UPSC MAINS 2019: Govt. earns ₹85,000 crore from disinvestment, overshoots target

Govt. earns ₹85,000 crore from disinvestment, overshoots target


Topic: Govt. earns ₹85,000 crore from disinvestment, overshoots target

Topic in Syllabus: General Studies Paper 3 : Indian Economy

Govt. earns ₹85,000 crore from disinvestment, overshoots target



As against a target of ₹80,000 crore for disinvestment for the current Financial year, the divestment receipts have touched ₹85,000 crore. During the current Financial Year, DIPAM has realised the proceeds through 28 transactions.


More about on news:

  • The government has overshot its disinvestment target for the second consecutive year, according to the Ministry of Finance.
  • The disinvestment proceeds this FY crossed ₹85,000 cr. against Revised Estimate of ₹80,000 cr.
  • For the second year in a row, DIPAM has exceeded the Revised Estimates. During the current FY, DIPAM has realised the proceeds through 28 transactions.”
  • In 2017-18, the government had earned a little more than ₹1 lakh crore from disinvestments against a target of ₹72,500 crore.
  • The official quoted then had pegged this on the completion of the Power Finance Corporation’s acquisition of Rural Electrification Corporation.
  • The government has also earned large amounts from the sale of ETFs, with the latest edition, so far, having earned it ₹10,000 crore.


What is disinvestment?

Literally, disinvestment means selling of assets. Here, in the case of PUSs, disinvestment means Government selling/ diluting its stake (share) in Public Sector Undertakings in which it has a majority holding. Disinvestment is carried out as a budgetary exercise, under which the government announces yearly targets for disinvestment for selected PSUs.


The Disinvestment Program in India:

  • The government of India has decided to withdraw from the Industrial sector, and in accordance with this decision, it decided to privatize the Public sector enterprises in a gradual and phased manner.
  • The approach adopted by the government in this regard is to bring down its equity shares in all non-strategic Public sector enterprises to 26 percent or lower.
  • For the purpose of privatization, the government has adopted route of disinvestment which involves the sale of the public sector equity to the private sector.
  • In the first round of dis‑investment it was decided to (a) offer a randomly structured portfolio of shares each with notional reserve price based on a complex valuation procedure and (b) to off‑load the shares to institutional investors as a buffer between the Government and the stock market.
  • Financial institutions and mutual funds were offered the opportunity to bid for the bundles. Later, the bidding process was opened up to foreign institutional investors and to the public at large with the stipulation of a certain minimum bid. Almost all the bidding so far has been done by financial institutions or mutual funds.
  • There have been the inevitable controversies about the prices at which some of the initial shares were sold, even though all the disinvestment has been done through an auction process.
  • The Government has decided to permit up to 49% disinvestment of equity so that the government would continue to hold 51%. A firm is legally regarded as a public sector firm in India if the Government holds more than 50% of equity.
  • A company so classified is then subject to all the rules, regulations, procedures etc. connected with government ownership. Thus, a firm in which government ownership goes below 50% can be effectively regarded as being in the private sector even if the government has a dominant share holding.
  • One criticism of this disinvestment process has been that it has essentially been seen as resource raising exercise by the government.
  • A second and, perhaps, more valid criticism is that the valuation of shares is affected by the decision not to reduce government holdings to less than 51 per cent. With the continuing majority ownership of the government the disinvested public enterprises would continue to operate within the constraints of the public sector.
  • Thus, there is a lack of clarity on future corporate plans and prospects of these enterprises. Consequently, it is expected that share bids would be lower than they would otherwise be if there was a clear announcement of eventual disinvestment of greater than 51 per cent.


Objectives of Disinvestment:

  • To reduce the financial burden on the Government
  • To improve public finances
  • To introduce, competition and market discipline
  • To fund growth
  • To encourage wider share of ownership
  • To depoliticise non-essential services


Importance of Disinvestment:

Presently, the Government has about Rs. 2 lakh crore locked up in PSUs. Disinvestment of the Government stake is, thus, far too significant. The importance of disinvestment lies in utilisation of funds for:

  • Financing the increasing fiscal deficit
  • Financing large-scale infrastructure development
  • For investing in the economy to encourage spending
  • For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts go towards repaying public
  • debt/interest
  • For social programs like health and education


Methods of Disinvestment:

There are primarily three different approaches to disinvestments (from the sellers’ i.e. Government’s perspective)


Disinvestment through minority stake sale:

  • Already listed profitable CPSEs (not meeting mandatory shareholding of 10%, which stands revised to 25%) are to be made compliant through ‘Offer for Sale’ (OFS) by Government or by the CPSEs through issue of fresh shares or a combination of both
  • Unlisted CPSEs with no accumulated losses and having earned net profit in three preceding consecutive years are to be listed.
  • Follow-on public offers would be considered taking into consideration the needs for capital investment of CPSE, on a case by case basis, and Government could simultaneously or independently offer a portion of its equity shareholding.
  • All cases of disinvestment are to be decided on a case by case basis
  • The Department of Investment and Public Asset Management (DIPAM) is to identify CPSEs in consultation with respective administrative Ministries and submit proposal to Government in cases requiring Offer for Sale of Government equity


Strategic Disinvestment:

  • To be undertaken through a consultation process among different Ministries/Departments, including NITI Aayog.
  • NITI Aayog to identify CPSEs for strategic disinvestment and advice on the mode of sale, percentage of shares to be sold of the CPSE and method for valuation of the CPSE.
  • The Core Group of Secretaries on Disinvestment (CGD) to consider the recommendations of NITI Aayog to facilitate a decision by the Cabinet Committee on Economic Affairs (CCEA) on strategic disinvestment and to supervise/monitor the process of implementation.


Comprehensive management of GoI’s investment in CPSEs:

  • The Government recognises its investment in CPSEs as an important asset for accelerating economic growth and is committed to the efficient use of these resources to achieve optimum return.
  • The Government will achieve these objectives by adopting a comprehensive approach for addressing critical inter-linked issues such as leveraging of assets to attract fresh investment, capital restructuring, financial restructuring, etc.
  • Different options for optimal utilization of Government’s investment in CPSEs will be assessed to adopt suitable investment management strategies to improve investors’ confidence in the CPSEs and support their market capitalization which is essential for raising fresh investment from the capital market for their expansion and growth.
  • Efficient management of investment in CPSEs shall be ensured through rationalization of decision making process for all related issues and seamless inter-departmental coordination in the matter.


Arguments against Disinvestment and Privatisation:

Privatisation has also been opposed by some who say that dismantling of public sector which has been built at a very heavy cost to the society would do no good.

  • Disinvestment of public enterprises is criticised by left-oriented economists on the ground that it amounts to selling ‘family silver’. This in our view is not a valid criticism. This is because original investment on these public enterprises was made by the Government out of its revenue and capital receipts in the past.
  • Second, it is pointed out that privatization of some public enterprises would, in the absence of anti-trust law, lead to the emergence of private monopolies under which resources are misallocated. As a result, consumer welfare will be reduced.
  • It is argued that mere change of ownership, from public to private, does not ensure higher efficiency and productivity of industrial enterprises. In the modern corporate form of business organisation, management has been separated from ownership.
  • The disinvestment of public enterprises is also opposed on the ground that it will lead to the concentration of economic power in a few private hands. This economic power can be used to exploit the consumers on the one hand and workers on the other.
  • An important argument against privatisation is that it will lead to retrenchment of workers who will be deprived of the means of their livelihood. Further, private sector, governed as they are by profit motive, has a tendency to use capital-intensive techniques in production.
  • Disinvestment is also opposed on the ground that it is no solution for loss-making sick public sector undertakings. In fact, it is pointed out that about 50 per cent of loss-making public enterprises, especially in the field of textiles, are those sick units which were taken over by the Government from the private sector to protect the jobs and interests of the workers.
  • Last but not the least, it is argued that public enterprises should not be privatized because, though they may not be yielding enough profits, they are socially profitable and have made important contribution to build up a strong base for industrial development of the country.


Way Forward:

  • Define the priority sectors for the government based on its strategic interests.
  • Investment in PSUs has to be in terms of generation of adequate social and strategic returns.
  • The government ownership is required for sectors with strategic relevance such as defence, natural resources, etc. The government should, exit non-strategic sectors such as hotels, soaps, airlines, travel agencies and the manufacture and sale of alcohol.
  • The government should look into strengthening the regulatory framework that ensures efficient market conditions.
  • Instead of creating PSUs, the government should create regulations that would ease the entry of new players. The regulations should also ensure that the basic necessities of the consumers are met.
  • Allowing both domestic and foreign buyers to bid freely for stakes.


Sample Question:

It is time that divestment is not seen as an option to cover for short-term fiscal gains; instead, it should be part of a strategic plan to improve the production of goods and services in India. Critically examine the statement.

Disinvestment - Info graphics - Mar20th