Consider this, the government has many sources of income but they are still falling short to pay for its expenses. So then the government decides to sell one of its assets like a company or a property to liquidate that money.
This is called disinvestment. While disinvestment is mostly a tool to raise money, it is also done to privatise assets or reduce the government or company's debt.
1. Causes of Disinvestment
Tax rate cuts or a slowdown in economic growth decreases the government’s income and dents its revenue. Then, when the government needs money or wants to reduce its financial burden, it makes use of disinvestments.
2. The Disinvestment of LIC
If you want an example, just think about all the attention LIC received last year. After talking about the disinvestment of LIC for a few years, the government finally conducted its IPO between 4 and 9 May 2022 and sold 3.5% of the company. In this way, the government sold 3.5% of its share in the company and liquidated a part of the asset.
3. New Target Every Year
The money made via the route of disinvestment is very important and partly funds the budget. Which is why, every year the government sets up a disinvestment target and for 2023, the government has set a disinvestment target of ₹65,000 crore.
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