The sale or liquidation of subsidiaries or fixed assets such as the public sector undertakings, enterprises, and projects by the central or the state government is termed as disinvestment. Disinvestments are principally stimulated by the optimization of resources to produce maximum gains and returns. Basically, when the government sells these sectors to the private players, they are giving the higher stakes to them, thereby, giving up their direct ownership.

In India, disinvestment is intended at reducing the financial burden on the government due to the unproductive and inadequately performing Public Sector Undertakings (PSU’s, called sick units) and to improve public investments and financial systems.

When disinvestment takes place, the competition in the market increases as the enterprises which were already known to the public are now in the run for maximum market gains. Further it also enhances the market discipline as it tends to depoliticize non-essential services.

 

BACKGROUND

After independence, for four and a half decades almost all the major industries, enterprises, and projects were under the direct control of the government. It was after the introduction of the New Economic Policy of 1991, that the government opened the reserved sectors such as agricultural and allied sectors, services sectors, industrial sectors, for private players. The aim was to fundamentally open the Indian economy for global exposure. As of today, only two sectors of national importance are reserved by the government, the railway operations, and the atomic energy, out of which certain railway operations like infrastructure have also been privatized to a certain extent.

 

WHY IS DISINVESTMENT NEEDED IN INDIA?

The performance of various PSUs over the years has proved that the government has no business to be in a specific business, especially where the private sector has now entered substantially unless it is of critical significance. As it is said that true wisdom lies in the proper allocation of resources to meet the incipient needs, through disinvestment of its businesses, the government can put the resulting proceeds to better utilization. With the increasing fiscal deficit which as of now stands at 3.8%, disinvestment could help the government finance it and reduce it to 3.5% as stated in the budget. Further the proceeds from the sale of certain PSUs to private players help the government to finance large-scale infrastructure projects coming up across the country. Apart from this, with the growing population, demands, and consumption, the government cannot alone handle the pressure, and hence it is better to divide the burden with the private sector. On the other hand, this helps in bringing respite to consumers by providing them more choices and better quality of products and services. For example, the telecom sector. Since a huge part of the Central Governments revenue receipts are utilized towards repaying the public’s interest/debts, this step also aids the government to retire its debts.

Disinvestment is necessary because, the Government controlled PSUs are not able to compete in the free market due to the inevitable political influence and various price control mechanisms due to which most of the publics’ money is squandered in keeping these PSU’s alive. Further it has been evident in the statistics that the dividends earned by the government have mostly been utilised in reviving the sick PSU’s, which in turn adds on to the government’s expenditure.

 

DEMERITS 

It has been argued that the private sector cannot achieve equal distribution of resources for all classes, by the socialist or the leftist psychology. Further, since the main agenda of most of the private players is money-making and profit, it is highly plausible that they won’t cater to the lower strata of the society. Further, it is also argued that disinvestment in major PSUs will result in the declination of regular dividends which in turn would lead to an increase in the fiscal deficit. Moreover, it is also quite plausible that it takes a blow on the employment front. Once liquidated, the employees of the PSU’s will be rendered jobless. As much as disinvestment boasts of increasing and maintaining healthier competition in the market, there are always possibilities of private monopolies.

 

METHODS OF DISINVESTMENT

At present in India there are two ways in which the government can disinvest.

  1. Stock exchange: the first is via the stock exchange. This is a faster way as there are comparatively fewer clearances required than in cases of sale or liquidation.
  2. Institutional Placement Program: This procedure involves directly selling the shares to another institution/company / mutual fund or other large private players. The process involves a systematic and long list of clearances before the actual sale takes place.

 

MAJOR DISINVESTMENTS IN THE RECENT YEARS

Source: Department for Investment and Public Asset Management

 

CONCLUSION

However, the government, must ensure beforehand that it is not being taken for a ride. It must make a fair judgment of the value of the business it decides to disinvest from and if by chance the market conditions are not favourable for the transaction, it is advisable that it waits for the appropriate juncture. Further, instead of utilizing the proceeds from the disinvestment to finance revenue deficit the earnings must be employed strictly for the creation and development of new assets.

 

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