Privatization and COVID economy

As all of you may be aware about the privatization of various public sector entities that are happening in our country. In this weeks post we will be looking into the effect of privatization in a COVID struck economy. Let us jump in and analyze.

What is privatization?

Privatization is the process in which the government sells majority share holding in a public sector undertaking inorder to raise money. The shares are bought by the public.

When did the privatization start?

In 1991 Shri Narasimha Rao and his then finance minister Dr Manmohan Singh introduced the LPG(Liberalization, privatization and globalization) model .During the initial years of India's independence our economy was based on the idea of socialism and only in 1991 that openning of markets happpened. When we look at that time period we can see two different major situations. One, the USSR a very good ally from whom we adopted the idea of socialism was on the verge of collapse and the second, China under Deng Xiaoping adopted Chinese economic reforms. All these situations decided that we should open our economy to the outside world.

Most PSUs are a liability

Today it is a fact that many government PSUs are running in loss for example, BPCL, ONGC, Air India etc. Why are they running in loss?

The answer to this question lies in the initial economic structure of the country which was based on a socialistic approach and in these notions were the PSUs created too. Which means the government was the owner of most of the assets in the country. Because at that time there was fear that capitalism works on the basis of profits and will not work towards the welfare of the people. As a government that is elected by the people it was necessary to work for the people.

But the country took time to realize that it was capitalism that will eventually provide greater results than a socialistic structure why was that? Because in capitalism the main motive was getting profits and it was this motive that helped in generating very good output with minimum wastage. The opening of the economy to the outside competitors and a trend change to capitalism would help the country to create innovative results and inturn boost the economy.

How does the disinvestment work in the current scenario and what are the reasons?

As said most PSUs are in debt and has become a liability for the government. Government's main revenue stream is the taxes that it collects and it has a lot of expenditures such as welfare policies, developmental projects defense etc. The revenue that the government gets should tally with the expenditure and in most cases it doesn't and this is often referred to as ficial deficit , thus it arises a need to rise some extra funds. This is where the disinvestment plans comes in. This not only helps the government to raise funds but also reduce its liabilities that are caused by loss making PSUs.

How does the disinvestment process take place?

The process is not a one step scenario, it is mainly divided into 3 types of disinvestments:

Major disinvestment : In this process the government sells about more than 50% of its stake in the company
Minor disinvestment : In this process the government sells less than 50% of its stake in the company. This is usually done inorder to raise funds.
Complete privatization : In this process the government sells the entire stake in a company.

Why is privatization good and what is its roll in current pandemic situation?

Due to the current pandemic situation the expenditure of the government has increased drastically and this has resulted in a need to rise more money and privatization is one way to achieve it.

The government is also planning on selling navaratnas that is the profit making companies too, the government's aim is to reduce the government's intervention in certain sectors as you know the government is elected for 5 years and each time there will be different policies and changes that are made on the companies and this will effect the performance of the PSUs. The government plans to reduce this interventions.