DISINVESTMENT – ECONOMY 

News: Govt. concedes disinvestment stalled by multiple challenges 


What's in the news?

The Finance Ministry, which last month pared the government’s disinvestment target for 2023-24 to a nine-year low of ₹51,000 crore, has now publicly acknowledged the numerous challenges it is facing in its efforts to privatise public sector enterprises (PSEs) and raise funds through minority stake sales, a drive that has slowed sharply since Air India’s sale.


Key takeaways:

Outlining the key obstacles to the disinvestment process, the Ministry has noted that the COVID-19 pandemic seriously impacted transactions in 2020 and 2021, followed by the Ukraine conflict last year, which hurt minority stake sales as well as strategic sales as “financial capacity and risk-reward options of potential bidders turned worse”. 


Disinvestment:

Disinvestment means sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets.

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.


Nodal Authority:

The Department of Investment and Public Asset Management (DIPAM) under the Ministry of Finance is the nodal department for the strategic stake sale in the Public Sector Undertakings (PSUs).


Objective of Disinvestment:

Reducing the fiscal burden on the exchequer.

Improving public finances.

Funding growth and development programmes.

Maintaining and promoting competition in the market.

Encouraging an open share of ownership.

Depoliticizing essential services.

Upgrading the technology used by public enterprises to become competitive.

Rationalizing and retraining the workforce.

Building competence and strength in R&D.

Initiating the diversification and expansion programmes.


Timeline of Disinvestment:

Post independence the government passed the Constitution (First Amendment) Act, 1951, following which nationalisation of private firms became a standard policy tool by the government.

This led to nationalisation of airlines, insurance businesses, and banking systems through the Air Corporations Act, 1953; Life Insurance Corporation Act 1956, Banking Companies (Acquisition and transfer of Undertakings) Act, 1970, etc.

After the 1991 LPG reforms, there was a transition in thinking about the public and private sector. The policy formulation gathered steam in 2001 when a separate ministry for disinvestment came into being. 

The process of disinvestment continued intermittently over the next decade 2004-2014. After 2014, the disinvestment policy was renewed with stake sales in PSEs.

Against this backdrop, New Public Sector Enterprise (PSE) Policy for Atmanirbhar Bharat was notified in 2021.

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. The privatisation of Central Electronics and Pawan Hans had to be scrapped after being announced, owing to legal concerns about the winning bidders.   


New Disinvestment/ Strategic Disinvestment Policy:

Strategic sectors:

Under the proposed Disinvestment/Strategic Disinvestment Policy, Government has kept four areas as strategic where bare minimum CPSEs will be maintained:

Atomic energy, Space and Defence

Transport and Telecommunications

Power, Petroleum, Coal and other minerals

Banking, Insurance and financial services.


Non-strategic sectors:

In the non-strategic sectors, CPSEs will be privatised, otherwise shall be closed.


Exclusion:

Excluded are central public sector enterprises concerned with

Assisting farmers in getting access to seeds.

Promoting innovation in agriculture.

Procurement and distribution of food for the public distribution system.


Moving forward task: 

Further to fast forward the policy, NITI Aayog has been asked to work out the next list of Central Public Sector companies that would be taken up for strategic disinvestment.


Incentivising states for disinvestment: 

To incentivise States to take to disinvestment of their Public Sector Companies, an incentive package of Central Funds for them will be worked out.


Special purpose vehicle (SPV) for monetising idle land: 

The SPV will contribute towards Atmanirbhar Bharat by monetising the non-core assets largely consisting of surplus land with the Ministries and PSEs.


Latest target:

In the Union Budget 2023-24, the government has set a disinvestment target of Rs. 51,000 crore which is the lowest in 7 years and 21% less than the budget estimate for the current year (2022-23).


Benefits of Disinvestment:

1. For Government:

It will reduce the government's debt and fiscal deficit.

It will save resources by spending less on PSUs which can be used by the government for welfare purposes.

It enables the government to raise funds that can be used to strengthen physical and social infrastructure.

2. For Society:

It will increase the government's focus on society welfare.

It will ensure resources in the hands of the public.

Consumers will get better services.

Companies will expand and that will lead to more jobs.

3. For Market:

It would bring more competition into various sectors thus improving the quality of services.

It will increase market profitability and hence companies profits.

4. For PSUs:

It will ensure modernisation of PSUs with changing times.

It distributes loss and failure risks of PSUs to the private sector.


Challenges ahead for disinvestment:

Controversies about the prices at which some of the initial shares were sold, even though all the disinvestment has been done through an auction process.

COVID-19 pandemic seriously impacted transactions in 2020 and 2021, followed by the Ukraine conflict last year, which hurt minority stake sales as well as strategic sales as “financial capacity and risk-reward options of potential bidders turned worse”. 

Apart from the global 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.

Multiple court cases filed by employees’ unions and other interest groups against the disinvestment policy as well as specific transactions were also hindering deals. 

It has been just a resource raising exercise by the government rather than reforming PSU.

The valuation of shares is affected by the decision not to reduce government holdings to less than 51 per cent.

With the continuing majority ownership of the government the disinvested public enterprises would continue to operate within the constraints of the public sector.

Because of their bureaucratic and non-market-oriented architecture, public sector businesses may not be able to compete successfully in the market, making their valuation a difficult task.

It may lead to the emergence of private monopolies.

Mere change of ownership from public to private does not ensure higher efficiency and productivity.

It may lead to loss of jobs for many workers. Private sector, governed by profit motive, has a tendency to use capital intensive techniques which will worsen unemployment problems in India.

Political parties and labor organizations who oppose the sale of public sector firms have frequently resisted disinvestment, which is a contentious subject in India.

A number of rules and approval procedures must be followed during the disinvestment process, which can cause delays and increase complexity.


WAY FORWARD:

1. Strategic interests:

Define the priority sectors for the government based on its strategic interests.

Investment in PSU’s has to be in terms of generation of adequate social and strategic returns.

Government ownership is required for sectors with strategic relevance such as defence, natural resources, etc. The government should, therefore, exit non-strategic sectors.

2. Serves social purpose:

Financial return cannot be the sole reason for investment in PSUs. 

They have to serve social/strategic purposes.

The key role of a PSU is to maintain competition in the sector and limit excessive monopoly.

The outlook towards strategic divestment should move from the current policy of emphasizing on public ownership and retaining majority shareholding to looking at the strategic interest.

3. Ownership doesn't mean for regulation:

It is important to realize that ownership is not a substitute for regulation. 

Therefore, instead of creating PSUs in non-priority sectors, the government should look into strengthening the regulatory framework that ensures efficient market conditions. 

The regulations should also ensure that the basic necessities of the consumers are met.


Divestment should not be seen as a short-term fiscal measure; instead, it should be part of a long-term plan to improve the production of goods and services in India. The government should strengthen the regulatory framework that ensures efficient market conditions.