HPAS/Allied Mains 2022 Answer Writing Challenge Day 202: Model Answer

Question: Discuss the Impact of Privatization on Indian Economy. (8 marks/120 words)

Answer:

Privatization: It implies shedding of the ownership or management of a government owned enterprise. Government companies are converted into private companies in two ways (i) by withdrawal of the government from ownership and management of public sector companies and or (ii) by outright sale of public sector companies. There are many examples of privatization of companies in India such as: Videsh Sanchar Nigam Limited (VSNL) Hindustan Zinc Limited (HZL), Bharat Aluminium Company limited (BALCO) etc.

Positive Impact:

1. Economically, privatization at the micro-level tends to increase efficiency, quality, range of choices, innovation, reduces cost & prices, and ultimately raises the profits of the firm. These can be further downloaded into, high incentives, lesser political interference, healthy competition, and reinvestment.
2. At macro-levels, privatization helps generate cash from asset sales which can increase capitalization. It improves government fiscal health, generates more wealth leading to overall economic growth. Wasteful spending, borrowings are checked, resulting in attracting foreign investments, and new revenues that arise from new corporate and income taxes.
3. At a social level, privatization reduces corruption in the public sector and red-tapism.
4. The organizations in the private sector are more sensitive to consumer tastes and hence have enhanced customer services.
5. Since there is ownership of shares, it empowers citizens’ participation in the management of the economy.
6. Citizens experience greater personal freedom, because of a reduction in state involvement.

Negative Impact:

1. Privatization may create local monopolies. Monopolies if created in utilities, will exploit their market power to the detriment of consumers’ welfare. They can reduce output and increase prices for profits.
2. There are some examples from developing countries where, divested assets were acquired by foreigners, who diverted the majority of their profits outside the country. So, there may be scenarios where there are no real benefits to the economy.
3. Some experts also believe that privatization induces social inequality. Wealth may get concentrated in the hands of a few, generating unemployment and massive retrenchments. This might worsen the plight of the poor. For example, according to Oxfam report, 73% of the wealth generated in 2017 went to the richest 1%.
4. The concept of welfare state may get defeated with the Privatization of economy. Private sector would not care about the society as its main objective is to earn profits.
5. Long Term Risk: Risk of short-term gains is prominent in private companies. There are decisions to start ventures which result in short term benefits but may not be good for long term.

Conclusion:  Privatization of the Indian economy will impact us in both ways positively and negatively we need to find a way to implement it in the best way. Privatization has helped in improving efficiency and competitiveness, as well as attracting foreign direct investment but it also needs to focus on welfare of people too.