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Disinvestment

1. An important aspect of present industrial policy of the Government is that it should not operate commercial enterprises. With that end in view the Government has decided to disinvest the public enterprises.


2. The Government can sell its enterprises completely to the private sector or disinvest a part of its equity capital held by it to the private sector companies or in the open market.


3. Distinction may be drawn between disinvestment and privatisation. Strictly speaking, disinvestment means the dilution of stake of the Government in a public enterprise.

4. This can be done in two ways. When the Government sells a part of its equity of a public enterprise less than 50 per cent of its total stock, it is called merely disinvestment and in this case control and management of the business enterprise remains in the hands of Government.

5. On the other hand, when disinvestment or sale of its equity capital by the Government exceeds 50 per cent so that the majority ownership and therefore control and management of the enterprise is transferred to private enterprise, it results in privatisation.

6. Therefore, in many disinvestment programmes government retains 51 per cent or more of the total equity capital of the public enterprises so that control and management remains in its hands.

7. Through disinvestment or privatisation, the Government can mop up a good amount of resources which can be used for various purposes. The released resources can be used to restructure and strengthen the public sector enterprises which are potentially viable. These resources can also be used to pay back a part of public debt. These resources can also be used to finance budget deficits.

8. The Government needs resources to reduce its budget deficit. Second, the Government urgently requires resources to make investment in infrastructure, social sectors such as education, public health and for poverty alleviation Programmes. Resources released through disinvestment can be used for investment in these crucial sectors.

9. Thirdly, a good number of existing public enterprises are working inefficiently and incurring huge losses. Disinvestment can lead to the improvement of efficiency of these enterprises. When government divests a good part of its stake to a private enterprise or public at large, it increase accountability of management of an enterprise which have a beneficial effect on the efficient working of the enterprise.

10. Disinvestment, especially Privatisation of public sector enterprises, will ensure that the working of these enterprises will be governed by professional managers guided by market mechanism instead of being administered by bureaucrats.

11. Functioning of these enterprises in the competitive environment of free markets will lead to higher efficiency and productivity. Privatisation will also lead to the closing down of unviable and sick public sector enterprises. A private company which buys such sick public sector units will benefit only from the real estate and assets of the sick public sector units.

12. Privatisation of public enterprises through public sector disinvestment is also beneficial because this will enable these enterprises to attract private foreign investment in setting up joint ventures. It may be noted that capital inflow through private direct foreign investment is better than that procured through foreign aid or commercial borrowing from abroad.

The following arguments are given against privatisation, that is, disinvestment of public sector enterprises:

1. Disinvestment of public enterprises is criticised by left-oriented economists on the ground that it amounts to selling ‘family silver’. Though this criticism is not valid because original investment on these public enterprises was made by the Government out of its revenue and capital receipts in the past. If some part of these public enterprises are sold and the resources so released are spent on certain beneficial schemes of promotions of education and health or reduction of poverty and unemployment, it cannot be called an undesirable act.

2. Second, it is pointed out that privatisation of some public enterprises would, in the absence of anti-trust law, lead to the emergence of private monopolies under which resources are misallocated. As a result, consumer welfare will be reduced. Besides, adoption of monopolistic practices will lead to higher prices and lower levels of output and employment.

3. It is argued that mere change of ownership, from public to private, does not ensure higher efficiency and productivity of industrial enterprises. In the modern corporate form of business organisation, management has been separated from ownership. In case of both public and private enterprises professional managers can be employed to manage the industrial enterprises to ensure efficiency in working. Thus, it is argued that for professionalization of management, privatisation of public enterprises is not needed.

4. The disinvestment of public enterprises is also opposed on the ground that it will lead to the concentration of economic power in a few private hands. This economic power can be used to exploit the consumers on the one hand and workers on the other. Further, greater concentration of economic power in private hands will also lead to increase in inequalities of income and wealth. Thus, disinvestment and privatisation is a negation of the objective of promoting equality.

5. An important argument against Privatisation is that it will lead to retrenchment of workers who will be deprived of the means of their livelihood. Further, private sector, governed as they are by profit motive, has a tendency to use capital-intensive techniques in production. This will not lead to generation of many employment opportunities. As a result, unemployment problem in India will worsen.

6. Disinvestment is also opposed on the ground that it is no solution for loss-making sick public sector undertakings. In fact, it is pointed out that about 50 per cent of loss-making public enterprises, especially in the field of textiles, are those sick units which were taken over by the Government from the private sector to protect the jobs and interests of the workers.

7. Last but not the least, it is argued that public enterprises should not be privatized because, though they may not be yielding enough profits, they are socially profitable and have made important contribution to build up a strong base for industrial development of the country. But for the growth of public enterprises in the industries such as machine making, heavy chemicals, fertilizers, steel and power, and communication, these industries would not have been developed as has been actually the case.

In the absence of this strong base, rapid industrial development would not have been possible. If they are privatized, the private sector would encase the benefits from the basic heavy industries for whose development heavy social costs have been incurred. Further, many public enterprises come under public utilities which must be run in public interest and not on the basis of maximising private profits.


Current scenario of Disinvestment: Key Highlights

Finance Minister, Nirmala Sitharaman announced on July 27 that the central government has been working on completing the stake sale process of about 23 public sector companies whose disinvestment has been cleared by the cabinet.

The central government as part of the Atmanirbhar Package had announced opening up of all the sectors for private participation. In those sectors which will be called strategic, the private will be allowed to come in but the public sectors will be limited to a maximum of 4 units.

For the fiscal year, 2020-21, the central government has set a disinvestment target of Rs. 2.10 lakh crore. Out of this, Rs. 1.20 lakh crore will come from the disinvestment of PSUs and another Rs. 90,000 crores from the stake sale in financial institutions.

In the strategic sectors, the involvement of private and limited units of the public sector will lead to the consolidation of Public Sector Undertakings (PSUs) as well as will scale up their operations.

For the disinvestment plan, the finance minister informed that the government wants to sell stake in public sector companies at a time when it fetches the right price.

Among the units that will go down the hammer include: Project & Development India Ltd, Hindustan Prefab Limited (HPL), Engineering Project (India) Ltd, Bridge and Roof Co. India Ltd., Pawan Hans Ltd., Hindustan Newsprint Ltd (subsidiary), Scooters India Limited, Bharat Pumps & Compressors Ltd, Hindustan Fluorocarbon Ltd. (HFL) (sub.),Central Electronics Ltd, Bharat Earth Movers Ltd. (BEML),Ferro Scrap Nigam Ltd.(sub.), Cement Corporation of India Ltd (CCI), Nagamar Steel Plant of NMDC and Alloy Steel Plant, Durgapur of SAIL.

Strategic disinvestment has been guided by the basic economic principle that the government should not be in the business to engage itself in manufacturing/ producing goods and services in sectors where competitive markets have come of age, and economic potential of such entities may be better discovered in the hands of the strategic investors due to various factors, e.g. infusion of capital, technology up-gradation and efficient management practices.


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