Indian Government Redefines Public Sector Strategy

Source: The post Indian Government Redefines Public Sector Strategy has been created, based on the article “Shifting gear” published in “Business Standard ” on 25th June 2025

UPSC Syllabus Topic: GS Paper3-Investment models

Context: The Indian government’s approach to Public Sector Undertakings (PSUs) has changed significantly over the past decade. Initial hopes of privatisation gave way to a strategy focused on using PSUs to drive capital expenditure and economic growth. This shift has had wide-ranging implications for disinvestment, revenue generation, and fiscal planning.

Disinvestment Trends and Early Expectations

1. Initial Optimism in Disinvestment Policy: The Indian government began with a strong push for disinvestment. Receipts rose from 0.2% of GDP in 2014–15 to 0.6% in 2017–18, raising hopes for accelerated privatisation.
2. Sharp Decline in Receipts Post-2018: After 2017–18, disinvestment receipts fell to 0.03% of GDP by 2024–25. The decline was sharper than the earlier rise, reflecting a reversal in approach.
3. Limited Progress in Privatisation: Despite plans in 2021 to privatise several PSUs, only three — Air India, Neelachal Ispat, and Ferro Scrap Nigam — were privatised in the last ten years. Some PSUs, like Rashtriya Ispat Nigam, received new equity instead.
4. Shift Toward Value Creation Narrative: The government repositioned PSUs as instruments of value creation, moving away from the earlier disinvestment model which aimed to reduce government ownership in businesses.

Financial Engagement with PSUs

1. Drop in PSU-Linked Revenue: Combined receipts from disinvestment and dividends fell from 0.45% to 0.25% of GDP over the decade, indicating limited financial returns from PSUs.
2. Rising Capital Allocations: Equity and loan support to PSUs rose from 0.54% of GDP in 2014–15 to 1.66% in 2024–25. This growth far exceeded that seen during the UPA government.
3. Support Integrated into Capex Strategy: This funding became a central part of the government’s capital expenditure plan, which doubled from 1.6% to 3.1% of GDP over ten years.
4. PSUs Used for Economic Recovery: Higher PSU investment enabled the government to maintain a robust capex push, particularly during the post-Covid growth phase.

Changing Composition of Capital Expenditure

1. PSU Share in Capex Rose Sharply: In 2014–15, PSU-related equity and loans made up 34% of total capex (₹67,512 crore of ₹1.96 trillion). By 2024–25, the share rose to 54% (₹5.48 trillion of ₹10.2 trillion).
2. Strategic Realignment of Growth Model: Instead of selling PSUs, the government used them as instruments for capital formation and infrastructure development.
3. Sustainability Concerns: Future expansion may face limits unless new funding options are explored, as dependence on PSU capitalisation may not be sustainable long-term.

Fiscal Adjustments and State Support

1. Correction in Revenue Estimate: A previous report wrongly stated a 6% drop in income tax collection. The actual fall in 2024–25 was only 1.7% below the revised estimate.
2. Shortfall from Negative IGST Receipts: A 2.3% fall in net tax revenue was largely due to negative IGST collections of ₹32,995.3 crore, caused by excess settlements with states.
3. No Recovery from States: The government allowed states to retain this amount, providing them with fiscal space for investments without cutting devolution.
4. Savings from Underutilised Allocations: Expenditure was lower due to savings of ₹25,000 crore (unclaimed grants), ₹20,000 crore (interest payments), ₹18,000 crore (scheme savings), and ₹8,000 crore (unused MSME funds).

Broader Implications of PSU Strategy

1. Capex Growth Without Revenue Gains: The government increased capital spending without matching revenue growth, relying on PSU support rather than disinvestment.
2. PSUs Central to Growth Revival: This strategy was crucial to post-pandemic recovery, despite low direct returns.
3. Need for New Financing Tools: Sustaining future growth will require broadening funding sources or strengthening PSU balance sheets further.

Question for practice:

Examine how the Indian government’s changing approach to Public Sector Undertakings has influenced its capital expenditure strategy over the past decade.