Industry Disinvestment and Privatization

Industry Disinvestment and Privatization

It was assumed that the public sector would be the driving force of economic growth during the first four decades following independence. Public sector shortcomings began to manifest themselves in low capacity utilisation and low efficiency because of overmanning, lack of work ethics, overcapitalization because of substantial time and cost overruns and so on. Moreover, there was a lot of interference from the public sector in the decision-making process. Thus, in 1991, the decision was made to go along the Disinvestment route.


In the financial world, disinvestment refers to the act of selling or liquidating assets. Disinvestment is the process through which a government’s share in a PSU (Public Sector Undertaking) is reduced to a minimal level. It enables the transfer of the government’s massive public debt of public sector enterprises to the private sector. The majority of disinvestments are driven largely by the need to optimise resources in order to provide the highest possible profits.

Disinvestment Policy

The Indian government has chosen to privatise public sector firms in a progressive and phased way, via disinvestment, in order to reduce the reliance on public funds.

It will be accomplished by reducing the government’s ownership stakes in all non-strategic public sector businesses to 26 per cent or less of total equity.

For the purpose of maintaining a 51 per cent stake in the company, the government has agreed to allow disinvestment of up to 49 per cent of ownership in the company.

Advantages of disinvestment

This is good for the government since it will help to lower the nation’s overall debt. To conserve money, the government will spend less on PSUs that may be utilised for welfare reasons. The budget deficit will be reduced as a result. It enables the government to generate cash that may be utilised to improve the physical and social infrastructure of the country.

Society’s benefit:

  • As a result, it will put more emphasis on public welfare.
  • As a result, public resources will be more readily available.
  • Better services will be provided to customers.
  • As businesses grow and hire more people, the economy will benefit.
  • The market’s advantage
  • The quality of services would improve since more businesses would be able to compete.
  • Profits will rise as a result of a rise in market value.
  • Advantage of PSUs
  • It will guarantee that PSUs are kept up to date with the times.
  • PSU failure and loss are transferred to the private sector as a result of this policy.

Disinvestment policy concerns a number of issues:

Despite the fact that all of the disinvestment has taken place via an auction procedure, there are disagreements concerning the pricing at which some of the original shares were sold in the first place.

Instead of reforming PSUs, the government has used them as a means of obtaining funds for other projects. The decision not to cut the government’s stake in the company to less than 51 per cent has an impact on the stock’s value.

The disinvested state firms would continue to function under the limits of the public sector as long as the government retained a majority ownership stake. Loss-making units do not attract the same level of investment as profitable ones.

It has the potential to result in the formation of private monopolies. The simple transfer of ownership from the public to the private sector does not result in increased efficiency and production.

It has the potential to result in the loss of countless jobs. The profit-driven private sector has a proclivity to adopt capital-intensive procedures, which would exacerbate the country’s unemployment crisis.

India’s disinvestment programme began in the 1990s:

This is without a doubt the most courageous stand taken so far in India’s short but tortuous history of disinvestment, which dates back to the 1990s when it started listing public sector undertakings on the stock markets via minority share sales.

Aside from generating valuable income, the sale or liquidation of such businesses would assist the government in avoiding the waste of good money on poor investments and redirecting it into more productive endeavors.

Because the Prime Minister had said in 2014 that the government had no business engaging in business, it is unclear why it took the current government administration so long to clarify this goal or make progress on this front even without a formal blueprint.

Now that the strategy has been established, its effective implementation will be just as important as dealing with the inevitable pockets of opposition that will inevitably arise.

Despite the fact that stock markets are soaring, the financial capacity of possible bidders may not be at its peak as a result of the epidemic.

Sectors to be disinvested in two ways:

CPSEs that have not been privatised, merged with another CPSE, or subsidiaries may be considered strategic sectors.

The following are the four sub sectors that fall within its purview:

  • Atomic energy, outer space exploration, and military defence all go hand in hand.
  • In addition to transportation and telecommunications,
  • Various forms of energy such as hydrocarbons, coal, and petroleum
  • Services in the fields of banking and insurance
  • CPSEs will either be privatised or closed in the non-strategic sector.


Governments should not immerse themselves in the business of manufacturing/producing products and services in industries where competitive markets have matured. The government will face a number of challenges, including establishing trust in the sale process, ensuring that the valuations are fair, providing officers with some protection from post-transaction witch hunts by auditors and investigating agencies, and ensuring that the economy does not face shocks or create monopolies.