Why do governments resort to selling off the family silver, to raise revenues? Critically examine the relevance of disinvestment. (200 Words)

Mentors Comments:

1. Present the numbers on disinvestment targets and achievements
2. Discuss how it is useful for the economy – revenue, efficiency, etc.,
3. Present the challenges in making an effective disinvestment policy – selling at lower prices, etc.

Answer:

Disinvestment, or divestment, refers to the act of a business or government selling or liquidating an asset or subsidiary or the process of dilution of a government’s stake in a PSU (Public Sector Undertaking). The target of disinvestment receipts has been set at Rs 1.05 trillion for FY20, in Union Budget 2019-20 Further, the government has decided to go for strategic disinvestment of 23 Public Sector Undertakings (PSUs). As per the Finance Ministry, in 2018-19, the proceeds from disinvestment were 84,972 crore.

Benefits of disinvestment policy:

1. Benefit of government:
 It will reduce the government’s debt.
 It will save resources by spending less on PSUs which can be used by the government for welfare purposes.
 It will help in reducing the fiscal deficit.
 It enables the government to raise funds that can be used to strengthen physical and
social infrastructure.

2. Benefit of society:
 It will increase the government’s focus on social welfare.
 It will ensure resources in the hands of the public.
 Consumers will get better services.
 Companies will expand that will lead to more jobs.

3. Benefit of the market:
 It would bring more competition into various sectors thus improving the quality of services.
 It will increase market profitability and hence companies’ profits.

4. Benefit of PSUs:
 It will ensure the modernisation of PSUs with changing times.
 It distributes the loss and failure risks of PSUs to the private sector.
Concerns:
 The process of disinvestment is not favored socially as it is against the interest of socially disadvantageous people.
 Political pressure from left and opposition.
 Loss-making units don’t attract investment so easily.
 Over the years, the policy of divestment has increasingly become a tool to raise resources to cover the fiscal deficit with little focus on market discipline or strategic objective.

 Sometimes the emergence of private monopolies, consumer welfare will be reduced.
 It is argued that mere change of ownership, from public to private, does not ensure higher efficiency and productivity.
 It may lead to retrenchment of workers who will be deprived of the means of their livelihood.
 The private sector, governed as they are by the profit motive, has a tendency to use capital-intensive techniques which will worsen the unemployment problem in India.
 Fiscal 2016-17 is the seventh year in a row where the government is not meeting the disinvestment target fixed in the Budget.

Way Forward:
 Define the priority sectors for the government based on its strategic interests.
 Investment in PSUs has to be in terms of the generation of adequate social and strategic returns.
 The government ownership is required for sectors with strategic relevance such as defence, natural resources, etc. The government should, exit non-strategic sectors such as hotels, soaps, airlines, travel agencies and the manufacture and sale of alcohol.
 The government should look into strengthening the regulatory framework that ensures efficient market conditions.
 Instead of creating PSUs, the government should create regulations that would ease the entry of new players. The regulations should also ensure that the basic necessities of the consumers are met.
 Allowing both domestic and foreign buyers to bid freely for stakes.

It is time that divestment is not seen as an option to cover for short-term fiscal gains; instead, it should be part of a strategic plan to improve the production of goods and services in India.

 

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himanshu paliwal
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please review

Krishana Chandra
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Sharing for the first time on this platform. Studied this topic last month. Seeking guidance regarding the relevance and structure of the answer. Thank you!
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Abhigyan
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Wasim Rahman
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Pls review
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