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Project Report On

Privatization

v/s

Nationalizati

on

Presented by:Rupali Jamdar 20

Sanket Pandit 2

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PRIVATIZATION

What is privatization?

The transfer of public assets, operations or activities to

private enterprise.

The opposite of nationalization is privatization, when

government-owned companies are spun off into the private

business sector.

privatization is the act of transferring property previously

owned by the state into the ownership of individuals or other

legal entities.

Meaning of Privatizations

The revolution of privatization started in 19! and spread to many

parts of the world. "everal countries are privatizing their public

sector enterprises. #ndia is no e$ception to it. %rivatization was

meant to improve the performance of public enterprises.

%rivatization techni&ues have been tried in countries li'e (reat

)ritain, *hina, +", Tur'ey, )razil, e$ico, apan, etc.

%rivatization, in the narrow sense, means transfer of ownership, orsale of public enterprises. owever, privatization has been used in

different ways as detailed below/

1. Liberalization Approah!%rivatization may be used in the

sense of liberalization having fewer controls and regulation by

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the state in economic activities. This also means slowing of

new controls and regulations and also dismantling of the

e$isting controls and regulations.

"# Relative $hare %nlarge&ent Approah!%rivatization mayrelate to enlargement of the share of private enterprises in the

production of goods and services in the economy. This means

that faster economic e$pansion of goods and services produced

by private sector and slowing down of production of goods and

services in the public sector.

'# Assoiation of Private $etor Manage&ent Approah!

This approach suggests utilizing the services of managerialpersonnel or e$ecutives of private sector enterprises for the

conduct and management of %"+s.

(# Transfer of Minorit) %*+it) O,nership Approah!

%rivatization may be defined as the transfer of minority e&uity

ownership of public enterprises to private individuals and

institutions so that the ultimate control continues to remain

with the state.

-# Transfer of .o&plete O,nership Approah!

%rivatization is also used in the sense of sale of all the shares to

the private parties so that the public enterprises are converted

into private enterprises. #n #ndia, privatization is ta'ing place

by adopting two common methods viz.,

aving fewer controls and regulations by the state in economicactivities, and

Transferring ownership of state e&uity in %"+s to private

individuals and institutions.

Privatization of P$/s


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a0ority of the industrial enterprises in the public sector have failed

to achieve the desired result. f course, a number of factors-internal

and e$ternal, controllable and non- controllable are responsible for

his precarious performance. 2 loo' at the history of public sector

underta'ings 3%"+s4 in the country reveals the continuous

e$pansion in the role of %"+s. *onse&uently, a number of

enterprises have been established and huge amount of borrowed

capital has been employed by the state even in the non-core, non-

strategic and not so essential area. ence, the state has made a

number of changes in its 5ew #ndustrial %olicy announced on uly

67, 1991.

#n #ndia, disinvestment of government share of e&uity in %"+s is

predominant. #t started in 1996 immediately after the 5ew

8conomic %olicy in a phased manner. The main criticism of

disinvestment of shares of %"+s in #ndia is that it has been partial

and half-hearted. There seems to be no plans to disinvest

completely. The government still would li'e to 'eep a dominant

control. 9 companies have been proposed for disinvestment till

199:-9;. 2ll the companies proposed for disinvestment are central

%"+s. 5o state level %"+ has been proposed for disinvestment. #t

could only disinvest 1< to :< shares of %"+s on an average. #t is

also observed that the shares of efficient and profit-ma'ing

companies are disinvested more than the companies which are

potentially sic' or sic' companies. The disinvestment percentage is

also not much in loss- ma'ing and inefficient units, thereby

defeating the purpose. The =inance inistry has also e$plained that

the government is consciously not off- loading larger chun's of itsholding. The >angara0an *ommittee has suggested that government

holding in public sector underta'ing must be less than :!


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0enefits of Privatization

#t is e$pected that privatization will ensure the following benefits/

1. #ncreasing overall efficiency/

6. #mprovement in the &uality of management and decision

ma'ing/

. 5o government financial bac'ing, and therefore, capitalmar'et will compel these enterprises to be more efficient?

7. "ubstantial reduction in government@s budgetary support

resulting in reduction in budgetary deficit?

:. >ecovery of government fund which could more

productively be used in development activities?

;. >eduction in political and bureaucratic interferences? )etterindustrial relations management? etc.

%ono&i benefits !

ne-time cash in0ection to government revenues

*ompetitive imperative

ar'et capitalization

$oial benefits !

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*ommercial control over enterprise 3more disclosure4

Aprivate-dividend@ more public money for programs and

services

$horto&ings Though the %"+s have contributed heavily to

develop the industrial base of the country, they continue, even

today, to suffer from a number of shortcomings which are identified

below very briefly.

1. 2 sizable number of %"+s have been incurring and reporting

losses on a continual basis. *onse&uently, a large number of

%"+s have already been referred of )#=>?

6. ultiplicity of authorities to whom the %"+s are

accountable?

. Belay in implementation of pro0ects leading to cost

escalation and other conse&uences?

7. #neffective and widespread inefficiency on management?

:. any %"+s are operating without the leader 3i.e., chief

e$ecutive or chairman4?

;. Cith a view to provide opportunities for more and m!!;=re

unemployed youths, more number of people, than re&uired,

were recruited and therefore, many %"+s are over-staffed

resulting in lower labour productivity, bad industrial relations,

etc.?

D. un-remunerative pricing policy? and

. 2 number of sic' companies 37! companies4 which were in

the private sector was ta'en over by public sector mainly to

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2ccess to private capital mar'ets

Eess government intervention, less political pressure

ore sources of capital

*ompetition/ incentive for better performance of state-owned

industries

2isavantages of the privatization

(ood management of nationalized industries/ no need of

privatization 3theoreticallyF4

Eabor relations/ interest of wor'ers

*o-ownership/ wor'er-shareholders how much do they weighF

.osts of privatization !

%ono&i osts!

Eoss of annual government revenue

$oial osts!

Eoss of Aguaranteed@ 0obs

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Eoss of government influence in mar'et outcomes 3public

interest4

Eoss of government control over provision of public goods and

services

Arguments For Privatization Of Banks In India

The following may be the arguments for privatization

of banks in India:

I. Public sector ownership has an inherent handicap

due to it being extremely diffused. This makes it less

amenable to effective control by shareholders,

compared to private ownership.

. !ank nationalization had given monopoly to thegovernment in the banking industry. "s in case of any

monopoly situation, the #uality of service went down

and the people suffered.

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$. %tate ownership of banks reduces competition and

breeds inefficiency.

&. There is no evidence to suggest that %tate

ownership lowers the probability of banking crises.

'. The sale of public e#uity of banks may be

particularly lucrative now. Twelve of the ( P%!s and

)* private sector banks are listed on stock exchanges,

and the market has appreciated their recent

performance.

+uring the years )- and -$, all P%!s

declared high profits, with some banks reporting

to $ per cent growth in their bottom-line

The bullish bond market enabled many banks to book

record trading profits in trading in /ovt, securities.

"dditional good cheer was the passage of the new"ct, which enables banks to seize the assets of

defaulting borrowers.

0. " sixth rationale for privatization is that it enhances

efficiency and productivity through proper

management and control.

(. The competition, not merely ownership, is the key.

"nd foreign competitors might bring additional

benefits take fresh capital as shown in other emerging

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markets. " foreign owned bank, with large

capitalization, can withstand local disturbances better.

1. The private sector and foreign banks can resist

local government pressure to lend to favored sectors.

*. 2re#uent recapitalization of %tate-owned banks is a

huge burden on the /overnment budget.

). The relative insensitivity of the public sector

banking system to its cost structure, inability to

respond #uickly to the changing market trends andthe greater rigidities in the management decision-

making processes because of what may be described

as 3non-com- metrical3 considerations.

)). +r. 4alan, /overnor of 5!I has given the following

arguments in support of privatization of the banking

sector:

6i7 8 Indian legal system provides8 full protection to

the private interests of the public servant3 including in

the banks and further public sector banks have been

afflicted with management by non-commercial3

considerations. 9e believes that accountability to the

shareholders will make sure that the officers stay oncourse.

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6ii7 Poor internal control and risk-management

systems of the banks and greater accountability on

the part of corporate.8

6iii7 India should increase its domestic savings and

invest them in the services sector to emerge a leader

in the world economy. 9e also #uotes ;. "rthur ustice in

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the country. !ank privatization is a step away from

this direction.

. Public sector banks in India have already been

exposed to increasing competition. The forces of

competition have already pushed Public sector banks

to optimize its resources in order to reach technical

efficiency. It is felt that conclusions are being drawn

on the basis of incomparable units - all of this to

favour privatization and even foreign ownership.

$. Privatization opens the way for the domination of

the economy by foreign capital. %ince it is extremely

difficult to distinguish in practice between domestic

and foreign capital within the private sector when

they are operating together in >oint ventures, or when

a domestic firm can be a front for foreign capital, any

expansion in the scope for the private sectornecessarily enlarges the sphere of operation of foreign

capital as well.

&. Privatization would remove a large chunk of the

economy from the purview of public scrutiny and

hence from the realm of social accountability. " basic

distinction between public and private propertyconsists in the fact that the former, in principle, is so-

cially accountable, and this is enforced through

Parliament and its committees.

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9ow well this >ob is done is a separate issue? If it is

badly done then that re#uires reforms in a different

sphere. !ut privatization puts an end to this form of

social accountability and hence constitutes in afundamental sense an abridgement of democracy.

'. %ocial accountability is not merely intrinsically

desirable. It becomes absolutely necessary when

enterprises have to fulfill certain social functions going

beyond mere profit- making. Privatization, and even

making public enterprises concentrate exclusively onprofit- making, effectively does away with these social

functions.

0. "ll privatization involves the selling of state

property at 8throwaway8 prices. This is true the world

over. "nd it has been true in India too as the

@omptroller and "uditor- /eneral3s report pointed outsome time ago.

In other words, in privatizing enterprises the state is

not merely changing the form of its property from

enterprises to schools or hospitals or reduced public

debt but is transferring gratis some state property to

private monopolists.

%ince state property has been built up through the

sacrifices of the common people through tax

payments or inflation-induced restraints on

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consumption, privatization amounts to an implicit act

of plunder, or what Aarx called 8primitive

accumulation of capital8: a few are being allowed to

filch from many through the courtesy of the state.

(. India has been a planned economy for the last

about five decades. !ut in absence of any effective

control over the commercial banks, the economic

planning was incomplete and monetary policy targets

were difficult to achieve and pursue.

;ith the nationalization of banks, the government

could actually plan and pursue the monetary policy

targets and it would be wrong to say that the decision

of bank nationalization was a mistake

NATIONALIZATION

What is Nationalization

5ationalization is the process of a government ta'ing control

of a company or industry owned by individuals or other legal

entities such as companies, which can occur for a variety of

reasons. Chen nationalization occurs, the former owners of the

companies may or may not be compensated for their loss in networth and potential income.

5ationalization is most common in developing countries

sub0ect to fre&uent leadership and regime changes. #n these

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instances, nationalization is often a way for a government to

e$pand its economic resources and power.

Intro+tion to nationalization

#n the si$ties and seventies, the public sector policy has been largely

guided by #ndustrial %olicy >esolution, 19:; which gave the public

sector a strategic role in the economy. Buring the last four decades,

massive investments have been made to build a public sector which

has a commanding role in the economy. Today, many 'ey sector of

the economy are dominated by the mature public sector enterprisesthat have successfully e$panded the production. #n the early post-

#ndependence years, there was virtual consensus about the need for

the government intervention in economic activities. %andit

awaharlal 5ehru described the public sector as Temples of odern

#ndia. 2t that time, virtually neither &uestioned the strategy nor

raised any doubts about its implementation. The number of central

public sector enterprises increased from : in the year 19:1 to 67! by

the end of 199: and investments in public sector underta'ings3%"+s4 increased from >s69 crore in 19:1 to >s. 1,D6,7 crore by

the end of 199:. They contributed nearly one third of our e$ports.

They made significant contribution to import substitution.

(overnment underta'ings account for more that D!< of the wor'

force employed in the organized sector. They have greatly reduced

the imbalanced of regional development and have laid strong base

for the rapid development of the country. "ome of the %"+s have

earned a reputation par e$cellence at the international level. "ome

giant public sector units 3e.g., #ndian il *orporation, "teel

2uthority of #ndia, il and 5atural (as *ommission, industan

%etroleum *orporation Etd., *oal #ndia Etd and )harat %etroleum

*orporation Etd4 figure in =ortune #nternational@s large companies.

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=urther, the public sector accounts for one-fourth of the country@s

(B%. There are two million employees in government underta'ings

and the average emoluments per annum amount to more than >s.:!,

!!! each. )esides paying higher salaries, public enterprises assure

0ob security, good wor'ing condition, attractive incentive scheme,

participative management, higher degree of safety, ade&uate

facilities, etc.

Advantages of Nationalization

ften leads to increasing participation

*an be a solution when privatisation has shown to be

ineffective

#nvestment decisions in the public interest 3serving poor etc.4

2daptation of policies and legal framewor'

2isavantages of Nationalization

igh costs and efforts for local government

%rocess of restructuring the public sector needs time

2ccountability and legitimacy important but problems with

corruption possible

Ob3etives 0ehin Nationalization of 0an4s in Inia

The nationalization of commercial ban's too' place with an aim to

achieve following ma0or ob0ectives.

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$oial Welfare / #t was the need of the hour to direct the funds

for the needy and re&uired sectors of the indian economy.

"ector such as agriculture, small and village industries were in

need of funds for their e$pansion and further economicdevelopment.

.ontrolling Private Monopolies / %rior to nationalisation

many ban's were controlled by private business houses and

corporate families. #t was necessary to chec' these monopolies

in order to ensure a smooth supply of credit to socially

desirable sections.

%5pansion of 0an4ing / #n a large country li'e #ndia the

numbers of ban's e$isting those days were certainly

inade&uate. #t was necessary to spread ban'ing across the

country. #t could be done through e$panding ban'ing networ'

3by opening new ban' branches4 in the un-ban'ed areas.

Re+ing Regional I&balane / #n a country li'e #ndia wherewe have a urban-rural divide? it was necessary for ban's to go

in the rural areas where the ban'ing facilities were not

available. #n order to reduce this regional imbalance

nationalisation was 0ustified/

Priorit) $etor Lening / #n #ndia, the agriculture sector and

its allied activities were the largest contributor to the nationalincome. Thus these were labeled as the priority sectors. )ut

unfortunately they were deprived of their due share in the

credit. 5ationalisation was urgently needed for catering funds

to them.

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2eveloping 0an4ing 6abits / #n #ndia more than D!

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