Nationalisation is the action of a government seizing control of a firm or industry, which usually occurs without compensation for the loss of the cumulative value of seized assets and potential income. The action could result from a government’s attempt to consolidate power, dislike of foreign ownership of businesses important to the local economy, or to prop up faltering industries.
Did you know? On July 19, 1969, then-prime minister Indira Gandhi announced the Nationalisation of 14 commercial Indian banks with balances above ₹50 crores.
Why is Nationalisation Needed?
Nationalisation helped India to emerge as one of the greatest economies and its potential being recognized around the globe. Nationalisation usually occurs in developing countries and could reflect a nation’s desire for controlling assets or to assert dominance upon foreign-owned industries.
Reasons Behind Nationalisation
The state should own the means of production, distribution, and exchange, according to certain brands of state socialist’ policy. Socialists believe that public ownership allows people to exercise full democratic control over the means by which they earn a living and is an effective means of more fairly distributing wealth and income.
Because nationalised industries are owned by the government, the government is responsible for repaying any debts incurred by these industries. Furthermore, except for short-term borrowing, nationalised industries do not typically borrow from the domestic market.
Nationalization can occur with or without compensation to the previous owners. Expropriation occurs when something is taken without compensation. When a government seizes illegally obtained property, nationalisation may occur.
Also read: How to Start An Online Saree Business from Home
The following are the list of effects of Nationalisation:
For strategic reasons
This is common during conflict or when the government attempts to regulate the economy. For example, if the government decides to go to war with another country, it can swiftly nationalize all of the opposing country’s businesses to reduce their income.
To avoid exploitation
Another reason the government may contemplate nationalizing a corporation is to avoid exploitation by persons in private. So, if the government observes that a corporation exploits citizens due to its monopoly, it may decide to nationalize the business.
Requirement for substantial capital
Corporations must get large sums of money from the government. For example, if a corporation requires finance that can only be obtained from the government, the government will be able to nationalize the business to receive the necessary funds.
To avoid wasteful competition
Nationalisation can be utilized to avoid wasteful running amongst businesses, particularly service businesses. The government may take over ownership and management firms in general.
To ensure continuous service
When private persons in a country own essential services like electricity, water supply, and so on, the government may nationalize those services to ensure citizens get the most out of them.
Also read: E-Invoicing for Businesses with Turnover Over Rs.50 Crore
Benefits of Nationalisation
There are many benefits of Nationalization, some of them are listed below:
It helps to prevent exploitation
As previously said, Nationalisation helps to prevent exploitation by foreign and private firms in the country. Citizens will benefit when the government takes control of a firm because the government may supply the same service for free or at a reduced cost.
It maintains a consistent supply of critical services
When a country’s essential services, such as water supply, are owned by private persons, they are not as efficient as when the government controls them. Thus, Nationalisation is a method of ensuring efficiency in the delivery of specific goods or services.
Promotes resource efficiency
It promotes the efficient use of economic resources. In a way it provides a certain topmost archive of resources to be used in the most efficient way possible.
Protection of Strategic Industries
The government can even nationalize a corporation if it is so crucial that it should not be in the hands of a private individual or a foreign investor.
Monopoly Elimination
Another key benefit of Nationalisation. Private monopoly is greatly reduced by taking over privately held and foreign enterprises.
Capital Mobilization
When a corporation is massive, quantities of nationalized capital can be mobilized to ensure large-scale investment.
Also read: What Are The Top 10 Business Ideas in Delhi?
Disadvantages of Nationalisation
1. Low productivity and Inefficiency
Typically, government firms perform poorly, and most nationalized businesses by the government end up being mismanaged, reducing company efficiency.
2. Preventing Private Initiatives
When the government takes over private businesses, private initiatives are more likely to decline. This may also be attributed to a lack of competition.
3. Consumers Can Be Taken Advantage Of
Nationalisation is intended to be non-profit, this does not exclude the government from exploiting citizens. The government widely abuses citizens even after Nationalisation.
4. Corruption and Mismanagement
As is typical, a substantial sum of corruption in government-owned and run businesses can be seen in an utmost consistent way. As a result, Nationalisation may not be wise in a country where the vast majority of politicians are dishonest by nature.
5. Political Intervention
When a corporation is taken over and operated by the government, there is usually political interference, leading to resource misallocation.
Also read: Best Small Business Ideas for Rural Areas, Villages, Small Towns in India
Examples of Nationalisation
- The Reserve Bank of India was nationalised on January 1, 1949. At the time of Indian independence, the Reserve Bank of India was a state-owned enterprise.
- Air India was established in 1953 under the Air Corporations Act.
- The Imperial Bank of India and its subsidiaries were established in 1955. (State Bank of India and its subsidiaries)
- 14 Indian banks were nationalised in 1969.
- The General Insurance Corporation of India was formed in 1972 after the nationalisation and restructuring of 107 insurance companies.
- Coal India Limited took over the coal industry in 1973, and the Oil and Natural Gas Corporation took over the oil and gas industry.
- In 1980, six more banks were nationalised.
Bank Nationalisation in India
According to the RBI website, the National Institute of Bank Management (NIBM) was established on September 24, 1969, to meet the country’s foreign currency and agriculture requirements.
On February 10, 1970, the Supreme Court declared the Act unconstitutional, citing that it was discriminatory against the 14 banks and that the proposed remuneration by the government was not equitable.
On February 14, a new Ordinance was enacted, eventually replaced by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
Indira Gandhi took this action in recognition of the sensitive nature of the banking sector. To expose banks to scrutiny, ownership was changed into public ownership.
Conclusion
Nationalization is motivated by both political and economic considerations. The surplus profit could be used and there has been protection of public interest. The working conditions have also improved and hence, the overall experience of the Nationalisation has been quite beneficial for India and its economy.
Follow Legal Tree for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.