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.

What’s in today’s article?

• Disinvestment
• News Summary

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 assets often brings efficiency and increases the profitability.
    • Eg., 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 number 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.
    • Eg., 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 while going for disinvestment in non-strategic sectors.
• However, the classification of strategic and non-strategic sector is not done properly.
• Eg., 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.