Explained | The status and proceeds of disinvestment

Source: The post is based on the article “Explained | The status and proceeds of disinvestment” published in The Hindu on 9th February 2023.

What is the News?

In the Union Budget for 2023-24, the government has set a disinvestment target of ₹51,000 crore, down nearly 21% from the budget estimate for the current year and just ₹1,000 crores more than the revised estimate.

This is the lowest disinvestment target in seven years. Moreover, the Centre has also not met the disinvestment target for 2022-23 so far.

What is Disinvestment?

Disinvestment or divestment is when the government sells its assets or a subsidiary, such as a Central or State public sector enterprise.

Approaches to disinvestment: There are three main approaches to disinvestment:

– Minority disinvestment: The government retains a majority in the company, typically greater than 51%, thus ensuring management control.

– Majority disinvestment: The government hands over control to the acquiring entity but retains some stake.

– Complete privatization: 100% control of the company is passed on to the buyer.

Nodal Department: The Union Finance Ministry has a separate department for undertaking disinvestment-related procedures called the Department of Investment and Public Asset Management (DIPAM).

Why does the government go for disinvestment?

The government may disinvest in order to a) reduce the fiscal burden or bridge the revenue shortfall for that year, b) finance the fiscal deficit, c) invest in the economy and development or social sector programmes, d) reduce government debt, e) encourage private ownership of assets and trading in the open market.

If disinvestment is successful, it also means that the government does not have to fund the losses of a loss-making unit anymore.

How has disinvestment fared in India?

Different Central Governments over the last three decades have been able to meet annual disinvestment targets only six times.

Since this current government came to power in 2014, it has met the disinvestment target twice: 2017-18 and 2018-19.

The pandemic-induced uncertainty, the geopolitical conflict, and the associated risks have posed challenges before the plans and prospects of the government’s disinvestment transactions over the last three years.

Nevertheless, the government has reaffirmed its commitment towards privatization and strategic disinvestment of Public Sector Enterprises by implementing the new Public Sector Enterprise (PSE) Policy and Asset Monetisation Strategy.