Implications of accelerating disinvestment: Reviving disinvestment

Source: The post implications of accelerating disinvestment has been created, based on the article “Reviving disinvestment: This must be a top priority for the next govt” published in “Business standard” on 12th April 2024.

UPSC Syllabus Topic: GS Paper 3- Indian economy – mobilization of resources

News: The article discusses the Indian government’s commitment to privatization and disinvestment, emphasizing the need for swift action. It highlights the potential benefits of accelerating the process, including supporting economic revival, fiscal consolidation, and boosting private sector investment.

For details information disinvestment in India read Article 1, Article 2

What is the government’s stance on disinvestment?

Despite omitting a specific disinvestment target in the recent Interim Budget, the finance minister recently repeated the government’s commitment to privatisation policy. The policy plans to reduce the government’s role in non-strategic sectors and maintain minimal presence in strategic sectors such as atomic energy and financial services.

What are the implications of accelerating disinvestment?

Positive Implications:

Boosts Government Capital Expenditure: Proceeds from disinvestment are planned to fund increased government spending on infrastructure, supporting economic growth.

Advances Fiscal Consolidation: Accelerating disinvestment helps reduce the fiscal deficit, which the government aims to bring below 4.5% of GDP by 2025-26, improving financial health and stability.

Frees Up Private Sector Funds: By reducing the government’s borrowing, more financial resources become available for private investments, potentially leading to an economic revival.

Optimal Asset Pricing: With current robust stock market conditions, disinvesting now could fetch higher prices for government assets, enhancing financial outcomes.

Negative Implications:

Complexity and Delays: The process of privatisation is complex, potentially leading to delays, especially when safeguarding employee interests.

Economic Risk: If the government continues to dominate savings absorption, it could jeopardize the revival of private sector capital expenditure and force reliance on foreign capital, which may not be ideal.

What factors support the timing for Disinvestment?

Strong Stock Market: The S&P BSE PSU Index has doubled over the past year, indicating robust market conditions, ideal for selling government assets at favorable prices.

Global Financial Climate: Global inflation has peaked, and financial conditions have eased, with expectations of US Federal Reserve rate cuts supporting capital flows to emerging markets like India.

Government Stability: The likelihood of a stable government after elections can enhance investor confidence, further improving conditions for disinvestment and potentially leading to better asset valuations and increased investor participation.

Question for practice:

Evaluate the potential positive and negative implications of accelerating disinvestment in India.