Disinvestment policies of PSU in India

Disinvestment in India is a policy of the Indian government in which the government liquidates its holdings in public sector enterprises, either partly or totally. The decision to disinvest is primarily intended to alleviate the fiscal burden and bridge the government’s income gap. Public Sector Enterprises (PSE) were a crucial driver of prosperity in India after independence. Among other duties of PSEs after independence, the nation’s social and developmental commitments were the most crucial, resulting in these entities avoiding competitive races. Later, the operations of the PSUs diverged, focusing in more non-core sectors such as hotels and consumer products, among others. Furthermore, public companies were exploited as vehicles for political and bureaucratic manipulation, resulting in poor capacity utilization, decreased productivity, inability to innovate, and complicated decision-making procedures on critical development concerns.

By the end of the 1980s, several analysts had said that the rise of the PSEs had become a “end in itself”. These issues slowed India’s development. As a result, the PSEs’ poor performance prompted changes to address India’s developmental weaknesses. Following the change of government in 1991, privatization was one of several economic reforms initiated, with an emphasis on the efforts necessary to reduce the state’s budgetary load by cutting public sector borrowings and implementing fiscal austerity measures.

Disinvestment Policies from 1991 to 1999

To clarify the country’s economic reforms and the performance of PSUs, a new Industrial program was drafted in 1991, which reviewed the role of PSUs and developed a comprehensive program for disinvestment of public sector enterprises. The policy provided autonomy to PSU boards and pushed them to increase operational efficiency. The government chose PSUs as priority sectors and focussed on them, eventually privatizing the majority of the loss-making businesses. Under industrial reform, the government opened up the majority of industries to private companies. While the public sector focused on railways, mining, and atomic energy. Another significant goal of the 1991 program was the elimination of “red-tapism” known as industrial licensing, which required obtaining a license to launch a private sector firm. As a result, any private organization will be able to construct an industrial unit without experiencing excessive delays.

One of the primary objectives of the industrial policy statement, as stated in the 1992 Union Budget, was to decrease the number of industries earmarked for the public sector from 17 to 4. Furthermore, budgetary allocations for PSUs were significantly reduced, and the majority of loss-making firms were submitted to the Board of Industrial and Financial Reconstruction. C. Rangarajan chaired a team charged with developing disinvestment rules. The panel issued its findings in 1993, recommending that disinvestments of up to 49 percent be permitted in enterprises designated for the public sector and 100 percent in other organizations.

1999 to 2004

The disinvestment strategy implemented by the Vajpayee-led NDA government between 1999 and 2004 intensified the country’s disinvestment process. The administration made a substantial shift in disinvestments; it was the same government that used the term “privatization” instead of disinvestment for the first time. The government’s new technique included categorizing PSUs into two categories: ”Strategic” and ”Non-Strategic”; all industries dealing with defense-related equipment were defined as strategic resources, and no disinvestments were proposed. In contrast, it was recommended that the government share be reduced to 26% in all other non-strategic industries. The NDA government’s objective was to expand PSUs in key areas while privatizing non-strategic firms. The administration focused on privatizing non-strategic PSUs up to 26 percent, or lower if necessary. Looking back on the Vajpayee-led NDA’s stint in power, several economic academics have complimented the former NDA administration’s efforts towards disinvestment, stating that “the disinvestment policy witnessed a golden period during late Prime Minister Atal Bihari Vajpayee-led NDA government.”

2004 to 2014

So far, the Manmohan Singh-led UPA-I and UPA-II administrations were in power from 2004 to 2014; according to DIPAM statistics, the government did not show sufficient interest in the disinvestment initiative, disrupting India’s long-term economic narrative. In 2004, the UPA-I administration produced a National Common Minimum Programme (NCMP) that succinctly outlined its disinvestment strategy. Some of the passages from (NCMP) stated: No profit-making enterprises shall be privatized; all Navratna companies shall be retained and encouraged to mobilize resources through the capital market; all loss-making PSUs shall be strengthened; and chronically ill industries shall be sold off, duly compensating the workforce; and all revenue generated by privatization shall be used for specific social sector schemes. The UPA administration, among many other measures, abolished the former NDA’s “Strategic sale” policy, and minority stakes in various PSUs were auctioned off.

Impact of Disinvestment

While disinvestments have been performed in India, they have often included transferring a small amount of stock to a private business rather than a total transfer of control of PSUs. As a result, some commentators believe that the term “partial privatization” is more suited to describe such a transaction. In his book Disinvestment in India: Policies, Procedures, Practices, Dr. Sudhir Naib states that “the government has gradually moved from disinvestments to privatization.” Furthermore, the author discovered that anytime a PSE’s ownership was transferred to private firms via disinvestment, the economic efficiency of the related company increased. Similarly, Harjit Singh says in his book Corporate Restructuring via Disinvestment (An Indian Perspective) that the performance of PSUs did not improve much after minority disinvestment since the company’s executive control remained same. As a result, the author observes that it is not the extent of the disinvestment that increases efficiency, but rather the change in corporate leadership and other market-driven elements such as innovation, technology, and administrative involvement that alter economic efficiency.

Politics of Disinvestment

As the process of disinvestment dilutes the state’s stake in PSUs, several researchers have recognized that numerous political issues may become an impediment to dealing with disinvestment policy. In their 2017 study, Jain and Sarkar discovered that disinvestments are greater when pursued by a right-leaning political party, including coalition parties with similar views, than by left-leaning parties. The research also suggested that the more the center-state convergence in ideas, the better the possibilities for disinvestment. Some commentators believe that the failure to fully execute the disinvestment strategy was due to the Congress party’s lack of a clear majority in the Lok Sabha after the 2004 general elections. As a result, they relied on outside backing from Left-leaning parties like as the CPI-M, which presented the administration with several obstacles since both parties had opposing ideas on various matters.