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Issues associated with Government’s Disinvestment proposal

Synopsis: Some experts are expressing concern over the government’s disinvestment proposal. There is a need for adopting a cautious approach that augments rather than deteriorates public welfare.

Background:

  • The government has set a target of 1.75 lakh crore rupees from the disinvestment of PSUs in the current financial year. Companies like Air India and BPCL will witness a strategic sale while an IPO (initial public offer) would be rolled out for LIC.
    • Disinvestment of PSUs simply means withdrawal of the government’s investment in public sector undertakings.
    • Strategic Disinvestment involves a sale of 50% or more in a PSU along with transfer of management control.
    • IPO means the offering of a company’s shares to the public which results in a change of ownership. Post-IPO a company gets listed on a stock exchange.  
  • The small industries and informal workers are already under severe stress post the demonization of 2016 and GST of 2017. The pandemic and rising oil prices have further worsened their position.

Why is the government disinvesting? 

  • First, it will help in the generation of additional revenue for the government.
  • Second, it will enhance the efficiency of PSUs with more efficient private management taking the charge.
  • Third, it will allow the government more time to do core and crucial tasks.
  • Fourth, it will reduce the government’s burden to consistently support and fund the sick units.

However, some experts are saying that the disinvestment might further increase the hardships of companies and the masses.   

Issues with Disinvestment of PSUs:

  • First, the sale of profitable PSUs is just like selling the family’s silver to pay the grocer’s bill. This would give short-term results but long-term losses. Eg – a privatised LIC might be reluctant to meet long-term financing needs for infrastructure projects with long gestation periods.
  • Second, the government sometimes undervalues the companies to favor some industrialists. This was seen in the sale of  Videsh Sanchar Nigam Limited (VSNL) and is criticised for strengthening crony capitalism.
  • Third, the government often fails to achieve huge disinvestment targets. Last year it received merely 32000 crores out of target sales of 2.1 lakh crore.
  • Fourth, the spirit of disinvestment is undermined when one PSU is purchased by another. The Life Insurance Corporation (LIC) of India bailed out the Industrial Development Bank of India (IDBI).
  • Fifth, disinvestment ignores social justice as private players are not bound to give reservations to vulnerable sections. Further, they fire large numbers of workers and are reluctant to invest in backward regions, unlike PSUs.
  • Sixth, the privatization of Public sector banks may not yield desired results. However, Private banks are driven by profit motives, and they are also suffering from corruption as seen in the recent Yes Bank case. Further, private players may shut down loss-making rural branches unlike public banks who also work for social welfare.   
  • Lastly, privatisation is not always good if the economic situation is uncertain. This is seen by the lack of tangible results post heavy relaxation in corporate tax cuts since 2019.

Way Forward:

  • The government must put the formula of valuing PSUs in the public domain to augment transparency. 
  • The promise of exiting from all the sectors except the 4 strategic sectors can be changed to selling only the non-strategic and non-core sectors.
  • The public banks can be clubbed and recapitalized instead of outrightly selling them.

In a nutshell, the process should be carried on in such a way that it generates resources for the government, sets the right incentives for PSUs management, and rewards the investing public.

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