Disinvestment of Public Sector Units (PSUs) in India – Pros and Cons

The government has set a disinvestment target for 2020-2021 to Rs.2.10 lakh crore, having failed to achieve the current fiscal year’s target of Rs.1.05 lakh crore. It hopes to achieve the unmet target of this fiscal year in the next fiscal year. A large part is likely to come from the sale of stakes in Life Insurance Corporation and IDBI bank. However, the strategy of how this target is going to be achieved is absent. Nevertheless, selling off stakes from high return public enterprises like LIC can ensure the achievement of targets set by the government. Achieving this alone is not enough. The government must use these earnings not to pay off its loans or achieve its fiscal deficit target but to reinvest in aspects that ensure improvement in economic growth and sustainable returns.

IAS EXPRESS owns the copyright to this content.

What is disinvestment?

  • Disinvestment is defined as the government’s action of selling or liquidating its stake in a public sector unit or subsidiary.
  • This is done when PSUs start turning into liabilities and start showing a negative rate of return, in turn putting pressure on government resources.
  • In such cases, disinvestment helps bring down the financial burden imposed by inefficient PSUs on public finances, raise money and put proceeds to better use.
  • Disinvestment is an annual exercise with the government setting a disinvestment target for select PSUs for the upcoming financial year.
  • This idea was introduced in the 1991 Interim Budget by the then finance minister Manmohan Singh as the country was moving towards more liberal economic reforms.
  • The Department of Disinvestment was established as a separate entity in 1999 and turned into a ministry in 2001.
  • In 2004, it was included as a department under the Ministry of Finance.
  • This department was later renamed as the Department of Investment and Public Asset Management (DIPAM) in 2016.
  • It should be noted that India was able to meet its disinvestment target only twice in the last eight years.

What are the advantages of disinvestment in India?

  • Reduces the fiscal burden on the exchequer
  • Improves public finances
  • Encourages private ownership
  • Funding growth and development programmes
  • Maintains and promotes competition in the market
  • Increases the efficiency and accountability of the public enterprises
  • Professionals manage enterprise rather than bureaucrats.

Most probable and repeated topics of upsc prelims

What is the difference between privatisation and disinvestment?

  • Disinvestment means the dilution of the stake of the government in the public enterprise.
  • This can be done in two ways.
  • If the government sells part of its equity of a public enterprise less than 50% of its total stock, it is called disinvestment. In this case, the government retains control over the enterprise.
  • However, when the disinvestment or sale of its equity capital by the government exceeds 50%, the ownership of the enterprise is transferred to the private enterprise, leading to the privatisation.
  • For instance, the government plans to privatise Air India by selling its 100% ownership in the airline, for which it invited expressions of interest earlier this month.
  • In majority disinvestment programmes, the government retains 51% or more of the total equity capital of the public enterprises to retain the ownership.

What is the disinvestment target set by the government during the Budget 2020?

  • For the current financial year 2019-2020, the government lowered its disinvestment target to Rs.65,000 crore from the budget estimate of Rs.1.05 trillion due to it failing to achieve the disinvestment target.
  • It had set the highest-ever disinvestment target for the next fiscal year despite failing to achieve the previous goal.
  • The Centre aims to bring in Rs.2.1 lakh crore through disinvestments in 2020-21.
  • Of this, it anticipates earning Rs.90,000 crore by selling stakes in public sector banks and financial institutions, while the balance Rs.1.2 lakh crore will come from the sale of stakes in central public sector enterprises.
  • The government plans to sell a partial stake in Life Insurance Corporation of India through initial public offerings. LIC’s assets are worth more than Rs.36 lakh crore as of March 2019.
  • The government expects about Rs.90,000 crore from stake sale in LIC and IDBI Bank.
  • The government also plans to divest stakes in Air India, Bharat Petroleum Corp.Ltd (BPCL), Container Corp. of India Ltd (Concor) and Shipping Corp. of India (SCI) soon.
  • Furthermore, the government plans to sell public sector undertakings in the power sector by selling its entire stake of 74.23% in Teri Hydro Development Corp. and its 100% stake in North Eastern Electric Power Corp. Ltd to NTPC Ltd.
  • The amount planned to be mobilised from the stake sale next fiscal is more than half of the government’s non-debt capital receipt of Rs.3.85 trillion. The non-debt capital receipts consist of recovery of loans and other receipts (disinvestment proceeds). Over the years, disinvestment became the major source of the Centre’s non-debt capital receipt.
  • Through aggressive disinvestment target, the government hopes to:
  • Contain its fiscal deficit at 3.5% of the GDP in FY21;
  • Revive the decreasing tax collections and economic slowdown.
  • Centre had increased the fiscal deficit from 3.3% estimated in the budget presented last July to 3.8% of the GDP in the revised estimate that was presented recently.

Why is strategic disinvestment a major concern?

  • Strategic disinvestment is the sale of a substantial portion of the government’s shareholding of a Central Public Sector Enterprise (CPSE) of up to 50% or such higher percentage, along with transfer of management control.
  • The Comptroller and Auditor General’s 2019 report points out how CPSEs were the major contributors to the Central government’s dividend/surplus income in 2017-18 along with RBI’s contribution during that period.
  • Experts are currently concerned of the way the government is financing its budget through off-budget borrowings, disinvestment and by draining out cash from CPSEs.
  • The concern is about how the disinvestment is done. The government is bleeding the CPSEs to finance budget, leading to it is damaging CPSEs permanently. This could harm the long-term prospects of the economy for short-term gains.
  • Furthermore, the problem the government is facing for the past 15 years is that though it is asset-rich, its returns are very poor.
  • Therefore, any sale or acquisition of assets should aim to generate income.
  • However, the government has used assets sales to make up for the shortfall in income.
  • Though the constitution of the DIPAM is a step in the right direction, there is still no evidence of operationalizing the asset management system. The disinvestments are still largely driven by fiscal pressure.
  • Disinvestment should be utilised for increasing the industrial production, capacity-building and increasing the demand in the economy so that the core problems faced by the economy is addressed and there is no repetition in the future.

What can be the way forward?

  • For the past 15 years, most Indian governments’ disinvestment programmes have mainly focused on sales of minority stakes in PSUs without the government actually ceding control, serving little purpose outside of numerically meeting disinvestment targets.
  • The current government’s plan to revive the idea of genuine disinvestment through strategic sales of its majority stakes in profitable PSUs to private buyers is a step in the right direction.
  • However, the centre should stick with the view that the “government has no business being in business”.
  • While the government’s presence may be unavoidable in strategic sectors like defence and oil exploration, there is really no need for it running fuel-retailing outlets, building ships or running container freight operations.
  • The governments’ presence in such non-strategic sectors not only distorts competitive dynamic for private players, but it also results in consumers and taxpayers bearing the burden.
  • To allay concerns of cronyism, the strategic sale proceeds need to be transparent with a minimum reserve price that does justice to the valuable assets being auctioned off.
  • A third-party valuation of every PSUs’ assets and a minimum number of bidders should be necessary pre-conditions to going ahead with each sale.
  • The centre should also recognise that, when it cedes majority equity in profit-making entities, it is giving up substantial future rights over these firms’ earnings and dividends, which results in a substantial opportunity cost to the exchequer. To offset this, it should sequester the substantial sums earned from such strategic sales from the Union Budget to prevent wastage on interest or salary payouts. The government should use the earning to reinvest in long-term infrastructure assets that can yield sustainable returns to the economy.


Promoting strategic disinvestment in select PSUs and decreasing the bureaucratic influence in non-strategic sectors can allow for the improvement of fiscal health and competitiveness within these enterprises. However, currently, the government does not have a clear strategy to achieve the ambitious disinvestment target it had set itself during the recent budget. Therefore, the government must take prudent steps to ensure the planning of a clear-cut strategy to achieve the current targets and reinvesting the earnings from the disinvestments in a judicious way.

Test Yourself:

The government has set an ambitious disinvestment target during the Union Budget 2020-21. Critically analyse the ways in which the government should invest the earnings it may get through the achievement of the target. (250 words).

Notify of
Inline Feedbacks
View all comments
Would love your thoughts, please comment.x