Why Government disinvesting Public Sector Units? Reasons behind it

Disinvestment in Public sector undertakings in India, is a process of public asset sales done by the President of India on behalf of the Government of India. It can be directly offered for sale to the public or indirectly done through a bidding process.

Strategic disinvestment in India has been guided by the basic economic principle that the government should not be in the business to engage itself in manufacturing/producing goods and services in sectors where competitive markets have come of age.

Between 2014 and 2018 the BJP-led NDA government divested a total of ₹1,94,646 crore.

Major strategic disinvestments by NDA Government-

• Bharat Aluminium Company (BALCO)

• Hindustan Zinc

• Indian Petrochemicals Corporation Limited

• ONGC

• Air India

While track record and future of these companies were good, they have all flourished under the private sector companies that they were sold to.

In Budget for FY 22, FM announces sale of IDBI Bank, BPCL, Shipping Corp, Container Corporation, Neelachal Ispat Nigam Ltd, among others, to be completed in 2021-22 fiscal year beginning April 1.

So why Government disinvesting Public Sector Units? here’s the answer-

There is a separate department under the Ministry of Finance which handles all disinvestment-related works for the government. On 10 December 1999, the Department of Disinvestment was set up as a separate department and later renamed as Department of Investment and Public Asset Management. Disinvestment targets are set under each Union Budget, and every year the targets change. The government takes the final decision on whether to raise the divestment target or not.

Disinvestment has become an almost regular feature of the Union budgets under successive governments, which set a target each year to raise funds from stake sales in public sector enterprises. Disinvestment has led to mixed results for the governments in terms of meeting the revenue targets. Governments select disinvestment candidates based on various factors, such as its existing stake in the company, private sector interest in ownership of that enterprise, general market conditions, expected value realisation etc.

Main objectives of Disinvestment in India-

  • Reducing the fiscal burden on the government and taxpayers, PSU’s such as Air India, BSNL, and MTNL made huge losses, costing the taxpayer massive amounts of money to manage these losses.
  • Improving public finances
    Encouraging private ownership
    Funding growth and development programmes
  • Maintaining and promoting competition in the market
  • To meet the budgetary needs
  • To reduce fiscal deficit
  • To improve public finances and overall economic efficiency
  • To diversify the ownership of PSU for enhancing efficiency of individual enterprise
  • To raise funds for technological upgradation, modernization and expansion of PSUs
  • To raise funds for golden handshake (VRS)
  • To introduce, competition and market discipline
  • To fund growth and development programmes
  • To encourage wider share of ownership
  • To depoliticise non-essential services
  • Transfer of Commercial Risks.

Conclusion –

  • It needs to be ensured that Privatisation (Strategic Disinvestment ) leads to greater competition in all cases.
  • It should be ensured that the proceeds of such strategic sales aren’t frittered away in interest or salary payouts but are reinvested prudently in long-term infrastructure assets that can yield enduring returns to the economy.
  • To allay concerns of cronyism, the strategic sale process needs to be fair and transparent with a minimum reserve price that does justice to the valuable assets being auctioned off. A third-party valuation of every PSU’s assets and a minimum number of bidders, should be necessary pre-conditions to going ahead with each sale.

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This Post Has One Comment

  1. Vansh

    Very good article 🔥👍

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