Unit V

Privatization

Privatization


It means transfer of ownership and management of an enterprise from the public sector to the private sector. It reduces the involvement of the state/public sector in economic activities of a nation. Narrow: induction of private ownership in public owned enterprises Broader: the induction of private management and control in the public sector enterprises.

Need of Privatization/Disinvestment
     

Better use of resource Satisfied the demand of the customer. Economic growth Inability of the Government Globalization Technology advancement

Measures/Ways of Privatization


Ownership Measures

Total denationalization Joint Venture Liquidation Management buy-out

Organizational Measures
Holding company Leasing Restructuring  Financial  Basic

Operational Measures

Privatization in India
 

Privatization ____ 1991 (new Industrial Policy) Efforts of privatization in India:

De-reservation of Industries for public sector Limited area of public enterprises Participation of Private sector Abolition of industrial licensing Removal of investment controls on Big Business Houses Policy relating to Sick units (SICA, 1985) Improvement in management of Public enterprises Disinvestment of equity in public sector

Ways of Privatization in India

   

  

Contraction of Public Sector Sale of shares of Public Enterprises Increasing the share of private sector investment Disinvestment in Existing Public Sector Industries No insistence on conversion Sick Industries MOU

Arguments


Favor Reduction in budgetary Deficits Less political intervention Improvement in economic and technical efficiency Increase accountability Globalization of economy Sources of new job Better decision making

   

  

Against Concentration of Economic power Substitution of monopoly power Lop-sided Development Industries Industrial sickness Entry of multinationals No safety for the weaker section Opposition by employees

Obstacles
   

Resistance of workers Fraudulent practices Corporatization to benefit the big industrialists monopolies

Conditions for success of privatization

      

Political willingness Freedom of entry Less susceptible to fraud Institutional arrangements Measurable outcome Equity Able to link benefit

Examples of privatization in India: Hindustan Zinc Limited (HZL) Hotel Corporation Limited of India (HCL) Bharat Aluminium Company limited (BALCO)

Liberalization

Liberalization


Introduced in 1980s by the Government of India Formed under New Industrial Policy on July 24, 1991 The economic reforms that were introduced were aimed at liberalizing the Indian business and industry from all unnecessary controls and restrictions.

Liberalization in India
  

 

 

Abolishing licensing requirement Freedom in deciding the scale of business activities Removal of restrictions on the movement of goods and services, Freedom in fixing the prices of goods and/ or services, Reduction in tax rates and lifting of unnecessary controls over the economy, Simplifying procedures for imports and exports, and Making it easier to attract foreign capital and technology to India

Policy under Liberalization

1. 2. 3. 4. 5.

Industrial licensing Public sector policy MRTP Act, 1969 Foreign investment Foreign technology agreements.

Policies
Industrial licensing
In the New Industrial Policy, all industrial undertakings are exempt from licencing except for the following industries which require compulsory licencing and those reserved for the Small Scale Sector: i. Cigars and cigarettes of tobacco and manufactured tobacco substitutes; ii. Electronic Aerospace and Defence equipment: all types; iii. Industrial explosives, including detonating fuses, safety fuses, gun powder, nitrocellulose and matches; iv. Hazardous chemicals; v. Hydrocyanic acid and its derivatives; vi. Phosgene and its derivatives; vii. Isocyanates and di-isocyanates of hydrocarbon, not elsewhere specified(example: Methyl Isocyanate).

Policies
Public Sector Policy


Reserved : 17 ---12-------8------4-----3

(a) Basic and essential infrastructural facilities (b) Mineral resources (c) Crucial areas in the interest of the economy in the long run and where the private sector investment is inadequate, and (d) Defence equipment.

Policies
MRTP Act 1969

To remove the threshold limits of assets in respect of MRTP companies and the dominant industrial undertakings. The important objectives of this were : Prevention of concentration of economic power in the hands of few which will be detrimental to the common interest; and Regulation of monopolistic, restrictive and unfair trade practices which are pursued by the business community and which are prejudicial to the public interest.

Policies
Foreign investment  Foreign direct investment is an investment that is made to serve the business interests of investor in a company, which is in a different nation different from the investor's country of origin.  100% FDI is permissible in the sector on the automatic route. (hotel & tourism)  49% FDI is permissible in private sector banking  FDI up to 26% in the Insurance sector  49% FDI is permissible in Telecommunication  FDI up to 51% in Trading companies

Policies
Foreign investment


Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants. FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical (except those specifically notified as not) FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors. FDI up to 100% in both manufacture of pollution control equipment and consultancy for integration of pollution control systems

Policies
Foreign Technology Agreement The New Industrial Policy proposes to give automatic permission for foreign technology agreements in identified high priority industries. Further, it also proposes to allow other industries to import foreign technology subject to the fulfillment of certain conditions. With a view to injecting the desired level of technological dynamism in Indian industry and for promoting an industrial environment where the acquisition of technological capability receives priority, foreign technology induction is encouraged both through FDI and through foreign technology collaboration agreements. Foreign technology collaborations are permitted either through the automatic route under delegated powers exercised by the RBI, or by the Government. However, cases involving industrial licenses/small scale reserved items do not qualify for automatic approval and would require consideration and approval by the Government. Automatic route for technology colloboration would also not be available to those who have, or had any previous technology transfer/trade-mark agreement in the same or allied field in India.

Globalization

The term Globalization as such denotes adjustment of national economy with that of the world economy. It is conversion of a national market into international mobility of factors of production. In others words, it may be described as the integration of national economy with that of global economy. An important attribute of Globalization is the increasing degree of openness, which has three dimensions, i.e.; international trade, international investment and international finance. According to World Development Report, Globalization reflects the progressive integration of worlds economies

Factors contributing to Globalization:

(a) Technological Advances In communication: Technological advances in communication have made it possible to know in an instant what is happening in different parts of the world. The flow of information and ideas, boosted greatly by the Internet, can enable developing countries to learn more rapidly from each other and from industrial countries. (b) Improvements In Transportation And Technology: Improvements in transportation networks and technology are reducing the costs of shipping goods by water, ground and air. This can facilitate the movements of goods. Technological improvements can enable developing countries to leap stages in the development process that rely on inefficient uses of national resources. (c) Other Factors: Rising educational levels, technological innovations that allow ideas to circulate, and the economic failures of most centrally planned economies have also contributed to Globalization.

Advantages of Globalization:
(a) Promise of Increase Productivity And Higher Living Standards:
Globalization brings in new opportunities such as access to markets and technology transfer. These opportunities hold out the promise of increased productivity and higher living standards.

(b) Increase In Trade In Goods And Services:

There is tremendous growth in trade in goods and services. Trade in goods and services has grown twice as fast as global GDP in the 1990s and the share attributable to developing countries has climbed from 23 to 29 percent. Increased international competition in services will lead to reduction in prices and improvements in quality. This will increase the competitiveness of downstream industries. Both industrial and development economics will gain by opening their markets.

(c) Provide New Opportunities For Growth:

For developing countries, trade is the primary vehicle for realizing the benefits of Globalization. Imports bring additional competition and variety to domestic markets, which benefit consumers. Exports, on the other hand, enlarge foreign markets and benefit business. Further trade exposes domestic firms to the best practices of foreign firms and encourages greater efficiency. Trade gives forms access to improved capital inputs such as machine tools, which boosts productivity. Trade encourages the redistribution of labour and capital too relatively to more productive sectors. It has contributed to the ongoing shift of some manufacturing and services activities from industrial to developing countries, providing new opportunities for growth.

(d) Globalization of Financial Markets:

Globalization of finance markets affects development because finance plays an important role in economic growth and industrialization. Financial Globalization affects growth in two ways. First, it increases the global supply of capital. Second, it promotes domestic financial development and hence, improves allocative efficiency, creates new financial instruments, and raises the quality of baking services.

Advantages of Globalization:
(e) Increased Flow Of foreign Market Capital: Globalization leads to increased flows of capital across countries. Flows of foreign capital offer substantial economic gains to all parties. Foreign investors diversify their risks outside their home market and gain access to profitable opportunities through out the world. Economies receiving inflows raise the level of investment. When there is foreign investment it is generally accompanied by management expertise, training programs and important linkages to suppliers and international markets. (f) Impact on Poverty: The fast growth and overall development resulting from liberalization, increased flow of trade ad capital could have a major impact on poverty. It is likely to reduce the number of people living in absolute poverty. (g) Increase The Level Of Interdependence And Competitiveness: Globalization is supposed to accelerate and increase the level of interdependence and competitiveness among nation. It is a change from plan to market. As a consequence, markets for merchandise trade are expanding, more and more service are being traded internationally, and capital is flowing in quicker and increasingly diverse ways across countries and regions. There is increasing integration of countries into World markets for goods, services and capital. In short, Globalization widens and intensifies international linkages in trade and finance. (h) Induce Domestic Firms To Improve Technology: The better technology brought in by the MNCs may induce or provoke the domestic firms to absorb similar technology. This may improve their competitiveness and expansion

Disadvantages of Globalization
Takeover of National Firms: There are a large numbers of cases of takeover of national firms by foreign firms. In some cases, the domestic firms had to handover the majority of equity to foreign partners of joint ventures due to their inability to bring in additional capital. Ruin of Traditional Crafts And Industries: Globalization has lead to replacement of traditional and indigenous products by modern products. This has resulted in the ruin of traditional crafts and industries and the livelihood of the people depended on these sectors. Brings Instability: Globalization sometimes brings instability and unwelcome change in the economy. It exposes workers to competition from imports, which can threaten their jobs. The inflow of foreign capital into the country through Globalization may undermine banks. Widens The Disparity: Globalization will widen the disparity between one who are associated with market and one who are not. With the expansion of trade and foreign investment, the gaps among the developing countries will widen .it has brought in increased income inequality in many industrial countries .it is argued that the developing countries and the poor people are not in a position of achieving benefits from Globalization. The only beneficiaries of it are the developed countries and the MNCs

Consumer Protection

Consumer Protection Act can be described as common mans Civil Court and MRTP Act for the poor. The Act is designed to make available cheap and quick remedy to a small consumer. The Act was passed in 1986 and was made effective in 1987. On getting further experience of implementation of the Act, substantial changes have been made by Amendment Act, 2002. Major changes made in the Amendment Act are * * * * * * * * Enhancement in monetary limit of District Forum from Rs 5 lakhs to 20 lakhs and of State Commission from Rs 20 lakhs to Rs one crore * Payment of fees for filing complaint/appeal Complaint/appeal will have to be admitted first Reason to be recorded if decision not given within specified time Cost of adjournment can be imposed Interim orders can be passed In absence of President, senior most member can discharge functions of President Pre-deposit of certain amount before appeal is entertained Notice can be sent by Fax/courier.

The amendments have been made effective from 15-3-2003.

The Act envisages setting up of Consumer Disputes Redressal Agency at local, i.e., district level, state level and national (Central) level. District Forum has jurisdiction to decide consumer disputes where value of goods or services and the compensation claimed does not exceed Rs. 20 lakhs. State Commission has jurisdiction to decide the cases where value of goods and services plus compensation is over Rs. 20 lakhs but not over Rs. 100 lakhs. In addition, it decides appeals filed against order of District Forum. National Commission (HQ at New Delhi) has original jurisdiction where matter is over Rs. 100 lakhs. It also has appellate jurisdiction over State Commission. Appeal against order of State Commission can be filed only in case of original order by State Commission i.e. when matter was over Rs. 20 lakhs. No appeal can be filed to National Commission in case where State Commission has passed order in appeal against original order of District Forum. Appeal against order of National Commission lies with Supreme Court only in matters where it exercises original jurisdiction, i.e., when matter is over Rs. 100 lakhs. There is no provision of appeal in cases where National Commission decides under its appellate jurisdiction, i.e., when it decides appeal against order of State Commission

Complaint can be filed by a consumer, a voluntary consumer association or Central/State Government. Class Action i.e., some consumers filing complaint on behalf of many consumers is also permitted. Complaint can be filed against (a) deficiency in goods or service (b) unfair trade practice or restrictive trade practice (c) charging of higher prices (d) Supplying hazardous goods or services. Fees are required to be paid along with the complaint. Complaint must be filed within two years from cause of action. This period can be extended on showing sufficient cause. Appeal against order of District Forum/State Commission/National Commission must be filed within 30 days from date of order. Penalty upto Rs. 10,000 can be imposed on a complainant, if it is found that he has made frivolous (bogus) complaint. Persons not complying with order of redressal authorities can be punished with imprisonment upto three years and/or fine upto Rs. 10,000.

Complaint to consumer forum - Section 12(1) provides that a complaint in relation to any goods sold or delivered or to be sold or delivered or any service provided or agreed to be provided may be filed with consumer forum. District, State Commission and National Commission are consumer forums, termed as Consumer Dispute Redressal Agencies. It is necessary to understand meaning of complaint and who can file the same. Defect - The word defect means any fault, imperfection or shortcoming in the quality, quantity potency, purity or standard that is required to be maintained by or under any law for the time being in force or under any contract, express or implied, or as is claimed by the trader in any manner whatsoever in relation to any goods (Section 2(1)(f) of CPA). Consumer Dispute - Consumer Dispute means a dispute where the person against whom a complaint has been made, denies or disputes the allegations contained in the complaint [section 2(1)(e)]. - - Obviously, if the person against whom complaint is made agrees to the complaint, there is no consumer dispute. Who is Complainant - Section 2(1)(b) of CPA defines that "Complainant" means (i) a consumer; or (ii) any voluntary consumer association registered under the Companies Act, or under any other law for the time being in force; or (iii) the Central Government or any State Government, who or which makes a complaint or (iv) One or more consumers, where there are numerous consumers having the same interest or (v) in case of death of a consumer, his legal heir or representative; - - who or which makes a complaint. Exclusion if goods or services for Commercial purpose - A person who buys goods for resale or commercial purposes or avails services for commercial purposes is specifically excluded from definition of consumer.

 

Trader - Complaint can be lodged against a trader in case of goods and against service provider in case of services. Trader includes manufacturer. Deficiency in service - Complaint can be lodged against service provider if there is deficiency in service, or if he charges higher prices or provides services which are hazardous or where service provider follows unfair or restrictive trade practice. Deficiency - Deficiency means any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard, which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service. [section 2(1)(g) of CPA]. Restrictive and Unfair Trade Practices - Consumer Protection Act makes specific provisions in respect of Restrictive Trade Practices (RTP) and Unfair trade Practices (UTP). Restrictive Trade Practice - Section 2(1)(nnn) of CPA [As amended by Amendment Act, 2002] define Restrictive Trade Practice (RTP) as one which tends to bring about manipulation of price or its conditions of delivery or to affect flow of supplies in the market relating to goods or services in such a manner as to impose on the consumers unjustified costs or restrictions and shall include (a) delay beyond the period agreed to by a trader in supply of such goods or in providing the services which has led or is likely to lead to rise in the price; (b) any trade practice which requires a consumer to buy, hire or avail of any goods or, as the case may be, services as condition precedent to buying, hiring or availing of other goods or services. Unfair Trade Practice - Unfair Trade Practice is defined under section 2(1)(r) of CP Act. Unfair trade practice means a trade practice which, for the purpose of promoting the sale, use or supply of any goods or for the provision of any service, adopts any unfair method or unfair or deceptive practice.

WTO & Its Impact on Indian Industries

Disinvestment

EVOLUTION OF DISINVESTMENT POLICY IN INDIA:

The policy of disinvestment has largely evolved through the policy statements of Finance Ministers in their Budget Speeches. The policy as evolved is enumerated below:In the Interim budget 1991-92, it was announced that Government would divest upto 20% of its equity in selected PSUs in favour of mutual funds, financial and institutional investors in public sector. In the budget speech of 1992-93, the cap of 20% was reinstated and the list of eligible investor was enlarged to include FIIs, employees and OCBs.
In April, 1993, Rangrajan committee recommended to divest upto 49% of PSEs equity for industries explicitly reserved for the public sector and over 74% in other industries. But Government did not take any decision on recommendations.

In 1996, as per the Common Minimum Programme, the Budget Speech 1996-97 announced the setting up of Disinvestment Commission for 3 years. CMP also emphasized to add more transparency to disinvestment process and examine the non core areas of public sector.

In the Budget Speech of 1998-99, it was announced that Government shareholding in CPSEs should be brought down to 26% on case to case basis, excluding strategic CPSEs where Government would retain majority shareholding. The interest of workers is to be protected in all cases. For this purpose on 16th March, 1999, the Government classified the PSEs into strategic and non strategic areas. It was decided that Strategic PSEs would be those in areas of:

OBJECTIVE OF DISINVESTMENT
        

To improve performance of units To reduce budgetary deficits To overcome the problem of political involvement in PSUs Enable the government to concentrate on Social development To provide better service to customers To ensure proper planning and execution To overcome the problem of corruption To fix the responsibility on management To make efficient use of disinvestment proceeds

Present policy on disinvestment

GOIs Commercial Banking

Commercial banks are in the business of providing banking services to individuals, small businesses and large organizations.

FUNCTIONS OF BANKS Advance of Loans

Accepting of Deposits

Other Functions Agencies Functions

Fixed Deposits

Overdrafts

Loan Saving Deposits Cash Credit Current Account Discounting Bills

Role of bank in Economic Development

          

Capital Formation Bank and level of Economic Activity Provision of finance and credit Distribution of fund between Region Expansion of Markets Allocation of funds between Regions Developing Entrepreneurs Help to consumer Bank and priority sector Provide elasticity to the supply of money Innovation

COMMERCIAL BANKS
Types of Commercial banks: Commercial banks are of three types i.e., Public sector banks, Private sector banks and Foreign banks.
(i)

Public Sector Banks: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Boroda and Dena Bank, etc.

(ii) Private Sectors Banks: In case of private sector banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd.,Global Trust Bank, Vysya Bank, etc. (iii) Foreign Banks: These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlays Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.

REGIONAL RURAL BANKS



Regional Rural Banks (RRBs) were set up in September 1975 in order to develop the rural economy by providing banking services in such areas by combining the cooperative specialty of local orientation and the sound resource base which is the characteristic of commercial banks. RRBs have a unique structure, in the sense that their equity holding is jointly held by the central government, the concerned state government and the sponsor bank (in the ratio 50:15:35), which is responsible for assisting the RRB by providing financial, managerial and training aid and also subscribing to its share capital. Between 1975 and 1987, 196 RRBs were established. RRBs have grown in geographical coverage, reaching out to increasing number of rural clientele. At the end of June 2008, they covered 585 out of the 622 districts of the country. Despite growing in geographical coverage, the number of RRBs operational in the country has been declining over the past five years due to rapid consolidation among them. As a result of state wise amalgamation of RRBs sponsored by the same sponsor bank, the number of RRBs fell to 86 by end March 2009.

CO-OPERATIVE BANKS
People who come together to jointly serve their common interest often form a co-operative society under the Cooperative Societies Act. When a co-operative society engages itself in banking business it is called a Co-operative Bank. The society has to obtain a license from the Reserve Bank of India before starting banking business. Any co-operative bank as a society is to function under the overall supervision of the Registrar, Co-operative Societies of the State. As regards banking business, the society must follow the guidelines set and issued by the Reserve Bank of India. Scheduled Cooperative Banks: Scheduled cooperative banks in India can be broadly classified into urban credit cooperative institutions and rural cooperative credit institutions. Rural cooperative banks undertake long term as well as short term lending. Credit cooperatives in most states have a three tier structure (primary, district and state level). Types of Co-operative Banks There are three types of co-operative banks operating in our country. They are primary credit societies, central cooperative banks and state co-operative banks. These banks are organized at three levels, village or town level, district level and state level. (i) Primary Credit Societies: These are formed at the village or town level with borrower and non-borrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent frauds. (ii) District Co-operative Banks: These banks operate at the district level having some of the primary credit societies belonging to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and function as a link between the primary credit societies and state co-operative banks. (iii) State Co-operative Banks: These are the apex (highest level) co-operative banks in all the states of the country. They mobilise funds and help in its proper channelisation among various sectors. The money reaches the individual borrowers from the state co-operative banks through the central co-operative banks and the primary credit societies.

Govt. Policy regarding Small Sector Enterprises

Small Scale Industry



Small Scale Industrial units are those engaged in manufacturing, processing or preservation of goods with investment in Plant and Machinery (original cost) not to exceed Rs.1 Crore In case of ancillary units also, the investment in Plant & Machinery (original cost) should not exceed Rs. 1 crore to get classified under Small Scale Industry The investment limit of Rs. 1 crore for classification as SSI has been enhanced to Rs. 5 crore in respect of certain specified items like hosiery, hand tools, all Drug & Pharmaceuticals by Government of India The status of Tiny enterprises may be given to all Small Scale units whose investment in Plant & Machinery is up to Rs.25 lacs, irrespective of the location of the unit

Medium Enterprises are defined as units with investment in plant and machinery of above Rs. 1 crore and upto Rs. 10 crore. Small Scale Service/ Business Enterprises (SSSBE) having investment in fixed assets (excluding land and building) up to Rs.10 lacs and registered as such, are also classified as SSI for the purpose. Artisans, Village and Cottage Industry has been defined as Artisans (irrespective of location) or Small Industrial activities (Viz. manufacturing, processing, preservation and servicing) in villages and small towns with a population not exceeding 50000, involving utilization of locally available natural resources and / or human skills (where individual credit requirement does not exceed Rs.50,000/-)

Importance
             

Vast employment Helpful in exports Less dependence on imports Suitable to the economic structure of the country Essential for the production of artistic goods Helpful in equitable distribution of income Helpful in industrial decentralization Free from industrial problems Complimentary to large scale industries Need of less capital and technical knowledge Quick r production Cottage industries Mobilization of capital and entrepreneurial skills Helpful in checking migration of population to urban areas

Step taken by government to encourage small scale and cottage industries

        

Establishment of boards and corporation Financial Assistance Technical Assistance Marketing facilities Licensing concession Priority in government purchases Tax and other concessions Organisation of exhibitions Establishment of industrial co-operatives

END OF UNIT V