The status and proceeds of disinvestment

What’s in today’s article?

• Why in news?
• What is Disinvestment?
• What are the main objectives of Disinvestment in India?
• Evolution of Disinvestment in India
• What are the benefits of Disinvestment?
• Why disinvestment is often criticised?
• News Summary: The status and proceeds of disinvestment
• How has disinvestment fared in recent years?
• What are CPSEs likely to be divested in 2023-24?
• Conclusion

 

Why in news?

• In the Union Budget for 2023-24, the government has set a disinvestment target of ₹51,000 crore, down nearly 21% from the budget estimate for the current year.
• It is also the lowest target in seven years.

 

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.
• In some cases, disinvestment may be done to privatise assets. However, not all disinvestment is privatisation.
  • In complete privatisation, 100% control of the company is passed on to the buyer.

 

What are the main objectives of Disinvestment in India?

• Reducing the fiscal burden on the exchequer
• Improving public finances
• Encouraging private ownership
• Funding growth and development programmes
• Maintaining and promoting competition in the market

 

Evolution of Disinvestment in India

• Disinvestment in India began in 1991-92 when 31 selected PSUs were disinvested for Rs. 3,038 crores.
  • The term ‘disinvestment’ was used first time in Interim Budget 1991.
• Later, Rangarajan committee, in 1993, emphasised the need for substantial disinvestment. 
• The policy on disinvestment gathered steam, when a new Department of Disinvestment was created in 1999, which became a full Ministry in 2001.
  • Ministry of Disinvestment was formed in 2001
• But in 2004, the ministry was shut down and was merged in the Finance ministry as an independent department.
• Later, the Department of Disinvestments was renamed as Department of Investments and Public Asset Management (DIPAM) in 2016.
  • Now, DIPAM acts as a nodal department for disinvestment. 

 

What are the benefits of Disinvestment?

• Helps government with the money
  • The government undertakes disinvestment: 
    • to reduce the fiscal burden on the exchequer, or 
    • to raise money for meeting specific needs, such as to bridge the revenue shortfall from other regular sources.
  • Govt also uses disinvestment proceeds to finance the fiscal deficit, to invest in the economy and development or social sector programmes.
• Beneficial for long term growth
  • Disinvestment can be helpful in the long-term growth of the country as it allows the government and even the company to reduce debt.
• Encourages private ownership of assets
  • Disinvestment also encourages private ownership of assets and trading in the open market.
    • With this, govt transfers the commercial risk to the willing private sector.
    • Also, it strengthens the dictum that says government has no business being in business.
  • Private ownership of assts often brings efficiency and increases the profitability.
    • E.g., Hindustan Zinc was acquired by Vedanta in 2022. Since then, it has seen 100 fold increase in profits on the back of six fold expansion in capacities.
• Often releases large amount of public resources
  • Disinvestment releases large amount of public resources (tangible & intangible both) such as manpower, assets etc.
  • These resources can be re-deployed in high priority social sector. 

 

Why disinvestment is often criticised?

• Loss of regular payments to the government
  • Profit making PSUs pay dividend to the govt at regular interval.
• Can create private monopoly
  • Disinvestment might create private monopoly in place of public monopoly.
  • E.g., Disinvestment of VSNL to TATA, IPCL to Reliance
• Vague classification of strategic and non-strategic sectors
  • Many proponents claim that govt should retain its presence in strategic sector which going for disinvestment in non-strategic sectors. 
  • However, the classification of strategic and non-strategic sector is not done properly. 
  • E.g., Strategic disinvestment in Oil sector might threaten the energy security of India.
• Faulty model
  • Using disinvestment funds to bridge the fiscal deficit has been termed as a faulty model by many analysts.
  • It is equivalent to selling family silver to meet short term goals.

 

News Summary: The status and proceeds of disinvestment

 

How has disinvestment fared in recent years?

 

Image caption: Disinvestment performance

• The Centre has not met the disinvestment target for 2022-23 so far, having realised ₹31,106 crore to date.
• According to the recently release Economic Survey report, about ₹4.07 lakh crore has been realised as disinvestment proceeds in the past nine years.
  • Post-2014 the government is engaging with the private sector as a co-partner in the development.
• So far, different central governments over the last three decades have been able to meet annual disinvestment targets only six times.

 

What are CPSEs likely to be divested in 2023-24?

• According to DIPAM, the government has decided to stick to the already-announced and planned privatisation of State-owned companies. 
• These include IDBI Bank, the Shipping Corporation of India (SCI), the Container Corporation of India Ltd (Concor), NMDC Steel Ltd, BEML, HLL Lifecare, and so on.
• The disinvestments of Bharat Petroleum Corporation Limited, SCI, and ConCor had been approved by the government in 2019 but have not gone through yet.

 

Conclusion

• Disinvestment should ideally be driven by the long-term vision of the government on the extent to which it wants to privatise the economy and the sectors where it needs to retain a presence — and not by the need to raise revenues.

 

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Q1) Are disinvestment and privatisation related?

The government, whenever it so desires, may sell a whole enterprise, or a majority stake in it, to private investors. In such cases, it is known as privatisation, in which the resulting ownership and control of the organisation does not rest with the government. The government mostly retains more than half of the stake in the public sector enterprise so that the control remains in its hands. But when it doesn’t, then the ownership is transferred to the private sector, which results in privatisation. 

 

Q2) What is the purpose of disinvestment?

Disinvestment is aimed at reducing the financial burden on the government due to inefficient PSUs and to improve public finances. It introduces competition and market discipline and helps to depoliticize non-essential services.

 

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Source: Explained | The status and proceeds of disinvestment  |  DIPAM  |  Financial Express  |  Deccan Herald