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Business News/ News / India/  Centre bets big on disinvestment as a growth tactic
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Centre bets big on disinvestment as a growth tactic

Disinvestment is a strategy through which the government gives up either a part of or full equity holding of PSUs. Privatization opens up business opportunities to the private sector, while disinvestment aims to strengthen the management by adding private talent. Mint decodes

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Photo: Mint

Disinvestment is a strategy through which the government gives up either a part of or full equity holding of PSUs. Privatization opens up business opportunities to the private sector, while disinvestment aims to strengthen the management by adding private talent. Mint decodes

What is the agenda behind disinvestment?

Disinvestment helps to reduce the fiscal burden on the exchequer for financing PSUs. It improves access to public finances by expanding share ownership base, funds development programmes and growth prospects of the country and depoliticizes non-essential services. PSUs that were meant to be pillars of economic growth have ended up being more of a strain on government resources because of their inefficiency and low returns. The strategic sale of ownership in PSUs will help to spur competition and bring about market discipline. It will induce optimization of government resources to deliver maximum returns for the country.

How will it impact the economy?

India’s fiscal deficit for 2020-21 is 9.5% of GDP. As such, funds garnered from disinvestment of PSUs will help finance the widening fiscal deficit gap, especially in the medium term, finance large scale infrastructure development and social welfare programmes, and enable retiring of government debt. It will also lead to a competitive environment that will help lower prices and better product quality. The proceeds from the stake sale will provide funds for infrastructure development. Unlocking of key sectors will help in attracting sectoral investments and creating value via private competencies.

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Why should profit-making public-sector units be sold?

Role of the government is to act as a facilitator and not be in the business of making business. Disinvestment of a profit-making public sector undertakings will help the Union government extract maximum value. Besides, the private sector is also not keen on acquiring loss-making PSUs with their massive debt and employee liabilities.

What are the multiple methods available?

The methods followed for disinvestment are public offer, strategic sales, buybacks, sale to employees, ETFs and CPSE to CPSE sale. After 2004, most disinvestment has been done via a public offer instead of the auction method. Strategic sale method wherein control of the PSU is transferred to a private entity was adopted in 1999-2004. Buybacks and ETFs are the more recent routes of divestment. To ensure transparency, the inter-ministerial group overseeing the process appoints advisers.

How are the sale proceeds utilized?

Successive governments have been resorting to disinvestment with different goals. The United Front government used revenue for social welfare. The Vajpayee regime used the money for retiring government debt, restructuring PSUs. The UPA government’s objective was to bridge fiscal deficit. The NDA leadership, aims to utilize the proceeds to develop infra that will have a multiplier effect on the economy and not just close the revenue deficit gap.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH

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Published: 02 Feb 2021, 11:10 PM IST
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