On Disinvestment – Not by Cosmetic Changes Alone

Source: This post on Disinvestment has been created based on the article “Not by cosmetic changes alone” published in “Business Standard” on 7^th February 2024.

UPSC Syllabus Topic: GS Paper 3 Indian Economy – Indian Economy and issues relating to planning, mobilization of resources.

News: The article discusses the slow progress of disinvestment in India. It also suggests ways to tackle the challenges. On Disinvestment – Not by Cosmetic Changes Alone

Background:

The recently released Interim Budget 2024 made a classification change – Disinvestment did not figure as a receipt item in the Budget documents. Earlier, disinvestment would be a separate entry under ‘miscellaneous capital receipts’.

What was The Idea Behind Disinvestment?

1. Reforming PSUs through disinvestment by making their managements a little agile and more responsive to market forces.
2. Increase the revenue for the government whose finances were in a poor state. Governments have periodically used disinvestment more as an instrument to reduce the deficit rather than to do away with government ownership of enterprises, upholding the economic principle that the government should not be in the business of running businesses.

What are The Issues with Disinvestment?

The pace of disinvestment has slowed, and in the last two decades only 1 PSU has been privatised.

In the last 32 years, the government has managed to achieve its disinvestment target only in 8 years.

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What new Approach to Disinvestment will Help Improve its Performance?

Here are two approaches that the government could adopt.

1) Timeline-based Targets: Apart from strategic PSUs, all other PSUs should be placed under a 5-year time-table for disinvestment or privatisation depending on the market opportunity and suitability of the entities involved.

2) Creation of New Ministry: PSUs which the government plans on exiting should be brought under the administrative control of a new disinvestment ministry (and delink it from the finance ministry). This will delink disinvestment from the government’s revenue-raising obligations.

Question for practice:

What are the reasons for the slow progress disinvestment in India? Suggest steps to tackle it.