Privatisation In Indian Essay

This essay provides information about the Globalization, Liberalisation and Privatisation in India!

Globalization:

The term globalization can be used in different contexts. The general usages of the term Globalization can be as follows:

i. Interactions and interdependence among countries.

ii. Integration of world economy.

iii. Deterritorisation.

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By synthesising all the above views Globalization can be broadly defined as follows:

It refers to a process whereby there are social, cultural, technological exchanges across the border.

The term Globalization was first coined in 1980s. But even before this there were interactions among nations. But in the modern days Globalization has touched all spheres of life such as economy, education. Technology, cultural phenomenon, social aspects etc. The term “global village” is also frequently used to highlight the significance of globalization. This term signifies that revolution in electronic communication would unite the world.

Undoubtedly, it can be accepted that globalization is not only the present trend but also future world order.

Effect of Globalization on India:

Globalization has its impact on India which is a developing country. The impact of globalization can be analysed as follows:

1. Access to Technology:

Globalization has drastically, improved the access to technology. Internet facility has enabled India to gain access to knowledge and services from around the world. Use of Mobile telephone has revolution used communication with other countries.

2. Growth of international trade:

Tariff barriers have been removed which has resulted in the growth of trade among nations. Global trade has been facilitated by GATT, WTO etc.

3. Increase in production:

Globalization has resulted in increase in the production of a variety of goods. MNCs have established manufacturing plants all over the world.

4. Employment opportunities:

Establishment of MNCs have resulted in the increase of employment opportunities.

5. Free flow of foreign capital:

Globalization has encouraged free flow of capital which has improved the economy of developing countries to some extent. It has increased the capital formation.

Negative effect of globalization:

Globalization is not free from negative effects. They can be summed up as follows:

1. Inequalities within countries:

Globalisation has increased inequalities among the countries. Some of the policies of Globalization (liberalisation, WTO policies etc.) are more beneficial to developed countries. The countries which have adopted the free trade agenda have become highly successful. E.g.: China is a classic example of success of globalization. But a country like India is not able to overcome the problem.

2. Financial Instability:

As a consequence of globalization there is free flow of foreign capital poured into developing countries. But the economy is subject to constant fluctuations. On account of variations in the flow of foreign capital.

3. Impact on workers:

Globalization has opened up employment opportunities. But there is no job security for employees. The nature of work has created new pressures on workers. Workers are not permitted to organise trade unions.

4. Impact on farmers:

Indian farmers are facing a lot of threat from global markets. They are facing a serious competition from powerful agricultural industries quite often cheaply produced agro products in developed countries are being dumped into India.

5. Impact on Environment:

Globalization has led to 50% rise in the volume of world trade. Mass movement of goods across the world has resulted in gas emission. Some of the projects financed by World Bank are potentially devastating to ecological balance. E.g.: Extensive import or export of meat.

6. Domination by MNCs:

MNCs are the driving force behind globalization. They are in a position to dictate powers. Multinational companies are emerging as growing corporate power. They are exploiting the cheap labour and natural resources of the host countries.

7. Threat to national sovereignty:

Globalizations results in shift of economic power from independent countries to international organisations, like WTO United Nations etc. The sovereignty of the elected governments are naturally undermined, as the policies are formulated in favour of globalization. Thus globalization has its own positive and negative consequences. According to Peter F Drucker Globalization for better or worse has changed the way the world does business. It is unstoppable. Thus Globalization is inevitable, but India should acquire global competitiveness in all fields.

Liberalisation:

It is an immediate effect of globalization. Liberalisation is commonly known as free trade. It implies removal of restrictions and barriers to free trade. India has taken many efforts for liberalisation which are as follows:

New economic policy 1991.

Objectives of the new economic policy.

i. To achieve higher economic growth rate.

ii. To reduce inflation

iii. To rebuild foreign exchange reserves.

FEMA:

Foreign exchange Regulation Act 1973 was repealed and Foreign exchange Management Act was passed. The enactment has incorporated clauses which have facilitated easy entry of MNCs.

i. Joint ventures with foreign companies. E.g.: TVS Suzuki.

ii. Reduction of import tariffs.

iii. Removal of export subsidies.

iv. Full convertibility of Rupee on current account.

v. Encouraging foreign direct investments.

The effect of liberalisation is that the companies of developing countries are facing a tough competition from powerful corporations of developed countries.

The local communities are exploited by multinational companies on account of removal of regulations governing the activities of MNCs.

Privatisation:

In the event of globalization privatisation has become an order of the day. Privatisation can be defined as the transfer of ownership and control of public sector units to private individuals or companies. It has become inevitable as a result of structural adjustment programmes imposed by IMF.

Objectives of Privatisation:

To strengthen the private sectors.

Government to concentrate on areas like education and infrastructure.

In the event of globalization the government felt that increasing inefficiency on the part of public sectors would not help in achieving global standards. Hence a decision was taken to privatise the Public Sectors.

Causes of Inefficiency of Public Sectors:

i. Bureaucratic administration

ii. Out dated Technology

iii. Corruption

iv. Lack of accountability.

v. Domination of trade unions

vi. Political interference.

vii. Lack of proper marketing activities.

Privatisation has its own advantages and disadvantages Viz:

Advantages:

i. Efficiency

ii. Absence of political interference

iii. Quality service.

iv. Systematic marketing

v. Use of modern Technology

vi. Accountability

vii. Creation of competitive environment.

viii. Innovations

ix. Research and development

x. Optimum utilisation of resources

xi. Infra structure.

However, privatisation suffers from the following defects.

i. Exploitation of labour.

ii. Abuse of powers by executives.

iii. Unequal distribution of wealth and income.

iv. Lack of job security for employees.

Privatisation has become inevitable in the present scenario. But some control should be exercised by the government over private sectors.

Changes across Euro, Third World, USA and Their Impact on India:

Changes across Euro and USA:

Significant changes have taken place across Euro and USA on account of globalization, particularly in the field of international business politics etc. Such changes have given rise to change in cultural and social aspects as well.

The economy of European countries and US are getting integrated with the global economy. Different arrangements have been made in this regard which are as follows:

1. Free Trade Area:

It is an agreement among a group of countries to abolish all trade restrictions and barriers, in carrying out international trade.

2. Customs Union:

The member countries abolish all the restrictions and barriers and adopt a uniform commercial policy.

3. European Economic Community:

It was initially formed by six countries viz: France, Federal Republic of Germany, Italy, Belgium, Netherlands and Luxembourg. It came into existence on 1.1.1958. How EEC has 15 members. In order to become a member of EEC, a country must be European country and it must be democratic.

Activities of EEC:

i. Elimination of custom duties and quantity restrictions on export and import of goods.

ii. Devising a common agricultural policy.

iii. Devising a common transport policy.

iv. To control disequilibrium in balance of payments.

v. Development of a common commercial policy.

4. North American Free Trade Agreement:

NAFTA

i. It came into being in 1994 Developed countries like US, Canada and a developing country Mexico became the members.

Objectives and Activities of NAFTA:

i. Removing barriers among the member countries to facilitate free trade.

ii. To enhance Industrial development.

iii. To enhance competition.

iv. To improve Political relationship among member countries.

v. To develop industries in Mexico. the international market.

European Free Trade Association:

It was formed in 1959. The member countries are: Austria, Norway, Denmark, Sweden and Switzerland and Great Britain.

Objectives of EFTA

i. To eliminate trade barriers.

ii. To remove tariffs.

iii. To encourage free trade.

iv. To enhance economic development of member countries.

Changes in the Third World:

The concept of Third World does not have much significance in the present scenario. This term was popular prior to the disintegration of Soviet Union. USA and USSR were considered as super powers and the countries in the world were divided in supporting them. The countries which did not have an alliance with both the countries were considered as Third World countries. But with the disintegration of USSR the concept of Third World has almost disappeared. However changes in Asian countries and other countries (other than Europe and USA) have affected India. Such changes can be discussed as follows:

Trade blocks in Asia:

South Asian Association for Regional Cooperation (SAARC)

It came into being in 1983 countries like India, Bangladesh, Bhutan, Pakistan, Maldives and Sri Lanka adopted a declaration on SAARC.

Objectives of SAARC:

i. To promote economic social and cultural development among member countries.

ii. To improve the life of people among member countries.

iii. To enhance cooperation with other developing economies.

iv. To liberalise trade among member countries.

v. To promote economic cooperation among member countries.

Changes in Asian Countries:

Chinese Market:

China has introduced many economic reforms. It started privatisation in 1984. China has formed special economic Zones. It has attracted heavy foreign investments. It has also formed economic and Technical Development Zones in towns and cities. These zones are free zones which allow quick business operations.

Japanese Market:

There is a rapid growth in Japan during the past Fifty years. Japanese maintained a close link with ministry of international trade and investment. The Strategies of Japanese-corporate sector was directed by ministry of international trade.

Impact on India:

Changes across Euro, USA and Third World has its own impact on India which can be summarised as follows:

i. India’s economic dependence on other countries has significantly increased.

ii. Extensive opportunities in the field of information technology.

iii. Extensive opportunities for India’s Telecom sector.

iv. Strategic alliances. Joint ventures, mergers have become the order of the day.

v. Extensive research and development.

vi. Bilateral treaties to promote free trade.

vii. Membership of WTO.

viii. Amending the domestic laws to suit the liberalised economy. E.g.: FEMA. Amendment of Patent Act

ix. Active participation in global politics.

x. Improvement in Productivity.

On the whole it can be concluded that changes across Euro, USA and other countries have significantly changed the Indian economy. India has realised that its business can’t survive without focusing on changes in other countries. Indian economy has become a major economy of the world and a significant trading partner. In the new era, India is looking at the potentials of the new products.

Management Perspective:

Globalization has led to the practice of management across culture. Modern business organisations have adopted Global management practices. Efforts are being made by India to understand Japanese, Chinese style of management. Issues in Motivation, communication across culture has gained significance. Every functional area of management is being studied with a global perspective. E.g.: International HRM, International Financial management, International marketing etc.

A look at the arguments for and against privatisation.

Privatisation involves selling state-owned assets to the private sector. It is argued the private sector tends to run a business more efficiently because of the profit motive. However, critics argue private firms can exploit their monopoly power and ignore wider social costs. Privatisation is often achieved through listing the new private company on the stock market. In the 1980s and 1990s, the UK privatised many previously state-owned industries such as BP, BT, British Airways, electricity companies, gas companies and rail network.

Arguments for and against privatisation

Potential benefits of privatisation

1. Improved efficiency

The main argument for privatisation is that private companies have a profit incentive to cut costs and be more efficient. If you work for a government run industry, managers do not usually share in any profits. However, a private firm is interested in making a profit, and so it is more likely to cut costs and be efficient. Since privatisation, companies such as BT, and British Airways have shown degrees of improved efficiency and higher profitability.

2. Lack of political interference

It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense. For example, a state enterprise may employ surplus workers which is inefficient. The government may be reluctant to get rid of the workers because of the negative publicity involved in job losses. Therefore, state-owned enterprises often employ too many workers increasing inefficiency.

3. Short term view

A government many think only in terms of the next election. Therefore, they may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term because they are more concerned about projects that give a benefit before the election.

4. Shareholders

It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state-owned firm doesn’t have this pressure and so it is easier for them to be inefficient.

5. Increased competition

Often privatisation of state-owned monopolies occurs alongside deregulation – i.e. policies to allow more firms to enter the industry and increase the competitiveness of the market. It is this increase in competition that can be the greatest spur to improvements in efficiency. For example, there is now more competition in telecoms and distribution of gas and electricity.

However, privatisation doesn’t necessarily increase competition; it depends on the nature of the market. E.g. there is no competition in tap water because it is a natural monopoly. There is also very little competition within the rail industry.

6. Government will raise revenue from the sale

Selling state-owned assets to the private sector raised significant sums for the UK government in the 1980s. However, this is a one-off benefit. It also means we lose out on future dividends from the profits of public companies.

Disadvantages of privatisation

1. Natural monopoly

A natural monopoly occurs when the most efficient number of firms in an industry is one. For example, tap water has very significant fixed costs. Therefore there is no scope for having competition amongst several firms. Therefore, in this case, privatisation would just create a private monopoly which might seek to set higher prices which exploit consumers. Therefore it is better to have a public monopoly rather than a private monopoly which can exploit the consumer.

2. Public interest

There are many industries which perform an important public service, e.g., health care, education and public transport. In these industries, the profit motive shouldn’t be the primary objective of firms and the industry. For example, in the case of health care, it is feared privatising health care would mean a greater priority is given to profit rather than patient care. Also, in an industry like health care, arguably we don’t need a profit motive to improve standards. When doctors treat patients, they are unlikely to try harder if they get a bonus.

3. Government loses out on potential dividends.

Many of the privatised companies in the UK are quite profitable. This means the government misses out on their dividends, instead going to wealthy shareholders.

4. Problem of regulating private monopolies.

Privatisation creates private monopolies, such as the water companies and rail companies. These need regulating to prevent abuse of monopoly power. Therefore, there is still need for government regulation, similar to under state ownership.

5. Fragmentation of industries

In the UK, rail privatisation led to breaking up the rail network into infrastructure and train operating companies. This led to areas where it was unclear who had responsibility. For example, the Hatfield rail crash was blamed on no one taking responsibility for safety. Different rail companies has increased the complexity of rail tickets.

6. Short-termism of firms.

As well as the government being motivated by short term pressures, this is something private firms may do as well. To please shareholders they may seek to increase short term profits and avoid investing in long term projects. For example, the UK is suffering from a lack of investment in new energy sources; the privatised companies are trying to make use of existing plants rather than invest in new ones.

Evaluation of privatisation

  • It depends on the industry in question. An industry like telecoms is a typical industry where the incentive of profit can help increase efficiency. However, if you apply it to industries like health care or public transport the profit motive is less important.
  • It depends on the quality of regulation. Do regulators make the privatised firms meet certain standards of service and keep prices low?
  • Is the market contestable and competitive? Creating a private monopoly may harm consumer interests, but if the market is highly competitive, there is greater scope for efficiency savings.

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