- Impact on Environment: Globalization has led to 50% rise in the volume of world trade. Mass movement of goods across the world has resulted in gas emission. Some of the projects financed by World Bank are potentially devastating to ecological balance, e.g.: Extensive import or export of meat.
- 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 labour and natural resources of the host countries.
- Threat to National Sovereignty: Globalization results in shift of economic power from independent countries to international organization, like WTO United Nations etc. The sovereignty of the elected government are naturally undermined, as the policies are formulated in favour of globalization. Thus globalization has its own positive and negative consequences. According to Peter F. Druckerk, 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.
The 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 labour and financial markets. Five year plan of India 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 attempts was in 1985 by Prime Minister Rajiv Gandhi. In the 80s, the government led by Rajiv Gandhi started light reforms.
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 government (1990-91) did not add any significant reforms.(Privatisation Globalisation & Liberalisation Study Material)
In response, Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated the economic liberalisation 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 labour laws and reducing agricultural subsidies. By the turn of the 21st century, Indian had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation. 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 liberalisation 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 has slowed significantly in the first half of 2012. An Organisation for Economic Co-operation and Development (OECD) report states that the average growth rate 7.5% wills 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 Privatisation Globalisation and Liberalisation in India Notes
BCom Privatisation Globalisation and Liberalisation in India Notes
BCom Privatisation Globalisation and Liberalisation in India Notes
BCom Privatisation Globalisation and Liberalisation in India Notes