Disinvestment In India: Objectives And Importance
Disinvestment refers to an action by a Government or an organisation liquidating (selling) its stake in the company or its subsidiary or general sale of assets. It can also imply a reduction in capital expenditure, which facilitates a re-allocation of resources into other productive areas within a Government-funded project or an organisation.
Regardless of its results, the primary objective of disinvestment is maximising its return on investment or ROI.
This article delves deeper into this subject and highlights the objectives and importance of disinvestment in India.
What are the Objectives Of Disinvestment?
The Government opts for disinvestment to raise wealth to meet particular needs or lower its fiscal burden. It may also undertake disinvestment with an aim to encourage investments from private players.
As it allows an entity to reduce its debt, disinvestment can pave the way for the long-term growth and development of a country. Moreover, it enables the open market to have a larger share of PSU ownership, thereby facilitating the development of a stronger capital market.
In simple words, the main objectives of disinvestment in India can be summed up as follows:
- Improving public finances
- Lowering the Government’s fiscal burden
- Allowing higher private ownership
- Promoting and maintaining competition in the market
- Funding programmes for growth and development
- Depoliticising non-essential activities
What is the Importance of Disinvestment?
The introduction of the New Economic Policy in 1991 aptly highlights the importance of disinvestment in India.
Public sector undertakings (PSUs) had indicated a negative return rate on capital employed, thus becoming more of a liability to the Government than an asset. Further, low returns from PSUs had an adverse effect on the country’s gross national savings and national gross domestic product.
A Disinvestment Policy allowed the Government to eliminate these units and focus on core activities instead. As a result, it moved out from non-core enterprises, especially those wherein the private sector has now emerged as a prominent player.
Since the 1990s, all successive governments in India have set a disinvestment target in order to raise funds by selling their stake in PSUs.
The importance of disinvestment in India includes:
- Financing the surged fiscal deficit
- Raising funds to enable large-scale infrastructural development
- Investing in the economy to boost consumer spending
- Initiating social programmes pertaining to education and health
- Reducing government debt (as about 40% of the Centre’s revenue receipts are spent on repaying public debt/interest)
At this point, it is critical to note that disinvestment is often confused with privatisation. However, there lies a distinction between these two, which we will now delve into.
What is the Difference between Disinvestment and Privatisation?
The Government of India, whenever the need arises, may decide to sell its majority stake or a whole enterprise to private investors. In such a circumstance, it can be called privatisation. Therefore, in the case of privatisation, the Government does not hold the resulting control and ownership. That said, this is seldom the case, as Governments generally avoid taking this step.
Here is an overview of the Indian Government’s current disinvestment plan.
Types of Disinvestment Methods in India
Example - Disinvestment Plan in India for 2021
In 1999, the Government set up a separate Department of Disinvestment. It is now known as the Department of Investment and Public Asset Management or DIPAM. It operates under the Ministry of Finance and deals with disinvestment-related tasks.
The disinvestment targets of this department are announced in each Union Budget. It varies every year, with the Central Government taking the final call on whether it will increase its disinvestment target or not.
In FY 2021, the Indian Government set up a target of Rs. 2.1 lakh crore. However, considering the aftermath of Covid-19, it raised just 10% of the desired sum. In fact, it recorded the lowest sum raised in the preceding seven financial years. The target for this fiscal year was three times more than that of the previous year.
Keeping that in mind, this year, GOI has set a target of gathering Rs. 1.75 lakh crore from disinvestments. This plan includes various banks, LIC, Shipping Corporation of India, and many other PSUs.
Take Away
In terms of achieving revenue targets, disinvestment in India tends to offer mixed results. The Government of India determines candidates for disinvestment based on a number of factors.
These factors include general market conditions, the interest of the private sector in owning an enterprise, its existing stake in an organisation, and expected value realisation.
Happy Investing!
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.