Privatisation and disinvestment


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Privatisation and disinvestment

  1. 1. Privatisation• Privatisation means allowing the privatesector to set up more and more of industriesthat were previously reserved for publicsector.• Change in ownership: Degree of privatisationjudged by the extent of ownership transferredfrom public to private sector.
  2. 2. Objectives of Privatisation• To increase efficiency & competitivepower of the enterprises• To strengthen industrial management.• To earn more & more Foreign currency.• To make optimum use of resources• To achieve rapid industrial developmentof the country.
  3. 3. Advantages of Privatisation• Reduction in economic burden• Increase in efficiency• Reduction in sense of irresponsibility• Scientific Management• Reduction in Political Interference• Encouragement of new Inventions
  4. 4. Disadvantages of Privatisation• Lack of social welfare• Class struggle• Increase in inequality• Increase in unemployment• Exploitation of weaker section
  5. 5. Disinvestment“The action of an organisation orgovernment selling or liquidatingan asset or subsidiary”
  6. 6. Objectives of Disinvestment To reduce the financial burden ongovernment To improve public finances To introduce, competition and marketdiscipline To increase growth of the firm To encourage wider share of ownership
  7. 7. Reasons for Disinvestment• To meet fiscal deficit• Expansion or diversification of the firm• To repayment of government debts• Implementation of government plan• PSUs give negative rate of return oncapital
  8. 8. The Indian economy had virtually embracedbankruptcy during the period of 1980-92.In 1991, there was 236 operating public sectorundertakings, of which only 123 were profit making.The top 20 profit making PSU’s were responsible for80 percent of profits.The return on public sector investment for the year1990-91 was just over 2 percent.Background of Disinvestment
  9. 9. Criteria for DisinvestmentThe decision regarding disinvestment or liquidationviewed in the light of following criteria: Whether the objectives of the company are achieved Whether there is decrease in number of beneficiaries Whether serving the national interest will be affectedbecause of disinvestment Whether private sector can efficiently operate and managethe undertaking. Whether the original rate of return targeted could not bepossible to achieve. Whether socio-economic objectives lots its purpose
  10. 10.  The govt. in July 1991 initiated the disinvestment process inIndia, while launching the New Economic Policy (NEP). The govt. had appointed the Krishnamurthy committee in1991 and Rangarajan committee in 1992 to look after thedisinvestment process. Both the committees have recommended disinvestments tofulfill objectives of modernization of the PSE’s through:(a) Strengthening R &D(b) Initiating diversification/expansion programme.(c) Retaining and reemployment of employees.(d) Funding genuine needs of expansion.(e) Mitigating fiscal deficit of the government.Process of DisinvestmentContd..
  11. 11.  These committees also distinguished between theshort term and long term goals of the disinvestmentand advised the govt. not to sacrifice the long termgoals for the sake of fulfilling the short termobjectives. The govt. has announced in its NEP that mitigating thefiscal deficits is the only objective of disinvestment. The crucial shift in govt. policy for disinvestment ofPSU’s was mainly attributed to poor performance ofthese enterprises and burden of financing theirrequirements through budget allocation.Contd..Process of Disinvestment
  12. 12.  Further in 1996, the govt. constituted a five member publicsector disinvestment commission under the chairmanshipof G.K.Ramakrshna for drawing a long term disinvestmentprogramme for the PSU’s. The committee submitted its report covering 58enterprises, out of 70 enterprises referred to it by the govt.recommendations ranged from strategic sales in variousproportions to disinvestments ant various level. This committee was ultimately abolished in 1999.Contd..Process of Disinvestment
  13. 13.  The govt. set up a new Department of Disinvestment in 1991to establish a systematic policy approach to disinvestment andto give fresh impetus to the programme of disinvestment,which will increasingly emphasize strategic sales of identifiedPSU’s. In 2001, the govt. reconstituted the disinvestmentcommission with R.H.Patil as its chairman. The govt. has decided to refer all ‘non-strategic’ PSU’s andtheir subsidiaries, excluding IOC, ONGC, and GAIL to thecommission for its independent advice.Process of Disinvestment
  14. 14. Privatization implies a change in ownership, resulting in achange in management.The privatization of public sector enterprises will occur onlywhen govt. sells more than 51% of its ownership to privateentrepreneurs.Disinvestment on the other hand, has a much widerconnotation as it could either involve dilution of govt. stake toa level that result in a transfer of management or could alsobe limited to such a level as would permit govt. to retaincontrol over the organization.Disinvestment beyond 50% involves transfer of management,where as disinvestment below 50% would result in the govt.continuing to have a major say in the undertaking.Privatization and Disinvestment