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Disinvestment of 23 PSUs (31 July 2020)

Disinvestment of 23 PSUs. (31 July 2020)

Why in News:

The government is working on completing the stake sale process of about 23 public sector companies whose divestment has already been cleared by the Cabinet, Finance Minister Nirmala Sitharaman said on Monday. The minister also said she would soon meet small finance firms and non-banking finance companies (NBFCs) to review the credit being extended by them to businesses. The minister said the government wants to sell stake in public sector companies at a time when it fetches the right price.

Context:

For the 2020-21 fiscal, the government has set a disinvestment target of Rs 2.10 lakh crore. Of this, Rs 1.20 lakh crore will come from disinvestment of public sector undertakings and another Rs 90,000 crore from stake sale in financial institutions.

Background:

Disinvestment is aimed at reducing the financial burden on the government due to inefficient PSUs and to improve public finances.

The Indian economy was adversely affected by bankruptcy during the period 1981-91.

The new economic policy has given rise to significant focus for the privatization of public enterprises in the year 1992.

The process of disinvestment in India was started in the year 1992 and 31 selected PSUs were disinvested for Rs.3,038 crore

The government has raised a total of Rs 4.5 lac crore till date through disinvestments. However, no sale of a company to a private player has been made since 200

Summary of the Debate

Need of the disinvestment:

  • GDP was getting adversely affected by low returns from PSUs, bout 10 to 15 % of the total gross domestic savings were getting reduced on account of low savings from PSUs.
  • To reduce the financial burden on the Government
  • To improve public finances.
  • To reduce the fiscal deficit.
  • To introduce, competition and market discipline.
  • Making availability of the funds for the growth of the PSUs and the economy.
  • The disinvestment encourages the wider share of ownership in the market.
  • For financing large-scale infrastructure development.
  • The world over the consumption of petroleum products in India is continue to increase and in other places in the developed economies it is not. So, the major companies are looking at Indian market.

Policy followed by Government to disinvestment and meeting targets:

  • Last two years there were significant targets for disinvestment. So the disinvestment targets are kept but then the entities have to be found which are suitable for disinvestment, so that they attract investment and they are significant investment.
  • There is a sectoral limit for investment in many areas, in some areas it is 100 percent, in some areas it is 74 and 49 percent, but mostly there is a liberalized regime for foreign investment.
  • Earlier, minority stakes have been either auctioned off to financial institutions or offloaded to the public by way of an offer for sale.
  • The present government has made a policy statement for FY 2018-19 that all disinvestments would only be minority disinvestments through public offerings.

                         A 20-year history of disinvestment in India | Value Research

Challenges:

  • Disinvestment may be the reason for public monopolies becoming private monopolies due to complete privatisation, which can exploit their position to increase costs of various services to earn higher profits.
  • Making funds from disinvestment to reduce the fiscal deficit is not a long term practice and an unhealthy process.
  • It can affect labour forces' social security.
  • According to some experts strategic disinvestment of Oil PSUs may be threat to National Security because Oil is a strategic natural resource and possible ownership in the foreign hand is not consistent with our strategic goals.
  • There may be loss of regular income to the Government due to sale of profit-making PSUs.

Way Forwards:

  • Policy environment must be very conducive for the disinvestment and privatisation for the more and more participation of private sector.
  • There must be policy reforms in consultation with the private sector and the major stakeholders.
  • Government has to move forward even if the investment in some of the companies is not very attractive because they are more or less have now become a burden on the exchequer and they are not really serving the core interest of the government.
  • The strategic sale process needs to be fair and transparent.
  • The partnership of government and the private sector will attract more and more investments and this is the good move not only for the PSUs and the government but also for development story of India.

Important points made by the Guests

Sushil Chandra Tripathi, Former Principal Secretary, Finance, UP

  • Lots of changes have taken place in the India economy, society and polity since 50s and 60s and in those times it was necessary to set up public sector undertakings particularly in the key areas like basic industries whether they were steel plants, BHEL, ONGC, etc.
  • But in the last 50 years whole scene has changed. Indian industry has come off age, many of these PSUs had number of objectives apart from being in the basic industry sector. They were also supposed to take up regional development, job creation, etc.
  • Now regional development and job creation are being done directly by the concerned governments, state governments and central government and therefore and therefore those objectives are no longer important.
  • Over period of time many of the Public Sector Industries are functioning in the areas where efficient Private Sector Enterprises are also functioning, so these undertakings are suffering in competition and if they are not disinvested at an appropriate time then over period of time many of them will become sick.
  • Many of these PSUs have outdated technology they are not competitive.
  • This is the time when government needs money so rather than putting money in these PSUs to revive them to modernise them, it is better since they are not really serving any strategic purpose they should be divested.

Subhomoy Bhattacharjee, Consulting Editor, Business Standard

  • Government every year is getting confidence to sell PSUs and BPCL (Bharat Petroleum Corporation Limited) is an important sale because it is a genuine sale.
  • Disinvestment will be done to a strategic partner not just selling equity in the market to the large body of investors.
  • Now we are looking at a clear change of ownership and the companies which come in have to show that they have the ability to be able to take on that sort of challenge.

S. P. Sharma, Chief Economist, PHDCCI

  • Now we are in a new economics and particularly during the last 4-5 years a lot of change in the global economic environment starting from tussle between USA and China and then trade war has impacted global economy.
  • Now the global money is looking for good growth partners and India is one of them because India is an attractive destination in the global economic system.
  • During the 1950s and 60s India was a closed economy and most of the investment in the public sector units and the dominance of the PSUs. But after the 1970s and 80s Indian economy became restrictive and in the 1990s after the LPG (Liberalisation, Privatisation and Globalisation) model introduced it again become open and the economy were liberalized and then again in 2000s India were in globalized manner and it opened the economy, which led to increase the trade to GDP ratio .
  • So, the integrity increased year after year and now the time is most opportune for privatisation because privatisation is only way for the India economy to push the growth trajectory because India is facing severe slowdown in growth trajectory and it has slumped from 7 percent to 6 percent and then 4.2 percent. So the role of private sectors becomes very crucial to push this growth trajectory and to make fruitful the ease of doing business which has been disseminated by the government.
  • It will also interact foreign investments, now we are only 60 to 70 billion dollar in the Foreign Direct Investments (FDIs) on annual basis. So going forward we have a lot of potential to interact 100 billion dollar in the next few years.   
  • But that should also be supported by reduced cost of doing business.
  • So that private sector is working efficiently and showing the good results. The private sector always works on price cost margin so that; it is the major attraction for private sector.

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