Disinvestment in India: Path for Fiscal Sustainability

General Studies Paper-3

Context: Recent developments indicate that the Indian government may be losing momentum in its disinvestment drive, raising concerns about its long-term economic implications.

About the Disinvestment Strategy in India

• Disinvestment refers to the process through which the government sells or liquidates its ownership stake in public sector enterprises (PSEs).
• It aims at promoting efficiency, enhancing competitiveness, and generating non-tax revenue.
• In India, disinvestment began during the Economic Reforms of 1991, aimed to reduce the fiscal burden and bring in managerial efficiency.
• It is spearheaded by the Department of Investment and Public Asset Management (DIPAM), Ministry of Finance.
• As per DIPAM, the objectives include:
  • Reducing the fiscal burden on the exchequer;
  • Improving public finance;
  • Encouraging wider shareholding in public enterprises;
  • Introducing private sector efficiency into PSEs;
  • Unlocking value from underperforming assets;
  • DIPAM manages government equity in CPSEs and ensures transparency in the sale of shares or assets.

Types of Disinvestment

• Minority Disinvestment: Government retains control.
• Majority Disinvestment: Transfer of management control.
• Strategic Disinvestment: Complete transfer of ownership and control.

Changing Approach to Disinvestment 

• Policy Evolution: The 2021-22 Budget introduced a new public sector policy, emphasizing minimal government presence in CPSEs.
  • It proposed to have a minimal presence in strategic sectors.
  • In non-strategic sectors, the CPSEs will be either privatised or closed down.
• Shift Toward Value Creation: Officials have reiterated that the focus remains on value creation rather than explicit disinvestment targets.
  • The government raised only ₹10,000 crore through disinvestment in 2024-25, despite a vibrant equity market.
  • It is important to note that the overall fundraising in the equity market in 2024-25 stood at over ~3.7 trillion, which was about 90% higher than in the previous year.

Challenges in Disinvestment 

• Implementation Gaps: Despite integrating the DPE into the Ministry of Finance in 2021, progress on the new policy has been slow.
  • Disinvestment has often been driven by the need to reduce fiscal deficits rather than as a sustained policy objective.
• Political Resistance: Disinvestment has faced opposition, often portrayed as ‘selling the family silver’.
  • A lack of political consensus has hindered the aggressive pursuit of disinvestment programs.
• Economic Implications: CAG Report (2022) revealed that 198 government companies had accumulated losses exceeding ₹2 trillion, eroding the net worth of 88 companies.
  • These losses continue to burden the exchequer, underscoring the need for decisive action.
• Flexibility vs. Neglect: While the absence of explicit disinvestment targets allows flexibility, it risks neglecting this critical revenue stream.

Key Government Steps

• Merging of Related Departments: The Union government is in the process of merging two departments — the Department of Public Enterprises (DPE) and DIPAM in the Ministry of Finance. The idea is to improve the efficiency and performance of CPSEs.
• Union Budget (2021-22): A Public Sector Policy stated that the government would minimise its presence in CPSEs.
  • It proposed to have a minimal presence in strategic sectors. Strategic sectors include atomic energy, space, defense, transport, telecommunications, power, petroleum, coal, and banking.
  • In non-strategic sectors, the CPSEs will be either privatised or closed down.

Other Important Initiatives

• Monetization of Idle Assets: The government has introduced a Special Purpose Vehicle (SPV) to monetize surplus land and other non-core assets of CPSEs.
  • It aims to unlock the value of idle assets and generate additional revenue.
• Incentives for States: The government has proposed an incentive package of central funds to encourage states to disinvest their public sector enterprises.
• Initial Public Offerings (IPOs) and Strategic Sales: The government has utilized methods like IPOs, Offer for Sale (OFS), and strategic sales to divest its stake in CPSEs.
  • Key examples include the privatization of Air India and the proposed IPO of Life Insurance Corporation (LIC).
• National Investment Fund (NIF): It was established in 2005, that channels proceeds from disinvestment into developmental projects and social sector programs.

Way Forward 

• Targeted Approach: The government should prioritize disinvestment in non-strategic sectors while retaining control in areas critical to national security and public welfare.
• Stakeholder Engagement: Transparent communication with employees, unions, and the public can help address concerns and build consensus.
• Strengthening DIPAM: DIPAM must streamline processes and ensure timely execution of disinvestment plans.

Conclusion

• The merger of DPE and Dipam marks a significant step in redefining the government’s approach to CPSEs.
• While the focus on value creation is commendable, the merits of an aggressive disinvestment program cannot be overlooked.
• Achieving a balance between managing CPSEs and pursuing disinvestment will require political will, strategic planning, and efficient execution.