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• GS 3 || Economy || Economic Reforms || Liberalization & Privatization

Why in the news?

How Nehru Govt took Air India from JRD Tata?

Background:

• Air India was founded by J.R.D. Tata and he was the first Indian to procure a flying license in 1929, at the age of 25, and own a Gipsy Moth aircraft soon after.
• He was the first Indian to pilot a plane from India to England in 1930, that too, devoid of any equipment modern flying machines are equipped with.
• He was the first to launch an air-cargo service between Karachi and Bombay, doing so under Tata Aviation Service in 1932, which was followed by the commercial TataAirlines the very next year.
• Those who worked closely with him say he had the vision to realise two things.
• First, that air travel would become economic only if it could be made into a mass market, large scale industry; and second, that Air India would participate effectively in air travel only if it could offer something unique to travellers.

All about Privatization and Disinvestment:

Privatization in India:

• In India, privatization is still at a rudimentary level.
• While privatization through the sale of public sector firms is almost non-existent, divestment through the sale of a portion of a public sector enterprise’s shares is also possible.
• In India, laws such as 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 helped to facilitate deregulation (DGTD).
• Following independence, India’s government implemented socialist economic policies. Rajiv Gandhi began economic reorganization in the 1980s.
• The Indian government began a series of economic reorganizations with the assistance of the International Monetary Fund.
• With the support of Dr. Manmohan Singh, P.V. Narasimha Rao brought about revolutionary economic changes.

Advantages of Privatization:

• Microeconomic benefits:
  • In terms of competitiveness, state-owned enterprises are frequently outperformed by private businesses. In terms of revenue, efficiency, and productivity, the latter outperforms the former.
  • Privatization results in significant structural changes, giving competitive sectors a boost.
  • Privatization leads to the adoption of global best practices, as well as the management and motivation of the greatest human talent, in order to develop long-term competitive advantage and improved resource management.
• Macroeconomic benefits:
  • Privatization improves the financial stability of a sector that was formerly dominated by the government by eliminating deficits and debts.
  • Through privatization, the net transfer to state-owned enterprises is reduced.
  • Assists in raising the industry’s performance benchmarks in general.
  • Can have an unfavorable impact on employees at first, but will eventually be useful to their growth and profitability in the long run.

Disadvantages of privatization:

• Profit maximization: In contrast to the public sector, which initiates socially feasible modifications in the event of emergencies and criticalities, the private sector concentrates more on profit maximization and less on social objectives.
• Corruption and illegitimate ways of obtaining licenses: Privatization has provided unnecessary support to corruption and illegitimate ways of obtaining licenses and business deals between the government and private bidders due to a lack of transparency in the private sector, and stakeholders do not have complete information about the operation of the enterprise.
• Lobbying and bribery are two prevalent difficulties that taint privatization’s practical application.
• Malpractices: Privatization dilutes the objective for which the company was founded, and profit maximization fosters malpractices such as lower-quality product production, increased hidden indirect expenses, and price escalation, among other things.
• High rate of personnel turnover: As a result of privatization, there is a high rate of personnel turnover, necessitating a significant expenditure to train less-qualified employees and to bring the PSU’s existing workforce up to speed on current business practices.
• Conflict of interest: There may be a conflict of interest among stakeholders and the buyer private company’s management, and initial resistance to change may impede the enterprise’s performance.
• Increases price inflation: Privatization increases price inflation in general because privatized enterprises do not receive government subsidies after the deal, and the burden of this inflation falls on the common man.

Major Concerns regarding Privatization:

• Privatization is not the first option: Privatization is not the default option in India; rather, it is used only when absolutely necessary.
  • This could explain the government’s reluctance to privatize some of the country’s largest loss-making PSEs, such as Air India, BSNL, and MTNL.
• There are no buyers for PSEs that are losing money: With their massive debt and employee responsibilities, no one would acquire a PSE.
  • If shares in public firms are offered for sale to the private sector, the latter will, understandably, be solely interested in profit-making concerns.
  • As a result, the government may be forced to compensate the buyer, as was the case with the privatization of the Delhi Discom.
• Excessive bureaucratization: In India’s public sector, excessive bureaucratization has resulted in inefficiencies. Their chairman-cum-managing directors are either bureaucrats lacking in domain understanding or technical service personnel lacking in commercial sense.
  • The administrative price mechanism is also triggered by monopoly/oligopoly of specific PSEs.
  • Oil PSEs, for example, have been permitted to profit because they have the ability to dictate oil pricing; this allows them to profit, but there have been no advances in the oil marketing sector.
• The post-privatization market structure has a significant impact on the valuation of PSEs.
• Since the government had to provide fiscal support to loss-making public companies, the government’s budget imbalance grew year after year. Privatisation, by an act of disinvestment, is one specific step adopted to lower the deficit.
• However, the manner in which disinvestment has been carried out gives the appearance that it is more of a budget-balancing exercise than a restructuring of PSEs.

Future prospects for India:

• Increased efficiency through target-oriented management: The primary strategic mandates for economic policies are globalization, liberalization, and privatization. Market-oriented reforms are sustainable and gaining acceptability, with resistance to privatization declining due to benefits such as increased efficiency through target-oriented management and the allocation of public monies to the country’s social and physical infrastructure.
• Positive impact on the development: Privatization has had a positive impact on the development of industries including as banking, insurance, telecommunications, power, and civil aviation.
• The unexpected turnaround of the Indian economy has weakened lobbying efforts in domestic circuits.
• Bureaucracy, red tape, political snafus, and corruption are all major roadblocks to India’s development, despite the fact that it has
• With additional liberal reforms in the works, the future of privatization appears bright, with a healthy flow of foreign investment and even the growth of domestic private actors to take over and turn around struggling PSUs.

Conclusion:

Indian policymakers have gradually abandoned their apprehensions about privatization and designed liberal reforms to divest the massive capital investment in PSUs and improve the efficiency and profit creation of state-owned businesses. Many industries with significant entry barriers have had their barriers lowered to allow both domestic and international investors to invest. Insurance, banking, civil aviation, telecommunications, and power are just a few of the industries that have reaped the benefits of privatization. Complete privatization, on the other hand, remains a pipe dream. Government control is still obvious in most liberalized industries, and delegation or joint ventures are more common between public and private sector are functional like Maruti Suzuki etc.

Mains oriented question:

When it comes to certain financial performance and efficiency metrics, privatized banks have outperformed fully public sector banks. Justify your statement. (200 words)