DISINVESTMENT

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DISINVESTMEN

WHY IN NEWS ?

For a record fifth year in a row, it is seemingly that the government is set to miss its divestment target.

WHAT IS DISINVESTMENT?

It is the action of an organization or government selling or liquidating an asset or subsidiary.
It can take the form of divestment or a reduction of total capital expenditures.
It is carried out for a variety of reasons, such as strategic, political, or environmental.

AIMS AND OBJECTIVES OF DISINVESTMENT:

As per the New economic policy of 1991, “The PSUs had shown a very negative rate of return on capital employed”.
Due to inefficient PSUs, the national gross domestic product and gross national savings were also getting adversely affected by low returns from PSUs.
Around 10 to 15 % of the total gross domestic savings were getting reduced on account of low savings from PSUs.

The following are the main objectives of disinvestment:

WHAT ARE THE CHANGES IN GOVERNMENTS STRATEGY:

According to Union government, it has decided to approach its investments in central public sector enterprises (CPSEs) from a capital management point of view rather than looking at it through the prism of fiscal deficit.
The government will look at both divestment and dividends from CPSEs combinedly.
The government has decided against setting a specific divestment target in the budget.
In the current interim budget, the government has thus budgeted ₹50,000 crore as ‘miscellaneous capital receipts’ for 2024-25 and this also includes asset sales apart from divestments.
The government also clarified that it will take a pragmatic and calibrated approach towards divestments.

WHY DID THE GOVERNMENT CHANGED STRATEGY?

For the consecutive fifth year, the NDA government is likely to fall well short of meeting its divestment target.
Such figures are despite bringing in a progressive reduction in divestment targets over the years.

As per interim budget, for 2023-24, it has revised downwards its original target of ₹51,000 crore to ₹30,000 crore in the interim budget.
In the last five years, the government has only managed to raise ₹2.34 trillion from divestment of mostly from minority stake sales as against a set target of ₹6.86 trillion.

IMPORTANCE OF DISINVESTMENT:

As per various scholars , “The governments are not good at doing business and should stay out of it”.
The government has no business to remain in business.
The other importances of disinvestment is that the efficient productivity and economic management of the companies.
From 2017-18 to 2021-22, the CPSEs incurred a loss of staggering amount of ₹1.54 trillion.
As Air India, before its sale, was losing ₹20 crore a day. Funding of these losses is a bad way to deploy public finances.
Divestment will also make CPSEs efficient and help raise money that can be used to reduce government debt and reduce the fiscal deficit.
It will also ensure better allocation of resources and catalyze overall economic growth.

CONCERNS REGARDING DISINVESTMENT:

The suitable timing of a divestment is the key to getting the right valuation.
In the past, pandemic and geo-political crises had turned the capital market sentiments bad.
The political support for divestment is lacking.
As the most labour unions oppose it and have filed legal cases.
State governments showing no enthusiasm is another concern.
Some divestments have also been derailed due to some poor-quality bidders. Divestment of BPCL, Pawan Hans, IDBI, Concor, Shipping Corporation of India and NMDC have been held up for these reasons.

SUCCESSES IN GOVERNMENT DISINVESTMENT:

The disinvestment of Air India in 2020-21 is the biggest success regarding disinvestment.
The government also offered 3.5% of its stake in LIC through an IPO and raised ₹20,516 crore.
On the other hand, IREDA’s IPO earlier this fiscal raised ₹858 crore.
Other disinvestments from Coal India, Rail Vikas Nigam, IRCON, ONGC, IRCTC and HAL account for a large share of divestment realization in recent years.

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