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Privatisation refers to the transfer of assets or service functions from public to private ownership or control and the opening of hitherto closed areas to private sector entry. The ranges of activities covered under privatisation are:
  • Liquidation
  • Creation of joint ventures
  • Franchising
  • Leasing
  • Divesture

Conditions for privatization

  • Liberalisation and de-regulation of the economy: If privatisation is to help realize higher productivity and profits, the economy has to be liberalised and de-regulated.
  • Well developed capital market: To be able to absorb the disinvested public sector shares, the capital market should be well developed.
  • Availability of entrepreneurial class: To undertake business responsibilities and bear risks in unexplored areas and make use of all business opportunities in a competitive environment, an entrepreneurial class must be present in the economy.

Objectives of privatization

  • To improve the financial position of the government by raising funds from the sale of enterprises or their assets
  • To improve the performance of the enterprises through increased efficiency, managerial autonomy, greater responsiveness to consumers, etc.

Merits of privatization

  • It allows profit making public sector units (PSUs) to modernize and diversify their business and thus, make them competitive
  • It will help to revive sick units which are a burden on the public sector
  • It will bring in accountability and responsibility in PSUs
  • It will decrease budgetary deficits that results from expenditure on loss making PSUs
  • Privatisation facilitates globalisation by opening out the economy and increasing its competitiveness in the international market
  • It will mitigate political interference on decision making and make business decisions rational

Demerits of privatization

  • Privatisation leads to monopoly and hence would increase disparity in income and wealth. As private sector displays lack of interest in buying shares of sick or loss making PSUs, such sick units continue to function in the public sector
  • Private enterprises aim at maximising profits and ignore the needs of the economy
  • Private entrepreneurs will not be interested in long period projects, infrastructure investments and risky projects which may retard the growth of capital goods industries, strategic sectors or those with less profit margins
  • Due to scarcity of resources of the private individuals, we fail to meet some of the vital tasks which can alter the very character of the economy
  • Unlike private sectors, PSUs exist in a regulatory framework and hence they are not able to deliver higher productivity and profits. However, given the same degree of freedom as in private sectors to decide prices, product-mix etc., even they would have showed higher efficiency and returns
  • Some private sector enterprises lack experience and expertise in facing foreign competition and in other aspects

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