Privatization — Meaning, Forms and Objectives

Privatization refers to the transfer of ownership and/or management of public sector enterprises (PSEs) — businesses owned and run by the government — to the private sector, or, more broadly, to any reduction in the direct role the government plays in owning and operating economic enterprises. The reform grew out of the recognition that many public sector enterprises, set up in the decades after independence to build core industries and infrastructure, had over time become a considerable drain on government finances, with a number of them operating at a loss, carrying excess staff relative to their output, or falling behind in efficiency, quality, and technology compared to well-run private firms both in India and abroad.

Privatization has taken several distinct forms in India rather than a single uniform method. Disinvestment refers to the sale of a part of the government's equity shareholding in a public sector enterprise to private investors or to the general public through the stock market, while the government may continue to retain a stake — sometimes a majority stake — in the enterprise even after disinvestment. Strategic sale goes further: it involves the sale of a substantial portion of the government's equity, generally along with management control of the enterprise, to a private strategic buyer, effectively transferring both ownership and day-to-day control out of government hands. A third form is contracting out, or outsourcing of government functions, in which the government continues to be responsible for ensuring a particular service is delivered, but engages a private firm under contract to actually perform certain functions or services — such as specific maintenance, support, or operational activities — that were earlier carried out departmentally by government staff.

The objectives behind privatization include improving the operating efficiency of public sector enterprises by subjecting them to the discipline and incentives of private ownership and management, reducing the fiscal burden that loss-making or low-return PSEs placed on the government's budget, raising financial resources for the government through the sale proceeds of disinvestment or strategic sale, and, in the case of disinvestment through the stock market, encouraging wider public participation in the ownership of these enterprises. …