Privatization
Privatization
refers to the process of transferring ownership or control of the government
assets, firms, and operations to the private investors. This process of
transfer takes the form of issue and sale or outright distribution of shares to
the general public. The term privatization broadly includes all other policies
such as “outsourced” which is the process by which activities while publically
organized or financed can be carried out by private sector companies. For
example, garbage collection, street planning, housing, education, etc.
Characteristics
of Privatization
The
different characteristics of privatization are:
·
Transfer of Ownership – In privatization, ownership of a company,
undertaking or property is transferred to the private sector.
·
Lack of Government Interference –
Privatization reduces indulgence and interference of the state in the
activities of a company.
·
Economic Democracy – Privatization dilutes state monopoly and
allows private companies to participate in economic activities more
democratically.
Objectives
of Privatization
Improved
Efficiency: State-run companies are predominantly influenced by political
intentions rather than economic well-being. It hinders the efficiency of public
sector companies and prevents growth. Privatization deters government influence
and aids economic growth. As private bodies do not have a political agenda,
they focus more on spurring growth and efficiency within an organization for a
greater generation of revenues.
Increased
Competition: State-run companies enjoy a monopoly and remain undisturbed
by competition in the market. Privatization, accompanied by deregulation of the
market, allows the private sector to engage more actively and encourages
competition. The competition will, in turn, accelerate overall industrial and
economic growth and protect the market against monopolistic sluggishness.
Promotes
Market Dynamism: Privatization liberates the economy of state control without
government regulations dictating market progression, the market operates
organically, Due to a lack of government interference and the market becomes
more dynamic and follows integral economic values of demand and supply Consumer
response to a more dynamic and organically run market is greater and generates
higher revenues
Revenue
from the Sale of a Company: A primary objective of privatization is a
one-time revenue generation for the government. Several governments have
previously resorted to privatization when facing a fiscal crisis.
Methods
of Privatization
There
are mainly five methods to privatize a company. These are –
Public
Auction:
Public auctions are held with the motive of raising the highest amount for a
government-owned property. Shares of a public company or long-term assets can
be auctioned through this route.
Sale
of Shares:
Equity shares of a public sector company or undertaking can be sold through
stock exchanges for privatization. The state hands over complete authority of
an organization’s economic activities through a public sale of shares.
Direct
Negotiations: When the government enters into dealings with specific private
bodies for carrying out the privatization of state-owned property, it is called
‘direct negotiation’. Direct negotiations are potentially more beneficial for
participating bodies as both the seller and purchaser are present and agree on
necessary and advantageous stipulations.
Public
Tender:
It refers to a contract issued to attract offers from interested procurers. A
tender is essentially like an auction where the bidder with the most lucrative
offer procures it. The process that follows public tender for the privatization
of government property is similar to direct negotiations. Except in direct
negotiations, there are already selected purchasers who can participate in the dealing.
In a public auction, there are no such provisions.
Lease
with a Right to Purchase: Under this method, a private company only assumes
possession and usage of a state-run company or undertaking by meeting certain
criteria. The private company can later choose to exercise the option to
convert the lease of a property to ownership by paying the necessary sum and
following certain stipulations.
Advantages
of Privatization
Improved
Performance: Private companies are profit-incentivized rather than politically
motivated. Privatization, therefore, allows companies to become more efficient
by eliminating unnecessary elements within an organization like overwhelming
bureaucracy & red tape. Moreover, private companies assess their employees
based on their performance and adequately incentivize better performance. This
factor spurs overall performance in an organization.
Better
Customer Service: As private companies are profit-driven and function in a
competitive market, their primary focus rests on efficient customer service.
State-run companies lack this feature as they face no competition and are not
financially motivated. Furthermore, customer service is enhanced in
privatization due to the elimination of unnecessary bureaucratic hassle.
Improved
Management: Privatization enhances management of a company. As managers
of a privately-owned organization are accountable to the company’s owners, it
becomes their responsibility to ensure efficient management. This factor of
accountability is less intense in public sector companies which results in poor
and inefficient operations that may ultimately harm the economy.
Disadvantage
of Privatization
Issues
of Regulating Monopolies: The private sector can manipulate their monopoly and neglect
social costs. Privatization of certain state industries such as water and
electricity regulators may create only single monopolies.
Public
Interest:
The profit motive should not be the primary objective for the industry which
performs an important public service, e.g. health care, education, and public
transport. For example, According to the researchers, the private sector in
India has grown independently without any major regulation; in the hands of
Private health sector, some private practitioners are not even registered
doctors and are referred to as quacks.
Accountability: The public
does not have any control or administration of private companies. Privatization
has a bad effect on accountability because Investors retain full authority to
do anything.
Un-assured
Success:
Privatization is un-assured in terms of the success rates of any
individual unit, due to which many private sector companies suffer huge losses.
Important Concepts of Privatization in India
Globalization
The
term globalization refers to the integration of the economy of the nation with
the world economy. It is a multifaceted aspect. It is a result of the
collection of multiple strategies that are directed at transforming the world
towards a greater interdependence and integration.
It
includes the creation of networks and pursuits transforming social, economical,
and geographical barriers. Globalization tries to build links in such a
way that the events in India can be determined by the events happening
distances away.
The
policy of globalization was introduced in India in 1991 along with liberation
and privatization. Its impact on the Indian economy has been massive. Globalization
and the Indian economy have become interrelated as they are directly related.
It has helped in the creation of jobs, attract foreign investment and generate
income in the economy. Along with the economic impact of globalization, it has
impacted the culture of the country too.
Advantages
of Globalization
Globalization
is a process that has several advantages. It is a process that contributes
significantly to the development and growth of a nation. Here are some of the
benefits of globalization:
Employment: The
establishment of special economic zones has increased the number of jobs
available. There are export processing units established all over the world,
which have helped employ thousands of people. The multinational companies of
the west have been providing employment opportunities to the people by
outsourcing employees.
Compensation: There has
been an increase in the level and amount of payment compared to the domestic
companies. The main reason for this is that domestic or home companies lack
skill and knowledge compared to multinational companies. An increase in
compensation is leading to changes in the management structure of the companies
too.
Standard
of Living:
With the emergence of globalization, there has been a change in people's
standard of living. The difference in the purchasing behavior of people has
increased the standards of living of people. Therefore, the evolution and
development of business have raised the standards of living of people.
Increased
Investment: Globalization has led to an increase in cross-border investments.
This has led to companies investing and opening branches in different countries
across the globe. The increase in investment across the borders has enhanced
the welfare of both countries.
Development
of Infrastructure: Technological advancement has helped improve the infrastructure
of countries. With the help of technology, the countries are achieving overall
development. Foreign Exchange Reserves: With the help of globalization,
there is a constant flow of capital in the international financial flows. This
capital flow helps countries build foreign exchange reserves.
Types
of Globalizations
Globalization
is mainly divided into three different kinds.
Economic
Globalization: In this type of globalization, countries aim to integrate
international financial markets and coordinate monetary exchange. Multinational
corporations that operate in more than two countries play an essential role in
a nation's economic globalization. Economic globalization is the North American
Free Trade Agreement or NAFTA, an economic agreement between the United States,
Canada and Mexico.
Political
Globalization: This is globalization that refers to a nation's policies that aim
at bringing it closer to other nations politically and economically. Political globalization
helps build a bond between countries with each other. Some examples of
political globalization are North Atlantic Trade Organization (NATO) and United
Nations (UN).
Cultural
Globalization: In this type of globalization, the focus is on the technological
and societal factors which bring people together. Cultural globalization
includes ease of communication, social media and access to faster and better
transportation.
EXIM Policy
The
Export-Import Policy (EXIM Policy), announced under the Foreign Trade
(Development and Regulation Act), 1992, would reflect the extent of regulations
or liberalization of foreign trade and indicate the measures for export
promotion. Although the EXIM Policy is announced for a five- year period,
announcing a Policy on March 31st of every year, within the broad frame of the
Five Year Policy, for the ensuring year
Export-Import (EXIM) Policy frames rules
and regulations for exports and imports of a country. This policy is also known
as Foreign Trade Policy. It provides policy and strategy of the government to
be followed for promoting exports and regulating imports. This policy is
periodically reviewed to incorporate necessary changes as per changing domestic
and international environment. In this policy, approach of government towards
various types of exports and imports is conveyed to different exporters and
importers.
Export refers to selling goods and services to other
countries, while import means buying goods and services from other countries.
Now in the era of globalization, no economy in the world can remain cut-off
from rest of the world. Export and import play a significant role in the
economic development of all the developed and developing economies. With the
growth of international organizations like WTO, UNCTAD, ASEAN, etc., world
trade is growing at a very fast rate.
Objectives of EXIM Policy:
The
principal objectives of this Policy are:
1) To
facilitate sustained growth in exports to attain a share of at least 1 % of
global merchandise trade.
2) To
stimulate sustained economic growth by providing access to essential raw
materials, intermediates, components, consumables and capital goods required
for augmenting production and providing services.
3) To
enhance the technological strength and efficiency of Indian agriculture,
industry and services, thereby improving their competitive strength while
generating new employment opportunities, and to encourage the attainment of
internationally accepted standards of quality.
4) To
provide consumers with good quality goods and services at internationally
competitive prices while at the same time creating a level playing field for
the domestic produce.
Foreign Exchange Management Act, FEMA
Foreign Exchange Management Act,
1999 (FEMA) came into force by an act of Parliament. It was enacted on 29
December 1999. This new Act is in consonance with the frameworks of
the World Trade Organization (WTO). It also paved the way for the
Prevention of Money Laundering Act, 2002 which came into effect from July 1,
2005.
Main Features of Foreign Exchange Management Act, 1999
- It gives powers to the Central Government to
regulate the flow of payments to and from a person situated outside the
country.
- All financial transactions concerning foreign
securities or exchange cannot be carried out without the approval of FEMA.
All transactions must be carried out through “Authorized Persons.”
- In the general interest of the public, the
Government of India can restrict an authorized individual from carrying
out foreign exchange deals within the current account.
- Empowers RBI to place restrictions on
transactions from capital Account even if it is carried out via an
authorized individual.
- As per this act, Indians residing in India,
have the permission to conduct a foreign exchange, foreign security
transactions or the right to hold or own immovable property in a foreign
country in case security, property, or currency was acquired, or owned
when the individual was based outside of the country, or when they inherit
the property from individual staying outside the country.
Structure of FEMA
- The Head
Office of FEMA, also known as Enforcement Directorate, headed by the
Director is located in New Delhi.
- There are 5
zonal offices in Delhi, Mumbai, Kolkata, Chennai, and Jalandhar, each
office is headed by Deputy Director.
- Every 5 zones
are further divided into 7 sub-zonal offices headed by Assistant Directors
and 5 field units headed by Chief Enforcement Officers.
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