Daily Answer Writing
29 June 2021

Q) Privatization of the large number of government  assets is seen as inevitable for brining efficiencies in the Indian economy. What challenges does the government faces in the execution of privatization? (150 Words)

Source: <https://www.thehindu.com/opinion/op-ed/reopen-the-files-reconsider-privatisation/article35027135.ece>

GS 3: Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Approach Answer:

Introduction: Privatisation of the public sector, including banks, has been part of the wish list of economic reformers since 1991. This was at the core of the ‘Washington Consensus’. The private sector is inherently more efficient. The ground realities of democratic politics in India, however, kept coming in the way of actual privatisation, though progressive disinvestment of the shares of public sector undertakings in the market has been taking place over the years.

 

Challenges in Privatization

              • Societal Challenges:

                   Resistance from public: Tactful execution will be as critical as dealing with the usual pockets of resistance that would crop up.

                   Electoral pressures: Managing electoral pressures in jurisdictions where these units would be located.

              • Governance Issues:

                    Investigation concerns: It would require giving officers some cover from potential post-transaction witch-hunts by auditors and

                    investigating agencies.

                    Risk of malpractice and corruption: The government officers may try to benefit the private businesses for personal gains.

                    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.

              • Economic Challenges:

                    Many PSUs are not profitable: Thus there is a challenge to find private investor. For example Air India.

                    Risk of monopolies: Sequence of sales would be important so that the economy does not face shocks or create monopolies,

                    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.

              • In the Financial Sector:

                    Financial contraction Rural Areas: More than 900 rural bank branches closed down across the country.

                    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.

             

Way ahead:  

              • There is a need for the creation of dedicated efficient capacity for Privatization as the task is huge and challenging.

              • Promote and develop public enterprises. Once the PSUs achieve efficiency, gradual privatization can be done.

              • Digitalization of the auctioning process.

              • Promotion of Public Private partnership

             

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.

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