POLICY OF DISINVESTMENT IN INDIA

FEB 18

Mains   > Economic Development   >   Budgeting   >   Disinvestment

WHY IN NEWS:

  • Union Budget 2021-22 proposed new strategic disinvestment policy for public sector enterprises and the Budget contains promise to privatize two public sector banks and a general insurance company this year.

WHAT IS DISINVESTMENT?

  • Disinvestment means sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets.
  • 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).
  • Unlike the simple disinvestment, strategic sale implies a kind of privatization.
  • The Department of Investment and Public Asset Management (DIPAM) under the Ministry of Finance is the nodal department for the strategic stake sale in the Public Sector Undertakings (PSUs)
  • National Investment Fund (NIF) was constituted in 2005, into which the proceeds from disinvestment of CPSEs were to be channelized.

RECENT DEVELOPMENTS:

  • New strategic disinvestment policy for public sector enterprises promised as a part of 'Atmanirbhar Bharat' package, states that the government will exit all businesses in non-strategic sectors, with only a ‘bare minimum’ presence in four strategic sectors
  • Four strategic sectors are:
    • Atomic energy, space and defence
    • Transport and telecom
    • Power, petroleum, coal and other minerals
    • Banking and financial services.
  • The government has set a disinvestment target of Rs 1.75 lakh crore for 2021-22.
  • This is lower than Rs 2.1 lakh crore it hoped to garner from disinvestment in 2020-21.
  • Besides IDBI Bank, the government would privatize two public sector banks and one general insurance company in the year 2021-22.

ISSUES IN DISINVESTMENT POLICY:

  • Missing targets:
    • Government's disinvestment target for 2020-2021 was 2.1 lakh crore
    • Adverse market conditions because of the pandemic affected government's disinvestment plans in 2020-21, and it is expected to fall short of the target by a long way
  • Selling public assets is politically contentious.
    • There will be allegations of government favoring certain industrial houses
    • There will be electoral pressures in jurisdictions where these units would be located
  • Low realization of income due to:
    • Lack of confidence of investors in the sale processes
    • Loss making units don’t attract investment so easily.
    • Issue with fair valuations of shares of  PSUs
  • Threat of monopoly and economic shocks:
    • Large sales may create shocks in economy or may lead to emergence of private monopolies.
  • It may lead to loss of jobs of many workers.
    • Private sector governed by profit motive has a tendency to use capital intensive techniques which will worsen unemployment problem in India.
  • Lack of broader approach:
    • It has been just a resource raising exercise by the government than reforming PSU.
  • Loss of revenue for Government:
    • Sale of profit-making and dividend paying PSUs would result in the loss of regular income to the Government
  • National security concerns:
    • Strategic disinvestment of Oil PSUs is seen by some experts as a threat to National Security since Oil is a strategic natural resource and possible ownership in the foriegn hand is not consistent with our strategic goals.
  • Large-scale privatization almost always involves substantial FDI.
    • In South East Asia and Eastern Europe, privatisation of banks meant >> a large rise in foreign presence in the domestic economies
  • Affects labour welfare:
    • Disinvestment affects social security of labour force
  • Malpractices:
    • Disinvestment raises concerns about cronyism and corruption by public officials
  • Concerns of economic slowdown:
    • The depressed state of the markets and the paucity of reasonable buyers would land in a bad deal.
  • Economically unsound practice:
    • Using funds from disinvestment to bridge the fiscal deficit is an unhealthy and a short term practice.
    • It is said that it is the equivalent of selling 'family silver' to meet short term monetary requirements.
  • Threat of private monopolies:
    • 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

BENEFITS OF DISINVESTMENT POLICY:

  • Benefit to government:
    • It will reduce government’s debt.
    • It will save resources by spending less on PSUs which can be used by government for welfare purposes.
    • It will help in reducing fiscal deficit.
    • It enables government to raise funds that can be used to strengthen physical and social infrastructure.
    • It helps government to channelize public money to more productive sectors
  • Benefit to society:
    • It will increase government’s focus on society welfare.
    • Consumers will get better choices and services as a result of increased presence of private players
    • Companies will expand that will lead to more jobs.
  • Benefit to market:
    • It would bring more competition into various sectors thus improving the quality of services.
    • It will increase market profitability and hence companies’ profits.
  • Benefit to PSUs:
    • It will ensure modernization of PSUs with changing times.
    • It distributes loss and failure risks of PSUs to the private sector.

WAY FORWARD:

  • Requires long-term approach:
    • Disinvestment should not be seen as 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.
  • Check crony-capitalism:
    • To allay concerns of cronyism, the strategic sale process needs to be fair and transparent with a minimum reserve price that does justice to the valuable assets being auctioned off.
  • Create confidence among investors:
    • Government will need to create confidence in the sale processes
  • Create mechanism for ascertaining fair valuation of shares:
    • Ensure fair valuations of shares of PSUs
  • Discretion for public servants:
    • Give officers some cover from potential post-transaction witch-hunts by auditors and investigating agencies
  • Check monopolies:
    • Government should sequence the sales so that the economy does not face shocks or create monopolies
  • Managing electoral pressures:
    • Government must manage electoral pressures in jurisdictions where these units would be located through wider information dissemination and campaigns

PRACTICE QUESTION

Q. Examine the pros and cons of government relying on disinvestment proceeds to mobilize resources for welfare schemes