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

Demand of the question

Introduction. Contextual introduction.

Body. Disinvestment Policy in India. Advantages of the policy and Issues in the policy.

Conclusion. Way forward.

 Disinvestment refers to the act of selling or liquidation of assets. The process of dilution of a government’s stake in a PSU (Public Sector Undertaking) is disinvestment. The money obtained from such share selling through disinvestment will be kept with a special fund called National Investment Fund and to invest the same to generate earnings without depleting the corpus. Disinvestments, in most cases, are primarily motivated by the optimisation of resources to deliver maximum returns.

Disinvestment Policy in India: The government of India will privatise the Public sector enterprises in a gradual and phased manner through disinvestment. DIPAM and NITI Aayog jointly identify PSUs for strategic disinvestment, with DIPAM as the nodal agency for disinvestment.

  1. It will be done by bringing down government’s equity shares in all non-strategic Public sector enterprises to 26% or lower.
  2. While pursuing disinvestment through minority stake sale in listed CPSEs, the Government will retain majority shareholding, i.e. at least 51% of the shareholding and management control of the Public Sector Undertakings.
  3. Strategic disinvestment by way of sale of substantial portion of Government shareholding in identified CPSEs upto 50% or more, along with transfer of management control.

Advantages 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 the government for welfare purposes.
  • It will help in reducing fiscal deficit.
  • It enables the government to raise funds that can be used to strengthen physical and social infrastructure.
  1. Benefit to society:
  • It will increase government’s focus on social
  • It will ensure resources in the hands of the public.
  • Consumers will get better services.
  • Companies will expand that will lead to more jobs.
  1. 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.
  1. 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%
  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 the 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 the unemployment problem in India.

Way forward:

  1. Define the priority sectors for the government based on its strategic interests.
  2. Investment in PSU’s has to be in terms of generation of adequate social and strategic returns.
  3. Financial return cannot be the sole reason for investment in PSUs. They have to serve social/strategic purposes. The key role of a PSU is to maintain competition in the sector and limit excessive monopoly.
  4. Government ownership is required for sectors with strategic relevance such as defence, natural resources, etc. The government should, therefore, exit non-strategic sectors such as hotels, soaps, airlines, travel agencies and the manufacture and sale of alcohol.
  5. The outlook towards strategic divestment should move from the current policy of emphasizing on public ownership and retaining majority shareholding to looking at the strategic interest.
  6. It is important to realize that ownership is not a substitute for regulation. Therefore, instead of creating PSUs in non-priority sectors, the government should look into strengthening the regulatory framework that ensures efficient market conditions. The regulations should also ensure that the basic necessities of the consumers are met.

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 strengthen the regulatory framework that ensures efficient market conditions.

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