[Economic and social issues]

Chapter 8

Privatization

“The transfer of public assets, operations or activities to private enterprise”.

• Privatization is the process of transferring ownership of a business, enterprise, agency,

public service or public property from the public sector to the private sector.

• The business that operates for a profit or non-profit organization.

Why privatization

• To reduce government involvement in commercially viable activities

• Increase efficiency in the delivery of programs and services

• Provides competition in market place which transfers the lower price and greater
choice for the consumers.

Variations in privatization:

1. Private sector choice for the production of a services

-Entire responsibility transferred from public to private

2. Public sector choice financing with private sector operations

-Joint activity of public & private

3. Deregulation of private firms

-Govt. reduces or eliminates the regulatory imposed on private.

Methods of privatization:

Main methods:

• Share issue privatization

» Selling shares on the stock market.

• Asset sale privatization

» Selling entire organization to a strategic investor by

auction.

• Voucher privatization

» Distributing ownership to all for free or at lower cost.

Sub methods:

• Contracting out:

» Production of service by private firm under a contract.

» Under this scenario, the private sector firm is paid directly

by the government

Example: collection of disposal waste, Other things include

security services, data processing services

• Franchising:

» Government awarding a rights to perform services within a

specific geographic area to a private firm

» The private firm generates revenue by collecting user fees

Example: Cable television, gas etc..

• Open competition:

» Many private firms are allowed to compete for customers

within a governmental jurisdiction.

» It is not appropriate for some services as it most likely

would not be efficient to have multiple suppliers of
electricity, gas, or water service.

Example: It typically seen telephone and internet provider

Some of the examples of privatization:

Toll roads, bridges and airport:

 A significant developments in public private partnerships is the lease of

toll roads, bridges, and tunnels by state and local governments to private
contractors.

 these kinds of deals have previously occurred in Europe and Australia

 Government could not do in 50 add years, privatization did in just 4-5

years.

 The result is we have a great highways and airports.

 Ports:

 Mundra port in gujarat has bacame a highly eficient and well managed
major port in 10 years

 When compared to the kandla in mumbai working as port for more than
50 years.

Banking:

 ICICI bank is the country’s largest private bank in second place after the
SBI

 SBI existing in more than 100 years on the other hand,

6 industries which are not reserved for private sector:

 Cigarette
 Indian railways
 Atomic energy
 Chemical fertilizers
 Arms and ammunition
 Hazardous chemicals

Benefits of privatization:

1. Improved efficiency

 Private company has profit incentives to cut costs and be more efficient.

 government run industry, managers do not usually share in any profits, however, a
private firm is interested in making profit and so it is more likely to cut costs and be
efficient.

Example: British airways

2. Lack of political interference

 Government companies can be motivated by political pressures rather than sound

economic and business sense.

Example: a state enterprise may employ surplus workers which is inefficient.

 3. Short term view

 A government many think only in terms of next election.

 They may be unwilling to invest in infrastructure improvements which will benefit the
firm in the long term because they are more concerned about projects that give a benefit
before the election.

4. Increased competition

 Policies to allow more firms to enter the industry and increase the competitiveness of the
market.

 increase in competition that can be the greatest spur to improvements in efficiency

 For example, there is now more competition in telecoms and distribution of gas and
electricity.

Disadvantages of privatization:

• Investment in industries of comfort and luxurious products instead of necessary products

and problem of optimum use of capacity

• Aims at making profit which adversely affect the interest of the community

• The private companies don’t like to have their branches in ruler cities.

• Their services remain confined to cities where sufficient clients are available.

• Problem of unemployment

FDI Limits in India 2018

Foreign Direct Investment (FDI) is an investment made by a company or individual in one

country in another country, in the form of either establishing business operations or acquiring
business assets in the other country, such as ownership or controlling interest in a foreign
company.

Sector Limit Entry Route

Agriculture & Animal Husbandry 100% Automatic
Plantation Sector (Tea,Coffee,Rubber,Cardamom,Palm
100% Automatic
oil, Olive oil)

Mining 100% Automatic

Petroleum & Natural Gas (Petroleum refining by the

49% Automatic
Public Sector Undertakings (PSU))

Petroleum & Natural Gas(All other activity) 100% Automatic

Automatic upto 49%

Above 49% under
Defence 100%
Government route on case
to case basis

Automatic upto 49%

Broadcasting Carriage Services 100% Government route beyond
49%

Broadcasting Content Services 49% Government

Print Media
[Publishing of newspaper and periodicals dealing with
news and current affairs ][Publication of Indian editions 26% Government
of foreign magazines dealing with news and current
affairs ]
Print Media
[Publishing/printing of scientific and technical
100% Government
magazines/specialty journals/ periodical ][Publication of
facsimile edition of foreign newspapers ]
Civil Aviation 100% Automatic
Airports[Greenfield projects ] 100% Automatic
Automatic up to 74%
Airports[Existing projects ] 100% Government route beyond
74%
Construction Development 100% Automatic
Industrial Parks 100% Automatic
Satellites- establishment and operation 100% Automatic
Private Security Agencies 74% Automatic

Automatic up to 49%
Telecom Services 100% Government route beyond
49%
Trading
[Cash & Carry Wholesale Trading/Wholesale Trading 100% Automatic
(including sourcing from MSEs) ]

E-commerce activities 100% Automatic

Automatic up to 49%
Single Brand product retail trading 100% Government route beyond
49%

Multi Brand Retail Trading 51% Government

Processed Food Products 100% Automatic
Duty Free Shops 100% Automatic
Railway Infrastructure 100% Automatic
Asset Reconstruction Companies 100% Automatic

Automatic up to 49%
Banking- Private Sector 74% Government route beyond
49% and up to 74%.

Banking- Public Sector 20% Government

Credit Information Companies (CIC) 100% Automatic
Infrastructure Company in the Securities Market[in
49% Automatic
compliance with SEBI Regulations ]
Insurance 49% Automatic
Pension Sector 49% Automatic
Power Exchanges 49% Automatic
White Label ATM Operations 100% Automatic
Non-Banking Finance Companies (NBFC) 100% Automatic
Pharmaceuticals[Greenfield] 100% Automatic
Pharmaceuticals[Brownfield] 100% Government
Railway Infrastructure 100% Automatic
Regulated Financial Services 100% Automatic

 Government allows 49 per cent FDI in Air India

 The Cabinet allowed overseas investors to invest 100 per cent FDI
(foreign direct investment) in single-brand retail trading and construction
development without any government approval

All the best by GKmojo