What do you mean by privatisation? Why is privatisation advocated these days?

Indicate possible areas of privatization in India.

Ans.II. Privatisation
In the context of economic reforms, privatisation means allowing the private sector to
set up more and more of industries that were previously reserved for public sector.
Under it, existing enterprises of the public sector are either wholly or partially sold to
private sector.
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Privatisation is the general process of involving the private sector in the ownership or
operation of a state owned enterprise." Need for privatisation was felt mainly because of
the inefficiency of the public sector. Most of the enterprises of the public sector were
running into loss. The main reason behind it was that the managers of public sector
enterprises were not free to take any decision independently. All important decisions
were taken by the Ministers, who were more concerned with their political interests. It
took long time to take decision. Consequently, production capacity remained under
utilized, managers failed to function in a responsible manner causing productivity to go
down. All these factors contributed to the inefficiency of the public sector. As a result of
privatisation there will more competition, efficiency of the economy will increase,
quality and diversity of production enhance
(1) C a u s e s of Privatisation
Inefficiency and tow productivity of public sector account for the increasing tendency of
privatisation in the recent years. The main causes of privatisation are as follows:
(i) Disintegration of Socialist Economies: Most crucial sector of Russia and other
socialist economies was public sector. Taking these economies as model, almost all under-
developed countries gave excessive importance to public sector. However, on account of lack
of decision making power on the part management and excessive political interference,
public enterprises turned inefficient and proved to be the single factor responsible for the
failure of these economies. In Russia, under Perestroika, liberal policy was adopted to some
extent, but these economies disintegrated soon thereafter. As a result, other economics also
lost confidence in the efficiency of public sector. On the other hand, economies of USA,
Japan, Germany etc. were making rapid progress under private sector. Thus, economies of
rest of the world were attracted towards market economy and private sector because of its
efficiency.
(ii) Inefficient Public Sector: Organisers of public sector do not have the
independence to take decision. Most of the decisions of public sector enterprises are taken
by the ministers. Their decisions are politically motivated. Decisions are taken after long
delay. As a result, production capacity is not fully utilize and there is fall in productivity. All
these factors render public sector inefficient.
(iii) Uneconomic Price Policy: Prices of public utility services like, electricity,
irrigation, transport, water, etc. are not determined on the basis of economic principles.

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These are determined on the basis l political, social and other non-economic considerations.
In most of the cases, prices are deliberately kept less than the cost of production.
Consequently public sector enterprises suffer losses. Privatisation is advocated to avoid
such losses.
(4) Burden on the Government: Losses incurred by public sector enterprises are not
borne by their organizers or any other person. Losses are made good by the government
revenue. Organisers are therefore indifferent to profits earned or losses incurred. No heed
is paid to the productivity and the efficiency of the enterprise. There is no spirit of
competition among these enterprises for want of accountability. Quality of production
deteriorates and consumers are the losers. It is to remove these shortcomings that the
tendency of privatisation has gathered momentum,
In short, the concept of privatisation has been gaining ground due to increasing losses and
inefficiencies of public sector enterprises.
• Objectives of Privatisation
Main objectives of privatisation are to increase efficiency and competitiveness among
industries to augment private profit, to increase productivity and efficiency of the
enterprises. Main objectives are described as under:
(i) To increase the efficiency and competitive power of the enterprises.
(ii) To reduce deficit financing and public deficit.
(iii) To strengthen industrial management.
(iv) To earn more and more foreign currency.
(v) To make optimum use of economic resources and diffuse their ownership.
(vi) To achieve rapid industrial development of the country.
• Advantages of Privatisation
Main advantages of privatisation are as follows:
(i) Reduction in Economic Burden: Economic burden on government is reduced
because private sector also makes its contribution to the heavy capital investment by the
government.
(ii) Increase in Efficiency: Privatisation of the ownership of public sector industries,
increases their productivity, profitability and effectiveness.
(iii) Reduction in Sense of Irresponsibility: Wide-spread bureaucracy, red-tapism
and sense of irresponsibility in public sector is removed to a large extent with the advent
of privatisation.
(iv) Scientific Management: As a result of privatisation management of industries
becomes more scientific, conscious and responsive to needs.
(v) Reduction in Political Interference: One gets rid of political interference to
some extent as a result of privatisation. There is no delay in taking industrial decisions.
Industries are run on sound economic principles. Investigations into the functioning of the
industries by the experts becomes possible.
(vi) Encouragement of New Inventions: Privatisation encourages new inventions and
the entrepreneur feels inspired mission. It is an advisory body and tenders advice to the
Central Government on a continuing basis on various issues pertaining to cost reduction and
improvement of industrial efficiency and pricing problems in relation to industrial costs.

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Apart from the chairman, the Bureau has two full-time members. In addition, the Director-
General of Technical Development and the Economic Adviser to the Ministry of Industry are
ex officio members of the Bureau.
After the winding up of the Tariff Commission with effect from August 1,1976, the cost and
economic studies which had hitherto been conducted by the Commission have been referred
by the government to the BICP.
Dual Pricing
Some commodities like sugar, cotton textiles, paper and aluminium are subject to dual
pricing in India.
The system of dual pricing has been designed to allow the weaker sections of the people or
the privileged buyers like the government to get the commodity at a lower price. Under dual
pricing, a part of the output of an industry is acquired by the government at a price fixed by it,
which is usually lower than the market price, and the remaining part of the output can be sold
by the industry at the market price. For instance, under the dual pricing policy for sugar, a part
of the total production of sugar is to be sold to the government as levy at the price fixed by the
government. The non-levy sugar (the remaining part) was allowed to be sold at the free
market price. Sometimes the free market price went upto three times, the leavy price.
The dual pricing system in our country has been severely criticised. It has been argued that
such controls affect capital formation and production in such industries. In industries subject
to dual pricing, profitability has been found to be less than the average for all industries.
However, in the paper industry, in the three years from 1974 to 1976, profitability was found
to be higher than the average. It is said that the dual pricing system does not always permit the
industry to make up for the loss on the levy sales by sales in the free market.
Another criticism is that the system encourages malpractices, black-marketing, tax evasion,
corruption and the generation of black money.
Subsidisation
Prices of certain commodities are directly affected by the policy of subsidisation. Important
commodities the prices of which are deliberately kept low by the government subsidies are
foodgrains, fertilizers and con-trolled cloth. Certain export goods also enjoy the benefit of
subsidies.
The principal objective of subsidies is the protection of weaker sections and priority sectors.
For instance, foodgrains are subsidised to increase the consumption levels of the vulnerable
sections. Certain export goods are subsidised to increase their pr ice competitiveness in the
international market so as to increase our foreign exchange earnings.
The effect of subsidies on prices is clear from the following facts. Replaying to the criticism
in Parliament on March 13, 1981, against the subsidies on foodgrains, the Finance Minister,
Mr. Venkataraman, pointed out : "If I reduce this subsidy which is Rs. 620 crores or
completely eliminate it, I will have to raise the price of wheat by about 74 paise per kg and of
rice by 6 4 poise". He further pointed out that if the subsidy of Rs. 650 crores for fertilizers
had not been retained, the price of urea would have gone up from Rs. 2,000 to Rs. 2,700 per
tonne—an increase of 35 per cent.
The steep increase in the outflow from the exchequer by way of subsidies has given rise to
the demand for their reduction and even the abolition of certain subsidies. There are two
principal arguments for reduction/abolition of subsidies, viz.,

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(1) Subsidies eat into the resources for development, and
(2) Subsidies, as they exist today, cannot be justified on grounds of economic equity and
social justice.
However, there are some strong arguments for their retention.

THE ESSENTIAL COMMODITIES ACT

Objectives
The main purpose of the Essential Commodities Act, 1955. was to provide, in the interest of
the general public, for the control of the production, supply and distribution of, and trade and
commerce in, certain commodities.
Essential Commodities
The government has now listed over 60 commodities as essential commodities. For the
purpose of this Act, "essential commodity" means any of the following classes of
commodities :
(1) Cattle fodder, including oil cakes and other concentrates:
(2) Coal, including coke and other derivatives;
(3) Component parts and accessories of automobiles;
(4) Cotton and woollen textiles;
(5) Drugs;
(6) Foodstuffs, including edible oil seeds and oils;
(7) Iron and steel, including manufactured products of iron and steel;
(8) Paper, including newsprint, paper board and straw board;
(9) Petroleum and petroleum products;