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1. Impact of
Disinvestments on
Indian Economy
RESEARCH METHODOLOGY
Submitted By :
Mohit Verma
Muskan Kaushal
Mansher Singh
Manik Grover
Manish chaudhary

2. Disinvestment
– Disinvestment means sale or liquidation of assets by
the government, usually Central and state public
sector enterprises, projects, or other fixed assets.
The government undertakes disinvestment to reduce
the fiscal burden on the exchequer, or to raise money
for meeting specific needs, such as to bridge the
revenue shortfall from other regular sources.

3. Objectives of Disinvestment in India
– Reducing the fiscal burden on the exchequer
– Improving public finances
– Encouraging private ownership
– Funding growth and development programmes
– Maintaining and promoting competition in the market

5. Disinvestment and Privatisation
– The government, whenever it so desires, may sell a whole
enterprise, or a majority stake in it, to private investors. In
such cases, it is known as privatisation.
– The resulting ownership and control of the organisation
does not rest with the government. The government
usually avoids doing this. The government mostly retains
more than half of the stake in the public sector enterprise
so that the control remains in its hands.
– When it doesn’t, then the ownership is transferred to the
private sector, which results in privatisation. It is also
known as majority disinvestment or complete privatisation
wherein 100 per cent control goes to the private sector.

6. Importance of Disinvestment
– Presently, the Government has about Rs. 2 lakh crore locked up in PSUs. Disinvestment of the
Government stake is, thus, far too significant. The importance of disinvestment lies in utilisation
of funds for:
– Financing the increasing fiscal deficit
– Financing large-scale infrastructure development
– For investing in the economy to encourage spending
– For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts go towards
repaying public
debt/interest
– For social programs like health and education
– Disinvestment also 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 value of the public assets making it critical to disinvest early to realize a high value.

7. Impact of Disinvestments on
Indian Economy
– Return on capital employed (ROCE) by
PSUs have been way too low as compared
to the cost of borrowing. According to the
previews result the average ROCE was
3.4% as against 8.6% average cost of
borrowing. PSE survey by NCAER shows
that PAT has never exceeded 5% of sales
for or 6% of capital employed. The
government pays a higher interest though,
by at least 3 percentage points.

8. Best Controlled After Disinvestment
– Lack of autonomy, political interference, nepotism
& corruption has further deteriorated the situation.
For instance, the head of a PSU is appointed by the
Government, who in turn appoints all employees
who play major roles in the organization. So directly
or indirectly the Government itself controls the
appointment of all manpower in these
organizations. It is not the business of the
Government to do business, i.e. it is best controlled
by experts and professional managers.

9. Low Surplus for Capital Expenditure
– Due to the current revenue expenditure on items such as
interest payments, wages and salaries of Government
employees and subsidies, the Government is left with
hardly any surplus for capital expenditure on social and
physical infrastructure

10. Necessity of Privatization
– In an era of globalization, liberalization and dissolution of boundaries
between nations, industrial competitiveness has especially assumed
an important role, necessitating privatization or disinvestment of
PSUs. Though it is claimed by many that ownership isn’t all that an
important indicator of an organization’s functioning as is its
management, it has been proven by an ample number of examples
that private controls of an organization bring about drastic changes
in its effectiveness. This is especially true today when
competitiveness is essential not only for leading the industry but for
mere survival.

11. At Macro Level
– Time has shown us how countries like Chile ,UK,
China , New zealand , Poland successfully used
disinvestment to achieve new economic heights.
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.
Analysis of these countries before & after
disinvestment shows that market-driven economies
are more efficient than the state-planned economies

12. At Micro Level
– The change in ownership will increase domestic
competition, hence efficiency; and encourage
public participation in domestic stock market – all
of which will promote ‘popular ‘capitalism that
rewards risk taking and private initiative, that is
expected to yield superior economic outcomes.
Disinvestment shows that govt means business
which will attract FDI, FII to finance projects in
India.

13. Positive For The Indian Equity Markets
– Disinvestment will be 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. It 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. Disinvestment will allow government to have much better control over the market economy
without upsetting norms of market behavior.

14. Public Sector Disinvestment
– First, resources available with the Government are scarce. The
Government needs resources to reduce its budget deficit.
– Second, the Government urgently requires resources to make
investment in infrastructure, social sectors such as education,
public health and for poverty alleviation programmes.
– Thirdly, a good number of existing public enterprises are working
inefficiently and incurring huge losses. Disinvestment can lead to
the improvement of efficiency of these enterprises.

15. DISINVESTMENT IN INDIA IN LAST 5 YEARS

16. Review
– The article has been taken from economic times published on 19 December, 2019.
– The government raised Rs 2,79,622 crore from the disinvestment of public sector undertakings (PSUs) during 2014-19
compared to Rs 1,07,833 crore during the 10-year UPA rule from 2004-14, Union minister Anurag Singh Thakur said on
Tuesday.
– The minister of state for finance said that in five years we raised the doubled amount in an average of 21 transaction while
there are only 4 transactions in 2004-2014.
– It can be clearly seen that we were able to raise an amount of only rs. 1,07,833 in 10 years as compared to raising rs. 2,79,622
in only 5 years which make a huge difference.
– Minister also said that the for the current year the target is to raise rs. 1.05 lakh crore and how it could be done.
– Minister said that they will follow a policy of disinvestment through minority stake sale and strategic disinvestments.
– According to the published article the had given approval for ‘in-principle’ for strategic disinvestment to 33 central public
sector undertakings (CPSEs).
– The niti aayog also said to identify such public sector undertakings.