What is the push behind the strategic disinvestment move?

Headline : What is the push behind the strategic disinvestment move?

Details :

In News:
  • In November 2019, the Cabinet Committee of Economic Affairs approved strategic stake sale in five public sector undertakings (PSUs), even giving up management control.
  • It also gave an in-principle approval for the government to reduce stake in certain state-owned companies to below 51 per cent while retaining majority stake management control.
  • These major divestment decisions were taken as the government targets to meet its highest ever divestment target of Rs 1.05 trillion for 2019-20.
Why do governments divest stake in public sector undertakings?
  • Government should not be doing business:
    • It can often be seen that government businesses are inefficient and see huge losses except when they have a monopoly in the sector.
    • Some governments believe that “the government has no business being in business”. The government’s role is to facilitate a healthy business environment but the core competence of a government does not lie in businesses like selling fuel or steel at a profit.
    • That is one reason that divestment is made a priority by some leaders/parties.
  • Disinvestment to bring in revenue:
    • With governments always having to spend more than they earn through taxes and other means, additional income from the proceeds of a stake sale in PSUs is always welcome.
    • This is especially the case now in India, where the government is having to spend higher amounts on infrastructure to boost economic growth, along with its commitments on health and education.
Why disinvestment now?
  • India is currently facing a slowdown in economic growth, with indirect tax collections also being below par.
  • The government has cut corporate tax rates hoping that companies will use these savings for price cuts or dividend payouts, or for investments that create jobs.
  • As consumption is highly muted, the Central government may look to place more disposable cash in the hands of the taxpayer through lowering personal income tax rates.
  • As a result of cut and to-be-cut tax rates, the government would have less and less cash for its own expenditure in infrastructure and the social sector.
  • To do all this, without breaching the fiscal deficit targets, the strategic sale of PSUs is a good way.
Disinvestment is mostly done through three models:
  • Promoting public ownership of CPSEs: Listing of profitable CPSEs on stock exchanges to promote ”people’s ownership” by encouraging public participation in CPSEs
  • Disinvestment through ”minority stake sale” in listed CPSEs to achieve minimum public shareholding norms of 25 per cent. Here, the Government will retain majority shareholding.
  • Strategic sale/disinvestment by way of sale of substantial portion of Government shareholding in identified CPSEs upto 50 per cent or morealong with transfer of management control.
A note on evolution of India’s Disinvestment policy:
  • For the first four decades after Independence, India pursued a path of development in which the public sector was expected to be the engine of growth.
  • However, the public sector overgrew itself and its shortcomings started manifesting in low capacity utilisation and low efficiency, inability to innovate, large interference in decision making process etc.
  • Hence, a decision was taken in 1991 to follow the path of Disinvestment.
1. Period from 1991-92 to 2000-01 (Sale of minority stakes of the PSUs)
  • The change process in India began in the year 1991-92, with 31 selected PSUs disinvested for about Rs.3,000 crore.
  • This was the period when disinvestment happened primarily by way of sale of minority stakes of the PSUs through issue of shares in small tranches, most of which were picked up by the domestic financial institutions.
  • Disinvestment was not a great success due to Unfavorable market conditions; Opposition on the valuation process; No clear-cut policy on disinvestment; Strong opposition from employee and trade unions etc.
  • Results:
    • Against an aggregate target of Rs. 54,300 crore to be raised from PSU disinvestment from 1991-92 to 2000-01, the Government managed to raise just Rs. 20,000 crore (less than half).
2. Period from 2001-02 to 2003-04 (Strategic Sale and Offer to Public)
  • The disinvestment took the shape of either strategic sales (involving an effective transfer of control and management to a private entity) or an offer for sale to the public, with the government still retaining control of the management.
  • Some of the companies which witnessed a strategic sale included: Bharat Aluminium Co. Ltd. Hindustan Zinc Ltc, Maruti Suzuki India Ltd. etc.
  • This was the period when maximum number of disinvestments took place. The valuations realized by this route were found to be substantially higher than those from minority stake sales.
  • Results:
    • During this period, against an aggregate target of Rs. 38,500 crore to be raised from PSU disinvestment, the Government managed to raise Rs. 21,000 crore (in just 2 years).
3. Period from 2004-05 to 2008-09 (Stagnation)
  • The issue of PSU disinvestment remained a contentious issue through this period. As a result, the disinvestment agenda stagnated during this period.
  • Results:
    • In the 5 years from 2003-04 to 2008-09, the total receipts from disinvestments were only Rs. 8,500 crore.
4. 2009-10 to 2015-16 (Minority sale in profitable PSUs)
  • A stable government and improved stock market conditions initially led to a renewed thrust on disinvestments. The Government started the process by selling minority stakes in listed and unlisted (profit-making) PSUs. This period saw disinvestments in companies such as NHPC Ltd., Oil India Ltd., NTPC Ltd. etc. through public offers.
  • However, from 2011 onwards, disinvestment activity slowed down considerably.
  • Results:
    • Disinvestment achieved during 2009-10 to 2013-14 was more than Rs. 99,000 crore, with an yearly average of Rs. 19,873.
    • The total disinvestment picked up during 2014-15 to 2016-2017 was Rs. 87,714 crore, with an average yearly realization of Rs. 29,238 crores.
5. 2016-17 onwards
  • For identifying CPSEs for strategic disinvestment, and implementing it, Government has organized Niti Aayog for assisting it, the Core Group of Secretaries on Disinvestment (CGD) to monitor implementation and the Department of Investment and Public Asset Management (DIPAM) to oversee the disinvestment.
  • The Government has approved listing of 14 CPSEs in sectors like railways, defence, power, steel, renewable energy & insurance.
  • Second tranche of CPSE Exchange Traded Fund (ETF) was floated to simultaneously divest multiple stocks spread across various sectors in one bundled instrument.
Section : Economics