[Answered]What is strategic disinvestment? Discuss its need and significance for Indian economy.

Demand of the question

Introduction. What is strategic disinvestment?

Body. Need and importance of investment in India.

Conclusion. Way forward.

Strategic disinvestment is the selling of more than 50% of government shares in a public enterprise. As a part of strategic disinvestment, a part of the control of the company and or management is passed from the government to the private shareholder. The strategic disinvestment leads to engagement of the private sector and thus, making the PSUs more efficient and profitable.

Need of Disinvestment in India:

  1. Fiscal health: The government faces a massive shortfall in revenue and capital receipts. The non-debt capital receipts were at 17.2% of the fiscal’s target of about Rs. 1.2 lakh crore. Given this, the share sale is aimed at helping the government narrow its widening fiscal deficit. Disinvestment would provide revenue to the government and thus would improve fiscal health.
  2. Economic slowdown: India is undergoing an economic slowdown with tax collection below par. As of now the net tax revenue had only reached 36.8% of the budget estimate of Rs. 16.5 lakh crore. Disinvestment would boost the economy through more revenue to the government, which could be invested in the economy further and more efficient PSUs.
  3. Inefficient PSU: Many PSUs are facing loss and are on verge of closure. While government presence may be necessary in strategic sectors such as defence or oil exploration, there is no need in areas like building ships or running container freight operations. Government presence in such non-strategic sectors distorts competitive dynamics for private players. It also results in consumers and taxpayers bearing the brunt of inefficient PSU operations.
  4. Competition: Strategic disinvestment is needed due to the prevalence of an increasingly competitive environment. Government control makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of the value of the public assets making it critical to disinvest early to realise a high value.

Importance of strategic disinvestment:

  1. Reduce fiscal burden: It will reduce the government’s debt and fiscal deficit. Disinvestment would help in saving resources by spending less on PSUs which can be used by the government for welfare purposes.
  2. Increased social spending: It will increase the government’s focus on society welfare. Thus, it will ensure resources in the hands of the public. Disinvestment funds can be utilised for long-terms goals such as:
  • Financing large-scale infrastructure development.
  • Investing in the economy to encourage spending.
  • Investing in social programs like health and education.
  1. Better quality products and services: It would bring more competition into various sectors, thus improving the quality of services. Consumers will get better products. It will further increase market profitability and hence companies’ profits pushing them to deliver more.
  2. Employment: Companies will expand that will lead to more jobs. With engagement of private sector and competition, more people would be needed to enhance the production and scale. It is important to improve public finances and overall economic efficiency.
  3. Efficiency of PSU: Economic potential of entities will be better discovered in the hands of the strategic investors due to various factors like infusion of capital, technology up-gradation and efficient management practices. Further, there will be distribution loss and failure risks of PSUs to the private sector.
  4. Modernisation: It will ensure modernisation of PSUs with changing times. Strategic buyers would bring in new management, technology and more investment for the growth of these companies and may use innovative methods for their development.

Way forward:

  1. Transparency: The strategic sale process needs to be 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 before going ahead with each sale.
  2. Infrastructure creation: Spending the sums raised from such strategic sales in long-term infrastructure assets can yield returns to the economy. Government can redirect these disinvestment proceeds into Infrastructure projects.
  3. Regulation: The government should look into strengthening the regulatory framework that ensures efficient market conditions.

Divestment should not be seen as only 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 regulations should also ensure that the basic necessities of the consumers are met.

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