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Day 65 – Q 2. What is the present policy of disinvestment being pursued by the Government? What are your views on this policy? Is it healthy for the economy in general? Critically comment. 

  • IASbaba
  • August 24, 2020
  • 0
GS 3, Indian Economy, TLP-UPSC Mains Answer Writing
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2. What is the present policy of disinvestment being pursued by the Government? What are your views on this policy? Is it healthy for the economy in general? Critically comment.  

सरकार द्वारा विनिवेश की वर्तमान नीति क्या है? इस नीति पर आपके क्या विचार हैं? क्या यह सामान्य रूप से अर्थव्यवस्था के लिए अच्छी है? समालोचनात्मक टिप्पणी करें।

Demand of the question – The existing policy of disinvestment is to be commented upon where your views on this policy are to be discussed and also it’s utility for economy in general where both sides of the arguments are to be focused upon.

Introduction

Disinvestment means sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets. It introduces competition and market discipline and helps to depoliticize non-essential services. This policy has undergone wide ranging changes during recent times in India.

Body

  • Disinvestment in India is aimed at reducing the financial burden on the government due to the inefficient and poorly functioning PSUs (called sick units) and to improve public finance.
  • The government in its interim budget 2019, set the disinvestment target for FY 2019-20 at Rs. 90,000 crore, higher than the Rs. 80,000 crore budgeted for the ongoing year that it said would be exceeded.
  • The present policy of disinvestment being pursued by the Government can be seen from the below given salient features:
    1. Public Sector Undertakings are the wealth of the Nation and to ensure this wealth rests in the hands of the people, promote public ownership of CPSEs.
    2. While pursuing disinvestment through minority stake sale in listed CPSEs, the Government will retain majority shareholding, i.e. at least 51 per cent of the shareholding and management control of the Public Sector Undertakings.
    3. Strategic disinvestment by way of sale of substantial portion of Government shareholding in identified CPSEs up to 50 per cent or more, along with transfer of management control.
  • In February 2018, the cabinet had cleared the institutional framework for monetisation of identified non-core assets of the CPSEs under strategic disinvestment.
  • As per the Department of Investment and Public Asset Management (DIPAM), the current policy on strategic sale entails that the Niti Aayog will identify CPSEs for strategic disinvestment and it will also advise on mode of sale, percentage of shares of the CPSEs to be sold and method for valuation.
  • Strategic disinvestment is the transfer of the ownership and control of a public sector entity to some other entity (mostly to a private sector entity). Unlike the simple disinvestment, strategic sale implies a kind of privatization.

Some of the views on Disinvestment can be seen as given below:

  1. Disinvestment 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 the value of the public assets making it critical to disinvest early to realize a high value.
  2. Disinvestments can be seen as necessary to diversify the ownership of PSU for enhancing efficiency of individual enterprise as well as raise funds for technological up gradation, modernization and expansion of PSUs.
  3. Public sector companies can only be on an equal footing with the private sector if their shareholders give them the desired flexibility. Therefore, the public good is the best served if the government focuses on providing a stable, clear and effective regulatory system and gets out of the business of running industries.

Disinvestment and Economy:

The Good- 

  • In the context of macroeconomics, time has shown us how countries like Chile, UK, China, New Zealand, and Poland successfully used disinvestment to achieve new economic heights. Disinvestment allows government to have much better control over the market economy without upsetting norms of market behaviour.
  • Many countries used disinvestment as a sure means of restoring budgetary balance & to revive growth on a sustainable basis after facing economic crisis in 80s.
  • Disinvestment is extremely positive for the Indian equity markets and the economy. It will draw lot of foreign and domestic money into the markets. It will allow PSU to raise capital to fund their expansion plans and improve resource allocation in the economy. 
  • Disinvestment will allow the government to stimulate the economy while resorting to less debt market borrowing. Private borrowers won’t be crowded out of the markets by the government and will have to pay less to borrow from the open market. 

The Bad-

  • Sale of profit-making and dividend paying PSUs would result in the loss of regular income to the Government and also affects labour forces’ social security.
  • There would be chances of “Asset Striping” by the strategic partner. Most of the PSUs have valuable assets in the plant and machinery, land and buildings, etc.
  • Strategic and National Security Concerns: Strategic Disinvestment of Oil PSUs is seen by some experts as a threat to National Security since Oil is a strategic natural resource and possible ownership in the foreign hand is not consistent with our strategic goals.
  • Using funds from disinvestment to bridge the fiscal deficit is an unhealthy and a short term practice. It is said that it is the equivalent of selling ‘family silver’ to meet short term monetary requirements.

Way forward-

  • Caution against undervaluation: The government, however, must ensure that it is not taken for a ride. 
  • Asset creation from the proceeds: Instead of using the proceeds from the disinvestment to fund revenue deficit the proceeds must be utilized strictly for new asset creation.
  • To allay concerns of cronyism, the strategic sale process needs to be fair and transparent with a minimum reserve price that does justice to the valuable assets being auctioned off. 

Conclusion

Disinvestment may be a magic solution to raise revenues, but it is a tamed tiger—the performance depends on how to tame it in accordance to the sectoral policies, strength and presence of the public sector, etc. With the COVID-19 pandemic, it is time to reflect how to develop a symbiotic relationship between competent public and private sectors to foster India’s potential as an industrial powerhouse.

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