(1) Releasing the large amount of public resources locked up in non-strategic PSEs, for redeployment in areas that are much higher on the social priority, such as, basic health, family welfare, primary education and social and essential infrastructure;

(2) Stemming further outflow of these scarce public resources sustaining the unviable non strategic PSEs;

(3) Reducing the public debt that is threatening to assume unmanageable proportions.

(4) Transferring the commercial risk, to which the taxpayers’ money locked up in the public sector, is exposed, to the private sector where ever the private sector is willing and able to step in.

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(5) Releasing other tangible and intangible resources, such as, large manpower currently locked up in managing the PSEs, and their time and energy, for redeployment in high priority social sectors which are short of such resources.

The need for privatisation arises out of the situations like

(1) Control of budgetary deficit

(2) Resource mobilisation

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(3) Reduction of extra tax burden

(4) Flow of funds to public

(5) Production increase

(6) Retrieval of civil servants from public enterprises to better utilisation in governance and administration.

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(7) Increase in competition, both in domestic as well as international markets.

Based on the recommendations of the Arjun Sen Gupta Committee on Public Sector Enterprise, the privatisation of public enterprises in India can take one of the following forms:

(1) Complete privatisation

(2) Partial privatisation

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(3) Privatisation of the management

(4) Creating competitive conditions

(5) Deregulation

(6) Delicensing and

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(7) Disinvestments and other liberalisation measures.

As a consequence, they must also follow the trend of the overall economic policy, which, in the current context, is heavily tilted towards liberalisation, democratisation, marketisation and globalisation, and a decisive move away from extensive social controls.

State intervention in the market arises out of two main reasons. Either, the market does not exist at all, as was the case with most developing countries who had acquired independence from colonial rule in the second half of the 20th century, mainly located in Asia-Africa and Latin America; or, there were cases of severe market failures which required governments to intervene decisively in public interest as was the case in many developing and even developed economies, like the UK, France, Italy, etc.

Benefits of disinvestment

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(1) Disinvestment would expose the public sector companies to market discipline, thereby forcing them to become more efficient and survive on their own financial and economic strength or cease.

(2) Disinvestment would result in wider distribution of wealth through offering of shares of privatised companies to small investors and employees.

(3) Disinvestment would have a beneficial effect on the capital market; the increase in floating stock would give the market more depth and liquidity, give investors easier exit option, help in establishing more accurate benchmarks for valuation and pricing, and facilitate raising of funds by the privatised companies for their projects of expansion, in future.

(4) Opening up the public sector to appropriate private investment would increase economic activity and have an overall beneficial effect on the economy, employment and tax revenues in the medium to long term.