Public sector

&
privatizatioN
Introduction to public sector
The part of the economy concerned with providing basic
government services. The composition of the public sector varies
by country, but in most countries the public sector includes such
services as the police, military, public roads, public
transit, primary education and healthcare for the poor. The public
sector might provide services that non-payer cannot be excluded
from (such as street lighting), services which benefit all of society
rather than just the individual who uses the service(such as public
education), and services that encourage equal opportunity.
Objectives of public sector
To accelerate the industrial growth and development of the
economy.
To build up a strong infrastructure for supporting economic
growth and development of the country.
To provide competition to the private sector for welfare of the
state and the public at large.
To generate employment and strive for removal of poverty.
To make investment in order to fill the gap between savings
and investment.
To promote balanced and comprehensive economic growth of
the country.
Objectives of public sector
To redistribute income and wealth in order to remove
inequalities in society.
To make investment in those areas where the private sector is
not willing to invest.
To promote the development of small and ancillary industries.
To focus on increasing exports of the country for earning foreign
exchange and also to enter sectors where imports can be
substituted by products made in India.
To help the govt in implementation of economic policies and
achieving objectives of five year plans.
To eliminate monopolies and prevent monopolistic practices.
Percentage Share of Public and
Private Sector in Capital Formation

Plan
Public Sector
(in per cent)
Private Sector
(in per cent)
First Plan 46 54
Second Plan 54 46
Third Plan 63 37
Fourth Plan 61 39
Fifth Plan 58 42
Sixth Plan 53 47
Seventh Plan 48 52
Eighth Plan 45 55
Ninth Plan 33 67
Tenth Plan 24 76
Eleventh (2007-12) 22 78
Significance of Public Sector
Employment Generation

Capital Formation

Share in GDP

Infrastructure development

Export promotion

Import substitution

Advantages :-
Balanced growth
Long period planning
Facilities for economic development
Greater public welfare
Equal distribution of wealth
Better co-ordination
Better relation with labor force
Better deal to consumers
Limitations :-
Lack of initiation and efficiency
Lack of selection of goods
Political interference
Slow growth
Poor management
Lack of flexibility
Privatization
Privatization may be defined as the transfer of a function,
activity or organization from the public to the private
sector.

Privatization indicates the emergence of a new culture in
the society in which marketization, competition,
efficiency become the guiding principle in economic
decision-making. The range of activities covered under
privatization are: total denationalization, liquidation,
creation of joint ventures, workers cooperatives,
contracting our to private agencies, leasing and financial
restructuring.

The most common and important objectives of
Privatization
Improving the government financial position by
Raising funds from the sales of enterprise or their;
Making the enterprises raise internal resources and from capital markets,
thereby reducing budgetary support to them

Improving the performance of an enterprise through
Increased efficiency;
Requiring enterprises to meet commercial performance objectives;
Greater responsiveness to consumers (whether in terms of quantity,
quality, diversity or services);
Relief from public sector financial constraints;
More managerial

Besides the above two broad objectives; privatization would help in
reducing the burden on public administration by reducing the size of the
public sector, strengthening market forces and competition within an
economy and promoting wider share ownership among public.

Arguments in favor of Privatization



Privatization will introduce efficiency and profitability in PSUs.

It will reduce budgetary deficits which result from expenditure on loss
making PSUs.

It will help in reviving sick units which are a burden on Public Sector.

It will help in bringing about globalization by opening out of an economy and
increasing its competitiveness in international market.

It will use modern techniques of production.

It will introduce accountability and responsibility in PSUs.
Arguments against Privatization
Privatization encourages growth of monopoly power in the
hands of big business houses. This results in greater inequalities
of income and wealth.

Private enterprises may not show any interest in buying shares
of sick PSUs.

Private sector produces with profit motive and have no
consideration for social welfare motive.

Private sector is not interested in those projects which take long
time to complete and have low profitability. This includes water
supply, salt, production, education for poor, etc.

Private sector is not interested in taking up risky projects.
Disinvestment

Disinvestment is the sale of a part of equity holdings held by the
government in any PSUs to Private investor.

Disinvestment has been major strategy by which the government
has financed fiscal policy.

Besides financing fiscal deficit, the economic motivation behind it
is to improve efficiency of PSUs.

The government expects that even small percent of private
ownership will discipline inefficient managers and motivate
them.
Methods of Disinvestment
Domestic public issue:- it means that equity was offered to retail
investors through domestic public issues.
Global Depository Receipts (GDR):- GDRs were issued to tap the
overseas market
Cross-holding:- in this method, the government simply sells part of its
shares in one PSU to another PSU.
Warehousing:- in this method, the governments own financial
institutions buy the governments stake in selected PSUs and hold them until
a third buyer comes.
Golden share:- in this method, the government retains stake upto 26% in
the PSU to protect its interest.
Strategic sale:- in this method, the government sells a major portion of its
stake to a strategic buyer and also gives out the management control.

Advantages of Privatization
16
Privatization helps to reduce the burden on Govt.
It will help profit making public sector unit to
modernize and diversify their business.
It will help in making public sector unit more
competitive.
It will help to improving the quality of decision making,
because the decisions are free from any political
interference.
It Encourage the new innovations without any
restrictions.
Industrial growth.
Increase in efficiency.




Disadvantages of Privatization
17
Industrial sickness.
Lack of welfare.
Class struggle.
Increase in inequality
Opposition by employees.
Problem of financing.
Increase in unemployment.
Ignores the weaker sections.
Ignores the national importance

Examples of privatization in India
18
Lagan Jute Machinery Company Limited
(LJMC)
Videsh Sanchar Nigam Limited (VSNL)
Hindustan Zinc Limited (HZL)
Hotel Corporation Limited of India (HCL)
Bharat Aluminum Company limited (BALCO)

Conclusion
The disinvestment programe has been carried out by the
government in a hasty manner. The outcome of
privatization so far as has been pathetic. The stress should
be on making PSUs work more efficiently rather than
reducing public ownership in the economy.