What is Disinvestment?

What’s in today’s article?

• Why in news?
• Disinvestment
• What is Disinvestment?
• Evolution of Disinvestment in India
• What are the benefits of Disinvestment?
• Why disinvestment is often criticised?
• How has disinvestment fared in recent years?
• News Summary: Govt. Concedes Disinvestment Stalled by Multiple Challenges
• What are the key obstacles to the disinvestment process?

 

Why in news?

• The Finance Ministry has publicly acknowledged the numerous challenges it is facing in its efforts to privatise public sector enterprises (PSEs) and raise funds through minority stake sales.
• Last month, the ministry had reduced the government’s disinvestment target for 2023-24 to a nine-year low of ₹51,000 crore.

 

Disinvestment

What is Disinvestment?

• About
  • 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.
• Objectives
  • 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
  • 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.
  • 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.

 

How has disinvestment fared in recent years?

• Disinvestment receipts so far this year amount to just ₹35,282 crore, as opposed to a Budget target of ₹65,000 crore and revised estimates of ₹50,000 crore.
• 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.

 

News Summary: Govt. Concedes Disinvestment Stalled by Multiple Challenges

What are the key obstacles to the disinvestment process?

• Global challenges
  • The Finance Ministry has noted that the COVID-19 pandemic seriously impacted transactions in 2020 and 2021.
  • It was followed by the Ukraine conflict last year.
  • These events hurt minority stake sales as well as strategic sales as financial capacity and risk-reward options of potential bidders turned worse.
• Internal challenges
  • Strategic disinvestment transactions have to deal with matters such as:
    • resolving land title, lease and land use issues with State government authorities;
    • disposal of non-core assets, excess manpower and labour unions, protection of process and functionaries etc.
• Challenges posed by employees’ unions
  • Multiple court cases filed by employees’ unions and other interest groups against the disinvestment policy as well as specific transactions were also hindering deals.
• Challenges to disinvestment through minority stake sale
  • These include: 
    • Reduced availability of government stake over 51% for large listed central PSEs; 
    • Relatively muted perception of investors in these stocks as compared to private sector peers; 
    • Price overhang in the market due to high disinvestment target and 
    • frequent use of exchange traded funds (ETF) route for stake sale till 2019-20.
      • ETF is a type of investment fund that is traded on stock exchanges like individual stocks.

 

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Q1) 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.

 

Q2) What is Exchange traded fund (ETF)?

An Exchange Traded Fund (ETF) is a type of investment fund that is traded on stock exchanges like individual stocks. It is a collection of assets such as stocks, bonds, or commodities, that is designed to track the performance of a particular market index, sector, or asset class. ETFs are similar to mutual funds in that they provide investors with a diversified portfolio of assets, but they differ in that ETFs trade on an exchange like stocks, allowing for intra-day trading and pricing transparency.

 

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Source: Govt. concedes disinvestment stalled by multiple challenges | DIPAM | Financial Express | Deccan Herald