Impact of Privatization on India’s Economy

INTRODUCTION
The history of privatisation finds its roots in the economic reforms of 1990s (Dhaliwal et al,
2021). The government ceases to be the owner of the entity or business. ... India went for
privatization in the historic reforms budget of 1991, also known as 'New Economic Policy or
LPG policy'. In 1991 India made some major policy changes in their economic ideologies.
There were stagnation and slow growth in the economy. To tackle these problems the, then
Finance Minister Dr. Manmohan Singh introduced some major economic reforms (1).
Privatization has been implemented with primary objective of increasing efficiency of an
economy characterized by intensive private participation. The success of privatization
depends on type, nature and size of objectives that the overall economic policy sets for
privatization. Realistic objectives and systematic execution of programme play vital role in
yielding expected results. In some cases, biased and impracticable objectives slated for
privatization are said to be a reason for formation of negative opinion about the privatization
policy (Selvam, 2007). The post 1991 era is the unique feature in the Indian economy.
Policies associated with deregulation and liberalization became rampant that led to
globalization. Privatizing non-strategic PSUs was initiated with the objective of increasing
efficiency and productivity as it is always believed that private sector is far more efficient,
innovative and cost-effective, both in terms of resources and time (Jesiah,2010). While India
is a fastest developing country in all over the world. When India was not privatized the
control of major sectors and industries like Banking sector, Mining, Steel, Insurance,
Telecommunications, etc was owned by government so called state-owned enterprises.
Because of the only role of public sector undertakings in India’s economy there were low rate
of GDP, Unemployment, Per Capita GDP. In 1990 the GDP growth rate of India was near
5.53% the GDP growth rate has gradually improved from 5.53% to 8.26% in year
2016(source World bank). On the other side the Unemployment rate of India in 1990 was
5.55% the rate has gradually increased to 7.11% in year 2020 which is not good for any
developing economy while the per capita GDP of India in year 1990 was 1190 PPP Dollars
has increased to 6390 PPP Dollars in year 2020(Source World Bank). Now, the question
arises how does privatization is associated with economic development and economic growth
of India? For answer this question firstly we have to understand the factors which affects
Privatization in India. There are some factors like political factors, economic factors, public-
sector size, which affects privatization in India. Political factors play a giant role in policies
and decisions pertaining to privatization. As politicians are powerful actors, their attitude and
perception contribute to the performance of the privatization (Jesiah, 2010). Geeta and Syed
Mohmood (2003) reveal that resistance to the PSUs’ reforms reveals not only lack of
expertise and poor resource availability for improving institutional capacity, but also political
hostility to privatization. When comparing with public sector, the private sector responds to
incentives in the market. On the other hand, public sector often has non-economic goals. The
public sector is not highly driven to maximize production and allocate resources effectively,
causing the government to run high cost, low-income enterprises. Privatization directly shifts
the focus from political goals to economic goals which leads to development of the market
economy (Poole, 1996). ... By reducing the size of the public sector, the government reduces
total expenditure and begins collecting taxes on all the businesses that are now privatized.
Privatization is gainful for the development and maintainability of the state-possessed
undertakings. Following the pattern of privatization over the world, the Indian government in
the 1990s likewise presented privatization in the midst of clamour from a large number of the
political and social gatherings. To achieve a development in the yield of the country there is a
prerequisite for privatization at a quick scale which will help in improving nature of the
things by decreasing unit costs, checking open spending and fund-raising to reduce open
commitment (Mittal, 2018).

Privatization plays a dominant role in the field of India’s economic growth. Firstly,
Privatization is a most important reform, In-spite of huge progress of the public sector during
the plan period, the importance of private sector is tremendous in the India economy. On the
basis of the latest data available for the country’s industrial development Gross fixed capital
formation, private sector (% of GDP) in India was reported at 21.82% in 2019, according to
the World Bank collection of development indicators.

India - Gross Fixed Capital Formation; Private Sector (% Of GDP)

Privatization also contributes towards Agriculture sector. As we aware that India is an agro-
based economy. The share of agriculture and its allied activities like fishing, poultry, cattle
rearing, animal husbandry, dairy farming etc. to the national income is nearly 16.41%
(Source RBI). On the other hand, about 60% of the total working population is engaged in
this area. Hence, this large agriculture sector is controlled by the private sector.

In recently announced Union Budget Indian government has announced to privatized state-
owned companies in the coming years. It is an important step in India’s programme of
reforms to achieve long-term sustainable growth. Now, the government would be less
involved in the business of business, and asset monetization and now privatization will
empower Indian citizens, enhance India’s infrastructure, and increase economic
efficiency. One of the benefits of privatization is asset recycling: the government monetizes
existing infrastructure assets through their sale to the private sector, and then invests the
proceeds in new projects or long-term investment funds. This is particularly important as
countries around the world look to rebuild their economies after the pandemic. India has
recently announced a national asset monetization pipeline to fund much-needed infrastructure
and welfare schemes. By allowing the private sector to take over the heavy lifting, attract new
capital and increase business efficiency, privatization also ensures that businesses are more
sustainable, creating an environment where they can grow, invest and create jobs well into
the future.

Major Causes of Privatization: -

 To reduce the burden on government

 To strengthen competition
 To improve public finances
 To fund infrastructure growth
 Accountability to shareholders
 To reduce unnecessary interference
 More disciplined labour force

The private sector has effective policies in solving the problem of externalities,
through costless bargaining, driven by individual incentives. According to the Coase
Theorem, individual parties will directly or indirectly take part in a cost-benefit
analysis, which will eventually result in the most efficient solution (Mankiw, 2001).

Literature Review: -

Due to the importance of the privatization or the advancement of private sector in the overall
growth of an economy and its contribution to the real GDP of a country, many authors and
researchers showed their interest in this sector. There are number of articles and research
paper which have highlighted this particular sector. There are number of methodologies used
to indicate the impact of privatization or private sector on the economic growth. Government
of India also releases the share of privatization or private sector every year to show the
benefits of privatization and to show the contribution in GDP.

Jesiah, (2010) studied the significant of privatization on economic growth empirical findings
from India. The data he used for this study covers a period of over seventeen years, 1991/92-
2006/07. For the findings of this he constructed regression model using the neo classical
growth model. The OLS result of his findings revealed that the privatization programme had
no impact on the economic growth of a country. However, the private sector development
initiatives of the government must have contributed robustly to the rising trend of capital
accumulation.

Dhaliwal et al. (2021) studied the impact of privatization on India. To get gist of how really
privatization affects our nation, they picked the main 3 sector namely Railway, Public sector
banks, and agriculture. For this they used the primary data for their findings. Their study
found that there could be both positive impact and negative impact of privatization on India.

Adams, (2007) studied the impact of privatization on economic growth and income inequality
in developing countries. The authors divided the 45 countries into three income groupings:
low income (GNP of less than $450), lower-middle income (GNP between $451-1800), and
upper middle income (GNP between $1801-7500), and found that the study examined the
impact of privatization on economic growth and income inequality in various regions of the
developing world between 1991-2002. The study finds that privatization did not play a
significant role in promoting economic growth and reducing income inequalities in
developing countries.

Mittal, (2018) studied the Positive impact of privatization on Indian economy. she used
doctrinal research method. The data had collected from books, magazines, blogs and online
sources. The findings of her study said that Privatization may positively affect a nation's
monetary circumstance.

Makhija, (2016) studied his findings on privatization in India. he wrote an article which
focuses on centrally owned PSUs, which may account for 85percent of the total assets in the
public sector. His findings are about the poor performance of state-owned enterprises. As per
his findings privatization showed a positive impact on economic efficiency and capital
accumulation.

Ivan, (2014) studied his findings on the impact of privatization: Empirical analysis and results
in Serbian industry. His aim of the study was to check the performance of privatization on
industrial sector in year between 2002-07 upon Serbian economy. His methodological
approach was based on panel analysis. He has done his survey in four segments to find out
the performance of privatization in industrial sector. The conclusions of his findings were due
to privatization in industrial sector there were growth of foreign capital share but there was
high labour cost as compared to state-owned enterprises.

Research Gap

All the studies mentioned in the literature review focused on the relationship between
privatization and economic growth. The studies found that privatization has no impact on the
economic growth. But very few studies measured the impact of privatization on economic
growth and how does privatization associates with economic growth. The above mention
studies had done through either using primary data or in selected sectors. So, the objectives of
this research paper are to analyse the trend of privatization in all the sectors of India and how
privatization impacts the Indian economy. By privatizing public sector undertakings Indian
government has started looking towards long-term sustainable growth. Due to privatization,
there will going to be a competition in market which will lead to better utilization of
resources and consumers will get wide variety of goods also it will help to increase economic
efficiency.

Research Questions

1. How does Privatization is associated with economic growth & development?

2. How Privatization will help to increase economic efficiency?

Research objectives

 To find out that how much privatization has contributed to Indian economy in last 30
years.
 To analyse the trends of privatization in India over the period of time.

Data Source & Methodology

Data source

The findings of this study will be done through by using secondary data. Data will be collects
from the Disinvestment Commission, Ministry of Finance (Government of India), Reserve
Bank of India and World Bank. The data used for this study covers a period of over thirty
years, 1990/91-2020/21.

Methodology

The methodology which is being used in the data is linear regression, descriptive study,
correlation between the independent and dependent variable which is Privatization or share of
private sector as the dependent variable, Economic growth & development as the independent
variables per capita income, employment, and GDP.

GDP = a + b PVT + Ui

Privatization

(Dependent Variable)

- Share of Private sector in India’s GDP

Economic Growth & Development

(Independent Variable)

- GDP, Per capita income & Employment