Privatization in India

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PRIVATIZATION IN INDIA : ISSUES AND EVIDENCE (A doctoral dissertation proposal) T.T.Ram Mohan Visiting Faculty, Finance and Accounting Area Indian Institute of Management Ahmedabad, India

Abstract The proposed research is intended to survey the process of privatization in India and assess its impact on the Indian economy. The central issue we will address is the impact of privatization that has taken place so far on profitability and performance of PSUs. Going beyond this, we will attempt to understand what explains the impact of privatization on performance. Is it the use of market power by oligopolistic firms whose pricing power had been constrained under government ownership ? Is performance bought at the expense of labour through extensive layoffs so that what we see is essentially a transfer from workers to shareholders ? Or are we confusing the impact of privatization with the more generalised impact of deregulation in the economy, which in itself could spur efficiency ? The research output will comprise the following: 1. A survey of the literature on privatization, particularly with respect to less developed countries. 2. A review of the role of the public sector in the Indian economy, and the process of economic liberalization and privatization in India upto this point. 3. Impact of privatization on firm performance. 4. Explanation for the impact of privatization 5. Assessment of mechanisms of corporate governance in India.



Background: privatization in theory and practice A great wave of privatization has swept the world in the past two decades, embracing the industrial economies, the transition economies of East Europe and large parts of the less developed world, and it continues to roll on. It is interesting, however, that its basis in theory was somewhat shaky to start with. Moreover, a sizable enough body of empirical evidence, on which hypotheses about its impact could be tested, became available only several years down the road. So much of the initial impetus to privatization entailed a leap in faith, and, as happens all too often in the development of knowledge, attempts to explain its impact have followed on the heels of widespread existing practice. Although ideological considerations - exemplified by such statements as, “ governments have no businesss to be in business” - have often been paramount in driving privatization in various parts of the world, it is also true that governments have sought to justify privatization in relation to certain objectives. These objectives include one or more of the following: 1. to promote increased efficiency. 2. to raise revenues for the state (and thereby to bridge fiscal deficits). 3. to reduce government interference in the economy and promote greater private initiative. 4. to promote wider share ownership and the development of the capital market. Of these, the first objective, the need to promote efficiency in running commercial organizations, has arugably been the dominant motivation. There is a sense that public ownership somehow leads to lower levels of efficiency than are possible under private ownership; and inefficient enterprises, in turn, are seen as creating other problems such as pre-emption of government revenues (badly needed for investment in social sectors in the less developed countries ) through subsidies or recapitalization and uncompetitive industries in the economy. All this is now virtually taken as axiomatic and is part of the conventional wisdom, but it is noteworthy that neoclassical theory dwelt does not have much to say about firm ownership, dwelling instead on the importance of market structure in generating efficient outcomes . If anything under certain conditions of market failure that cannot not be entirely rectified through Pigouvian taxes or subsidies, there is a case for public, rather than private, ownership to meet overriding social objectives.

T.T. Ram Mohan, Indian Institute of Management, Ahmedabad

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