CA Foundation Business & Commercial Knowledge Study Material Chapter 4 Government Policies for Business – Meaning of Privatization

Meaning of Privatization

Privatization means the transfer of ownership and/or management of an enterprise from the public sector to the private sector. It refers to the introduction of private control and ownership in public sector undertakings. According to the World Bank, “privatization is the transfer of State owned enterprises to the private sector by sale (full or partial) of going concerns or by sale of assets following their liquidation.” In the words of Barbara Lee and John Nellis “Privatization is the general process of involving the private sector in the ownership or operation of a State owned enterprise,”

There are several forms or methods of privatization such as:

  • Denationalization of a public enterprise by its complete sale to the private sector. For example, BALCO. was sold to Sterlite Industries.
  • Divestiture, i.e., the sale of equity in full or part of a public sector undertaking to private sector.
  • Transfer of management of a public sector enterprise to private sector through a management contract.
  • Joint venture, i.e., joint ownership of an enterprise by Government and private sector.
  • Leasing, Le., transferring the use of assets of a public sector unit to private bidders for a specified period.
  • Franchising of public sector services to designated private sector units.

Trends And Issues – Privatization In India

The process of privatization began in India mainly after the Industrial Policy of July 1991. Under this policy the number of industries reserved for the public sector was reduced from 17 to 2 – Railways and Atomic Energy. Shares of several public sector enterprises have been sold to mutual funds, workers and the public.

Impact of Privatization on Indian Economy

The main reason for privatization in India has been the poor performance of public sector units which results in wastage of national resources and burden on common man.


Positive Effects

  • Expansion of market
  • Growth of independent money market
  • Free flow of resources
  • Advancements in technology
  • Equilibrium in balance of payments
  • Development of infrastructure
  • Higher living standards
  • International cooperation

Negative Effects

  • Cut-throat competition
  • Rise in monopoly
  • Increase in inequalities
  • Takeover of domestic firms
  • Removal of protection to domestic firms
  • Affect on national sovereignty