Liberalization, Privatization And Disinvestment

Liberalization, Privatization and Disinvestment

Liberalization Liberalization means relaxation of previous government restrictions usually in areas of social and economic policies. Liberalization in trade means removal of tariff, and other restrictions on the flow of goods and services between countries.

Privatization • Privatization may be defined as the transfer of a function, activity or organization from the public to the private sector. • Privatization indicates the emergence of a new culture in the society in which marketization, competition, efficiency become the guiding principle in economic decisionmaking. The range of activities covered under privatization are: total denationalization, liquidation, creation of joint ventures, workers’ cooperatives, contracting our to private agencies, leasing and financial restructuring.

The most common and important objectives of Privatization are as follows:Improving the government financial position by • Raising funds from the sales of enterprise or their; • Making the enterprises raise internal resources and from capital markets, thereby reducing budgetary support to them Improving the performance of an enterprise through • Increased efficiency; • Requiring enterprises to meet commercial performance objectives; • Greater responsiveness to consumers (whether in terms of quantity, quality, diversity or services); • Relief from public sector financial constraints; • More managerial Besides the above two broad objectives; privatization would help in reducing the burden on public administration by reducing the size of the public sector, strengthening market forces and competition within an economy and promoting wider share ownership among public.

Arguments in favor of Privatization • Privatization will introduce efficiency and profitability in PSUs. • It will reduce budgetary deficits which result from expenditure on loss making PSUs. • It will help in reviving sick units which are a burden on Public Sector. • It will help in bringing about globalization by opening out of an economy and increasing its competitiveness in international market. • It will use modern techniques of production. • It will introduce accountability and responsibility in PSUs.

Arguments against Privatization • Privatization encourages growth of monopoly power in the hands of big business houses. This results in greater inequalities of income and wealth. • Private enterprises may not show any interest in buying shares of sick PSUs. • Private sector produces with profit motive and have no consideration for social welfare motive. • Private sector is not interested in those projects which take long time to complete and have low profitability. This includes water supply, salt, production, education for poor, etc. • Private sector is not interested in taking up risky projects.

Disinvestment Disinvestment is the sale of a part of equity holdings held by the government in any PSUs to Private investor. Disinvestment has been major strategy by which the government has financed fiscal policy. Besides financing fiscal deficit, the economic motivation behind it is to improve efficiency of PSUs. The government expects that even small percent of private ownership will discipline inefficient managers and motivate them.

Methods of Disinvestment • Domestic public issue:- it means that equity was offered to retail investors through domestic public issues. • Global Depository Receipts (GDR):- GDRs were issued to tap the overseas market • Cross-holding:- in this method, the government simply sells part of its shares in one PSU to another PSU. • Warehousing:- in this method, the governments’ own financial institutions buy the governments’ stake in selected PSUs and hold them until a third buyer comes. • Golden share:- in this method, the government retains stake upto 26% in the PSU to protect its interest. • Strategic sale:- in this method, the government sells a major portion of its stake to a strategic buyer and also gives out the management control.