In the former Soviet Union, Gorbachev introduced Glasnost and Perestroika (restructuring) which include a massive decentralisation of economic management and decision-making, setting up of prices through competition, allowing private enterprise in selected areas and so on.
In USA, privatisation has dominated in the areas of “contracting out” of public services, infrastructure services, health services and public safety.
France denationalised banking and insurance sectors and some profit making industries. Similar experiments with privatisation also started in Italy, Spain, Sweden, Germany, Netherlands, Ireland, Austria and Japan.
In the less developed countries privatisation has been pursued mainly because of fiscal problems like budget deficit through a variety of ways such as total or partial denationalisation, closure or liquidation of perpetually loss- making enterprises, transfer of management, selling through auction etc.
Experimentations with privatisation process have started in 80s in Bangladesh, Pakistan, Thailand, Malaysia, Latin America and African countries.
Signals of privatisation process in India began with certain loosening of controls in the area of industrial licensing, liberalisation of import control policy, reduction in income and corporate tax rates and the long-term fiscal policy since 1985.
India’s development strategy failed to exploit the advantages inherent in the economy. Instead, through planning it created high cost inefficient industries of less than economic scale and sheltered them from foreign competition.
Self-reliance was perverted into self-sufficiency. The softness of the budget constraint of the bloated public sector and bureaucracy is at the heart of the problem. The socio-political system was unable to distribute assets.
The instruments of industrial and import licensing policy have not succeeded in reducing inequalities. Even though tax revenue as a share of GDP has risen, the revenue has been increasingly squandered. The deficit reflects the growth of subsidies of various kinds and the soft budget constraints of the public sector.
Many observers argue that the solution to industrial sickness in the public sector is privatisation. But privatisation is not the real solution. Bagaram Tulpule has rightly observed that closing down PSUs will involve heavy financial as well as other costs. Closure of these will take away the jobs of over four lakh employees.
Payment of compensation to them at the rate of Rs. 1.5 lakh each will Involve an outgo of over Rs. 6000 crore. Even if a part of this amount is raised by the sale of assets of the units concerned, the government has conceded that the net cash outgo will still be very large.
In many of these enterprises the cash outgo on closure, according to the official document, will be as much as 6 to 10 times their annual losses.
Closing down such enterprises at such heavy cost and the displacement of such large number of employees may make little economic sense since the annual interest on the present cash outgo will more or less equal the annual cash losses of these enterprises.
The Government of India has ruled out any overnight handing over of such PSUs to the private sector. It would be better if the management of ailing PSUs come out with credible revival packages. The Government would take a pragmatic approach to decide on the fate of these undertakings.
The present trend indicates that public enterprises require a radical restructuring and reorientation. This is likely to take any of the following routes:
(i) Divestiture i.e. assets of a Government enterprise are sold or transferred to a private owner.
(iii) Under the Industrial Policy certain industries are exclusively reserved for development in the state sector. Any relaxation in respect of such an exclusive reservation.
(iv) Leasing of PE to a private sector party.
(v) Transfer of management and control of a PE to a private agency.
Privatisation has transformed itself from rhetoric to reality in both developed and developing countries. In the present day situation it is an accomplished fact and not rigmarole. It is a reform that necessitates a redistribution of income and usually a change in employment patterns.