[Answered] What do you understand by disinvestment? Critically examine the policy of disinvestment in India.

Demand of the question
Introduction. What is disinvestment?
Body. Disinvestment policy. It’s benefits and issues.
Conclusion. Way forward.

Disinvestment means to the act of selling or liquidating of assets. The process of dilution of a government’s stake in a PSU (Public Sector Undertaking) is disinvestment. It allows the transferring of the government’s enormous public debt of PSU to the private sector. Disinvestments, in most cases, are primarily motivated by the optimisation of resources to deliver maximum returns.

Disinvestment Policy:

  1. The government of India has decided to privatise the Public sector enterprises in a gradual and phased manner through disinvestment.
  2. It will be done by bringing down government’s equity shares in all non-strategic Public sector enterprises to 26% or lower.
  3. The Government has decided to permit up to 49% disinvestment of equity so that the government would continue to hold 51%.

Benefits of disinvestment policy:

  1. Benefit of government:
    • It will reduce government’s debt.
    • It will save resources by spending less on PSUs which can be used by government for welfare purposes.
    • It will help in reducing fiscal deficit.
    • It enable government to raise funds that can be used to strengthen physical and social infrastructure.
  2. Benefit of society:
    • It will increase government’s focus on society welfare.
    • It will ensure resources in the hands of public.
    • Consumers will get better services.
    • Companies will expand that will lead to more jobs.
  3. Benefit of market:
    • It would bring more competition into various sectors thus improving the quality of services.
    • It will increase market profitability and hence companies’ profits.
  4. Benefit of PSUs:
    • It will ensure modernisation of PSUs with changing times.
    • It distribute loss and failure risks of PSUs to the private sector.

Issues in disinvestment policy:

  1. There are 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.
  2. It has been just a resource raising exercise by the government than reforming PSU.
  3. The valuation of shares is affected by the decision not to reduce government holdings to less than 51 per cent.
  4. With the continuing majority ownership of the government the disinvested public enterprises would continue to operate within the constraints of the public sector.
  5. Loss making units don’t attract investment so easily.
  6. It may lead to emergence of private monopolies.
  7. Mere change of ownership from public to private does not ensure higher efficiency and productivity.
  8. It may lead to loss of jobs of many workers. Private sector governed by profit motive has a tendency to use capital intensive techniques which will worsen unemployment problem in India.

Divestment should not be seen as a short-term fiscal measure; instead, it should be part of a long term plan to improve the production of goods and services in India. The government should strengthened the regulatory framework that ensures efficient market conditions.

Read More: Disinvestment in India: Trends and Challenges – Explained, pointwise
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