What is privatization? Briefly discuss the three forms adopted for privatizing Public Sector Enterprises.

What is privatization? Briefly discuss the three forms adopted for privatizing Public Sector Enterprises.


How important is privatization in India? The first order issue is that of competition policy. When the government hinders competition by blocking entry or FDI, this is deeply damaging. Once competitive conditions are ensured, there are, indeed, benefits from shifting labour and capital to more efficient hands through privatisation, but this is a second order issue. The difficulties of governments that run businesses are well-known. PSUs face little "market discipline". There is neither a fear of bankruptcy, nor are there incentives for efficiency and growth. The government is unable to obtain efficiency in utilising labour and capital; hence the GDP of the country is lowered to the extent that PSUs control labour and capital. When an industry has large PSUs, which are able to sell at low prices because capital is free or because losses are reimbursed by periodic bailouts, investment in that entire industry is contaminated. This was the experience of Japan where the "zombie firms" - loss-making firms that were artificially rescued by the government - contaminated investment in their industries by charging low prices and forcing down the profit rate of the entire industry.
Further, in many areas, the government faces conflicts of interest between a regulatory function and an ownership function. As an example, the Ministry of Petroleum crafts policies which cater for the needs of government as owner, which often diverge from what is best for India. There is a fundamental loss of credibility when a government regulator faces PSUs in its sector: there is mistrust in the minds of private investors, who demand very high rates of return on equity in return for bearing regulatory risk. These arguments have led many economists to advocate large-scale privatisation, so as to clear the slate, and get on with the task of building a mature market economy. The role model in this regard is India. After the collapse of communism and the unification of East and West Germany, an auction was held for selling off all East German PSUs. Negative bids were permitted; i.e. the government was willing to even pay a private manager to take over a loss-making business if no higher bid was to be found. Through this, Germany was able to erase the heritage of socialism, and get on with the task of running an efficient market economy.
While such a game plan is entirely feasible in India, the present Parliament desires no privatisation. Does this mean that in the immediate future, progress in economic policy on privatisation must merely wait for the next elections? When we look at various industries in India, the gains from privatisation are quite heterogeneous. In some cases, there are hopelessly loss-making PSUs. These operate in industries where private and foreign firms have been able to come in, and the PSU has been left far behind the standards of quality and price set by the private sector. The PSUs should ideally have been sold off long ago, but today, these firms are irrelevant for the competitive dynamics of the industries that they operate in. The only issue is that of getting the land, the labour and some machinery out of public hands. When privatisation is achieved, India will benefit because the private buyer will produce more GDP using the same resources, and the flow of budgetary support to these firms will cease. The government should be happy to get these firms out of its hands with negative bids. The next and most interesting category comprises industries like telecom and airlines. In these areas, India has witnessed the dramatic benefits that come from the entry of private players.
Telecom and airline services in India are now dramatically improved, if not yet up to world-class, by changing rules in a way that permitted limited entry to domestic and foreign players. The privatization of VSNL was critically important because it was part of the opening up of the ILD sector to competition: the government would arguably have been more tardy in opening up if it had a vested interest through ownership of VSNL.
However, the key innovation, which broke with the stasis of socialism was opening up entry barriers - not privatisation. In both sectors, the full benefits from permitting foreign competitors, which are only present in very muted fashion, remain to be harnessed. While Spicejet is a good airline, there are bigger benefits waiting to be obtained by having domestic flights run by Lufthansa and Singapore Airlines. In both sectors, the defining issue in policy is the removal of entry barriers, not privatisation. Looking forward, there is a good chance that in some years, BSNL, MTNL [ Get Quote ] and the merged airline will end up like one of the many defunct PSUs of today. It makes sense for the government to sell today - while the going is good. But the privatisation of these three firms is no longer the most important issue - the further elimination of entry barriers faced by domestic and foreign firms is. What does this tell us about banking? The decline in market shares of PSU banks, while helped along by strikes of PSU bank unions, has proceeded only slowly. This is partly because there is a fundamentally non-level playing field where private and foreign banks have deposit insurance for only Rs 100,000 of deposits while PSU banks have unlimited deposit insurance. This gives one reason in favour of bank privatisation: it is inherently difficult to achieve competitive conditions without privatisation. But equally, there is no industry in India where the licence-permit raj hinders entry more than in the case of banking. At a time when the Indian economy is booming, and every kind of business is being created, the one industry where we see no new firms starting up is banking. This has surely got to do with government restrictions on entry. There is absolutely no industry in India where the opening of branch offices by foreign firms and private firms requires permission from the government. When Ford operates in India, it has to obey rules on FDI, but after that, it never has to go back to the government to take permission to open offices. What is worse, all foreign banks - put together - are given permission to open 12 branches per year in the full country. There is no worse instance where contemporary Indian policy-making is animated by ideas from the 1960s.

"Liberalisation, privatization and globalization are the means to achieve certain ends by the society."

"Liberalisation, privatization and globalization are the means to
achieve certain ends by the society." In the light of the statement, list five major
goals/ends, which these instruments are intended to achieve.

Answer.
Liberalisation
In general, liberalization refers to a relaxation of previous government restrictions,
usually in areas of social or economic policy.
Policies that make an economy open to trade and investment with the rest of the world
are needed for sustained economic growth. The evidence on this is clear. No country in
recent decades has achieved economic success, in terms of substantial increases in
living standards for its people, without being open to the rest of the world. In contrast,
trade opening (along with opening to foreign direct investment) has been an important
element in the economic success of East Asia, where the average import tariff has
fallen from 30 percent to 10 percent over the past 20 years. The goals of Liberalization
are listed below:
1) Opening up their economies to the global economy has been essential in enabling
many developing countries to develop competitive advantages in the manufacture of
certain products. There is considerable evidence that more outward-oriented countries
tend consistently to grow faster than ones that are inward-looking.
2) Indeed, one finding is that the benefits of trade liberalization can exceed the costs by
more than a factor of 10.
3) Countries that have opened their economies in recent years, including India,
Vietnam, and Uganda, have experienced faster growth and more poverty reduction.

4) On average, those developing countries that lowered tariffs sharply in the 1980s
grew more quickly in the 1990s than those that did not.
5) Freeing trade frequently benefits the poor especially. Developing countries can illafford
the large implicit subsidies, often channeled to narrow privileged interests, that
trade protection provides. Moreover, the increased growth that results from freer trade
itself tends to increase the incomes of the poor in roughly the same proportion as those
of the population as a whole.
6) New jobs are created for unskilled workers, raising them into the middle class.
Overall, inequality among countries has been on the decline since 1990, reflecting
more rapid economic growth in developing countries, in part the result of trade
liberalization.
7) The potential gains from eliminating remaining trade barriers are considerable.
Estimates of the gains from eliminating all barriers to merchandise trade range from
US$250 billion to US$680 billion per year. About two-thirds of these gains would
accrue to industrial countries. But the amount accruing to developing countries would
still be more than twice the level of aid they currently receive. Moreover, developing
countries would gain more from global trade liberalization as a percentage of their GDP
than industrial countries, because their economies are more highly protected and
because they face higher barriers.
Although there are benefits from improved access to other countries' markets, countries
benefit most from liberalizing their own markets. The main benefits for industrial
countries would come from the liberalization of their agricultural markets. Developing
countries would gain about equally from liberalization of manufacturing and agriculture.
The group of low-income countries, however, would gain most from agricultural
liberalization in industrial countries because of the greater relative importance of
agriculture in their economies.


Globalization
Economic "globalization" is a historical process, the result of human innovation and
technological progress. It refers to the increasing integration of economies around the
world, particularly through trade and financial flows. The term sometimes also refers to
the movement of people (labor) and knowledge (technology) across international
borders.
The term has come into common usage since the 1980s, reflecting technological
advances that have made it easier and quicker to complete international
transactions—both trade and financial flows. It refers to an extension beyond national
borders of the same market forces that have operated for centuries at all levels of
human economic activity—village markets, urban industries, or financial centers.
Markets promote efficiency through competition and the division of labor—the
specialization that allows people and economies to focus on what they do best. Global

markets offer greater opportunity for people to tap into more and larger markets around
the world. It means that they can have access to more capital flows, technology,
cheaper imports, and larger export markets. But markets do not necessarily ensure that
the benefits of increased efficiency are shared by all.
The globalization integrates the Indian Economy with world economy. It is a reform
package. It allows the:
Reduction of barriers in various countries regarding imports & exports. Various
trade norms have been setup that allows free flow of information, goods & services
countries have agreed to follow a common protocol with reference to the trade
polices. This allows an easy approach towards business activities, leading to a
win-win situation of business activities among various nations
There is an environmental setup where free flow of capital takes place. One
country can invest in the fruitful products / projects of the other countries & this
happens only when there is an environment of harmony for it. The disputes among
various nations lead to the friction in relationship thereby creating a distrustful
environment. No business can prosper in such an environment. In order to have a
prosperous business one need to have an environment of harmony. Thus a free
trade can only happen in an environment where capital flow occurs freely.
Technology is essential for prosperity of a nation. A nation can prosper only if it
has technology driven attitude. Technology could be imported from other nations
& can be developed in house as well. This can happen only when there is an
environment of the kind, maintained therein, Technical collaborations are the key
to globalization activities. There must be parity among the countries of world in
terms of technology being used, otherwise they would lag behind. In order to have
uniformity in the process, behaviour & price of technology there must be sufficient
measures to propagate it to the counties access the world. Thus free flow of
technology among nations and states is another benefit of globalization.
Globalization also makes sure that the manpower skills can be utilized effectively.
Once we have integrated the economy there happens a free flow of information,
labour, resources from one nation to another thereby reducing the distances &
narrowing the gaps. The labour forces learn to work in an environment that
belongs to foreign culture. Thus the world acts as a global village where everyone
can work as per international rules & scenarios.
Promotion of globalization has been prioritized in the Indian economy. Restrictions of
imports Exports, education, technical collaborations etc. have been lifted up. Bans on
certain restricted goods have also been taken off. This has provided a way towards
broadening of activities among the two nations. Foreign investment has been
encouraged & certain policies with effect to it have been framed. Direct foreign
investment has been invited by the government of India for better functioning. Now
technicians can move across the world to solve the problems of their clients. No

permission is needed for them to hire & take their services. Thus globalization has
eased the working among the technicians & businessmen. It has helped a lot in
generating effective development policy.?.


Privatization
Privatization (sometimes privatization, denationalization, or, especially in India,
disinvestment) is the process of transferring property, from public ownership to private
ownership and/or transferring the management of a service or activity from the
government to the private sector. The opposite process is nationalization or
municipalization.
Privatization is frequently associated with industrial or service-oriented enterprises,
such as mining, manufacturing or power generation, but it can also apply to any asset,
such as land, roads, or even rights to water. In recent years, government services such
as health, sanitation, and education have been particularly targeted for privatization in
many countries. In theory, privatization helps establish a "free market", as well as
fostering capitalist competition, which its supporters argue will give the public greater
choice at a competitive price. Conversely, socialists view privatization negatively,
arguing that entrusting private businesses with control of essential services reduces
the public's control over them and leads to excessive cost cutting in order to achieve
profit and a resulting poor quality service.
Types of privatization
In terms of outright privatization (that is, sale of a business), there are three major
types:
share issue privatization (SIP) - selling shares on the stock market
asset sale privatization - selling the entire firm to an investor, usually by auction
voucher privatization - shares of ownership are distributed to all citizens, usually
for free or at a very low price.
Share issue privatization is the most common type. Voucher privatization has mainly
been used in the transition economies of Eastern Europe - countries such as Russia,
Poland and the Czech Republic. Share issue can broaden and deepen domestic
capital markets, boosting liquidity and potentially economic growth, but if the capital
markets are insufficiently developed it may be difficult to find enough buyers, and
transaction costs (eg underpricing required) may be higher. Risks (political risk,
currency risk) are also higher, deterring foreign portfolio investors. As a result, asset
sales are more common in developing countries.
Arguments in Favour of privatization
Advocates of privatization argue that governments run businesses poorly for the

following reasons:
Performance. The government may only be interested in improving a company in
cases when the performance of the company becomes politically sensitive.
Improvements. Conversely, the government may put off improvements due to
political sensitivity — even in cases of companies that are run well.
Corruption. The company may become prone to corruption; company employees
may be selected for political reasons rather than business ones.
Goals. The government may seek to run a company for social goals rather than
business ones (this is conversely seen as a positive effect by critics of
privatization).
Capital. It is claimed by supporters of privatization, that privately-held companies
can more easily raise capital in the financial markets than publicly-owned ones.
Unprofitable companies survive. Governments may "bail out" poorly run
businesses with money when, economically, it may be better to let the business
fold.
Unprofitable units survive. Parts of a business which persistently lose money are
more likely to be shut down in a private business.
Political influence. Nationalized industries can be prone to interference from
politicians for political or populist reasons. Examples include making an industry
buy supplies from local producers (when that may be more expensive than buying
from abroad), forcing an industry to freeze its prices/fares to satisfy the electorate
or control inflation, increasing its staffing to reduce unemployment, or moving its
operations to marginal constituencies. It is argued that such measures can cause
nationalized industries to become uneconomic and uncompetitive.
Privatization Goals
It reduces the fiscal burden of the State by relieving it of the losses of the SOEs
and reducing the size of the bureaucracy.
Privatization of SOEs enables the govt. to mop up funds.
Privatisation helps the State to trim the size of the administrative machinery.
It enables the government to concentrate more on the essential State functions.
Privatization helps accelerate the pace of economic development as it attracts
more resources from the private sector for development.
It may result in better management of the enterprise.
Privatization may also encourage entrepreneurship.
Liberalization, Globalization & Privatization are the economic reforms aiming
towards the regulation of the basic activities related to opening new arenas,
providing better control & defining uniformity in operations across the world. It
helps the countries to achieve higher growth rates, employment & self reliance.