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The Public Sector Disinvestments And Implications For Economy Economics Essay

The founding fathers of our republic used the public sector as an essential and vibrant element in the building-up of India’s economy. One of the basic objectives of starting the public sector in India was to build infrastructure for economic development and rapid economic growth. Since their inception, public enterprises have played an important role in achieving the objective of economic growth with social justice. However economic compulsions, viz., deterioration of balance of payment position and increasing fiscal deficit led to adoption of a new approach towards the public sector in 1991. Disinvestment of public sector undertakings is one of the policy measures adopted by the government of India for providing financial discipline and improve the performance of this sector in tune with the new economic policy of Liberalization, privatization and Globalization.

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What is Disinvestment?

In general terms Disinvestment (Dis-investment) is simply selling the equity (share) invested by the government in Public Sector Enterprises (PSU). PSUs are enterprises which are either owned completely by the government or whose shares are maximum owned by the government (51% or above). Examples include BHEL, ONGC, and NTPC etc.

If there is no progress achieved by the PSU or if there are no profits obtained (sometimes government may not be able to recover the investment capital also) by it, government sells some part of the equity to private companies. The funds raised by this sale can be used to develop other underperforming PSUs.

Why we needed Disinvestment?

During the first five year plans government possessed 5 PSUs with investment of Rs 29 crores. At the end of the Seventh Plan in 1990, there were 244 PSUs and the investment in them had gone up to Rs. 99,000 crores. The idea of disinvestment first came in 1991-1992. First only a small share of equity was sold till 2000-2001. During 2000-2001, there are 122 profit making enterprises with a net profit of Rs 19,000 crores. These include NTPC, ONGC, IOC; VSNL etc. 111 companies bore losses with a total loss of Rs 12,839 crores. These include Hindustan Fertilizers, the Fertilizer Corporation of India (FCI), Bharat Coking Coal etc.

So instead of making extra revenue from the PSUs government was not able to get the invested capital. It was also felt that government funds in these companies by way of share capital can be better utilized if taken out.

Inefficiency and corruption in PSUs are the other issues which force the gov. to felt the need of Disinvestment.

The aims of disinvestments policy are:

Raising of resources to meet fiscal deficit

Encouraging wider public participation including that of workers

Penetrating market discipline within public enterprises

Improving performance

How Disinvestment can be done?

There are two ways of disinvestment:

1.Transfer of complete management to private enterprises

Modern Food Industries, Bharat Aluminum Company Limited (BALCO), VSNL, Centaur Hotel Airport are examples of this kind.

2. Partial selling of shares

Here, government sells some part of shares. But still it retains majority of them (51% or higher) this has been and adopted in majority of cases.

To make the disinvestment process a success it is essential that profit making companies be distinguished from loss incurring companies. There must be transparency in the deals made in disinvestment. Method and basis of valuation of assets must be revealed to the public when a public undertaking is sold off. This would eliminate suspicions of any malpractice as would also fetch competitive price of assets.

Further, legitimate demands and expectation of labor force should not be overlooked and care must be taken that either they are not thrown out of employment or alternate jobs are provided to them. Hence social implications of labor structuring should be properly studied. Scheme of voluntary retirement may be adopted so that persons willing to take retirement may lead a better life. This will garner support for Privatization. The proceeds of disinvestment should be spent for social uplift. These should not be utilized to meet the fiscal deficit because the aim of disinvestment as proclaimed by the government is to reduce public debt and provide funds for social sector.

Why Disinvestment is tough and Tricky Road?

Disinvestment was a very bold and important step initiated by the government as apart of its reform measures. But the way it was handled has defeated its very purpose. The challenges before investment are as follows-

Social Problem: Process of disinvestment is not favoured socially as it is against the interest of socially disadvantageous people and society at large. This process will definitely affect the social objectives of the government.

Political Problem: The coalition government at the centre with a number of parties has posed a serious threat to this programme. Conflicting interest has made it difficult to arrive at a national


Economic Problem-Most of the units identified for disinvestment are in a very bad shape which does not offer good returns. The Government due to paucity of funds is also not in a position to revive it.

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Legality of the disinvestment process has been challenged on a variety of grounds that slowed the sale of public assets. However, there were two significant judicial rulings that broadly set the boundaries of the Disinvestment process. These are:

Privatisation is a policy decision, prerogative of the executive branch of the state; courts would not interfere in it

Privatisation of the PSE created by an act of parliament would have to get the parliament-ary approval

While the first ruling gave impetus for strategic sale of many enterprises like Hindustan Zinc, Maruti, and VSNL etc. since 2000, the second ruling stalled the privatisation of the petroleum companies, as government was unsure of getting the laws amended in the parliament.

Less inclination of organization towards Disinvestment- The number of bidders for equity has been small not only in the case of financially weak PSUs, but also in that of better-performing PSUs. Besides, the government has often compelled financial institutions, UTI and other mutual funds to purchase the equity which was being unloaded through disinvestment. These organizations have not been very enthusiastic in listing and trading of shares purchased by them as it would reduce their control over PSUs. Instances of insider trading of shares by them have also come to light. All this has led to low valuation or under pricing of equity.

Advantages and Disadvantages of Disinvestment


1.To achieve greater inflow of private capital

E.g. This revenue can be used to compensate the deficit finance.

2. Allows new firms to enter into the market and thus increases competition

3. Brings the low productivity PSUs back on track thereby improving the quality of goods, eliminating excessive manpower utilization and enabling high profits.


1. Loss of public interests

Eg. PSUs are resources of the nation. They belong to the people. By selling them to private companies, government is seriously affecting the people’s welfare.

2. Fear of foreign control

Eg. Selling equities to foreign companies result in serious consequences shifting the nation’s wealth, power and control to outsiders.

3. Issues with workers

Eg. The jobs of Lakhs of workers in the PSUs will fall in danger by privatization.

4. Less number of bidders

Eg. Even though government plans to disinvest, there are actually less number of people willing to place

Implication of Disinvestment to Indian Economy

India is already confronting the challenges of fiscal deficit due to the huge symphonizing of capital for the social sector specially flagship program of government NREGA. The current account deficit is also the cause of concern for the Indian government. The expenditure on different front namely defense (16% of GDP) is larger in extent and worthwhile also. But the growing fiscal deficit and current account deficit will not be bearable for longer span of time. There is immediate need to tame this gap. The only way out is disinvestment of Public Sector Undertakings. It results in efficient use of resources whereby scarce resources like land, capital and machinery are put to more efficient use. The economy as a whole is benefited by increase efficiency of the units and the fiscal mess is reduced by lessening of liabilities. Inefficient PSU’s were largely responsible for the macro-economic crisis faced by India during 1980’s although they were set up for the purpose of providing employment and the same time generate revenue surplus. But they could not stand to expectations. Hence steps for disinvestment had to be taken.

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