Many developing countries were forced to accept privatization as a condition for support from the World

Bank or IMF while many other countries have embraced privatization, often on the Privatization
generally refers to changing the status of a business, service or industry from state ownership to private
control. It sometimes also refers to the use of private contractors to provide services previously delivered
by the public sector.In recent years it finds mention in the India’s Annual Budget speech as “India’s
Strategic Disinvestment Policy and, more importantly, it was articulated by Prime Minister Narendra
Modi that ‘government has no business being in business. ’

Let us first look into the difference between Privatization and Disinvestment

Privatization means migration from the Public to Private Sector through the transfer of ownership,
management and control. While, Disinvestment, or divestment, refers to the act of a business or
government selling or liquidating an asset or subsidiary or the process of dilution of a government ’ s
stake in a PSU (Public Sector Undertaking). Disinvestment indicates only a partial dilution of control by
the Govt and still retaining overall ownership of a particular enterprise, whereas privatization for all
purposes signify relinquishing the entire ownership in favor of private parties.

So, India adopted a gradual approach to privatization—so gradual that the process is actually referred to
as “disinvestment” and not privatization. Now coming to the …. Approaches of Disinvestment.

Process of Disinvestment In India, the disinvestment process is conducted by the Department of

Investment and Public Asset Management (DIPAM), which comes under the Ministry of Finance. The
primary objective of this department (DIPAM) is to manage the government’s investments in public
sector enterprises and to oversee the disinvestment of government equity in these enterprises.

Government had constituted the National Investment Fund (NIF) in 2005 into which the proceeds from
disinvestment of Central Public Sector Enterprises were to be channelized. Rationale behind
Disinvestment

Reduce the Fiscal Burden: The government may disinvest in order to reduce the fiscal burden or bridge
the revenue shortfall for that year. It also uses disinvestment proceeds to finance the fiscal deficit, to
invest in the economy and development or social sector programmes, and to retire government debt.

Encourages Private Player : Disinvestment also encourages private ownership of assets and trading in the
open market. Encourag ing the private sector investment in the economy, as it signals the government’s
commitment to reforms a nd to creating a more conducive business environment. If successful, it also
means that the government does not have to fund the losses of a loss -making unit anymore.
Improves Efficiency: By divesting from public sector enterprises, the government can improve the
efficiency and competitiveness of these enterprises, as private sector ownership and management can
bring in new ideas and a more market -oriented approach and can help in improving low labor output
ratio of the PSUs.

Better Allocation of Resources: The government can reallocate the resources freed up through
disinvestment towards other priorities, such as social and infrastructure development.

Increases Transparency : Disinvestment can bring in greater transparency and accountability in the
functioning of public sector enterprises, as private sector ownership and management can lead to more
stringent financial and operational reporting.

After 1991, only eight industries were reserved for the public sector, including defence production,
atomic energy, coal and lignite, mineral oils, iron ore, manganese, gold and diamond, atomic minerals,
and railways.

The new policy for public sector disinvestment stated that the government will run the public sector on
sound commercial principles. Chronically sick public sector units will be referred to Board for Industrial
and Financial Re-construction (BIFR) for examining their viability.

Another important feature of the new disinvestment policy was that 20% shares of selected profit-
making public-sector units can be sold to financial institutions, mutual funds, etc. These institutions will
hold the shares for a specified period of time after which they will be permitted to sell the shares in the
share market.

Now coming to the developments after 1991 that highlights Minimum Government intervention

Over the subsequent years, pressures of coalition politics hindered the pace of government action on
the disinvestment front, with only Rs 17,557 crore (around Rs 91,800 crore in today’s terms) being
earned through this route in the eight years between 1991 and 1999.

In UPA-II (2009-14), the government earned a much more robust Rs 1.2 lakh crore (Rs 2.4 lakh crore
today) in just five years.

In total, the UPA disinvested Rs 1.32 lakh crore — the equivalent of Rs 2.74 lakh crore in today’s terms —
over its 10 years in power.
But it was only in 2014 that the Government’s disinvestment drives really picked up momentum. While
the Covid pandemic derailed the progress significantly.

In the first term of the Modi government (2014 -19), earnings from disinvestments totalled a whopping
Rs 3.2 lakh crore, which today would amount to Rs 4.7 lakh crore. The three- and-half years up to
September 2022, including the two pandemic years, of Modi 2.0 have seen disinvestment proceeds total
Rs 1.26 lakh crore, or an adjusted Rs 1.48 lakh crore, so far.

What is the latest policy on Disinvestment?

The disinvestment policy will cover existing Central Public Sector Enterprises (CPSEs), Public Sector
Banks, and Public Sector Insurance Companies.

The government has classified the public sector under 2 categories: Strategic Sector and Non- strategic
Sector.

In Non-strategic sectors, the Government will exit from all bus inesses. It will keep only a ‘bare minimum’
presence in four broad strategic sectors, i.e.

(a) Atomic energy, Space and Defence;

(b) Transport and Telecommunications;

© Power, Petroleum, Coal, and other minerals;

(c) Banking, Insurance, and financial services.

The government will incentivize States for disinvestment of their Public Sector companies. The new
policy is significant as it goes beyond the past case -by-case approach and lays down a rationale for
deciding the future ownership pattern of 439 CPSEs, including their subsidiaries. For instance, it is now
clear that 151 public sector firms in non-strategic sectors (including 83 holding companies and 68
subsidiaries) will either be closed or sold. The policy also brings public sector banks and insurance
entities into the ambit of disinvestment for the first time.

The Government will also monetize the surplus land with Government Ministries and Departments and
PSEs. The Cabinet has already approved the creation of National Land Monetisation Corporation.

This is perhaps why the government’s strategy can best be articulated with Modi’s statement that “the
government has no business to do business”.

The stor” so far is that 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 from the last year and just ₹1,000 crore
more than the revised estimate. It is also the lowest target in seven years.

The Modi government’s emphasis on disinvestment has meant that it accounts for a whopping 72 per
cent (Rs 4.48 lakh crore) of what has been earned from disinvestment since the process first started in
1991, an analysis by The Print has found.

(ThePrint’s analysis of disinvestment uses data from the Reserve Bank of India (RBI) and from the
Department of Investment and Public Asset Management (DIPAM) for the absolute earnings per year)

Policy and Revenue

Data shows that disinvestments, although significant under the Modi government,

Add just a tiny fraction o f the government’s revenue as compared to the other

Sources such as income tax, corporate tax, and the Goods and Services Tax (GST).

Why then, is overwhelming importance given to disinvestment? The answer tothat question is twofold.
First, despite the revenue from disinvestments being relatively small, it still serves

A particular purpose, according to the government Disinvestment is a very small

Amount compared to the overall budget, but still, it is not negligible.

LIKE… If total fiscal deficit in the past was Rs 10-12 lakh crore range, and if you budget for disinvestment
to be about Rs 1 lakh crore, that is still a significant portion of the total deficit numbers. So, if we are
budgeting for a fiscal deficit of 4 per cent, then effectively 30-40 basis points of that is budgeted to be
financed from disinvestments.

Second, disinvestments serve as an important policy tool to open up markets in certain areas to the
private sector, while also ensuring that the government gets the right price for its assets.

What are the challenges and concerns related to Disinvestment?

First, the Sale of profit-making and dividend-paying PSUs would result in the loss of regular income to
the Government. Disinvestment has become just a resource raising exercise by the government. There is
no emphasize on reforming the PSUs.

Second, the valuation of shares has been affected by the Government’s decision not to reduce
government holdings below 51%. With the continuing majority ownership of the Government, the public
enterprises would continue to operate with the earlier culture of inefficiency.

Third, Government is not willing to give up its control even after strategic disinvestment. In the Budget
(2019 -20) Speech the Union Finance Minis ter stated that government will change the policy of ‘directly’
holding 51% or above in a CPSU to one whereby Government’s total holding, ‘direct’ plus ‘indirect’, is
maintained at 51%. It means government will still exercise its control over PSUs. This will reduce the
interests of buyers .

Fourth, The process of disinvestment is suffering from bureaucratic control. Almost all processes starting
from conception to the selection of bidders are suffering due to it. Moreover, bureaucrats are reluctant
to take t imely decisions in the fear of prosecution after retirement.

Fifth, Strategic Disinvestment of Oil PSUs is seen by some experts as a threat to National Security. Oil is a
strategic natural resource and possible ownership in the foreign hand is not consistent with strategic
goals.
Sixth, Loss-making units don’t attract investment. It depends upon the perception of investors about the
PSU being offered. This perception becomes more important in the case of strategic sales, where the
amount of investme nt is very high.

Seventh, Complete Privatization may result in public monopolies becoming private monopolies, Private
monopoly has a tendency to exploit their position to increase costs of various services and earn higher
profits.

Eighth, using funds from disinvestment to bridge the fiscal deficit is an unhealthy and short-term
practice. This is not sustainable in the long term. Government should focus on increasing its revenue
from more reliable resources and cut down Fiscal Deficit.

What are the NITI Aayog ’s recommendations on Disinvestment?

First, The Aayog’s disinvestment proposals should go to directly to the Cabinet Committee on Economic
Affairs (CCEA) instead of the respective Ministry. This would shorten the process.

Second, Government should consider appointment of Advisors and Asset valuers to speed up the
process of disinvestment.

Third, an independent professional agency should be set-up to speed-up the Asset Monetisation
Programme.

What should be the approach going ahead?

First, the Government should increase the operational autonomy of PSEs. It can be supplemented by
strong governance measures like listing on stock exchanges. It will increase the transparency in their
performance.

Second, the government must also try to provide the bidders with a fair valuation of the Government
entities. It will boost their confidence in the disinvestment process. Third, the Government should also
reduce its involvement in the management and day-to-day operations of the PSEs.
The Government should reform their boards and reorganize the structures. This will attract more buyers
and get better valuations.

In Conclusion I would like to emphasize that,Disinvestment has several benefits. It can help enhance
competition in various sectors and improve efficiencies. It also helps raise revenue for the Government,
which can be spent on welfare measures. However, the Government should take care to ensure its
presence in certain strategic sectors like banking, energy etc. It will ensure the social obligations and
strategic interests intricately (complicated) linked with these sectors are secured.