Disinvestment in India - Policy, Example, History, & Process
Disinvestment is when the government sells its stake in public sector enterprises to private entities or the general public. It is a strategic tool governments use to divest their stake in public sector undertakings (PSUs) or state-owned enterprises.
The primary objectives of disinvestment are to improve the company's overall efficiency, reduce the burden on the government and promote the private sector's growth. This article will discuss the objectives and importance of disinvestment in India, along with its methods and plans.
Difference between disinvestment and privatisation
Disinvestment and privatisation are two different concepts. It is essential to understand the difference between them. Privatisation involves selling the entire ownership of a public sector enterprise to private entities. Disinvestment involves selling only a part of the government's ownership of the company.
In addition, the government retains its controlling stake in the company with disinvestment. Through privatisation, the government has no stake in the company.
What are the objectives of disinvestment?
The primary objectives of disinvestment in India are:
To improve the overall efficiency of the company: Disinvestment improves the efficiency of the company by reducing bureaucratic interference and promoting market-oriented practices. In addition, after acquiring a stake in the company, private entities or the general public bring in better management practices, which leads to overall efficiency improvement.
To reduce the burden on the government: Disinvestment is a way to reduce financial burden on the government. The government can use the proceeds generated from disinvestment to fund social welfare schemes, infrastructure development or to reduce the fiscal deficit.
To promote the private sector's growth: Disinvestment promotes the growth of the private sector by increasing competition, promoting innovation and reducing the monopolistic nature of the public sector.
To improve corporate governance: Disinvestment leads to better corporate governance, which ultimately helps in improving the company's overall performance. Private entities bring in better governance practices, which help in improving transparency, accountability and efficiency.
What is the importance of disinvestment?
The introduction of the New Economic Policy in 1991 emphasised the importance of disinvestment. At that time, public sector undertakings (PSUs) generated negative returns on capital employed and were a burden for the government rather than an asset. The low returns from PSUs were also negatively impacting the country's gross national savings and gross domestic product.
The Disinvestment Policy in India was implemented to address this issue, allowing the government to dispose of non-core enterprises and focus on core activities instead. This move paved the way for the private sector to be more prominent in some industries.
Ever since, successive governments have set India disinvestment targets to raise funds by selling their stake in PSUs. This strategy has been critical in optimising the allocation of resources and improving the efficiency of the country's economic activities.
Why is disinvestment essential?
Disinvestment is essential for the following reasons.
Resource mobilisation: Disinvestment helps in mobilising resources, which can be used for developmental activities such as building infrastructure, improving health and education, and more. The proceeds from disinvestment can also be used to reduce the fiscal deficit.
Promoting economic growth - Disinvestment promotes economic growth by increasing competition, promoting innovation, and reducing the monopolistic nature of the public sector. As a result, it leads to increased efficiency and productivity, which ultimately helps in promoting economic growth.
Reducing the burden on the government - Disinvestment is a way to reduce the burden on the government. The government can use the proceeds generated from disinvestment to fund social welfare schemes, infrastructure development or to reduce the fiscal deficit.
Promoting better corporate governance - Disinvestment leads to better corporate governance, which ultimately helps in improving the company's overall performance. In addition, private entities bring in better governance practices, which help in improving transparency, accountability and efficiency.
Types of disinvestment methods in India
The Government of India has implemented several methods of disinvestment, which are:
Initial Public Offerings (IPOs)
https://upstox.com/ipo-initial-public-offeringInitial public offerings involve selling shares of public sector companies to the general public. The proceeds of the IPOs go to the government.
Follow-on Public Offers (FPOs)
Follow-on Public Offers - In this method, the government sells shares of public sector companies to the general public after the IPO.
Offer for Sale (OFS)
In OFS, the government sells its shares on the stock market. This method is commonly used for disinvestment in large public sector companies.
In a strategic sale, the government sells a controlling stake in a public sector company to a private entity. This method is used for chronically loss-making companies with low market value.
Exchange Traded Funds (ETFs)
ETFs are marketable securities that track a basket of assets. The government creates ETFs for specific sectors and public sector companies and then sells them to investors.
Disinvestment plan in India
In 1999, the Government of India (GOI) created a department exclusively for disinvestment purposes. Today, it is known as the Department of Investment and Public Asset Management or DIPAM, operating under the Ministry of Finance. Its main task is to handle disinvestment-related matters.
Every year, the department announces disinvestment targets in the Union Budget, which vary based on the Central Government's decision to increase the targets or not. For example, in FY 2021, the Indian Government aimed to reach a target of Rs. 2.1 lakh crore. However, due to the pandemic's impact, only 10% of the desired amount was raised, the lowest in the previous seven financial years. As a result, the following year's target was three times more than the previous year's.
This year, the GOI aims to raise Rs. 1.75 lakh crore through disinvestments. This plan includes several banks, LIC, the Shipping Corporation of India and other Public Sector Undertakings (PSUs).
Disinvestment is a crucial policy tool for the Government of India to reduce its fiscal deficit and increase the efficiency of public sector enterprises. Therefore, it is essential to understand the objectives and methods of disinvestment and their importance for the Indian economy.
Furthermore, the recent disinvestment plan announced by the government will help mobilise resources which can be used for various developmental activities in the country.
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