• Akshata Pai

Impact of Privatization of Government Sectors on the Indian Economy


Privatization means selling state-owned assets to the private sector. It is defined as the transfer of ownership, management and control from public sector enterprise to the private sector. It is deregulations of services and operations from governmental bodies to a private entity. India changed its closed economy policy to open policy in 1991 in order to bring balance in the balance of payment for foreign currency. The significant deficit in Balance of payment had made the economy slow and stagnated.

In order to solve the economic slowdown, the then Finance Minister Dr Manmohan Singh introduced the LPG (Liberalization, Privatization and Globalization).

Concept of Privatization in India

  1. Delegation: The government had to remove the monopoly and allow the private organization to entry in the market and actively participate in the market. Example: Telecommunications government-owned company VSNL and MTNL had to face competition from Reliance Communications, Tata Group etc.

  2. Divestment: The government had reduced its holding percentage from 100 % to range between 75-50%. It gave a minority stake to private. Example: Mumbai Metro project was done by the State Government and Reliance Industries. Thus, the profit-sharing was on prorate basis

  3. Displacement: After the delegation, the public-owned were started to be replaced by the private entity for better service and operations in the customer’s point of view. Example: The Airline sector, people prefer private airline the company over Air India as it provides better services and affordable price range.

Advantages of Privatization

  1. It enables the customer to enjoy better service and quality products.

  2. It helped the Indian domestic to reach the international level and earn in foreign currency.

  3. It created employment opportunities and aided to increase the standard of living.

  4. It helped to create demand for skilled worker and promoted sector organized work.

  5. It helped to increase the demand for goods and service and this lead reduction production cost.

  6. The business law becomes user- friendly to operate now in the market.

Impact on the monopoly by privatization in the government sector

Monopoly is derived from the Greek word ‘mónos’ single or alone and ‘pōleîn’to sell. A monopoly exists when a specific enterprise is the only supplier of particular goods or service. Monopoly means a lack of competition for the sale of goods and service. Monopolies could be established by a government, formed by integration. In many jurisdictions, competition laws restrict monopolies due to government concerns over potential adverse effects.

Monopoly can be of two types

Government monopoly When a specific industry area has a dominant seller and or monopoly in the market is not recognized as illegal in absolute nature. However, if a monopoly is used to in malefide intention, the government and legal provisions will be imposed in competition law manner to safeguards the interest of the industry. Governments grant or allow monopoly by state sanction for as incentive to invest and operate in the highly risky industry by the domestic interest which is called as a government monopoly. Intellectual Property Law such as patents, copyright and trademark are used to support government monopoly in form of Central or State-funded company. For example, Post-independence Air India had a monopoly in the airline industry which is owned by the central government. Life Insurance Corporation of India (LIC) which is owned by the Government of India and managed a monopoly in the life insurance sector until License Raj was cancelled in 1992-93.

Private monopoly Private monopoly is a dominant position owned and maintained by a private individual or group of individuals for a particular market. For example, Amazon for online shopping for almost anything on the internet is traded on the website and enjoys a monopoly. Bookmyshow is an online ticket booking platform which enjoys monopoly due to its early market entry in the online ticketing business area. Google platform for online search engine and data management, enjoys monopoly across the world.

Thus, we can conclude that a monopoly can have advantages and disadvantages attached to it which is affected by internal and external factors. Hence, it is important to understand the characteristics or features of a monopoly.

What are the essential features of Monopoly?

  1. Profit maximization.

  2. Price-maker by the manufacturer or seller.

  3. Market obstacles or barriers to start the business in that particular market. i.e. the Airline Industry.

  4. No substitute or similar product or service availability to the consumer i.e. Microsoft software until google entire the market.

Why is Monopoly preferred and allowed?

  1. Profit maximization- Seller has less or no competition in the market which enables him to fix the price and earn a profit on it. Thus, marginal revenue for each sell is high profit for the seller.

  2. Product differentiation- Due to no competition, the seller has little or no effort to distinguish his product or service with others for the sales revenue. When no similar product is available, the customer has no choice but to choose the seller only. i.e. Salt as a product has no substitute.

  3. Control and Monitor- If the market has a monopoly, the decision-making lies with the seller itself. When decision-making with the seller, it enables better efficiency and effectiveness for operational plans. It attracts higher profit and economic stability. i.e. Railway transport owned and controlled by the Central and State Government. Also, the defence is owned and controlled by the Government of India.

  4. Economic Growth and Development- When the seller has a monopoly, quick decision-making helps to invest in upgraded technology and enhance the market level.

Why a monopoly is not preferred and controlled?

  1. Profit Maximization- When the seller has an only concern with profit-making, the ethical role and environmental issues are ignored and laws are not maintained.

  2. Malefide Intention- If the seller has malefide intention, the money lent to him would be left unpaid and affect the cash flow for the economy. i.e. Vijay Mallya enjoyed a monopoly in the airline industry but failed to pay Rs 9,000 crore loan.

  3. Technology Advancement- If the seller has upgraded the technology at such a level when automatic is promoted and the labour force is cut-down. It affects the economy due to high unemployment levels and less purchasing power. Example - Tesla is a USA based company that has a monopoly for electric car manufacture which enables automatic driven cars which require no human to drive it. Thus, the legal provision for Artificial Intelligence is not defined and who bear the consequence of loss of jobs and economic fall down.

  4. Misuse of Power- if the monopoly power is misused without delegation of power, the seller will abuse the power for personal use. All business units are aware that resources are limited for the production of goods, if the seller has the power to use it solely, it may comprise environmental safety. i.e. Greece’s government failed the economy due to its abuse of power inherited as a government monopoly.

The negative impact of Privatization

  1. The Government monopoly was impacted and lost its majority market share.

  2. The employment dependence on Foreign investment and franchise for economic survival.

  3. The standard of living improved at the cost of bearing more imports than the exports sent.

  4. The social cause is being eliminated due to private sector profit motive.

  5. The gap between the rich and poor is increasing and resulted in black money and corruption.


Monopoly came into existence due to privatization in India. The Government monopoly in sectors such as telecommunication, insurance, banking, energy resource was been impacted due to privatization. The Government sector was using laissez-faire policy and refused to opt for innovations and improvement plan to work and develop their state-owned company. The negative impact on the privatization is more than the benefit of it.

This article has been authored by Akshata Pai who is currently a learner at Chembur Karnataka College of Law (Mumbai University).

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