Strategic Disinvestment

  • Category
    Economy
  • Published
    15th Oct, 2019

Cabinet approves new strategic disinvestment processes.

Context

Cabinet approves new strategic disinvestment processes.

About

  • Disinvestment is selling or liquidating an asset or subsidiary by government. It is also referred to as ‘divestment’ or ‘divestiture.’
  • Disinvestment of an asset is either a strategic move for the company (or government), or used for raising resources to meet general/specific needs.
  • The Cabinet has approved a new process of strategic disinvestment to expedite privatization of select PSUs.
  • For this purpose, Department of Investment and Public Asset Management, DIPAM under the Ministry of Finance has been made the nodal
  • DIPAM and NITI Aayog will now jointly identify PSUs for strategic disinvestment.
  • 2019-20 Budget announced increasing the divestment target.
  • In the backdrop of corporate tax cuts, mobilizing revenues has become more critical for the government.
  • Disinvestment proceeds will be critical for the government to stick to its fiscal deficit target for FY 2020 (3.3 per cent of the GDP).
  • Recently, government agreed for sale of its stake in Bharat Petroleum Corp Ltd (BPCL), Shipping Corporation of India (SCI), NEEPCO, THDC and Concor.
  • This together account for 85% of the disinvestment revenue target for this fiscal.

Disinvestment vs. Strategic Disinvestment

If the government is selling minority shares in a PSE (less than 50%), it will continue to be the owner of the PSE. This is normal disinvestment procedure.

But if the government is selling majority shares (50% or more) of PSE to some other entity (mostly to a private sector entity), then this method is called strategic disinvestment or strategic sale). Unlike the simple disinvestment, strategic sale implies some sort of privatization, along with transfer of management control.

PSEs for strategic disinvestment are selected based on certain criteria.

  • They may be incurring losses
  • Or it may be operationally difficult for the government to continue with the PSE.

Importance of Disinvestment

The importance of disinvestment by the government lies in utilisation of funds for:

  • To improve public finances and fund increasing fiscal deficit.
  • Financing large-scale infrastructure development.
  • For investing in the economy to encourage spending and fund growth.
  • For retiring Government debt- since a big part of Centre’s revenue receipts go towards repaying public debt/interest.
  • For expenditure on social programs like health and education.
  • To encourage wider share of ownership in an enterprise, and reduce monopoly like enterprises.
  • To introduce, competition, market discipline and efficiency.
  • To depoliticize non-essential services and move out of non-core businesses, especially ones where private sector has now entered in a significant way.
  • It also sends a positive single to the market and can boost economic activity.

Criticism

  • It is argued that government is selling profit-making enterprises and is weakening the public sector
  • It is diverting attention from the economic slowdown
  • It is skipping the normal channel of parliamentary procedures

Conclusion

  • Disinvestment assumes significance due to prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably.
  • But government should also concentrate on increasing its own-revenue receipts to meet the public finances.
  • It should also take into account the suggestions of the 14th FC in this regard. For example, selling stake in those companies with less than 1% market share.

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