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Union Budget 2021 – Is the Government selling everything? What are privatisation plans of Government?

Union Budget 2021 – Is the Government selling everything? What are privatisation plans of Government?


  • GS 3 || Economy || Economic Reforms || Disinvestment

Why in the news?

The government budgeted Rs 1.75 lakh cr from stake sale in public sector companies and financial institutions, Including 2 PSU banks and one general insurance company, in the next fiscal year beginning April 1.

Disinvestment Targets

  • The amount 1.75 lakh cr is lower than the record Rs 2.10 lakh cr which was budgeted to be raised from CPSE disinvestment in the current fiscal year.
  • However, the COVID-19 pandemic impacted the government’s CPSE stake sale programme, and the target has been lowered to Rs 32,000 cr in the Revised Estimates.
  • So far this fiscal year, the government has mopped up Rs 19,499 cr from CPSE stake sale and share buyback.
  • For fiscal year 2021-22, out of the total Rs 1.75 lakh cr, Rs 1 lakh cr is to come from selling government stake in public sector banks and financial institutions. Rs 75,000 cr would come as CPSE disinvestment receipts.
  • Strategic Sectors
    • Unveiling the Disinvestment/Strategic Disinvestment Policy, Finance Minister Nirmala Sitharaman said, Four sectors — Atomic energy, Space and Defence; Transport and Telecommunications; Power, Petroleum, Coal and other minerals; and Banking, Insurance and financial services would be strategic sector
    • In strategic sectors, there will be bare minimum presence of the public sector enterprises.
    • The remaining CPSEs in the strategic sectors will be privatised or merged or subsidiarized with other CPSEs or closed. In non-strategic sectors, CPSEs will be privatised, otherwise shall be closed.
  • Companies that are being privatized
    • In 2021-22 Budget speech, FM said strategic disinvestment of BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam Ltd, among others would be completed in 2021-22.
    • Privatisation will reduce fiscal pressure as the Centre has been infusing capital year after year even though market valuation of government-owned banks has shrunk.
    • Post disinvestment, economic growth of Central Public Sector Enterprises (CPSEs)/ financial institutions will be through Infusion of private capital, technology and best management practices.

How many PSUS in India?

  • There were around 300 Public Sector Enterprises (PSEs) in India as on March 31, 2019
  • To fast-track the disinvestment policy, NITI Aayog would work out on the next list of central public sector companies that would be taken up for strategic disinvestment.

All about disinvestment:

Definition of Disinvestment

  • At the very basic level, disinvestment can be explained as follows:
    • “Investment refers to the conversion of money or cash into securities, debentures, bonds or any other claims on money. As follows, disinvestment involves the conversion of money claims or securities into money or cash.”
    • Disinvestment can also be defined as the action of an organisation (or government) selling or liquidating an asset or subsidiary. It is also referred to as ‘divestment’ or ‘divestiture.’
    • In most contexts, disinvestment typically refers to sale from the government, partly or fully, of a government-owned enterprise.
    • A company or a government organisation will typically disinvest an asset either as a strategic move for the company, or for raising resources to meet general/specific needs.

Objectives of Disinvestment

  • The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very negative rate of return on capital employed.
  • Inefficient PSUs had become and were continuing to be a drag on the Government’s resources turning to be more of liabilities to the Government than being assets.
  • Many undertakings traditionally established as pillars of growth had become a burden on the economy. The national gross domestic product and gross national savings were also getting adversely affected by low returns from PSUs.
  • About 10 to 15 % of the total gross domestic savings were getting reduced on account of low savings from PSUs. In relation to the capital employed, the levels of profits were too low. Of the various factors responsible for low profits in the PSUs, the following were identified as particularly important:
    • Price policy of public sector undertakings
    • Under–utilisation of capacity
    • Problems related to planning and construction of projects
    • Problems of labour, personnel and management
    • Lack of autonomy
  • In this direction, the Government adopted the ‘Disinvestment Policy’. This was identified as an active tool to reduce the burden of financing the PSUs. The following main objectives of disinvestment were outlined:
    • To reduce the financial burden on the Government
    • To improve public finances
    • To introduce, competition and market discipline
    • To fund growth
    • To encourage wider share of ownership
    • To depoliticise non-essential services
  • Sometimes, disinvestments can also be called upon for political or legal reasons

Importance of Disinvestment:

  • Presently, the Government has about Rs. 2 lakh crore locked up in PSUs. Disinvestment of the Government stake is, thus, far too significant. The importance of disinvestment lies in utilisation of funds for:
    • Financing the increasing fiscal deficit
    • Financing large-scale infrastructure development
    • For investing in the economy to encourage spending
    • For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts go towards repaying public debt/interest
    • For social programs like health and education
  • Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of value of the public assets making it critical to disinvest early to realize a high value.
  • Necessity of Disinvestment:
    • Control: It brings public money of PSUs/CPSE into public control.
    • Performance: Private sector is much more target oriented and this shall help in boosting the profits of PSUs.
    • Core Competency: Government lacks the technical expertise to manage the PSUs/CPSE considering the complex business environment. Private sector can bring better technical expertise and managerial skills.
    • Demarcation of Roles: Disinvestment helps in bringing clear demarcation of role to be played by government and market.

Issues with disinvestment:

  • The rates at which some of the initial shares were sold are controversial, even though all the disinvestment was made through an auction process.
  • It was also a government resource-raising activity, rather than changing the PSU.
  • The share valuation is influenced by the decision not to reduce government holdings to less than 51%.
  • The disinvested public corporations will continue to work under the constraints of the public sector with the continuing majority control of the government.
  • Loss-making units do not so readily draw investment.
  • It may contribute to the creation of private monopolies.
  • Higher efficiency and productivity is not guaranteed by mere shift of ownership from public to private.
  • It can contribute to the loss of work for many employees. The profit-driven private sector continues to use capital-intensive techniques that will exacerbate the issue of unemployment in India.

Current Disinvestment Policy:

  • The Government promotes public ownership of CPSE
  • For all listed profitable CPSE or unlisted CPSE without any accumulated losses, Government shall conduct minority stake sale while retaining majority shareholding (51%)
  • Strategic disinvestment shall be done by sale of substantial portion (>50%) of Government stake along with managerial control.

NITI aayog recommendation for disinvestment:

  • Trying to meet the disinvestment target set by the government, the Department of Disinvestment and Public Asset Management (DIPAM) and Niti Aayog are looking at the scope of putting various public sector enterprises (PSUs) on the block.
  • “The government is looking at potential strategic stake sales in the non-priority sector. The government has asked Niti Aayog to identify companies which can be privatized


Government’s initiatives such as Bharat-22 is a welcome step wherein rationalization of CPSE is being done by giving control of CPSE to the public by selling its minority stakes – mobilizing finances to improve the balance-sheets of such CPSE and keep them afloat. Other measures to strategic disinvestment could be to expand management by involving more private and independent directors while still retaining majority stakes.

Mains oriented question:

Examine why it is important for disinvestment? Analyze if there is a need to look at the disinvestment strategy again? (250 words)