The trade off between allocative and economic efficiency poses a question about the regulation of public utilities. It’s known as empirical knowledge that PSUs are more allocatively efficient and private firms are productively efficient. The scenario is however changing. The PSUs remain efficient in provision of low cost services like transport, but private players like Reliance are disrupting the markets by introducing low cost products and services like Jio. Does it still make sense to retain control over provisions made by government entities?
An example of efficient public facilities is the Delhi Metro. The Delhi Metro is built and operated by the Delhi Metro Rail Corporation Limited. DMRC is a state owned company with equal involvement of the state and central government.The Delhi’s Metro network is known for a fact that it is nothing short of a world class public transportation facility. Comparing Delhi Metro with its counterpart, the Mumbai Metro, which is operated by Metro One Operation Private Limited (MOOPL), a joint venture between a French company and Reliance Infrastructure, it can be clearly seen that the state operated metro service although being cheaper provides, if not better, equally good facilities in terms of time-compliance, cleanliness etc.
Another advantage that public enterprises have is the prevalent outreach created by the existing infrastructure. India Post Payments Bank is an example of how a natural monopoly will always be more allocatively efficient. With 1.54 post offices across the country, IPPB is the most accessible banking network in the country. By fine tuning the infrastructure of post offices to suit the functions of a bank and cooperation with other private sector banks,enterprises and financial institutions, IPPB will now be able to complement rural development by making financial inclusion a reality. Beneficiaries are not only the people but also government welfare promoting schemes such as MNREGA.
Private enterprises have not been allocatively efficient in the past because of difficulties of factor mobility which is now resolvable. Services like Reliance Jio have penetrated the country not only in price terms but also the outreach. Also by providing the most high end infrastructure at highly affordable rates, Reliance telecom has set an example of allocative efficiency at its best.
Natural monopolies which arise from sheer size are bound to have a positive impact on the consumption as they reduce price to a level which can not be competed. This is sheerly because of the capital available with private enterprises. Excess profits and capital of large enterprises such as reliance usually are reinvested in large projects only. These investments can reduce price of services quite significantly so why not channel it where welfare is maximised? Government owned enterprises usually rely on money from government collected from taxes to be able to invest. Most of the time this money is not even earned by these enterprises. The burden of their expenditure is indirectly faced by the taxpayer and results in a budget deficit.
Larsen & Toubro is one of the cheapest road builders, is given a large number of highway and other roadway tenders. The major driver of its efficient production is something not all firms may have. Experience and personnel to conduct R&D. R&D is a major priority of private firms with profit maximizing incentives, which allows them to reduce costs and hence increase profits. PSUs seldom do so as they lack incentive of increasing productive efficiency as alot of them are regulated monopolies. They are also subject to regulations of laws such as reservation which forces them to hire inefficient workers and disallows them to dismiss the same. This leads to increased bureaucracy which further hinders the firm’s productivity. Private sector contrarily mostly only recognizes merit.
The extent to which PSUs should be privatized remains questionable; it is subjective to every firm and industry and no definitive verdict can be given.
An example of efficient public facilities is the Delhi Metro. The Delhi Metro is built and operated by the Delhi Metro Rail Corporation Limited. DMRC is a state owned company with equal involvement of the state and central government.The Delhi’s Metro network is known for a fact that it is nothing short of a world class public transportation facility. Comparing Delhi Metro with its counterpart, the Mumbai Metro, which is operated by Metro One Operation Private Limited (MOOPL), a joint venture between a French company and Reliance Infrastructure, it can be clearly seen that the state operated metro service although being cheaper provides, if not better, equally good facilities in terms of time-compliance, cleanliness etc.
Another advantage that public enterprises have is the prevalent outreach created by the existing infrastructure. India Post Payments Bank is an example of how a natural monopoly will always be more allocatively efficient. With 1.54 post offices across the country, IPPB is the most accessible banking network in the country. By fine tuning the infrastructure of post offices to suit the functions of a bank and cooperation with other private sector banks,enterprises and financial institutions, IPPB will now be able to complement rural development by making financial inclusion a reality. Beneficiaries are not only the people but also government welfare promoting schemes such as MNREGA.
Private enterprises have not been allocatively efficient in the past because of difficulties of factor mobility which is now resolvable. Services like Reliance Jio have penetrated the country not only in price terms but also the outreach. Also by providing the most high end infrastructure at highly affordable rates, Reliance telecom has set an example of allocative efficiency at its best.
Natural monopolies which arise from sheer size are bound to have a positive impact on the consumption as they reduce price to a level which can not be competed. This is sheerly because of the capital available with private enterprises. Excess profits and capital of large enterprises such as reliance usually are reinvested in large projects only. These investments can reduce price of services quite significantly so why not channel it where welfare is maximised? Government owned enterprises usually rely on money from government collected from taxes to be able to invest. Most of the time this money is not even earned by these enterprises. The burden of their expenditure is indirectly faced by the taxpayer and results in a budget deficit.
Larsen & Toubro is one of the cheapest road builders, is given a large number of highway and other roadway tenders. The major driver of its efficient production is something not all firms may have. Experience and personnel to conduct R&D. R&D is a major priority of private firms with profit maximizing incentives, which allows them to reduce costs and hence increase profits. PSUs seldom do so as they lack incentive of increasing productive efficiency as alot of them are regulated monopolies. They are also subject to regulations of laws such as reservation which forces them to hire inefficient workers and disallows them to dismiss the same. This leads to increased bureaucracy which further hinders the firm’s productivity. Private sector contrarily mostly only recognizes merit.
The extent to which PSUs should be privatized remains questionable; it is subjective to every firm and industry and no definitive verdict can be given.
What matters, is provision of good quality and affordable commodities/services that consumers demand. If private players can do it charging lower prices, there is no reason to disallow them. What the Government should do, is set up efficiently functioning PSU’s in sunrise sectors, and then sell part of it to private players, and use this revenue to build basic and core infrastructure(the only sectors which shouldn’t be privatized). A deregulated and non-interferential environment promotes investments, both national and foreign.
ReplyDeleteA new industry apart from infrastructure requires a lot of R&D to achieve efficiency. It becomes very difficult for government to allocate huge sums of money for an industry whose future is uncertain. Due to globalisation, innovations in unconventional sectors are taking place in developed countries, making it very difficult for indigenous firms to compete at an international level. Hence it becomes important for the government to encourage private firms to invest in these sunrise sectors.
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ReplyDeleteWhat you've said about the PSUs being inefficient, might be true, not to mention that there are efficiently running PSUs too. But the question that arises is that, welfare will completely be neglected if complete privatization takes place. Not all private companies will be like Reliance Jio, providing cheap services. They might be financially pressurising the government, but overall they are a huge relief to the common man
ReplyDeleteI completely agree with the fact that welfare will be neglected if total privatization takes place as the main motive of private enterprises is profit maximisation. There are various alternatives to total privatisation. The enterprise can remain as a public utility and provide services of everyday necessity to the public. It can also be managed by a private non-profit organisation. Another method used by the state to avoid privatisation is to wait until the enterprise becomes bankrupt.
DeleteIt would be unfair to say that private companies completely neglect welfare when they are present in sectors where previously the particular service was provided by the government. We have many examples to this effect, such as the privatisation of UTI Bank to Axis Bank. And as for Jio, their only motive isn't welfare, but also capturing a larger market share, which is possible only because Reliance is an established company. Profit maximisation and social welfare can certainly coexist.
DeleteTanay Agarwal
Group 4
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ReplyDeletePrivatization of the public sector not only leads to unhealthy competition but also causes the formation of a monopoly. Taking the example of Reliance Jio, they may be providing cheaper data to all but at the same time they are taking up more and more interconnect points which is displacing government owned companies like MTNL as well as other companies like Airtel and Vodafone and causing unfair competition, which in my belief leads to greater inequalities.
ReplyDeleteForemost, privatization of MTNL has been undertaken already in march 2015. As far as giving competition to other companies like Bharti Airtel and Vodafone is concerned, the provision of protecting slightly weaker firms is not provided by the government or the rules or TRAI. So, according to me, Jio is only helping consumers to gain a benefit. Secondly refering to Reliance Jio displacing other companies, we have moved way past the era of protectionism and companies today survive on their own abilities. If weaker firms get displaced by stronger ones, let it be that way.
DeleteWhile the primary aim of a government entity is to benefit its citizens, a private company's is to make profit. This means a privatized company is more inclined to undertake cost cutting initiatives, even if it means providing lower quality services or products. However, government programs may have less resources to start off with. As mentioned in the article, every country and every firm has different values and resources, and a generalized statement about these varied entities would be unfit for use.
ReplyDeleteRuchi Bhasin
Team 4
Group 1
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DeletePrivatization of any public owned firm is definitely a big step as private firms have a motive of profit maximization instead of welfare maximization. However, the fact to be noticed is that these firms when undertaken by private owners, do have improved quality to a great extent. So, a generalized statement could be made in the sense that in mostly all cases, privatization has led to provision of better quality of the product or the service.
DeleteThe general notion that since private firms primary motive is profit, they can never provide good quality services at cheaper rates, is wrong. This is because large private firms are able to invest in R&D and bring down costs. An example can be telecom network. Reliance Jio uses a Packet-Switching technology instead of the usual Circuit-Switching, that has helped it further bring down voice call rates.
DeleteOne aspect not covered here is the perpetuation of influence of large firms on politics. reliance has the ability to provide public services at a cheaper rate than the government could provide .if large chunks of public services are given to one firm to take control of, there would be a huge amount of political influence these firms would have on, say, elections. The solution is that concentration, or creation of monopolies should be kept in check by the government.
ReplyDeletePrivate sectors in today's time can provide social welfare to all and government wants it. Converting private sectors into public is not the ultimate solution. The government can collaborate with companies and provide benefits to a larger extent. Government checks can help too. We should keep in mind the needs of our country and if it is being fulfilled, the government's job is done halfway. Time is changing and the private companies know that being profit oriented only wont help.
DeleteOften political interference destroys good businesses with crony capitalism and illegal siphoning of funds(sugar scam).Delhi Metro is an exception. Supporting companies like Air India in the name of national pride is foolish.(3rd worst airline). Job security in government jobs creates moral hazard since focus is not on captital formation leading to inefficiency and losses. Bottomline is that a healthy competition must exist between both sectors to ensure maximum consumer satisfaction.
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DeletePolitical interference is an issue, but privatisation of a sector, especially in a developing country like India, is likely to lead to the formation of a collusive oligopoly. The consumer is bound to lose as the firms look to maximise their profits. There exist several examples of efficient Indian PSUs, such as SBI (before it's IPO) and the 108 ambulance services. Job security in the government sector may in turn attract a sizeable talent pool who prefer the stability.
DeleteDhwani Nanavati
Group 4
I do agree that certain inefficiencies exist in public sector. However, Delhi Metro is not an exception of a successful PSU. Companies like ONGC and SBI are amongst the highest profit earning companies in India even though public welfare is their primary motive. Air India provides connectivity to remote regions of the country like the North East where there is absence of private firms and any other form of transportation is unviable, serving as an important tool for regional inclusion.
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