Some Macroeconomic Implications of Privatisation

Abstract

Privatization has been a key element of structural reform in many developing and transition economies during the last decade. Governments undertaking privatization have pursued a variety of objectives: increasing economic efficiency, enhancing competition etc. In addition, liquidity-constrained governments facing fiscal pressures have sometimes privatized with a view to financing fiscal deficits with the proceeds.There exists a large literature on the microeconomic aspects of privatization that has emphasized the potential efficiency gains. However, there has been less work done on the fiscal and macroeconomic impact of privatization. This paper reviews fiscal and macroeconomic issues in the privatization of public enterprises with a special focus on India. The fiscal effect arising out of use of privatization proceeds is a direct effect. However, there exists indirect implication of privatization such as, impact on employment, impact of effectiveness of monetary policy transmission etc. This paper aims to study the literature on these macroeconomic implications of privatization.This paper is divided into four sections. The first section comprises of the theoretical arguments, issues and literature review pertaining to the fiscal impact of privatization. This is followed by a comparative assessment of actual privatization proceeds in Indian case versus the baseline scenario offered by Kelkar Task Force. The second section is about the monetary policy transmission and whether the same gets affected by the factor of ownership in Indian banks. The third section captures the labour market effects of privatization with a special focus on India. The last section provides scope for future research and the conclusion.