Daily Answer Writing
25 September 2021

1. 'Privatization compromises India's sovereignty and economic freedom, threatening its energy security and strategic posture'. Critically analyse this statement in the context of highest ever foreign investments received by India in the recent times. (250 words)

  • Source: Indian Express - Page 11/The Ideas Page: The strategic public sector
  • GS 3: Privatization & Liberalization


Approach Answer:

Introduction: Privatisation of the public sector, has been part of the wish list of economic reformers since 1991.  Since then, India has seen a huge growth in the economy as well as the Foreign Direct Investment(FDI) boom into India. India has attracted highest ever total FDI inflow of $ 81.72 billion during the financial year 2020-21, which has also raised India's foreign exchange reserves to highest ever levels of more than $600bn.


However there have been various criticisms of privatization that allows foreign investments.


Challenges due to Privatization

    • Sovereignty/Ownership risks:
      • Risk of monopolies: Sequence of fire-sales bye the government in the economy faces shocks  risk of create monopolies with only a few players controlling the market.
      • Opportunistic takeovers: Chinese private and government owned firms have in the recent past tried to increase their stakes in major commercial entities in India, after which India had subjected all Chinese FDI to mandatory government screening.
      • Financial capacity of markets: The number of firms that can buy public enterprises are very few. The financial capacity of potential bidders may not be optimal, due to the pandemic.
    • Economic Freedom:
      • Instrument of Government Policy: PSUs are often important tools to implement government policies such as National Solar mission through Renewable Energy Corporation of India (RECI), and Dedicated Freight corridor through DFCCIL. Therefore it is not wise to give up control over these industries.
      • Financial contraction Rural Areas: More than 900 rural bank branches closed down across the country since 1991.
      • Credit crisis in Agricultural sector: Rate of agricultural credit growth fell sharply from around 7%/ annum in 1980s to about 2%/annum in 1990s.
      • Diversion of funds meant for Rural areas: Banks were allowed to lend to activities that were remotely connected with agriculture or  in agri-business, yet classify them as agricultural loans.
      • Losses due to Difficulties in judging the valuations: It is very difficult to assign real value to PSUs due to their hold on a huge variety of assets and Properties.
    • Giving up Strategic posture:
      • In the international Markets: through Videsh Sanchar Nigam Limited(VSNL) controlled 25%, before its privatization government controlled 25% of world's internet routes.
      • Extension of Diplomacy: For example, India's HAL is instrumental in inviting defence deals in India, and ONGC Videsh is an important tool to capture Oil productions in international markets.
      • Leakage of designs of critical technology: when private sector is allowed to create critical components of say space or defence technology equipment, this faces a risk of getting leaked.
    • Energy Security:
      • Giving up decision making to foreign entities: The foreign countries make the decision regarding expansion and distribution of energy.
      • Risk of blockade: This can create a problem for the Indian economy in hostile times.


However, Privatization provides various advantages too:

    1. Growth in the Economy: The economy showed the average growth rate of GDP at 8% post liberalization period till 2011.
    2. Rise in foreign exchange: India currently has a foreign exchange of more than $600 billion which is much higher than in 1991 which was negligible.
    3. Fall in interest rates: The Repo rate in the 1990s hovered at around 10% which is now consistently below 5% boosting the economy and the consumption.
    4. Increase in FDI: Foreign direct investment (FDI) as a % to GDP increased from 24% in FY2001-02 to 67% in FY2009-10. 
    5. Reduced political interference: Public enterprises are burdened by the public policy decisions regardless of profitability.
    6. Increase competition: Sectors like Coal have government monopolies as in the past there have been in the banking, insurance and various other sectors. The removal of such monopolies is good for increasing competition
    7. Prevent shifting of burden on Capital budget: Often the PSUs are assigned job to implement various schemes. This hides the actual budget deficit. 
    8. Better efficiencies: Some companies, including Balco and Hindustan Zinc, where the government still has residual minority stakes, have fared much better under private management.
    9. Value unlocking for government: It can be no one’s case that India’s public sector remains at the ‘commanding heights’ of the economy. The market capital of may strategically disinvested companies have surged post privatization.
    10. Corporate governance: Public interest and Shareholders' interest is ensured.
    11. General Governance: It would ensure better customer satisfaction as well as improve employment prospects in the country.


Precautions against the dilution of sovereignty:

    • Presence in Strategic sectors: The new strategic disinvestment policy(2021) ensures presence in the strategic sectors such as - atomic energy, space and defence; Communication: transport and telecom; Energy: Power, Petroleum, coal and other minerals; and Finance: Banking and financial services.
    • Government Regulation: In sectors such as energy, finance, tele-communications etc. prevent any monopoly.
    • Emergency Measures: India can always exercise such measures to takeover any hostile establishment that works against Indian interests.


Conclusion: The government has created a dedicated department, namely Department of Investment and Public Asset Management, to iron out these difficulties. Further, it has launched Government e-market place platform for transparent auctioning of the assets of the PSUs. All these steps have brought in efficiencies in the Privatization process in India, which can help the government achieve its disinvestment targets including the target for current year of ₹1.75 Lakh Crore, while also ensuring that Indian interests are served.

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