Debate of the Week

[Week-2] Privatizations of Public Sector in India: Arguments For and Against [Debate of the Week]

In India, privatization should be in a unique form in accordance with the priorities of our mixed economy and as well as by considering operational aspects of the PSUs.
By IT's Research Team
November 20, 2017


  • Privatization in India
  • Difference between Privatization and Nationalization
  • Arguments for Privatisation
  • Arguments against Privatisation
  • Conclusion

Privatizations of Public Sector in India: Arguments For and Against

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Privatization in India

  • India is a mixed economy with both the private sector and the public sector performing various activities in accordance with regulations. But the public sector was affected by inefficiencies and incompetence in a non-sustainable manner by 1991.
  • The New Industrial Policy of 1991 contained several reform measures for the public sector. Some of them are selling of loss making units to the private sector, inviting private participation in PSEs, and strategic sale. Some of these reform measures included privatization in a low degree.
  • Privatization in the country was launched mainly to enhance the efficiency of the public sector enterprises as well as to concentrate the operation of the public sector in priority areas.

Difference between Privatization and Nationalization:


Arguments for Privatisation

Dismal Performance of PSEs:

  • One of the strongest arguments in favour of privatisation aired by its supporters is the dismal performance of the PSEs and, thus, its inefficiency can be removed if these enterprises are privatised. PSEs in India are over controlled and overregulated causing inefficiency to grow upwards.
  • Accountability of these enterprises is minimal and no one is held responsible for the ineffective functioning of these enterprises. Political interference also has a telling effect on the performance of the PSEs. Most PSEs operate with manager having less or no expertise on the affairs of the concern. Decision-making again is a lengthy process. In fact, managerial inefficiency is one of the greatest banes of the PSEs.
  • As a result of all these, PSEs chronically suffer from losses leading to a drainage of state resources. Most of the public sector undertakings fail to generate revenues.

Lack of political interference:

  • It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense.
  • The government may be reluctant to get rid of the workers because of the negative publicity involved in job losses. Therefore, state-owned enterprises often employ too many workers increasing inefficiency.

Accountability of the Private Sector Raises Efficiency:

  • Privatisation will usher in an improvement in efficiency and as improved performance is concerned with ‘profit-oriented’ decision-making strategy, accountability is strictly ensured in a private sector enterprises and some people are held responsible for any failure.
  • Accountability and responsibility will definitely tone up the efficiency and greater output of the private sector.

Development of Social and Economic Infrastructures by the Government:

  • Government resources for keeping up PSEs may be utilised for the purposes of social sector development as this sector is starved of financial resources.
  • Modern governments should spend more on this sector as well as economic infrastructures as these are the two essential pillars of growth.

LPG against Anti-Competitive Behaviour:

  • Hitherto, Indian private industrialists performed in a sheltered market and remained insulated from any kind of external competition. This made Indian private sector an inefficient one.
  • Goods produced by this sector were far below international standards. Private industrialists kept themselves busy competing among themselves domestically.
  • Privatisation will promote private sector culture by introducing competition so that Indian industrialists can compete with their foreign counterparts and, hence, generate greater output and improved efficiency. All these trigger a chain of favourable movements in many direct and indirect directions.

Absence of Governmental Interference:

  • Indian PSEs are subject to too much governmental and political interference thereby making them operationally in­efficient. Private sector is free from such unavoidable interference.

Production of Non-Priority Items by PSEs Lacks Reasoning:

  • Over the years, the Indian PSEs have branched out in all directions, as their operations must not only consider economic objectives, but also social welfare objectives. In the name of enlarging public sector enterprises, the government has moved into the production of many unimportant consumer goods (producing food products like bread, fruit juice, entertainment business, and so on).
  • No economic logic is forwarded for producing these commodities, even the welfare objective does not hold here. This kind of distortion needs to be corrected through privatisation.

Arguments against Privatisation

Private Sector is Inefficient too:

  • There are some good number of PSEs that are not loss-making enterprises; instead, some of them generate revenues. If PSEs are allowed to grow in an independent way, managers of these enterprises are expected to respond according to the changed requirements.
  • Further, there is no evidence that can suggest that the Indian private sector performs satisfactorily. Private sector is inefficient too.
  • During 1950-1990, India’s private industrialists functioned under the protective umbrella without putting much effort in increasing factor productivity. These industrialists felt no urgency in modernising their industries; they used old and obsolete technology which made this sector an inefficient one.
  • There is no statistical evidence that can show a positive relationship between ownership and performance. In fact, performance is not be related to the ownership of industries. What is needed is the competitive environment in which any sector public sector and private sector can grow.

Financial burden:

  • There are so many private industries that are lying sick. Sometimes, private industrialists deliberately make their organisations ‘sick’—so that they can receive financial help from public sector institutions to tide over the crisis.

Infrastructures may not grow in Abundance:

  • Economic growth crucially depends on the growth of infrastructures. Infrastructures both economic and social and economic growth are positively linked to each other.
  • Since infrastructure investments are lumpy in character, private capital shies away from such investments and thrives on state- support infrastructures.
  • Therefore, move to­wards greater and greater privatisation means country’s slow and haphazard growth of infrastructural facilities.

Public interest:

  • There are many industries which perform an important public service, e.g., health care, education and public transport. In these industries, the profit motive shouldn’t be the primary objective of firms and the industry.
  • For example, in the case of health care, it is feared privatising health care would mean a greater priority is given to profit rather than patient care.

Problem of regulating private monopolies.

  • Privatisation creates private monopolies, such as the water companies and rail companies. These need regulating to prevent abuse of monopoly power. Therefore, there is still need for government regulation, similar to under state ownership.

Peripheral Social Responsibility:

  • Private sector is completely guided by the profit motive. This sector will invest in those areas that yield quick return the low priority industries.
  • Above all, social responsibility or welfare objective of business is side-lined by the private industrialists.

Danger of Employment Loss:

  • Employment loss seems to be another argument against privatisation as far as present employment scenario is concerned.
  • In the name of more and more profit, private industrialists have adopted ‘hire and fire’ policy of employment as well as labour-saving technologies.
  • Further, private businessmen exploit workers in many forms (like extending working hours or increasing work load, sabotaging the power of the workers to negotiate with the employers, etc.). All these impact on wages. Income inequality, thus, gets widened.


  • In a country like India, Privatization in today’s concept is seen as a means of increasing output, improving quality, reducing unit costs, curbing public spending and raising cash to reduce public debt.
  • Privatisation has become a popular measure for solving the organizational problems of governments by reducing the role of the state and encouraging the growth of the private sector enterprises. However, privatisation takes a number of forms and has been approached in various ways during the move away from government control to other forms of owner­ship in developing countries.
  • Privatization in India has both pros and cons. Disadvantages of privatization should be balanced with proper laws.
  • In India, hence privatization should be in a unique form in accordance with the priorities of our mixed economy and as well as by considering operational aspects of the PSUs.



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