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Important Reasons for Privatisation in India:

(1) Releasing the large amount of public resources locked up innon-strategic PSEs, for redeployment in areas that are muchhigher on the social priority, such as, basic health, family welfare,

primary education and social and essential infrastructure.(2) Stemming further outflow of these scarce public resourcessustaining the unviable non strategic PSEs.

(3) Reducing the public debt that is threatening to assumeunmanageable proportions, Effectively minimizescorruptionandoptimizes output and functions.

(4) Transferring the commercial risk, to which the taxpayers'

money locked up in the public sector, is exposed, to the privatesector where ever the private sector is willing and able to step in.

(5) Releasing other tangible and intangible resources, such as,large manpower currently locked up in managing the PSEs, andtheir time and energy, for redeployment in high priority socialsectors which are short of such resources.

The need for privatisation arises out of the situations like

(1) Control of budgetary deficit

(2) Resource mobilisation

(3) Reduction of extra tax burden

(4) Flow of funds to public

(5) Production increase

(6) Retrieval of civil servants from public enterprises to betterutilisation in governance and administration.

(7) Increase in competition, both in domestic as well asinternational markets.

Based on the recommendations of the Arjun Sen GuptaCommittee on Public Sector Enterprise, the privatisation of publicenterprises in India can take one of the following forms:

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(1) Complete privatisation

(2) Partial privatisation

(3) Privatisation of the management

(4) Creating competitive conditions

(5) Deregulation(6) Delicensing and

(7) Disinvestments and other liberalisation measures.

State intervention in the market arises out of two main reasons.Either, the market does not exist at all, as was the case with mostdeveloping countries who had acquired independence fromcolonial rule in the second half of the 20th century, mainly located

in Asia-Africa and Latin America; or, there were cases of severemarket failures which required governments to intervenedecisively in public interest as was the case in many developingand even developed economies, like the UK, France, Italy, etc.

Benefits of Disinvestment:

(1) Disinvestment would expose the public sector companies tomarket discipline, thereby forcing them to become more efficientand survive on their own financial and economic strength orcease.(2) Disinvestment would result in wider distribution of wealththrough offering of shares of privatised companies to smallinvestors and employees.(3) Disinvestment would have a beneficial effect on the capitalmarket; the increase in floating stock would give the market moredepth and liquidity, give investors easier exit option, help in

establishing more accurate benchmarks for valuation and pricing,and facilitate raising of funds by the privatised companies fortheir projects of expansion, in future.(4) Opening up the public sector to appropriate privateinvestment would increase economic activity and have an overallbeneficial effect on the economy, employment and tax revenues inthe medium to long term.

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Demerits of Privatisation in India:

(1) Accountability The public does not have any control oroversight of private companies.

(2) Civil-liberty Concerns A democratically electedgovernment is accountable to the people through aparliament,and can intervene when civil liberties are threatened.

(3) Strategic and Sensitive areas Governments have chosento keep certain companies/industries under public controlbecause of their strategic importance or sensitive nature.

(4) Cuts in essential services If a government-ownedcompany providing an essential service (such as the water supply)to all citizens is privatized, its new owner(s) could lead to theabandoning of the social obligation to those who are less able topay, or to regions where this service is unprofitable.

(5) Natural monopolies Privatization will not result in truecompetition if anatural monopolyexist.

(6) Political influence Governments may more easily exertpressure on state-owned firms as compare to private firms to helpimplementing government policy.

(7) Job Loss Due to the additional financial burden placed on

privatized companies to succeed without any government help,unlike the public companies, jobs could be lost to keep more

money in the company.

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