The term Disinvestment has been in frequent discussion since the announcement of Union Budget of 2020-21, with special reference to plan for disinvestment in L.I.C. of India & Air India. PSU is a Public sector undertaking or an enterprise with Government of India’s controlling stake, typically designed to render products or services to the general populace of India.

After independence, as a welfare state, government decided to establish its own enterprises or nationalize the existing private operating ongoing business units. Steel Authority of India, Bharat Heavy Electricals, and Bharat Electronics are examples of PSUs initiated by the GoI. 

The government also adopted the policy of nationalization. It nationalized various privately owned insurance companies to form L.I.C. of India. It also took over few major operating banks, and took the control of Air India from Tata group.

Over a period of time, government invested huge funds in them and created large employment opportunities. However, in reality most of the public enterprises failed to deliver desired results. They were running in sick conditions, their projects were delayed and resulted in large carry forward losses. Profitability was a mirage for these investments made by the government.

With each day PSUs were becoming unproductive and a liability to the Ex-chequer. The era of disinvestment began in the 1990s and disinvestment in the PSUs was considered as an option to not only stop the Government’s recurring expenditure but also give one-time large cash inflow by way of return of capital invested. 

Thus, the decision of disinvestment would ease the pressure on government spending and thereby help reduce the fiscal deficit. Disinvestment in these PSUs is an important aspect of this government’s economic policy. 

The Government plans to sell its enterprises completely or in some cases partially either to the private sector companies or in the open market. 

Technically, disinvestment means dilution of government’s stake in the public enterprise. This can be done in two ways: 

In the first case, government sells less than 50% of its equity in the PSU, thereby merely disinvesting a part of its holding but maintaining the overall control over its management. In the other case, government disinvests more than 50% of its stake and hands over the management control to a private enterprise. This is called as Privatization. 

In the past, government has retained 51% or more equity capital of the public enterprises, so as to maintain its control over the management.

What problems does a government run PSU face? 

A government essentially looks at a PSU as a welfare scheme and not as a business enterprise. Its subsidized price policy results in heavy loses. In a government operated PSU, resources are often under-utilized resulting in low productivity.

Labor problems & unrest of recurring nature hampers the working environment, which in return hampers the planning, thereby increasing the cost of each project.

Lack of autonomy & political intervention prevents the speedy decision and acts as a major demotivating factor.

What does the Government of India plan to achieve through its Disinvestment in PSUs?

By privatizing the PSUs government hopes to increase the efficiency of these units thereby making them profitable in the near future. An enterprise of that size, if made profitable can contribute significantly to the GDP. 

In addition to that, government also wishes to realize/liquidate the locked-up investment for actual welfare schemes, such as infrastructure projects.

PSUs are often huge cost centers for the government, disinvestment in them helps them in better utilizing the funds collected through direct and indirect taxes. 

Once a PSU is handed over to the private sector, it is run with a certain amount of efficiency and that results in a direct reduction of project costs. 

Privately managed companies attract niche talent which is often missing within the government infrastructure. In addition to that a corporate management has considerably less protocols and hierarchical structures, thus reducing the delays in execution. 

Criticism faced by disinvestment in PSUs

Disinvestment & Privatization have traditionally faced a lot of political opposition in the country. It is not surprising since privatization goes against the very ethos of Socialism, an over arching ideology of our economic and social policy. 

The general belief among the left leaning economists is that the dismantling of public sector would harm the general people who benefit from it, as a subsidized option. 

The critics of disinvestment advocate that the government should not disinvest in the PSUs which directly impact supply of essential goods and services. There is also heavy criticism against selling of PSUs who are already in profit or have a growth potential. 

Disinvestment Plans for future

As a need for economic liberalization and infrastructure development, it was essential to mitigate the fiscal deficit and make fresh capital investments. To ensure a smoot transition government started disinvestment in a phased manner as advised by Niti Aayog. 

During the process of disinvestment, government has given reasonable assurance to employees in terms of their job security. 

It has also indicated that not all PSUs are up for privatization. Indian railways for example have been categorically kept out of any discussion with respect to privatization. Even for PSUs in the telecom sector like B.S.N.L. & M.T.N.L., government has planned to re-strengthen the working pattern & increase the productivity of these PSUs. 

For the financial year 2020-21, beginning April 1, the government expects a substantial amount of INR 90,000 crore in revenue from disinvestment of government stake in public sector banks and financial institutions like LIC & IDBI Bank. 

This would be in addition to estimated INR 1.20 lakh crore from CPSE stake sales in 2020-21, like Air India, BPCL, Shipping Corporation, Container Corporation etc. 

In the past the Government of India has missed its disinvestment targets due to political problems. With the mandate this current government has, there are hopes for their disinvestment plan to actually work. 

Ajit Phadke

Ajit Phadke, B.Com.(Hons), M.B.A., LL.B, has been operating as a freelance industrial consultant for 35 years and specialises in 100% EOU / Export / Import, Foreign Exchange Rules and Industrial Regulations.

The views and opinions expressed in the article are those of the authors and do not necessarily reflect the official policy or position of The Tilak Chronicle and TTC Media Pvt Ltd.

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