Need to relook at Privatisation – UPSC GS3

  • India’s fiscal deficit for FY22 is said to be 6.8% of the GDP or ₹15.06 lakh crore. It accounts for about 12.7% of the GDP if debts of the States are included.
  • In FY20, ₹50,304 crores were raised against a target of ₹1 lakh crores.
  • Between FY11 and FY21, about ₹5 lakh crores were raised, which is about 33% of FY22’s projected fiscal deficit.
  • Privatisation means the transfer of ownership, management, and control of the public sector enterprises to the private sector.
  • Objectives:
    • To minimise the public sector’s role and create new investment space for the private sector, and to infuse private capital, technology and management practices that will contribute to growth and new jobs.
    • The proceeds from the sale of the public firms would help finance various government-run social sector and developmental programmes.
Evidence against privatisation:
  • Studies indicate that the gap in growth between public sector undertakings (PSUs) with autonomy and private firms is not very significant.
  • A study highlighted that the famed British privatisation initiative of British Airways, British Gas, and the Railways led to no systemic difference in performance.
  • Evidence on performance after privatisation is more mixed in developing countries.
  • Growth post-privatisation is linked to factors like better funding by the private firms compared to the government budget and a better business model.
  • Privatisation as a revenue source has also offered meagre returns.
Challenges with privatisation:
  • Valuation: 65% of 300 national highway projects have been recording significant toll collection growth. Valuations of such assets should ensure to capture potential growth in toll revenue.
  • Employment: PSUs have been significant generators of employment, with about 10.3 lakh employees in Central Public Sector Enterprises (in 2019). A push for privatisation is said to be a push for mass layoffs, in a period of low job creation.
  • Concentration of public assets in select private hands: In India, about 70% of profits generated in the corporate sector in FY20 were from just 20 firms.
  • Concerns of Monopoly:
    • Cigarettes are dominated by a single player, with a 77% market share in FY21
    • Paints has one entity with 40% in FY21
    • Telecom has just three players left
  • Loss of strategic control: Privatization decreases the government control on strategic sectors.
  • An alternative method of selective PSU reform could be considered which has been a success in other countries like:
    • In China, growth has been led by corporatized PSUs that are held under a holding company, which promotes better governance, appoints leadership and executes mergers and acquisitions.
    • In Singapore, the Ministry of Finance focuses on policymaking, while Temasek Holdings (a private firm) is focused on corporatizing and expanding its PSUs.
  • A PSU with greater autonomy, with the government retaining control and subject to the right incentives, the Indian PSUs could aspire to be as large and efficient as that of China’s.
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