written by khatabook | November 17, 2022

Nationalization - Overview, How It Works, Examples

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Table of Content


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.

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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.

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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.

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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.

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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.
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FAQs

Q: What is the difference between Nationalisation and Privatization?

Ans:

Privatization generally occurs when a government-owned enterprise is sold to an individual. On the other hand, Nationalisation occurs when the government purchases a specific business or firm from an individual in the private sector. Nationalisation and privatization are the processes through which firms and assets are moved into public and private hands. Privatization entails selling at least 50% of those state-owned industry shares to the general public.

Q: What is privatization?

Ans:

Privatization is transferring a government-owned or publicly-owned enterprise into private hands. The goal may be that privatization leads to a more efficient institution, or it may simply occur as a bribe or reward to regime supporters.

Q: How does Nationalisation work?

Ans:

Nationalisation is frequently used in smaller nations when governments want to grab control of a profitable industry to provide a substantial income stream for those in power. Suppose that industry may be critical to the economy, such as the energy sector. It is carried out in major parts of countries where governments are not elected and have no term limitations.

Q: Can the government nationalise any business?

Ans:

The process by which private companies are taken over and controlled by the government is known as nationalisation. It frequently occurs in developing countries when governments wish to seize control of a profitable industry in order to generate a substantial income stream for those in power.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.