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LIBERALISATION
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Liberalization (orliberalisation) refers toa relaxation of previous governmentrestrictions, usually in areas of social or
economic policy. In some contexts thisprocess or concept is often, but notalways, referred to as deregulation
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In short economics liberalization means
Open competition
Free trade
Privatisation
End of licensing
End of registration
Freedom of import-export
Freedom of capital investment
Freedom from bureaucratic control
To narrow down the public sector
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Liberalization vs
Democratization There is a distinct difference betweenliberalization and democratization, which areoften thought to be the same concept.Liberalization can take place without
democratization, and deals with acombination of policy and social changespecialized to a certain issue such as theliberalization of government-held property for
private purchase, whereas democratization ismore politically specialized that can arisefrom a liberalization, but works in a broaderlevel of government.liberalization.
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The main aim of liberalisation was todismantle the excessive regulatoryframework which acted as a shackle onfreedom of enterprise. Over the years, the
country had developed a system of license-permit raj. The aim of the new economicpolicy was to save the entrepreneurs fromunnecessary Harassment of seeking
permission from the Babudom (thebureaucracy of the country) to start anundertaking.
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The major purpose of liberalisation was tofree the large private corporate sector formbureaucratic controls. It, therefore, started
dismantling the regime of industriallicensing and controls.
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Liberalisation is a process by which theeconomy is opened up and stringentregulatory measures are relaxed to a large
extent.
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The list of industries in which industrial Licensing is compulsory:
1. Distillation and brewing of alcoholic drinks2. Hazardous chemicals3. Sugar4. Animal fats and oils5. Cigars and Cigarettes of tobacco and manufactured tobacco substitutes6. Petroleum (other than crude) and its distillation products7. Coal and Lignite8. Paper and newsprint except bagasse-based units9. Tanned or dressed fur skins10. Raw hides and skins, leather, chamois leather and patent leather11. Plywood, decorative veneers, and other wood based products12. Asbestos and asbestos-based products
13. Industrial explosives14. Drugs and Pharmaceuticals15 . Electronics, aerospace and defense equipment: all types
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The various dimensions of financialliberalization are:
Abolishing credit controls.
Deregulating interest rates.
Allowing free entry into the banking industry or more
generally into financial services industry.
Making banks autonomous.
Putting banks in private ownership.
Freeing international capital flows.
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Disadvantages
The major problems concerned with liberalization can besummarized as under:
(1) In so far as fiscal deficits are financed by moneycreation and growing, financial liberalization serves toaccelerate inflation which coupled with an over- valuedexchange rate, promotes capital flight.
(2) Liberalisation does raise real interests and results inan increased diversity of financial instruments. Innocent
investors may be taken in by the rather fanciful termsoffered.
(3) Competition is not automatically enhanced. It canlead to domination by big institution that has market
controlling powers.
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(4) Distortions in credit allocation or self dealing bybanks can produce efficiency gains.
(5) Deregulation can shorten the horizons of savers andinvestors, leading to a drawing up of long-term finance.
(6) Sometimes there can be problems of moral hazard.
(7) Pressure on profits and profitability can lead tospeculation and create problems of systemic failures.
(8) With fewer entry restrictions, it has been possible formany entrants to make inroads into this lucrative sector,some antisocial elements can enter the field directly orindirectly.
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(9) A number of companies can incorporate their ownfinance companies to make finance available on easyterms for purchase of their products, this phenomenoncan also be used against the interest of the society.
(10) It should also be noticed that liberalization can alsoresult in the increase in instability. In general, financialliberalization represents a profound change in theeconomic rules. It can increase the riskiness of
traditional behaviour or introduce new inexperiencedplayers. In these circumstances, disasters can also take
place.
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Advantages Full use of resources
Production will increase Export will increase
Improve in mass media
Improve information technology
Development of science and technology Indian economy will become competitive
Good will and understanding
Improvement in the efficiency of public sector
Expansion of industrialization
Consumer will be benefitted
More equal development of society
Indian economy will get linked with world economy
Security of country
Develop small and cottage industries
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Advantages
Liberalisation can well be considered an investment inthe future financial well being of a nation. It helps thebanking industry as a whole by providing:
1. Increased financial flexibilities of firms.
2. Reduced transaction costs.
3. Improved allocation efficiency.
4. Attraction of new capital to financial intermediaries.
5. Stronger and more competitive banking institutions. 6. Better and diversified portfolios.
7. More effective conduct of monetary policy.
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8. Meaningful competition in banking services byallowing greater role to private sector and foreign banks.
9. Technological up-gradation of banks through wide useof computers and modern communication systems.
10. Removing major regulatory impediments to profitableworking of banks.
11. Relaxation in the regulations covering foreigninvestment and foreign exchange.
12. Easy access to foreign capital.
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Industrial Policy 1991
Meaning: -The Government of India announced the new industrialpolicy (NIP) on 24th July, 1991. The NIP aims at liberalisation ofIndian industry. The main objectives of the NIP are:
1. Attainment of international competitiveness.
2.Development of backward areas.3. Encouraging competition within Indian industry.4. Efficient use of productive resources.5. Full utilisation of plant capacities to generate employment.
6. Revival of weak units, etc.
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Main features ofindustrial policy
of 1991 and liberalisation Abolition of licensing system Amendment in monopolies and restrictive trade practice
act METP act
Restricted the role of public sector Investment of foreign capital
Import of foreign technology
Collaboration with foreign trading companies
Policy related to small scale industries Establishment of new industries
Facilities of retrenched workers
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Objectives of the Industrial Policy of the Government are
to maintain a sustained growth in productivity;
to enhance employment;
to achieve optimal utilization of human resources;
to attain international competitiveness Development of indigenous technology through greater investment
in R&D and bring in new technology to help Indian manufacturingunits Incentive for industrialization of backward areas
Ensure running of PSUs on business lines and cut their losses
Protect the interests of workers
Abolish the monopoly of any sector in any field of manufactureexcept on strategic or security grounds.
to transform India into a major partner and player in the global
arena.
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Economic Liberalization in IndiaPast Ach ievements and Futu re Chal lenges
6 August 2011
Confederation of Indian Industry
E i R f
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The early burst of reforms in the early to mid nineties made sweeping changes such as
Reduction in tariff barriers
Removal of barriers to entry in industry
Removal of controls in the financial sector
Encouragement to foreign investment and technology
Rationalization of tax structure
These have ensured macroeconomic stability and driven the economy towards greatercompetitiveness
These measures have also helped India in emerging as a resurgent, vibrant anddynamic nation, leading global growth
India is the second fastest growing economy in the world after China
India was able to withstand the repercussion of the global economic crisis Indias participation is required in all global negotiations ranging from global trade to
climate related deals
Economic Reforms
CII R l
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Post-1991, CII worked on multiple fronts to facilitate liberalization:
Engaged with administration to calibrate policies to sequence reforms and minimizeindustry adjustment pains
Sensitized officials and Members of Parliament for reforms through sustainedinteraction
Worked with industry to build consensus recommendations
Organized seminars to disseminate awareness among industry
Interacted persuasively with different stakeholders across society to create buy-in
Globalisation was a key plank ofCIIs endeavours since 1991. Some ofCIIs pioneeringinitiatives that helped industry to align with global imperatives include:
Arranging outward missions through networking with international governments,industry associations, institutes and academia for opening new avenues for Indianindustry
Initiating Quality Movement in India; Sundaram Fasteners first company to get
ISO9000 certification (1991) Organising exhibitions/shows to showcase Indian products
Initiating debate on key economy/ industry issues
Laying thrust on Corporate Governance: Developing Code of Corporate Governance
CIIs Role
Robust GDP Growth
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Robust GDP Growth
5.3
%
1.4
%
5.4
%5.7
%6.4
% 7.3
%8.0
%
4.3
%
6.
7%
6.4
%
4.4
%5.8
%
3.8
%
8.5
%
7.5
%
9.5
%
9.6
%
9.3
%
6.8
%8.0
%8.5
%
0.0
1000.0
2000.0
3000.0
4000.0
5000.0
6000.0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
(Rs.
000'Crore)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Y-O-YGrowth
(%
GDP GDP Growth Rate
Source: Economic survey 2010-11 and CSO
GDP has surged from 5.7% during1991-00 to 7.7% during 2001-11
-0.5
%
3.4
%3.8
%
3.8% 5
.1% 5
.9%
2.4
%
4.7
%
4.5
%
2.5
% 4.1
%
2.1
%
6.8
%7.1
%7.8
%
8.0
%
7.8
%
5.3
% 6.5
%7.1
%
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
(Rs.)
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%5.0%
6.0%
7.0%
8.0%
9.0%
Y-O-YGrow
th(%
Per Capita Income Growth in Per Capita Income
GDP
Per Capita Income
Per Capita Income has more thandoubled from Rs. 15,826 in 1991
to Rs. 41,129 in 2011; has beenincreasing at an average annualrate of about 7% since 2004
Structural Change in GDP Composition
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Structural Change in GDP Composition
GDP has undergone a marked structural change over a span of two decades
Agriculture contribution has shrunk to 16.6% in 2011 from 34.0% in 1991 Share of tertiary sector has increased commendably, in fact is becoming
engine of growth
Flat growth in Secondary sector is however, a cause of worry given thereducing employment elasticity of agricultural sector
Composition of GDP (1991 v/s 2011)
34.0%
23.2%
42.7%
Agriculture, 16.6%
Industry, 25.7%
Services, 57.7%
1991
2011
Source: Economic survey 2010-11 and CSO
Savings and Investment (as % of GDP)
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Savings and Investment (as % of GDP)
Savings as a proportion of GDP moved up by more than ten percentage pointsfrom 22.8% in 1991 to 33.7% in 2010
Investment to GDP ratio also jumped from 26.0% to 30.8%, however expectedto declined to 29.5% in 2011 due to rising interest rate
22.8%
21.5%
21.2%
21.9%
24.4%
24.4%
22.7%
23.8%
22.3%
24.8%
23.7%
23.5%
26.3%
29.8%
32.4%
33.5%
34.6%
36.9
%
32.2%2
6.0%
22.1%
23.1%
22.5%
25.5%
26.2%
24.0%
25.3%
23.3%
25.9%
24.3%
22.8%
25.2% 27.
6% 3
2.8%
34.7%
35.7%
38.1%
34.5%
33.7%
30.8%
-
500
1,000
1,500
2,000
2,500
3,000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(Rs.000'Crore)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Y-O-YGrowth(%)
Savings Investment Savings as % of GDP Investment as % of GDP
Source: Economic survey 2010-11 and CSO
Merchandise and Service Trade
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Merchandise and Service Trade
18.
5
18.
3
18.
9
22.
7
26.
9
32.
3
34.
1
35.
7
34.
3
37.
5
45.
5
44.
7
53.
8
66.
385.
2
105.
2
128.
9 166.
2
189.0
182.
2
250.
5
27.
9
21.
1
24.
3
26.
7
35.
9
43.
7
48.
9
51.
2
47.
5
55.
4
57.
9
56.
3
64.
580.
01
18.
9 157.1
1
90.
7
257.
63
08.
5
300.
6
380.
9
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
(US$
Billion)
Merchandise Exports Merchandise Imports
Merchandise exports soared to crossUS$250 bn in 2011 from US$ 18.5 bn in1991, about 14 fold increase
Service exports went up to US$132 bn in2011 from mere US$ 4.6 bn in 1991,registering a CAGR of 18.3%
Backed by robust exports of IT andITes services; close to $60 billion in2010-11
Merchandise and Service imports grownat a CAGR of about 14.0% and 17.1%respectively
Faster rise in imports over exportshave undoubtly widened trade deficityet it has helped in keeping globaldemand alive in the wake of theglobal economic crisis
Trade as a proportion of GDP hasincreased magnificently from 9.0% in1991 to 87.9% in 2011
Source: RBI
4.6
5.0
4.7
5.3
6.1
7.3
7.5 9
.4 13.2
15.7
16.3
17.1
20.8 2
6.9
43.2
57.7
73.8
90.3
106.0
95.8
132.0
3.6
3.8
3.6
4.7
5.5 7
.5
6.7
8.1
11.0
11.6
14.6
13.8
17.1
16.7 2
7.8 3
4.5 4
4.3 5
1.5
52.0 6
0.0
8
4.3
-10.0
10.0
30.0
50.0
70.0
90.0
110.0
130.0
150.0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
(US$
Billion)
Service Exports Service Imports
Merchandise Trade
Service Trade
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SENSEX
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SENSEX
Steps taken over the last two decades have resulted into maturing of nascent
financial market. Further, robust economic growth and fast pace ofglobalization has led to buoyant investors sentiment
SENSEX has increased from a level of 1908.9 in 1991 to 18518.2 in 2011 ata CAGR of 12.0%
Tre nds in Capital M arket - SENSEX ans BSE 100
0.0
3,000.0
6,000.0
9,000.0
12,000.0
15,000.0
18,000.0
21,000.0
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
SENSEX BSE 100
Source: BSE, bseindia.com
Move Towards Inclusive Growth
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Move Towards Inclusive Growth
While the first phase of reforms had unleashed economic growth, it was feltthat the benefits of growth must be more equitably distributed
Starting 2005, the UPA government has shifted the focus to inclusive growththrough greater allocation to socially beneficial schemes and programmes
Total Plan Allocation increased markedly from Rs. 9.6 thousand crore in1991 to Rs. 335.5 thousand crore in 2011-12, nearly 35 fold increase
Source: Budget and Government Sources
Some flagship schemes
Bharat Nirman - Total Budget allocation for 2011-12: Rs. 58,000 crore
NREGA - Total Budget allocation for 2011-12: Rs. 40,000 crore
JNNURM - Total Budget allocation for 2011-12: Rs. 49 crore
CIIs Initiative on Socio Responsibilities
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Corporate Social Responsibility
Set up Social Development and Community Affairs Council in 1995
Developed Action Agenda for Affirmative Action and worked to generateawareness and intensify industry efforts
Facilitates industry interventions in society through NGO partnerships
Undertakes public health and community welfare activities in factories
Spearheaded the India Business Trust for HIV/AIDS
Environment Management Set up Environment Management Division after Rio Summit in 1992
Initiated Green Building movement in India through its Centre of ExcellenceGreen Business Center
Engages in climate change mitigation efforts
CII s Initiative on Socio Responsibilities
Social indicators
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Social indicators
Overall literacy rate has gone up from justover half to almost three-quarters during1991 and 2011
Literacy level among female folk which
constitutes about half of the populationhas nearly doubled
Among young people, the rates are higheras the Right to Education law kicks in
Source: Economic Survey
52.2%
74.0%
64.1%
82.1%
39.3%
65.5%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
Overall Males Females
1991 2011
35.6%
27.5%
35.0%
28.3%
37.0%
25.7%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Total Rural Urban
1991 2005
Overall, poverty has declined by eight
percentage points from as high as 35.6% in1991 to 27.5% in 2005
Decline was more pronounced in urban areasas compared to rural areas
Urban poverty fell by double digits. Ruralpoverty came down by seven percentagepoints
Literacy Rates
Poverty Estimates
Source: Planning Commission
Major Plans for Infrastructure Development
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Sector Deficit Eleventh Plan (2007-12) Targets
Roads/
Highways
65,590 km of NH comprise only 2% ofnetwork; carry 40% of traffic; 12% 4-laned; 50% 2-laned; and 38% single-laned
6-lane 6,500 km in GQ; 4-lane 6,736 km NS-EW; 4-lane 20,000 km; 2-lane 20,000 km;1,000 km Expressway
PortsInadequate berths and rail/roadconnectivity
New capacity: 485 m MT in major ports; 345m MT in minor ports
Airports
Inadequate runways, aircraft handlingcapacity, parking space and terminalbuildings
Modernize 4 metro and 35 non-metroairports; 10 greenfield airports
Railways
Old technology; saturated routes; slowspeeds (freight: 22 kmph; passenger: 50kmph)
8,132 km new rail; 7,148 km gaugeconversion; modernize 22 stations;dedicated freight corridors
Power
13.8% peaking deficit; 9.6% energyshortage; 40% transmission anddistribution losses; absence ofcompetition
Add 78,577 MW; access to all ruralhouseholds
Source: Planning Commission
Major Plans for Infrastructure Development
Power and Road
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Power and Road
Source: CMIE, Industry Analysis Service
Installed Capacity in Power Sector: All India
66,086.3
153,774.8
-
20,000.0
40,000.0
60,000.0
80,000.0
100,000.0
120,000.0
140,000.0
160,000.0
180,000.0
1991 2011
MW
Total installed capacity has more than doubledduring 1991 and 2011
Even after 20 years, thermal power remained themost dominant form
There is a need to change the present compositionin favour of hydro, nuclear and other bio-producepower to conserve coal for industrial purposes
Road Length
2,327.4
4,236.4
-
500.0
1,000.0
1,500.0
2,000.0
2,500.0
3,000.0
3,500.0
4,000.0
4,500.0
1991 2008
(000'Km)
Source: Ministry of Road, Transport and Highways
Public-private-multilateral partnerships havebeen successful in implementing highwaysprogramme
NHAI to award 7,994 km of highway projectsin the FY 2012
Going to generate demand for cement,steel, and bitumen of worth Rs 42,000 crore
Though the sectoral performance hasimproved, yet to be enhanced considerablyto ensure optimal utilization of resourcesand to avoid overrunning ofcost
Installed Capacity: Power
Road Length
Steel and Telecom
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Steel and Telecom
Steel production has surged nearly five foldin last 20 years
India fourth largest steel producer in the
world and is expected to become thesecond largest producer by 2013
Steel production capacity to touch 120Million Tonnes by 2013 and over 150Million Tonnes by 2020
Source: CMIE, Industry Analysis Service
Finished Steel Production
13,566.0
66,013.0
-
10,000.0
20,000.0
30,000.0
40,000.0
50,000.0
60,000.0
70,000.0
1991 2011
(000'Tonnes)
Telecom S ubscriber Base
5.1
826.9
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
1991 2011
(Millions
)
Source: Department of Telecommunications, Ministry of Communications and Information Technology
Private sector participation has lead to sharpreduction in tariffs and rapid increase inpenetration of basic/mobile telephones
Registering a CAGR of 29.0% during 1991and 2011
Teledensity improved from 0.6 (per 100person) in 1991 to 66.2 twenty years later
Finished Steel Production
Telecom
Challenges
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High inflation level above comfortable zone9.4% in June 2011
Industrial slow downIIP has grown by 5.6% in May 2011 as compared to 8.5% in May 2010
Falling investment - 30.8% in 2010 to 29.5% in 2011
High interest rates have impacted credit to MSMEs in manufacturing sector as well as keyindustries Non food credit growth to MSMEs declined from 21.1% in April, 2010 to 20.6% in April,2011
Inadequate infrastructure continues to be a major structural bottleneck
Shrink in FDI inflows due to structural bottlenecks In 2010-11, FDI inflows shrunk by 28% toUS$ 27 billion from a level of US$ 38 billion in 2009-10
Weak enforcement and monitoring
Likely overshooting of fiscal deficit Though fiscal deficit is budgeted at 4.6% for FY 2012,however, developments in recent months like deceleration in growth, high crude oil prices, high subsidyand rising interest rates are casting doubts
Challenges
Agenda for further reforms
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Investment Climate:
FDI in sectors such as retail, insurance, defence, etc needs to be expanded drastically
Rapid clearance of large projects
Financial Sector Reforms:
Liberalize financing guidelines
Facilitate increased access to international debt markets
Encourage development of the corporate debt market
Agriculture Sector Reforms:
Allow FDI in food retailing to integrate distorted supply chain Encouragement to PPP model in strengthening agriculture research and extension programmes
Exempting horticulture produce from APMC Act
Move towards unified national market and allow free movement of produce
Infrastructure:
For greater investment in infrastructure policy framework needs to be made more friendly
Social Sector:
Much better delivery of government services to the poor with the support of state governments
Agenda for further reforms
CII has been a strong partner to gov ernment dur ing the reforms per iod and w i l l
cont inue to bui ld the partnership of Government and industry to make India a
developed nat ion in the next two decades
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Privatisation
Privatisation means endorsing / assigningthe ownership of a publicproperty/business to a private party.
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Uses
1)Development would be faster(due to competition withthe other private parties)2)Innovative solutions (due to again competition with theother private parties)
3)effective & time bound results4)cost cuttings5)improves quality in work6)in turn more services to public are possible
7)increase the productivity8)significant Growth in the business9)controlled monitoring of public property gives public inturn good services
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The benefits of privatization include:-better quality products-lower priced products-more efficient firms which have lower costs
-makes costs lower for other firms who use the productthe privatized firm produces-this increases employment and incomes across theeconomy
-Government no longer needs to subsidize product-Government makes revenue from asset sale to spendon health, education etc-Promotes technological advancement, again creating
jobs and growing incomes
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Possible Losses
1)always a threat to working staff.
2)as private parties try to extract work from minimumresources, down sizing is the common problem3)un-employment increases4)if the private party is inefficient, there is everypossibility of the business winding up.5)more restrictions on many things6)purely commercial in nature and lacks ethical / human
morale at times.
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Thank You
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