7.2.1. Meaning and Rationale of Privatisation

Privatisation basically implies the process which leads to transfer of ownership of public sector enterprises from the government to the private sector. However, taken in a wider sense, privatisation also implies the process of granting autonomy to the public sector enterprises in decision-making and infusing the spirit of commercialisation in them.

The supporters of privatisation put forward the following arguments in support of it:

a) Ideological Grounds: Privatisation in the advanced countries is favoured on ideological grounds. The central idea of this argument is that public sector enterprises should be confined to essential activities, which the private sector cannot or will not perform. All

other activities should be performed by the private sector enterprises as they are more efficient.

b) Improvement in Managerial Efficiency: Privatisation is supported as a means of improving managerial efficiency. Privatisation through disinvestment (i.e. policy of sale of equities held by the government to private investors) will establish a direct relationship between the shareholders and the management. The private shareholders would have direct interest in increasing the efficiency of these enterprises. The management would not be subjected to unnecessary political pressure and interference. This would remove the managerial inefficiency of public sector enterprises that arises due to political intervention. Management would be guided by economic and commercial considerations. It will help in improving the quality of decision-making.

c) Creation of Competitive Environment: Transfer of the ownership of the public sector enterprises to the private sector would abolish monopoly position. These enterprises will have to compete with other similar enterprises. So a competitive environment can be created. Such an environment would help in improving the competitive strength and efficiency of these enterprises. It would infuse commercial spirit in the enterprises. These enterprises would be under pressure to increase production efficiency by using modern and improved technologies.

d) Profit-oriented Decisions: Privatisation policy will help in infusing the commercial spirit in the functioning of enterprises. The private sector will introduce 'profit- oriented' decision- making process in the working of enterprises. This will lead to an improvement in the efficiency and performance of the enterprises.

e) Greater Flexibility in Decision-making: The public sector enterprises normally do not enjoy sufficient functional autonomy. This often leads to delay in decision-making. In fact, delayed decision-making is often equivalent to making no decision at all. The policy of privatisation will be helpful in imparting greater flexibility in the decision-making process. Management would be free from any government intervention. It would not have to consult anyone for any decision. It would be possible to take quick and timely decisions, which is the hallmark of efficiency. Timely and prudent decisions will improve the efficiency of business operation.

f) Reduction in Burden on Public Exchequer: Operation of the public sector enterprises has been putting a large burden on public exchequer because of huge losses incurred by a number of enterprises and growing amount of subsidy payments. Privatisation would be helpful in reducing this financial burden on the government. Government would not be under obligation of providing subsidy and making up for the losses.

g) Greater Attention to Consumers' Satisfaction: It is often argued that the public sector enterprises many a time do not get personally involved with the needs of the consumers. However, the very survival of private enterprises depends on the satisfaction of the consumers. Privatisation will lead to the consumers being taken care of because of the need for creating and sustaining market. Hence, quality of service will improve.

h) Greater Investment and Employment Opportunities: Privatisation will lead to opening up of new areas to the private sector enterprises, hitherto reserved for the public sector. This will lead to the increase in investment by the private sector. Higher investment would mean creation of larger employment and income-earning opportunities in the economy.

i) Revival of Sick Units: A number of public sector enterprises have been incurring losses for a long time. They have become, more or less, sick units. Privatisation may help in reviving sick units, which have become a liability on the government.

j) Increase in Accountability: Personnels in the public sector enterprises are not accountable for any lapse. There is always the scope of responsibility being shifted to others. However, the areas of responsibility in the private sector are clearly defined. Thus, privatisation will lead to an increase in accountability of the personnel managing these enterprises.

k) Increase in Financial Discipline: The public sector enterprises can get budgetary support irrespective of their performance. But the private sector enterprises will be able to raise funds in the capital market only if they are performing well. Therefore, privatisation will put pressure on the enterprises to perform well in order to raise funds in the capital market. This will improve their financial discipline.