It’s no secret that the Indian economy has seen its fair share of ups and downs. In an effort to revitalize its financial system, the government started disinvestment in the late 80s. The goal was to sell off some of the government-owned companies to private entities and use the funds to pay off national debts. This move was part of a broader economic liberalization program that aimed to open up the Indian market to foreign investment.
Following its inception under the Narasimha Rao government, disinvestment has been a contentious issue in Indian politics. While some argue that selling off public sector units (PSUs) has led to increased efficiency and competitiveness, others believe that it’s nothing but privatization of the nation’s assets. Nonetheless, disinvestment has continued under different governments, even as it has been met with significant opposition at times. The government has across the years reiterated that its goal with disinvestment has been to plug the fiscal deficit and channel funds to critical social schemes.
With each government that has come and gone, the disinvestment debate has continued to rage. While several state-owned companies have been privatized, disinvestment in some PSUs has been challenged by labour unions and political parties before. Today, disinvestment remains a sensitive topic in India, attracting both supporters and detractors alike. Nonetheless, it’s hard to ignore the impact that disinvestment has had on the Indian economy, making the program one that will continue to shape the nation’s financial future.
Disinvestment in India
Disinvestment has been a crucial policy issue in India since the 1990s. In simple terms, disinvestment refers to the sale of government-owned assets or companies to private entities. The primary objective behind disinvestment is to improve the financial performance and efficiency of public sector enterprises. The idea is that private management and ownership would bring in greater operational efficiency and better returns on investment, which would benefit the economy as a whole.
- The concept of disinvestment was first introduced in India in 1991, following the country’s economic liberalization policies.
- The first major disinvestment initiative in India was undertaken by the government in 1991-92, when it sold 20% of its equity in several state-owned enterprises.
- Since then, successive governments have continued with the disinvestment policy, and it has become a key tool for fiscal consolidation and reducing the government’s fiscal deficit.
Chronology of Disinvestment in India
Here’s a brief timeline of the major disinvestment initiatives taken by the Indian government:
| Year | Key Disinvestment Initiative |
|---|---|
| 1991-92 | The government sold 20% of its equity in several state-owned enterprises. |
| 1999-2000 | The government announced its first-ever disinvestment target of Rs. 10,000 crore. |
| 2003-04 | The government set up the Disinvestment Commission to lay out a roadmap for disinvestment. |
| 2004-05 | The government announced its highest-ever disinvestment target of Rs. 22,500 crore. |
| 2017-18 | The government proposed to merge three public sector insurance companies and subsequently sell a minority stake in the merged entity. |
The Indian government has faced several challenges in implementing its disinvestment policy, including opposition from labor unions, issues of valuation, and market volatility. Nevertheless, the policy has proven to be an important instrument for improving governance, enhancing competition, and achieving economic growth.
Evolution of Disinvestment Policy
Disinvestment, also known as divestment, refers to the strategic sale of a government’s ownership in a public sector unit (PSU). The objective of disinvestment is to reduce the government’s stake in PSUs and rely more on the private sector for investment in the economy.
The policy of disinvestment was first introduced in India in 1991 under the leadership of former Prime Minister P.V. Narasimha Rao. The policy aimed to introduce market-oriented reforms in India’s economic system, which was then dominated by the public sector. The disinvestment policy aimed to reduce the government’s fiscal burden and promote economic growth.
- The first phase of disinvestment began in 1991-92 and continued until 1996-97. During this phase, the government introduced partial disinvestment in select PSUs.
- The second phase of disinvestment took place from 1997-98 to 2003-04. The government introduced strategic disinvestment during this phase whereby PSUs were sold to private sector players to improve their efficiency.
- The third phase of disinvestment took place from 2004-05 to 2009-10. During this phase, the government continued with strategic disinvestment and introduced guidelines for the sale of minority shares in PSUs.
The government of India continued with its disinvestment policy under the leadership of Prime Minister Narendra Modi. The policy aimed to privatize non-strategic and loss-making PSUs and promote economic growth. In 2019-20, the government set a disinvestment target of Rs 1.05 lakh crore.
The table below provides an overview of the disinvestment target and actual disinvestment carried out by the government of India:
| Year | Disinvestment Target (in crore) | Actual Disinvestment (in crore) |
|---|---|---|
| 2014-2015 | 58,425 | 31,350 |
| 2015-2016 | 69,500 | 25,312 |
| 2016-2017 | 56,500 | 46,246 |
| 2017-2018 | 72,500 | 1,00,056 |
| 2018-2019 | 80,000 | 84,972 |
| 2019-2020 | 1,05,000 | 50,299 (as of Feb 2020) |
In conclusion, the policy of disinvestment has evolved over the years in India. The government’s aim to reduce its stake in PSUs and promote economic growth through private sector participation. The disinvestment policy has been successful in divesting the government’s stake in select PSUs and making them more efficient.
Objectives of Disinvestment
Disinvestment is a policy initiated by the government to reduce its ownership in the public sector by selling off its shares to private sector entities. The primary objectives of disinvestment are manifold, and they include:
- Cutting down fiscal deficit: The government aims to reduce the fiscal deficit by reducing its expenditure and increasing income. By selling its stake in public sector undertakings (PSUs), the government can earn revenue that can be utilized for social welfare schemes and infrastructure development projects.
- Encouraging competition: Disinvestment opens up opportunities for private sector players to enter industries where PSUs previously had a monopoly. This encourages healthy competition and drives efficiency.
- Increasing efficiency: PSUs are often plagued by inefficiencies due to bureaucratic red tape and political interference. Private sector entities function more efficiently and have the flexibility to make quick decisions.
Apart from these three primary objectives, disinvestment also helps to improve the corporate governance of PSUs, ensures better utilization of resources, and enhances transparency in the functioning of such companies.
If we look back in history, the disinvestment policy was first introduced in India in 1991 by the then Finance Minister, Dr. Manmohan Singh. Since then, the policy has evolved and undergone several reforms to improve its effectiveness.
Table: A brief overview of disinvestment in India
| Year | Amount raised (in Rs. crores) | Percentage of disinvestment |
|---|---|---|
| 1991-92 | 0 | – |
| 1999-2000 | 2,753 | 0.6% |
| 2000-01 | 2,936 | 0.7% |
| 2001-02 | 13,104 | 6.6% |
| 2002-03 | 6,294 | 2.6% |
| 2003-04 | 25,123 | 6.8% |
| 2004-05 | 2,745 | 0.7% |
| 2005-06 | 15,299 | 2.6% |
| 2006-07 | 37,559 | 6.1% |
Since the beginning of the disinvestment policy in India, the amount of money raised through disinvestment has steadily increased. Disinvestment has now become an integral part of the government’s economic policy to improve the country’s fiscal health, encourage private sector growth, and promote competition.
Methods of Disinvestment
Disinvestment refers to the process of the government selling its stakes in public sector companies to private entities. The Indian government initiated disinvestment in the early 1990s, and since then, it has utilized various methods to carry out the process. Here are some of the methods of disinvestment:
- Initial Public Offerings (IPOs): In this method, the government sells its shares in a public sector company to the general public through an IPO. The shares are traded on the stock exchange, and the government gradually reduces its stake in the company.
- Offer for Sale (OFS): In this method, the government sells its shares in a public sector company to institutional investors through an OFS. The shares are sold at a discount to the current market price to attract more investors.
- Strategic Disinvestment: This method involves selling the government’s stake in a public sector company to a private entity or a strategic partner. The buyer acquires a controlling stake in the company and takes over its management.
The government also uses a combination of these methods to carry out disinvestment in public sector companies. The method chosen depends on the market conditions and the objectives of the disinvestment.
One of the most successful disinvestment campaigns carried out by the Indian government is that of the Oil and Natural Gas Corporation (ONGC) in 2004. The government used the IPO method to sell its shares, and due to strong demand from investors, the shares were oversubscribed by 1.5 times. The disinvestment helped the government raise Rs. 10,000 crore in revenue.
Disinvestment Targets and Achievements
The Indian government sets annual disinvestment targets to reduce its stake in public sector companies. The targets are announced in the Union Budget, and the government uses various methods to achieve them.
The table below shows the disinvestment targets and achievements of the Indian government in recent years:
| Year | Target (in Rs. crore) | Achievement (in Rs. crore) |
|---|---|---|
| 2020-21 | 2,10,000 | 32,000* |
| 2019-20 | 1,05,000 | 50,312 |
| 2018-19 | 80,000 | 85,000 |
| 2017-18 | 72,500 | 1,00,056 |
*Data as of November 2020
The government has managed to achieve its disinvestment targets in recent years, with the exception of 2020-21, where the target was revised due to the COVID-19 pandemic. The disinvestment has helped raise significant revenue for the government, which can be used for development and welfare programs.
Impact of disinvestment on economy
Disinvestment is a process where the government sells its stake in public sector companies to private entities or individuals. This strategy was first pursued by the Indian government in 1991. Since then, several governments have followed suit, including the current government.
- Improved efficiency: One of the significant impacts of disinvestment is that it encourages better efficiency in the public sector enterprises. Private players bring in better management practices and infrastructure to run the business, which leads to improved efficiency and increased productivity.
- Better allocation of resources: Disinvestment enables the government to earn funds that can be utilized in other development activities. It is also an excellent way to allocate resources effectively, thereby generating growth in the targeted areas.
- Reduced fiscal deficit: By selling its stake in public sector enterprises, the government can generate revenue that can be used to reduce the fiscal deficit. This, in turn, improves the economy’s overall financial health and stability.
However, critics argue that disinvestment may lead to negative impacts on the economy, such as:
- Job losses: Disinvestment may lead to job losses in public sector enterprises, which may have adverse effects on the economy. This is because the government enterprises provide employment to a significant number of people, especially in developing countries like India.
- Social impact: The government enterprises are often responsible for providing critical services to the underprivileged sections of society. The privatization of these essential services may lead to a reduction in quality and access to these services.
Table- The following table provides data on the disinvestment proceeds earned by the Indian government in recent years:
| Year | Disinvestment Proceeds (in INR crores) |
|---|---|
| 2017-18 | 1,00,056 |
| 2018-19 | 84,972 |
| 2019-20 | 50,298 |
The Indian government’s disinvestment program has had a mixed impact on the economy. While it has generated substantial revenue, critics have raised concerns over the potential negative impacts on employment and social welfare. However, the government is likely to continue its disinvestment strategy to reduce the fiscal deficit and promote more efficient management practices in public sector enterprises.
Controversies surrounding disinvestment
Disinvestment, or the sale of government-owned assets to non-state entities, has been a topic of controversy since it first began in the 1990s. While some see it as a necessary step towards economic growth and modernization, others see it as a betrayal of public trust and a means of enriching the private sector at the expense of ordinary citizens.
- Privatization of public services
- Loss of public sector jobs
- Transparency and accountability issues
One of the major controversies surrounding disinvestment is the privatization of public services. When government-owned assets are sold to private entities, those entities are often motivated by profit, rather than providing affordable and accessible services to the public. This can lead to increased prices and decreased quality for consumers.
Another concern is the loss of public sector jobs that can result from disinvestment. When private companies take over government-owned assets, they may choose to lay off public sector employees and hire their own staff, often resulting in job losses and increased unemployment.
Transparency and accountability issues have also plagued many disinvestment initiatives. Critics argue that the process is often opaque and lacks adequate oversight, leading to corruption and the enrichment of connected parties at the expense of the public.
Overall, while disinvestment has been heralded as a means of improving the efficiency and competitiveness of the economy, it is clear that there are significant concerns and controversies surrounding the process that must be addressed if it is to be implemented successfully and fairly.
Source of controversies surrounding disinvestment:
| Issue | Arguments For | Arguments Against |
|---|---|---|
| Privatization of public services | Increased competition, improved efficiency | Decreased quality, increased prices for consumers |
| Loss of public sector jobs | Greater flexibility for private companies | Increased unemployment, loss of benefits for public sector employees |
| Transparency and accountability issues | Improved efficiency and reduced corruption | Lack of oversight, enrichment of connected parties |
(Source: Investopedia)
Future of Disinvestment in India
Disinvestment has been a key strategy for governments in India to manage their finances and achieve their economic goals. From a historical perspective, disinvestment was first started by the government of India in 1991. Since then, there have been various governments that have used it as a tool to raise revenue and reduce the fiscal burden of the state.
- The government’s policy on disinvestment has been largely consistent, irrespective of the party in power. The rationale behind disinvestment is to optimize resources, reduce the burden of non-performing assets on the economy and enable efficient use of capital.
- It has proven beneficial for the government in the past through revenue generation, reducing the fiscal deficit and increasing the competitiveness of public sector undertakings (PSUs).
- Historically, disinvestment was seen as a tool for privatization. However, the government’s new policy aims at consolidating public sector undertakings by merging PSUs with similar business interests and divesting their non-critical businesses.
The future of disinvestment in India is expected to remain largely consistent. The government’s strategy will continue to focus on consolidating and merging PSUs while divesting non-critical businesses. However, recent events could impact the future of disinvestment in India.
The COVID-19 pandemic has had far-reaching economic consequences globally, and India is no exception. The government’s disinvestment goals and timelines may need to be re-evaluated in light of the pandemic’s impact on the economy. However, with the government already announcing its strategic disinvestment policy earlier this year, it is clear that the policy will remain an essential component of India’s economic strategy.
| Year | Government | Target | Achievement |
|---|---|---|---|
| 2017-18 | BJP led | Rs. 72,500 crore | Rs. 1,00,056 crore |
| 2018-19 | BJP led | Rs. 80,000 crore | Rs. 84,972 crore |
| 2019-20 | BJP led | Rs. 1,05,000 crore | Rs. 50,298 crore* |
| 2020-21 | BJP led | Rs. 2,10,000 crore | NA |
* Target revised to Rs. 65,000 crore in February 2020 due to the pandemic.
Which Government Started Disinvestment?
1. What is disinvestment?
Disinvestment refers to the sale of a government’s stake in a public sector unit (PSU) to private individuals or entities.
2. When did disinvestment of PSUs start in India?
Disinvestment of PSUs started in India in 1991.
3. Which government took the first steps towards disinvestment in India?
The first steps towards disinvestment were taken by the Narasimha Rao-led government in 1991.
4. Why did the government start disinvestment?
The government started disinvestment to reduce the fiscal deficit and to promote competition in the market.
5. Which were the first PSUs to undergo disinvestment in India?
Hindustan Zinc and Balco were the first PSUs to undergo disinvestment in India.
6. How much has the government raised through disinvestment?
As of March 2021, the government has raised around Rs 120,000 crore through disinvestment.
7. How does disinvestment impact PSUs and the economy?
Disinvestment helps in improving the performance of PSUs by introducing competition and improving efficiency. It also helps in reducing the fiscal deficit and promoting economic growth.
8. Has every government since 1991 continued with disinvestment?
Yes, every government since 1991 has continued with disinvestment in varying degrees.
Closing Thoughts
Thank you for reading about the history of disinvestment in India. It is important to understand the rationale behind the government’s decision and the impact it has on the economy. If you want to stay updated with the latest news and articles, make sure to visit again later.