Liberalization, Privatization

and Disinvestment
 Liberalization
Liberalization means relaxation of previous
government restrictions usually in areas of
social and economic policies.

Liberalization in trade means removal of

tariff, and other restrictions on the flow of
goods and services between countries.
 Privatization
• Privatization may be defined as the transfer of a function,
activity or organization from the public to the private
sector.

• Privatization indicates the emergence of a new culture in

the society in which marketization, competition, efficiency
become the guiding principle in economic decision-
making. The range of activities covered under privatization
are: total denationalization, liquidation, creation of joint
ventures, workers’ cooperatives, contracting our to private
agencies, leasing and financial restructuring.
 The most common and important objectives of
Privatization are as follows:-
Improving the government financial position by
• Raising funds from the sales of enterprise or their;
• Making the enterprises raise internal resources and from capital markets,
thereby reducing budgetary support to them

Improving the performance of an enterprise through

• Increased efficiency;
• Requiring enterprises to meet commercial performance objectives;
• Greater responsiveness to consumers (whether in terms of quantity,
quality, diversity or services);
• Relief from public sector financial constraints;
• More managerial

Besides the above two broad objectives; privatization would help in reducing
the burden on public administration by reducing the size of the public sector,
strengthening market forces and competition within an economy and
promoting wider share ownership among public.
 Arguments in favor of Privatization
• Privatization will introduce efficiency and profitability in PSUs.

• It will reduce budgetary deficits which result from expenditure

on loss making PSUs.

• It will help in reviving sick units which are a burden on Public

Sector.

• It will help in bringing about globalization by opening out of an

economy and increasing its competitiveness in international
market.

• It will use modern techniques of production.

• It will introduce accountability and responsibility in PSUs.

 Arguments against Privatization
• Privatization encourages growth of monopoly power in the
hands of big business houses. This results in greater
inequalities of income and wealth.

• Private enterprises may not show any interest in buying shares

of sick PSUs.

• Private sector produces with profit motive and have no

consideration for social welfare motive.

• Private sector is not interested in those projects which take long

time to complete and have low profitability. This includes water
supply, salt, production, education for poor, etc.

• Private sector is not interested in taking up risky projects.

 Disinvestment
Disinvestment is the sale of a part of equity holdings held by the
government in any PSUs to Private investor.

Disinvestment has been major strategy by which the government

has financed fiscal policy.

Besides financing fiscal deficit, the economic motivation behind it

is to improve efficiency of PSUs.

The government expects that even small percent of private

ownership will discipline inefficient managers and motivate
them.
 Methods of Disinvestment
• Domestic public issue:- it means that equity was offered to
retail investors through domestic public issues.
• Global Depository Receipts (GDR):- GDRs were issued to tap
the overseas market
• Cross-holding:- in this method, the government simply sells
part of its shares in one PSU to another PSU.
• Warehousing:- in this method, the governments’ own financial
institutions buy the governments’ stake in selected PSUs and
hold them until a third buyer comes.
• Golden share:- in this method, the government retains stake
upto 26% in the PSU to protect its interest.
• Strategic sale:- in this method, the government sells a major
portion of its stake to a strategic buyer and also gives out the
management control.