Privatisation – I

Meaning of Privatisation

The concept of privatization is used in a narrow as well as broader sense.

In a narrow sense privatization means transfer of ownership from public sector [government owned enterprises] to private sector, where it is privately owned and operated. This is usually by selling them/selling shares to individual or institutional investors.

In a broader sense it means introduction of private management and control with or without change in ownership of enterprise.

In simple words privatization refers to a process that reduces the involvement of public sector and increases that of private sector in economic activities ie the conversion of a public enterprise to a private enterprise. For example, a government-owned railroad or airline may undergo privatization if ownership shares of the enterprise are sold to individual and institutional investors.

It may also mean government outsourcing of services or functions to private firms, eg revenue collection, law enforcement, and prison management.

The theory behind privatization is that privately run enterprises, are more efficient and provide better service than government-run companies. The increased efficiency is thought to come from the greater importance private owners tend to place on profit maximisation as compared to government which tends to be less concerned about profits.

But in many cases, privatization is a way for the government to raise cash and to reduce its role as service provider.

The process of privatization is as old as Adam Smith’s “Wealth of Nations” published in 1776 in which he has stated that the government cannot manage the economic activities efficiently. Therefore, minimum state interference in the market economy is necessary. He advocated the “laissez-faire” policy ie minimum interference of the government in a market economy. This was nothing but privatization.

For the purpose of privatization, the government of India has adopted the path of disinvestment.

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