Strategic Disinvestment Policy: Issues and Challenges – Explained 

 Disinvestment Policy

COVID-19 pandemic has hit the Indian economy very hard. At once, due to lockdowns, Indian economy was dried out of funds. Economic activities got reduced drastically. At present, the Indian economy is in urgent need of a revenue stream so that all activities can go back to normal.

Government expenditure was expected to help the economy out, just like it did during the 2008 financial crisis. However, all these factors have also reduced the revenue and capital receipts of the government.

Now, the government has announced a large-scale monetization of government sector assets. It includes the sale of vast tracts of land and disinvestment receipts of ₹1.75-lakh crore.

Government  disinvestment policy  for strategic disinvestment 

During Union Budget 2020-21 presentation, Government announced a new policy for strategic disinvestment of public sector enterprises. It will provide a clear roadmap for disinvestment in all non-strategic and strategic sectors. The government has aimed to receive Rs. 1,75,000 crore from disinvestment in BE 2020-21.

  1. The disinvestment policy will cover existing Central Public Sector Enterprises (CPSEs), Public Sector Banks, and Public Sector Insurance Companies.
  2. The government has classified the public sector under 2 categories: 1. Strategic Sector and 2. Non- strategic sector.
  3. In Non-strategic sectors, the government will exit from all businesses. It will keep only a ‘bare minimum’ presence in four broad strategic sectors, i.e.
    1. Atomic energy, Space and Defence
    2. Transport and Telecommunications
    3. Power, Petroleum, Coal, and other minerals
    4. Banking, Insurance, and financial services
  4. The government will incentivize States for disinvestment of their Public Sector Companies. An incentive package of Central Funds for states will encourage them to do so.

The new disinvestment policy goes further than the past case-by-case approach and straight away allows the sale or closure of nearly 151 PSUs (83 holding companies and 68 subsidiaries) in non-strategic sectors.

Other than that, Government will monetize the surplus land with Government Ministries/Departments and Public Sector Enterprises. A Special Purpose Vehicle will be created in the form of a company to carry out monetization. 

What is Disinvestment policy ?

  • Disinvestment means the sale or liquidation of assets by the government. It usually consists of Central and state public sector enterprises, projects, or other fixed assets.
  • The government undertakes disinvestment to reduce the fiscal burden on the exchequer. It raises money for meeting specific needs, such as to bridge the revenue shortfall from other regular sources.
  • Strategic disinvestment is the transfer of the ownership and control of a public sector entity to some other entity (mostly to a private sector entity).
  • The disinvestment commission defines strategic sale as the sale of a substantial portion i.e. 50%, or higher percentage of the Government shareholding in a central public sector enterprise (CPSE). It also involves a transfer of management control.
  • National Investment Fund (NIF) was constituted in November 2005. In this fund, the proceeds from the disinvestment of Central Public Sector Enterprises were to be channelized.

Need of disinvestment policy

  1. Under the aegis of the Atmanirbhar Bharat Mission, the rationalization of the participation of the CPSEs in commercial activities has been proposed.
  2. As per the experts, the involvement of the government should only be limited to ‘strategic sectors’. So that it can develop these crucial sectors of the economy with its full energy.
  3. This will encourage healthy competition in the non-strategic corporate sector. It will lead to an increase in their efficiency under the pressure of competition.
  4. Selling the non-productive companies will provide the government with non-debt revenue in this time of fund crunch. Moreover, it will increase the efficiency of the government investments in the Public sector.

Performance of disinvestment policy in the recent scenario:

  • According to the Department of Investment and Public Asset Management (DIPAM), between 2004-05 to 2013-14, disinvestment raised Rs. 1.07 lakh crore, on an average yearly collection of Rs. 10,700 crores.
  • However, from 2014-15 to 2017-18, the collection went up to Rs. 2.12 lakh crore, i.e., a yearly collection of Rs. 53,000 crores.
  • The government has exceeded the target of Rs. 1 lakh crore in 2017-18 and Rs. 80,000 crores in 2018-19.
  • The success of BHARAT-22 Exchange Traded Funds (ETF) takes government closer to the disinvestment target. The ETF is a benchmark to an index named BHARAT22 consisting of 22 companies (19 PSEs and 3 private).
  • However, in 2020-21 due to the COVID-19 pandemic, the disinvestment process was hindered in between. It could only gather disinvestment revenues of Rs 31,000 crore against a target of Rs 2.1 lakh crore.

Challenges of disinvestment policy :

First, the Sale of profit-making and dividend-paying PSUs would result in the loss of regular income to the Government. It has become just a resource raising exercise by the government. There is no emphasize on reforming PSUs.

Second, the valuation of shares has been affected by the government’s decision not to reduce government holdings below 51 percent. With the continuing majority ownership of the government, the public enterprises would continue to operate with the earlier culture of inefficiency.

Third, Government is not willing to give up its control even after strategic disinvestment. It is evident from the budget speech of 2019-20 by the Finance Minister. She stated that government is willing to change the extant policy of government. It will change the policy of “directly” holding 51 percent or above in a CPSU to one whereby it’s total holding, “direct” plus “indirect”, is maintained at 51 percent. It means government will still exercise its control over PSUs.

Fourth, The process of disinvestment is suffering from bureaucratic control. Almost all processes starting from conception to the selection of bidders are suffering due to it. Moreover, bureaucrats are reluctant to take timely decisions in the fear of prosecution after retirement.

Fifth, Strategic Disinvestment of Oil PSUs is seen by some experts as a threat to National Security. Oil is a strategic natural resource and possible ownership in the foreign hand is not consistent with our strategic goals. For example, disinvesting Bharat Petroleum Corporation Limited (BPCL).

Sixth, Loss-making units don’t attract investment so easily. It depends upon the perception of investors about the PSU being offered. This perception becomes more important in the case of strategic sales, where the amount of investment is very high.

Seventh, Complete Privatization may result in public monopolies becoming private monopolies, which would then exploit their position to increase costs of various services and earn higher profits

Eighth, using funds from disinvestment to bridge the fiscal deficit is an unhealthy and short-term practice. It is said that it is the equivalent of selling ‘family silver’ to meet short term monetary requirements.

Way forward

Disinvestment and rationalization of some CPSEs are being planned. But there is also a need to strengthen the sectors retained by the government to fully meet the expectations.

For strengthening them, the government should take steps to completely revamp the Boards of the CPSEs and reorganize their structure.

The government should increase the operational autonomy in CPSEs. It can be supplemented by strong governance measures like listing on stock exchanges. It will increase the transparency in their performance.

The government must also try to provide the bidders with a fair valuation of the PSUs. It will boost their confidence in the disinvestment process.

The government should also avoid its involvement by any means in the management of operations of PSUs, after its strategic sale. Otherwise in the long run, it would discourage the buyers from investing in them.

Some steps taken by the Department of Public Enterprises will improve the performance of CPSEs. These are:

  1. The performance monitoring system of the CPSEs has been reformed.
  2. It has also improved the process of timely closure of sick and loss-making CPSEs and disposal of their assets.

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

Print Friendly and PDF