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Mains Daily Question
Feb. 1, 2024

Q2. The Government of India's dictum of “no business to be in business” has faced several impediments along the way. In this context, comment on the Objectives of Disinvestment policy of the Government & various approaches to the Disinvestment policy. Also, suggest ways to effectively mobilize public resources for modernizing the Indian economy. (10M, 150W)

Model Answer

Approach to the Answer: 

The Question requires discussion on the Disinvestment policy of the Government of India and various approaches for the same. It also requires to highlight the issues being faced by the Disinvestment policy and suggestive measures to better mobilize public resources. 

Introduction: 

In Introduction, two approaches can be taken: 

  1. Definition based introduction: Either, one can start with describing what is Disinvestment policy of the Government 
  2. Data based introduction: Or, one can provide Appropriate data related to Disinvestment targets and achievements 

Body: 

As the directive is to “comment” on the Objectives of the Disinvestment policy, the question can be divided into 3 sections: 

Section 1: In this section, the Objectives of the Disinvestment policy can be highlighted in detail along with integrating the “statement” in the question 

Section 2: Various approaches such as Minority & Majority Disinvestment can be written in succinct manner

Section 3: Steps for effective mobilisation of “Public resources”: 

Conclusion: Either a generic conclusion highlighting the overall measures to mobilize public resources can be written in succinct manner

 

Answer: The Disinvestment policy of the Government of India (GOI) involves the sale of Government's share in Public sector units (PSU) to strategic or financial buyers, either through the sale of shares on stock exchanges or directly to buyers. In the Union Budget 2023-24, the government has set a Disinvestment target of ₹51,000 crore. 

 

Objective of the Disinvestment Policy: “Government has no Business to be in Business”: 

 

  • Reduce the Fiscal burden: Proceeds from the Disinvestment can be directed towards financing the Fiscal deficit i.e; exceeding of Govt's expenditure over & above revenue income. 

 

      • Thus the dependency on the Foreign source of debts will decline. 
    • Encourages Private players: It encourages private ownership of assets & trading in the open market thus promoting “free trade” economy. 

 

  • Improving efficiency of the Public sector: The Private market is based upon the principle of “survival of fittest”. Thus induced competitiveness through privatization brings several reforms. Eg- Market oriented approach, new business ideas, discipline among employees etc. 
  • Diversified allocation of resources: Freed Funds can be directed towards more diversified & priority sectors such as Social development, Infrastructure creation etc 
  • Less fiscal burden: With Privatisation, the Government does not need to fund “loss making units anymore”. 

 

 

Approaches to the Disinvestment policy: 

In 2021, the Government introduced a new Strategic Disinvestment policy in 2021 to maintain “bare minimum presence” in strategic sectors like atomic energy, defense etc. For this, purpose GOI has taken following approaches: 

 

  • Minority Disinvestment: In this kind of Disinvestment, GOI retains the majority share in the company typically greater than 51% thus ensuring management control 
  • Majority Disinvestment: In this case, the GOI hands over control to the acquiring entity but at the same time retains some stakes in the company 
  • Privatization: In this scenario, 100% control & stakes of the PSU is passed over to a “private buyer” 

 

  • The process is conducted by the Department of Investment & Public Asset Management (DIPAM) under Ministry of Finance 

Additional Information:

“Impediments in the way of  Disinvestment policy”: 

    • Shortfall of target: As per PRS Legislative Research report, Centre has not met Disinvestment target for 2022-23 
      • Eg - Of ₹31,106 crore realized, 66% came from IPO share of Life Insurance Corporation (LIC) 
  • Political Opposition: Various political parties has opposed Disinvestment policy as “deviation from Socialist principles” enshrined in the Article 38 of the Constitution which position India as a “Welfare state” 
  • Overvaluation: Eg - Disinvestment of 52% share in Bharat Petroleum (BPCL) had to be called off in mid-2022 because almost all the bidders had withdrawn citing issue of “Overvaluation” 
  • Structural shortcomings: Various economists argue that Public sector enterprises may not be able to compete effectively in the market due to their bureaucratic & Non-market oriented structures 
  • Fear of Job loss: Various trade unions have opposed Disinvestment policy due to “Profiteering” policy of the Private companies which can lead to Layoffs, Job loss & wage cut 
      • Eg- One of the challenges before the government about the strategic sale of Rashtriya Ispat Nigam Ltd (RINL) or Vizag Steel is vehement opposition by employee unions
  • Red Tapism: Process of Disinvestment is regulated by various entities such as NITI Ayog, DIPAM etc which ultimately slows down the process 

 

Steps for effective mobilisation of “Public resources”: 

  • Long term planning: Disinvestment policy calls for consistent and long term rationale 
  • Liberalization: Further Liberalizing of FDI norms for increasing investment in PSUs shall be taken 
  • Alternative sources of funding: Incorporating “Angel investors” & “Venture Capital” funding in PSUs can also provide alternative to Government funding 
  • Enhancing Human capital: Building Human capital in PSUs through skilling along the lines of the requirement of Industry 4.0 driven by technology is imperative 
  • Digitisation drive: Digitization of PSUs for effective service delivery is also required 

 

Disinvestment is a major component to modernize the Indian economy by reducing financial burden on the Government and improving public finances. Thus, immediate reforms are necessary to introduce competition and market discipline to ensure India's vision of becoming a $5 trillion economy by 2027. 

Subjects : Economy
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