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What is meant by Strategic Disinvestment?

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Question – What is meant by Strategic Disinvestment? Discuss its necessity, and significance for the Indian economy. 7 April 2022

AnswerStrategic disinvestment is the sale of more than 50% of government shares in a public enterprise. As part of strategic disinvestment, part of the control of the company and/or management is transferred from the government to a private shareholder. Strategic disinvestment leads to private sector participation, and thus, can make public sector undertakings more efficient and profitable.

Need for Disinvestment in India:

  • Financial health: The government is facing severe shortfall in revenue and capital receipts. In view of this, the purpose of the share sale is to help the government reduce its increasing fiscal deficit. The disinvestment will bring revenue to the government and thereby improve the fiscal deficit.
  • Economic slowdown: India is going through an economic slowdown, and tax collections are extremely meager. Disinvestment will boost the economy through more revenue to the government, which can be invested in more efficient PSUs in the economy.
  • Inefficient PSUs: Many PSUs are facing losses, and are on the verge of closure. While government presence may be necessary in strategic sectors such as defense or oil exploration, it is not required in sectors such as shipbuilding or container freight. Government presence in such non-strategic sectors distorts the competitive dynamics for private players. As a result, consumers and taxpayers have to bear the brunt of inefficient PSU operations.
  • Competition: The proliferation of an increasingly competitive environment requires strategic disinvestment. Government control makes it difficult for many PSUs to operate profitably. This leads to rapid erosion of the value of public assets, making it important to do early disinvestment to achieve higher value.

Importance of Strategic Disinvestment:

  • Reduction in fiscal burden: This will reduce the government’s debt and fiscal deficit. Disinvestment will help in saving resources by spending less on PSUs which can be used by the government for welfare purposes.
  • Increase in social spending: This will increase the government’s focus on social welfare. Thus, it will ensure resources in the hands of the public. Disinvestment funds can be used for long-term goals, such as:
  • Funding for large scale infrastructure development.
  • Investing in the economy to stimulate spending.
  • Investing in social programs such as health and education.
  • Better quality products and services: This will bring more competition in various sectors, thus improving the quality of services. Consumers will get better products. This will further increase the profitability of the market and hence the profits of the companies will motivate them to give more.
  • Employment: Companies will expand which will create more jobs. With private sector participation and competition, more people will be needed to scale up production and scale. It is important to improve public finance and overall economic efficiency.
  • Efficiency of PSUs: The economic potential of the entities in the hands of strategic investors will be better ascertained due to various factors such as capital, technology up-gradation and efficient management practices. In addition, distribution of PSUs to the private sector would lead to the risk of loss and failure.
  • Modernization: It will ensure modernization of PSUs with the changing times. Strategic buyers will bring new management, technology and more investment to the growth of these companies and may use innovative methods for their growth.

Way Forward

  • Transparency: The strategic disinvestment process should be transparent with a minimum reserve price that does justice to the valuable properties being auctioned. Third-party appraisal of assets of each PSU and minimum number of bidders should be the necessary pre-conditions before proceeding with each sale.
  • Infrastructure development: Spending the money raised from such strategic disinvestment on long-term infrastructure assets can generate returns for the economy. The government can redirect these disinvestment proceeds to infrastructure projects.
  • Regulation: The government should focus on strengthening the regulatory framework ensuring efficient market conditions.

Disinvestment should not be seen only as a short-term fiscal measure. Instead, it should be part of a long-term plan to improve the production of goods and services in India. Regulations should also ensure that the basic needs of the consumers are met.

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