Disinvestment in India

Last updated

Disinvestment in India is a policy of the Government of India, wherein the Government liquidates its assets in the Public sector Enterprises partially or fully. The decision to disinvest is mainly to reduce the fiscal burden and bridge the revenue shortfall of the government. The key engine in achieving growth in India during post-independence was played by Public Sector Enterprises (PSE). Among other responsibilities of PSE's post-independence, the social and developmental obligations of the nation were most important, which resulted in these units escaping competitive race. Later on the activities of the PSU's were divergent, concentrating towards more non-core areas like hotels and consumer goods among others. Further, the public enterprises were used as tools for political and bureaucratic manipulation; which was consequential in low capacity utilization, reduced productivity, failure to innovate, and complex decision-making processes on vital issues of development.

Contents

By the end of the 1980s, the growth of the PSE's had turned into, as expressed by some commentators, an "end in itself". These factors became an obstacle to the growth of India. Therefore, the poor performance of the PSE's called for reforms to address the weakness in India's development. After the change of Government in 1991, among many economic reforms launched; privatization was one, which focused on the efforts required to be taken to curtail the fiscal burden of the state by reducing public sector borrowings and bring in fiscal austerity. [1]

Background

The economic policies of the colonial governments during the pre-independence era were mainly focused on promoting their home country rather than India. Hence, most of the industrial activity was centered on exporting raw materials and importing finished products from Britain. India's Economic and Industrial policy after independence was worked out on the lines of the Soviet Union, which was characterized as the 'Socialist framework'. However, this socialist policy of industrialization regulated most of the private enterprises with rigid restrictions over its operations, resulting in an ineffective industrial system to be replaced by Import-substitution industrialization. Further, disappointing performance by the industrial sector and Balance of Payment crisis of 1991 forced the policymakers to reassess the situation and program reforms towards a further open-market oriented policy. [2]

Mandate

In 1996, the Government of India set up a Disinvestment Commission under the Ministry of Industries; the mandate of the commission was to assess the viability and advice the Government on disinvesting various PSE's through market development and diversifying transfer of ownership of the PSU's for five-ten years period. [3] On 10 December 1999, the commission was dissolved and all the decisions on disinvestments in India were taken by a separate Department of Disinvestments that was formed under the Ministry of Finance. In 2001, the Vajpayee government upgraded the Department of Disinvestment to a full-fledged Ministry. But in 2004, the Manmohan Singh government, first among many decisions taken, was to shut down the ministry and merge it in the Finance ministry as an independent department. [4] Later, the Department of Disinvestments was renamed as Department of Investments and Public Asset Management (DIPAM) on 14 April 2016. [5]

The mandate of DIPAM is as follows:

All other post disinvestment matters, including those relating to and arising out of the exercise of Call option by the Strategic Partner in the erstwhile Central Public Sector Undertakings, shall continue to be handled by the administrative Ministry or Department concerned, where necessary, in consultation with the Department of Investment and Public Asset Management (DIPAM). [5]

Disinvestment policies

The policy on disinvestment has evolved considerably through President's address to Joint Sessions of Parliament and statement of the Finance Minister's in their Budget Speeches. [6]

1991 to 1999

To redefine the economic reforms in the country and the performance of PSU's, a new Industrial policy was drawn up in 1991, which discussed the role of PSU and came up with a comprehensive policy for disinvestment of public sector undertakings. The policy brought autonomy to the PSU boards and encouraged them to improve efficiency in their operations. The Government identified PSU's under priority areas and concentrated towards them and subsequently privatized most of the loss-making entities. Under Industrial restructuring, the Government opened up most of the sectors to the private entities. While, Public sector concentrated towards Railways, Mining, and atomic energy. Another key prospect of the 1991 policy was to end "red-tapism" which was known as Industrial licensing, wherein the requirement to get a license to start a private sector industry was abolished. Thereby, cutting down unnecessary delays in establishing an industrial unit by any private entity. [7]

One of the key accomplishments of the industrial policy statement, as indicated in the Union Budget of 1992 was: it reduced the industries reserved for the public sector from seventeen to four. [8] Further, the budgetary provisions for the PSUs were sharply curtailed and most of the loss-making enterprises were referred to the Board of Industrial and Financial Reconstruction. A committee was set up to develop guidelines for disinvestments headed by C. Rangarajan. The commission submitted its report in 1993, which recommended: disinvestments up to 49 percent to be allowed in companies reserved for the public sector and 100 percent in other entities. [8]

1999 to 2004

The disinvestment policy of the Vajpayee led NDA Government during 1999-2004 accelerated the disinvestment process in the country. The Government made a significant change in disinvestments, it was the same government that used the expression "Privatization" in place of disinvestment for the first time. The new method used by the government was, classifying the PSUs in two categories: ‘'Strategic'’ and ‘'Non-Strategic'’; all the industries dealing with defense-related equipment were described as strategic resources and no disinvestments were recommended for these sectors. whereas, it was proposed to bring down government stake to 26 percent in all other non-strategic sectors. The policy of the NDA government was to strengthen the PSUs in strategic sectors by privatizing non-strategic companies. The government focussed on the privatization of the non-strategic PSUs up to 26 percent or lower if needed. [9] Looking back at the Vajpayee led NDA term in office, some economic scholars have applauded the earlier NDA government's effort towards disinvestment and have observed: "the disinvestment policy witnessed a golden period during late Prime Minister Atal Bihari Vajpayee-led NDA government". [10]

2004 to 2014

So far, the Manmohan Singh led UPA-I and UPA-II governments were in power from 2004 to 2014; data from DIPAM indicates, the government did not take enough interest in the disinvestment program and interrupted the long-term growth story of India. [10] [11] UPA-I government in 2004, devised a National Common Minimum Programme (NCMP) in which, it laid out its policy towards disinvestment briefly. some of the excerpts of (NCMP) declared: No profit-making enterprises shall be privatized, all Navratna companies shall be retained and encouraged to mobilize resources through the capital market, attempts shall be carried out to strengthen all loss-making PSUs and chronically sick-industries shall be sold off, duly compensating the work-force, all the revenue generated from privatization shall be used for selected social sector schemes. The UPA government in first among many other decisions taken discontinued the process of the "Strategic sale" policy of earlier National Democratic Alliance; and particularly minority stake was auctioned in some PSUs. [12]

Impact of disinvestment

While disinvestments in India have been practiced, largely by transferring a limited extent of equity to a private entity and not by carrying out a complete transfer of ownership of the PSUs. Thus, some observers have used the term ‘'partial privatization'’ as a better fit for such a transaction. [13] Dr. Sudhir Naib in his book titled Disinvestment in India: Policies, Procedures, Practices writes, "the government has gradually moved from disinvestments to privatization." Further, through his research, the author has found that, whenever there was a transfer of ownership in any PSEs' to private entities through disinvestment, the economic efficiency of the relevant enterprise was improved. [14] Similarly, Harjit Singh in his book titled Corporate Restructuring through Disinvestment (An Indian perspective) writes; the performance of the PSU's did not increase considerably post minority disinvestment, since the managerial control of the company continued to be the same. Hence, the author notes: it is not the size of the disinvestment that improves efficiency, but the change in leadership of the company and other market driving factors like innovation, technology, administrative intervention which affects the economic efficiency. [15]

Politics of disinvestment

As the process of disinvestment dilutes the state's ownership in PSUs, some scholars have observed, various political factors could also develop into an obstacle in dealing with disinvestment policies. [16] Jain and Sarkar, in their research conducted in 2017 found: disinvestments are higher, when pursued by a right-leaning political party including coalition parties with similar ideologies than left-leaning parties. The study also hypothesized, the more center and state cohesion in ideologies, the prospects of disinvestments improve significantly. [17] Some analysts have observed, the reason for not implementing the disinvestment policy to the core was because of a lack of a clear majority of the Congress party in the Lok Sabha after the 2004 general elections. Resulting in their reliance on outside support from Left-leaning parties like CPI-M, which caused the government to confront many challenges as both the parties had differing ideologies on distinct issues. [18]

Related Research Articles

A state-owned enterprise (SOE) is a business entity created or owned by a national or local government, either through an executive order or legislation. SOEs aim to generate profit for the government, prevent private sector monopolies, provide goods at lower prices, implement government policies, or serve remote areas where private businesses are scarce. The government typically holds full or majority ownership and oversees operations. SOEs have a distinct legal structure, with financial and developmental goals, like making services more accessible while earning profit. They can be considered as government-affiliated entities designed to meet commercial and state capitalist objectives.

Small and medium-sized enterprises (SMEs) or small and medium-sized businesses (SMBs) are businesses whose personnel and revenue numbers fall below certain limits. The abbreviation "SME" is used by international organizations such as the World Bank, the OECD, European Union, the United Nations, and the World Trade Organization (WTO).

The socialist market economy (SME) is the economic system and model of economic development employed in the People's Republic of China. The system is a market economy with the predominance of public ownership and state-owned enterprises. The term "socialist market economy" was introduced by Jiang Zemin during the 14th National Congress of the Chinese Communist Party (CCP) in 1992 to describe the goal of China's economic reforms.

<span class="mw-page-title-main">Bharatiya Mazdoor Sangh</span> RSS-affiliated Labour Association

The Bharatiya Mazdoor Sangh is a trade union in India. It was founded by Dattopant Thengadi on 23 July 1955.

<span class="mw-page-title-main">Ministry of Finance (India)</span> Finance ministry of India

The Ministry of Finance is a ministry within the Government of India concerned with the economy of India, serving as the Treasury of India. In particular, it concerns itself with taxation, financial legislation, financial institutions, capital markets, currency regulation, banking service, centre and state finances, and the Union Budget.

Nagarajan Vittal was an Indian civil servant who held a number of senior positions in the Government of India, most prominently that of central vigilance commissioner.

Indian Petrochemicals Corporation Limited (IPCL) was a petrochemicals company in India. At the time of its disinvestment to Reliance Industries Limited, its turnover for the financial year 2005-06 had crossed the US $2 billion mark.

<span class="mw-page-title-main">Ministry of Mines (India)</span> Indìan government departmental ministry

The Ministry of Mines is the ministry in the Government of India. The ministry functions as the primary body for the formulation and administration of laws relating to mines in India. The head of the ministry is G. Kishan Reddy, who has been serving since June 2024.

The economic liberalisation in India refers to the series of policy changes aimed at opening up the country's economy to the world, with the objective of making it more market-oriented and consumption-driven. The goal was to expand the role of private and foreign investment, which was seen as a means of achieving economic growth and development. Although some attempts at liberalisation were made in 1966 and the early 1980s, a more thorough liberalisation was initiated in 1991.

<span class="mw-page-title-main">Public sector undertakings in Kerala</span> State-owned enterprises in Kerala, India

Public sector undertakings in Kerala are of two types, public sector units in which majority shares are owned by Union Government and public sector units in which majority shares are owned by State Government. Public sector undertakings in Kerala, i.e. enterprises in which majority shareholder is Government of Kerala are generally divided into Manufacturing & Non-Manufacturing. Some of the PSUs such as Kinfra, KSIDC, SIDCO etc. are promotional agencies. As of 2004 there were 104 enterprises spread over 14 different sectors of Kerala economy. These sectors are as varied as engineering, electronics to wood products & welfare agencies. Eleven units are joint venture of Kerala government with the central government. Most of state PSUs units are under Department of Industries & Commerce.

Modern Food Industries (India) Ltd (MFIL) was set up in 1965 as Modern Bakeries (India) Limited and owned by Government of India. It was situated at Kazhikundram, Taramani, Chennai, Tamil Nadu. It was set up under the Colombo plan. It was disinvested by the Government of India to Hindustan Unilever Limited in 2000 under the Premiership of Atal Bihari Vajpayee. It got its present name in 1982. MFIL had bread manufacturing units in 13 cities spread across India. MFIL had also marketed fruit juice concentrate under brand name Rasika in Delhi. MFIL also produced aerated soft drinks under the brand Double Seven. MFIL was a wholly owned Central Government-owned PSU. This was the first privatisation of public sector unit by the government of India. Modern Foods had over 40% of the bread market in India.

NMDC Steel Limited was formed under Government of India under Ministry of Steel with the help of NMDC's resources for setting up a 3 MTPA capacity greenfield Integrated Steel Plant based on Hi-Smelt technology in Nagarnar, located 16 km from Jagdalpur in Chhattisgarh state with an estimated outlay of Rs. 25500 crore. A pure-play miner, NMDC had in 2009-10 conceived the Nagarnar steel plant with the intention of moving up the value chain and diversifying its portfolio. The idea was also to hedge itself against the vagaries of iron ore prices. This is the only new large-scale steel plant currently fully ready to start production India, with little likelihood of a new plant of similar size plant coming up in the next few years. Tata Steel and JSW Steel are expanding capacity at their existing mills.

<span class="mw-page-title-main">Ministry of Industry, Commerce and Supplies</span>

The Nepalese Ministry of Minister of Industry, Commerce and Supplies is a governmental body of Nepal to monitor and manage industries of the country.

Public Sector Undertakings (PSU) in India are government-owned entities in which at least 51% of stake is under the ownership of the Government of India or state governments.These type of firms can also be a joint venture of multiple PSUs. These entities perform commercial functions on behalf of the government. Depending on the level of government ownership, PSUs are officially classified into two categories: Central Public Sector Undertakings (CPSUs), owned by the central government or other CPSUs; and State Public Sector Undertakings (SPSUs), owned by state governments. CPSU and SPSU is further classified into Strategic Sector and Non-Strategic Sector. Depending on their financial performance and progress, CPSUs are granted the status of Maharatna, Navaratna, and Miniratna.

<span class="mw-page-title-main">Dredging Corporation of India</span> Indian dredging company

Dredging Corporation of India Limited, or DCI, is an Indian dredging company which does dredging for Indian seaports exclusively. It occasionally dredges at foreign seaports in countries such as Sri Lanka, Taiwan and Dubai. It is mainly involved in maintenance dredging. Almost all the maintenance dredging in Indian seaports is carried out by DCI due to government regulations. DCI is also involved in capital dredging, beach nourishment, and land reclamation. The main seaports in which DCI does business are Visakhapatnam Port, Haldia, Kandla, Cochin Port and Ennore Port.

Disinvestment of Public Sector Undertakings in India is a process of public asset sales done by the President of India on behalf of the Government of India. It can be directly offered for sale to the private sector or indirectly done through a bidding process.

In South Africa the Department of Public Enterprises is the shareholder representative of the South African Government with oversight responsibility for state-owned enterprises in key sectors. Some companies are not directly controlled by the Department of Public Enterprises, but by various other departments. Further, not all state owned entities are registered as companies.

The Central Industrial Security Force Act, 1968, is an act of the Indian Parliament through which the Central Industrial Security Force (CISF) was raised on 10 March 1969. The CISF is a Central Armed Police Force which specialises in providing security and protection to industrial undertakings and other critical installations including nuclear plants, space centres and Delhi Metro. It is also the airport police of India.

Atanu Chakraborty the chairperson of HDFC Bank. He was appointed by the Reserve Bank of India in April 2021. He is a retired 1985 batch officer of the Indian Administrative Service and Gujarat cadre, and served as Economic Affairs Secretary of India until his retirement in April 2020.

References

  1. ↑ Arun, T. G.; Nixson, F. I. (2010). "The Disinvestment of Public Sector Enterprises: The Indian Experience". Oxford Development Studies. 28 (1): 19–32. doi:10.1080/713688302. ISSN   1360-0818. S2CID   153421938.
  2. ↑ Burange, G.; Yamini, Shruti (May 2011). "A Review of India's Industrial Policy and Performance". Working Papers. Retrieved 7 May 2020.
  3. ↑ Ghosh & Devaiah 2009, pp. 226.
  4. ↑ "Modi govt must learn from Vajpayee on how to generate wealth from disinvestment in PSUs". 29 November 2019. Retrieved 10 May 2020.
  5. 1 2 "Mandate | Department of Investment and Public Asset Management | Ministry of Finance | Government of India" . Retrieved 10 May 2020.
  6. ↑ "DIPAM | Disinvestment Policy". dipam.gov.in. Retrieved 23 January 2023.
  7. ↑ "What are the features of New industrial policy of 1991?". 4 October 2016. Retrieved 7 May 2020.
  8. 1 2 Ghosh & Devaiah 2009, pp. 225.
  9. ↑ Dhameja, Nand (2016). "PSU Disinvestment in India: Process and Policy–Changing Scenario". Vision: The Journal of Business Perspective. 10 (1): 3–6. doi:10.1177/097226290601000101. ISSN   0972-2629. S2CID   153389192.
  10. 1 2 "'NDA is better in pushing disinvestment policy' - The Sunday Guardian Live". 30 November 2019. Retrieved 11 May 2020.
  11. ↑ "Summary | Department of Investment and Public Asset Management | Ministry of Finance | Government of India" . Retrieved 11 May 2020.
  12. ↑ Kakkar, Bhawna (2017). "A Study of Disinvestment of Central Public Sector Enterprises in India (1991-2016)". SSRN Working Paper Series: 5–6. doi:10.2139/ssrn.3093570. ISSN   1556-5068. S2CID   219382478.
  13. ↑ Ghosh & Devaiah 2009, pp. 223.
  14. ↑ Wadhwa, Charan (2005). "Review:Disinvestment in India: Policies, Procedures, Practices by Sudhir Naib". Pacific Affairs. 78 (2): 319. JSTOR   40023945.
  15. ↑ Harjit Singh (December 2007). Corporate Restructuring Through Disinvestment (An Indian Perspective). New Age International (P) Limited. p. 104. ISBN   978-81-224-2162-0.
  16. ↑ Gupta, Nandini (2010). "Selling the family silver to pay the grocer's bill? The case of privatization in India". Selling the Family Silver to Pay the Grocer's Bill? The Case of Privatization in India. 2010 (2): 2. doi:10.7916/D8XP7CW5.
  17. ↑ Jain, Ritika; Sarkar, Shubhro (2018). "An empirical analysis of disinvestment policy in India: does ideology matter?". Journal of Economic Policy Reform. 22 (4): 2. doi:10.1080/17487870.2018.1457961. ISSN   1748-7870. S2CID   54515568.
  18. ↑ Ashraf, Fahmida (2007). "Congress-led UPA Government in India: CPI-M's Support and Challenges". Strategic Studies. 27 (4): 68. JSTOR   45242419.

Bibliography

Further reading

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.