In 1991, Government of India has adopted the policy of privatisation, due to decline in the popularity of public sector.
The word “privatisation” refers to the process by which the public sector participation in the economic activities are decreased and the performances of private sector should increase with in the country.
In other words, it means that the productive activities are transfer from public sector to private sector for interest of the whole economy. In last three decades most of the economies have introduced the process of privatisation in their domestic activities.
The main rationales behind privatization are as follow:
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(i) Private sector is guided by profit motive. Thus, they always try to improve performance and efficiency by increasing the quality of managerial skill.
(ii) Private sector works with more responsibility and discipline in compare to public sector. Therefore, work culture in private sector is many times superior than the public sector.
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(iii) Private sector generates more surplus and this leads to high rate of capital formation with in the country. Thus, it helps to bring ‘sustained economic growth,
(iv) Public sector is always crowded with unnecessary and unavoidable political interference and this ultimately leads to poor performance. However, private sector on the other hand is more free flowing and has no political trouble or disturbance.
In 1991, Indian economy faced a high level of fiscal imbalance and huge deficit in the Balance of Payment. All these problems have forced the country to approach IMF for repurchase facilities and also to the World Bank for the adequate loan. These two institutions had jointly put some conditions before the country. Hence, 1991 the New Economic Policy was formulated to fulfill their conditions.
These include:
(i) Abolition of licensing in all industries except some core and very crucial sectors;
(ii) Power and performance of private sector should be increased;
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(iii) Reducing the limit of Monopoly Restrictive Trade Practice Act;
(iv) Policy of free trade and encouragement of foreign investment; etc. Above all these lead to the adoption of ‘privatisation’ in 1991.