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What is disinvestment? – Types and examples

How does disinvestment differ, and why does it matter?

disinvestment

Disinvestment involves selling shares in companies, parts of a business, or assets by a government or organisation. It can also reduce spending on specific projects to redirect funds elsewhere, either for government projects or within an organisation.

The primary motive of disinvestment is to maximise the value return from initial investments.

This article delves into the objectives and importance of disinvestment in India, highlighting its role and effect on the financial scene.

Objectives of disinvestment

Disinvestment is done to gather funds for specific purposes or to lighten financial burdens while inviting private investments. It assists in reducing a country’s debt, fostering long-term growth, and allowing the market to have a larger share in Public Sector Undertakings (PSU), which in turn aids in creating a solid capital market.

The key objectives of disinvestment in India encompass:

  • Improving public finances,
  • Lightening the government’s financial burden,
  • Encouraging private ownership,
  • Maintaining market competition,
  • Allocating funds to growth and development plans,
  • Distancing politics from non-critical activities.

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Importance of disinvestment

The 1991 economic policy highlighted the importance of disinvestment in India due to public sector undertakings (PSUs) yielding negative returns, thus becoming more of a liability. Their subpar returns were impacting India’s national savings and Gross Domestic Product adversely.

The disinvestment policy is aimed at phasing out these unproductive units, enabling the government to concentrate on essential activities and gradually stepping back from non-core enterprises, especially where the private sector has begun to dominate.

Since the 1990s, disinvestment has been a strategy for every Indian government to accrue funds by selling shares in PSUs.

Disinvestment in India – significance

  • Addressing the growing fiscal deficit,
  • Generating capital for extensive infrastructure projects,
  • Stimulating the economy to enhance consumer spending,
  • Launching social schemes in education and health sectors,
  • Reducing government debt (as roughly 40% of the Centre’s revenue goes towards servicing public debt/interest).

It’s vital to distinguish disinvestment from privatisation, although they’re often confused. They have apparent differences, which will be discussed further.

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Difference between disinvestment and privatisation

The government of India might sell its majority stake or an entire enterprise to private investors, known as privatisation. In privatisation, the government loses control and ownership. However, this is rare as the government usually avoids this.

In contrast, under the current disinvestment plan, the government reduces its stake but maintains control. Disinvestment helps in better management and utilisation of public funds. Through disinvestment, the government aims to improve efficiency and promote economic growth.

Example – Disinvestment plan in India for 2021

In 1999, a special department for disinvestment was made by the government. Now, it is called the Department of Investment and Public Asset Management or DIPAM. This department works under the Ministry of Finance and takes care of disinvestment-related things.

Every year, in the Union Budget, the disinvestment goals of this department are shared. The goals change every year, with the government deciding if it wants to increase the disinvestment goal or not.

For the financial year 2021, the government had a goal of Rs. 2.1 lakh crore from disinvestment. But, due to the Covid-19 effects, only 10% of this goal was met. It was the smallest amount collected in the last seven financial years. The goal for this year was three times more than last year’s goal.

So, this year, the government wants to collect Rs. 1.75 lakh crore through disinvestment. This plan includes banks, LIC, Shipping Corporation of India, and many other Public Sector Undertakings.

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Take away

Regarding meeting money goals, disinvestment in India shows mixed results. The government picks the candidates for disinvestment based on several factors.

These factors have to do with market conditions, whether the private sector is interested in owning a company, its current share in a company, and the expected value that can be got from disinvestment.

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Akanksha Jha

With extensive writing experience and years deep in the stock market and fintech sectors, I excel at transforming intricate financial concepts into clear, actionable insights. I'm dedicated to guiding readers on their financial paths with confidence and clarity.

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