Privatisation of PSEs
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Baljit Dhaka

Privatisation of PSEs

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Economics

Privatisation of PSEs

Why in the news?

Central Govt. recently announced that it is going to that it would sell stakes in several public sector enterprises (PSEs) and even give up management control in some like oil marketing company Bharat Petroleum Corporation Ltd. (BPCL), Shipping Corporation of India (SCI), and Container Corporation of India Ltd (CONCOR), etc.

Background:

At independence, India adopted a mixed economy model. In this context, the Public Sector Enterprises (PSEs) were established on a socialistic pattern of development.

Apart from that, there was a need to create adequate infrastructural facilities which served as the most important consideration leading to the expansion of the PSEs.

However, due to the poor performance of several PSEs and the consequent huge fiscal deficits, the issue of privatization has come to the forefront. 

Why Govt.intends to privatize?

Current economic slowdown

Increasing fiscal deficit

Loss-making PSEs

With governments always having to spend more than they earn through taxes and other means, an additional disposable fund from the proceeds of a stake sale is always welcome

Commitment towards expenditure in sectors like health, education, infrastructure, etc.

6. The hope that privatization will infuse efficiency and increase productivity. Also, it will increase competition in the market.

Privatization

The term ‘privatization’ is used in different ways, ranging from ‘transition to private legal forms’ to ‘partial or complete denationalization of assets.’ 

 In India, privatization is sought to be achieved through two measures:

1. The disinvestment of the government’s equity in public sector undertakings.

Disinvestment: Selling off public sector equity to mutual funds, financial institutions, and the private sector.

2. The opening up of closed sectors of the economy for private participation.

The main objective of disinvestment is to put national resources and assets to optimal use and in particular to unleash the productive potential in our public sector enterprises.

The disinvestment policy aims at:

Modernisation and up-gradation of PSEs

Creation of new assets

Generation of employment

Retiring of public debt

Bounce back of loss-making units in various aspects

Issues Related to Privatisation of PSEs

1. No Buyers for Loss-making PSEs: No one would buy PSEs with their huge debt and employee liabilities. If shares of PSEs are offered for sale to the private sector, the latter will naturally be interested only in the shares of profit-making units. Therefore, the government may even have to pay the buyer, as it happened in the case of the Delhi Discom privatization.

2.  Privatisation, not the first option: In India, privatization is not a default option; rather, it is resorted to only out of extreme necessity. This may explain the hesitation to privatize some of the largest loss-making PSEs like Air India, BSNL, and MTNL.

3.  Excessive Bureaucratisation: Excessive bureaucratization without domain knowledge in higher-level posts in PSE leading to poor decision making.

4. The valuation of the PSEs critically depends on the market structure post-privatization. (industrial sector, competitive environment, etc.)

5. Privatisation being seen as a deficit financing instead of revamping the PSE.

Way Forward::

Where restructuring or even ensuring an additional infusion of funds and other resources in PSEs have not produced results, should be disinvested or can follow the exit route through the new Insolvency and Bankruptcy Code. For example, some of the major loss-making PSUs like BSNL, MTNL, and Air India should follow this route as their losses are greater than their revenue.

The privatization of profit-making PSEs will still bring in benefits of the efficient operation of the private sector through reduced costs. 

For PSEs of Strategic importance, the government should go for the de-bureaucratization of the public sector, instead of privatization.

Privatization must be accompanied by competition in the post-privatized scenario. To improve the performance of inefficient units, the creation of a competitive market environment is essential.