Indian Public Sector Disinvestments And Its Implications Economics Essay

1455 words (6 pages) Essay in Economics

5/12/16 Economics Reference this

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” It is evident that disinvestment in public sector enterprises is no longer a matter of choice but an imperative…… The prolonged fiscal hemorrhage from the majority of these enterprises cannot be sustained longer “. — By former President A.P.J. Abdul Kalam in his opening address to parliament in 2002 budget session

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The term disinvestment basically refers to withdrawal of Government shares of capital invested in Public Sector Undertakings (PSU’s). The rationale behind the formation of Public Sector Undertakings was to provide necessary infrastructure for the fast growth of economy. They were supposed to safeguard the interests of the citizens of the country against monopolies of industrialist community, but the failure to do so has forced the government to tread the difficult path of disinvestment There were various reasons behind the failure of PSU’s where mis-management, low productivity, lack of technological innovations, minimal research and development, and issues of autonomy and political interference were the most persistent ones transforming the PSU’s into a liability, after 1980, for the Indian Government. Inefficient PSU’s were responsible for the macro crisis that India faced during 1980 and 1990s. So, Government of India revisited their industry policy and in 1991 envisaged disinvestment of government holdings in the share capital of some selected PSU’s, hoping that market discipline will improve the performance of PSU’s and huge capital will used for accelerating the growth of country. The Method adopted by government of India for disinvestments were a) Net Assets method b) Profit Earning Capacity Value method c) Discounted Cash Flow Method. The timing of disinvestment is basically done through technical analysis of market trends.

Objective of Disinvestment:

Sale of those public sector undertakings, which have shown negative rate of return on capital employed, reduce financial burden of government, Market competition and discipline, wider share of ownership.

Recent trends: – Finance Minister Parnab Mukherjee is banking to bring down the fiscal deficit to 5.5% through divestment programme, raising Rs40,000 crore by selling stake in state owned firms in 2010-11. So far they have realized Rs17925 crore through disinvestment and fresh issue of shares, which is some sort of record. The proceeds from the realization will be used to meet the capital expenditure requirements of social sector schemes for creating new assets. At least 114 divestment offers are in the pipeline including 56 initial public offerings and 24 follow on public offerings (FPOs). Sources (

Summary of Disinvestment from 2005-10


Target Amount (in Crore)

Amount realize (in Crore)

Enterprises disinvested



No target fixed



Sale of MUL shares to Indian public sector financial institutions and banks and employees.


No target fixed


No target fixed



Sale of MUL shares to Indian public sector financial institutions and banks and Indian mutual funds.


No target fixed


No target fixed


(Rs2012.85 -NHPC and

Rs2247.05 from OIL)

However the picture shows another dimension, budgetary deficit on revenue account has been increasing, failure of government to used the disinvestment proceeds to finance expenditure on capital account; i.e. it has resulted in capital consumption rather than generation, administrative cost is getting higher. Further lack of information has impeded free competitive and efficient bidding of shares and also free trading of those shares. We know that PSU’s are not monetarily benefitted from disinvestment, which result into reluctance and unfair distribution of prospectuses, further preventing transparency of above process.


Different author have different view regarding Disinvestment of PSU’s where capitalist society has favorable view and communist has negative reason to give, But rising wealth of capitalist society with several reforms have underlying effect upon the whole world and provide a proven example that private sector are judicious in the use of resources which increases the wealth of a nation and provide economic stability in the era of globalization. In the case of India, it is worth remembering that PSU’s after disinvestment have almost double in their values and if the above performance is maintained there will be huge benefits to the economy. Most of the public sector company is loss making and are burden on public funds. The unfounded fear of job losses through privatization has been proven wrong, as more jobs are now been created in divested companies.

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The use of disinvestments receipts to mitigate budget deficit is often raised as an argument for more enthusiasm in this field. For instance, it has been contended that if the realization from strategic sales were put in banks at 10% interest rate, it would earn much morethan the dividend that is earned now. As the average cost of borrowing of the government is greater than 10%, the benefit is real. However the validity of argument lies in investing only in an activity that yields higher returns. Disinvestments helped in bridging fiscal deficits and the stimulus from competition led to radical improvements in customer service in the short and medium term. A change in ownership influenced the quality of management and agility in decision-making process. The Government prefers an IPO to disinvest mainly because it gives it the access mechanisms to retain control, stimulate public ownership and last but not the least give the government the flexibility to disinvestment further. However, IPO of large public sector enterprises are best executed in tranches to enable the market to absorb transaction volumes. Such disinvestments are best administered within a framework of mutually reinforcing economic reforms that include public sector reforms and regulatory reforms.

Disinvestment is the need of hour which should be given socio-human touch according to the fabric of country so that wealth accumulation is done with all round development of society which will further accelerate the growth rate, the merits of disinvestment is lost when few people amass the resources by buying corrupt politician who play in the hand of few players. In this case, country like India not only lost their resources but also the trust of common masses. The inefficiency of Government authority to track overall corruption in divestment has led nation to loose 2 lac’s Crore rupees in 2G scam. When all respected part of society to say Media, Government authority etc who are opinion leaders and builders of society, start to play on behalf of few people will further drain the resources without having any impact on the lifestyle of masses.

To think that disinvestment or sale of PSU’s share is the only method of reform reflects a close mindset of our policy makers. Critics has pointed out that, the whole process of disinvestment has been carried out in hasty and unplanned manner, as a result the public sector equity has been sold for a fraction of what it could actually fetch. Government has used these proceeds to offset the shortfalls in revenue receipts and thus reduce the fiscal deficits as a part of IMF stabilization programme. In fact the right method would have been to allow the public sector to use the above fund to expand their activities. Selling the stake in Navratnas and Maharatnas shows fiscal imprudence by the government and using it for other purposes.

To make disinvestment successful, we first have to get our concept of democracy right. My logic is simple, if we are not able to bring this corrupt politician and business men under the rule of law, we as masses will become economically handicapped and will lose our strategic resources. In this era of globalization as big Multi National Corporations are actively participating in buying of Indian company and its resources, our country would lose economic independence and we will be forced to economic subjugation by these MNC’s losing our own identity and faith of being world’s largest vibrant democracy.

To make disinvestment successful there must be distinction between profit making company and loss making enterprises. There must be transparency in the deal made in investment; method and basis of valuation must be revealed to the public, which will fetch us competitive price of assets. All legitimate demands and expectation of labor force should be met; social implications of labor structuring should be studied and its effect should be evaluated. Thereby a more controlled, regulated and transparent disinvestment policy would help go a long way in putting our country back on its path of sustained growth.

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