Disinvestment refers to the scarcity of funds required for investment. Organizations experience this problem when they are unable to maintain or restore their worn-out capital assets or when they sell these assets, such as machinery and equipment, to others. It refers to the withdrawal of funds from a nation or an organization. It goes by the names divestiture or divestment as well.
Disinvestment or divestment is the partial selling of government shares and equity holdings to a PSU or private sector. It serves as the government’s primary approach for financing its fiscal deficit. Alongwith financing the fiscal deficit, it also helps to maintain the proficiency of public enterprises.
What is disinvestment?
The term disinvestment is more prevalent in India than the term ‘privatisation’. Privatisation means a change in ownership and management, whereas disinvestment may not necessarily lead to a change in management. A well-structured disinvestment program, combined with increased foreign investment, technology transfer, and enhanced productivity, is essential for securing long-term growth. The Indian Government initiated the disinvestment process in 1991-92, marking it as a significant milestone in major PSU reforms.
Around 50% of PSUs in India were incurring losses and draining out funds from the national exchequer. The public sectors were intensely spending public capital and revenues and the government was also facing the resource crisis because of the rising fiscal deficit. The former finance minister, Manmohan Singh, in 1991, realized that pursuing reforms could pose a significant challenge and have adverse consequences for already cash-strapped PSUs.
As a consequence, he introduced equity sale privatization in 1991 as a measure to raise funds and improve the performance of PSUs. Furthermore, the initiation of the liberalization process occurred in 1990. Adequate financial resources enabled private companies to penetrate industries once monopolized by PSUs. The government further decided to entirely hand over the food and hotel industry into the hands of the private sector, as they were in a better position to manage them.
Rationale for Disinvestment
The main reasons for the state ownership of industries are:
1) Limited Entrepreneurship
Developing industries were beyond the capacity of the private sector in the 1940s and 1950s due to a scarcity of funds in the money market and limited entrepreneurial activity. So government used high rates of taxation and deficit inflationary financing to develop public industries.
2) Rescue Missions/Nationalisation
Sometimes government had to step in to rescue certain enterprises, whose closure could result in significant loss of jobs and also because of several other economic and social reasons.
3) Control of Strategic Sectors
Another rationale for state ownership was the belief that state investment in and control of the strategic sectors of the economy was necessary for the economic development of those sectors and the security of the country.
4) Developing the Economy
The establishment of a few public sector enterprises aimed to balance or substitute underperforming private sectors, promote industrial growth in less developed regions, create jobs, and offer goods at more affordable prices.
5) Improvement in the Economy
Policymakers considered the establishment of public enterprises as a suitable strategy to enhance the economy in both developed and developing countries. There appeared to be an economic consensus around the world accepting public enterprises as an inevitable part of the economy, especially to manage natural monopolies and also the core industry.
Objectives of Disinvestment
The objectives of disinvestment are as follows:
1) Get Rid of Bureaucratic Setup
In the public sector, management has no right to make decisions. Major decisions, primarily concerning politics, are within the ministers’ purview and often experience prolonged procedures, causing delays. Thus, they cause shrinkage in the productivity level and under-utilisation of production capacity.
2) Get Rid of Uneconomic Price Policy
In India, various political, social and other non-economic considerations determine the price of public utility services such as transport, irrigation, electricity, water, etc., instead of determining them on a commercial principles basis. In several cases, the intentional pricing of products is lower than their production costs. The different forms of losses can be remedied through privatization.
3) Reduce Burden on the Government
There are more than 50 public sector enterprises that are incurring losses. This has created an unnecessary burden on the government. No one is interested, neither the management nor anyone, else in the profits and losses made by the government. Therefore, privatisation has been supported by the government to reduce its economic burden.
4) Gain Advantage of Capitalism
The government has decided to promote privatisation after considering the successful stories of capitalism in the countries like U.S.A., Singapore, Hong Kong, Korea, etc., and its related advantages such as a rise in competence, technological advancement, and increase in productivity.
5) To Solve the Financial Crisis of the Government
The Government has a shortage of funds for developing adequate infrastructure in the country. This condition of financial crisis can be sorted out by selling the government shares at profitable prices to the private sector.
6) For Promoting Globalisation
As foreign investors and entrepreneurs prefer to do business with private companies, privatisation helps in promoting globalization worldwide. Through globalisation, a country can avail the benefits of advanced technology and foreign investment.
7) Releasing Large Amounts of Public Resources
Releasing public resources is the foremost objective of disinvestment. This enables the government to utilise these resources in places where they are highly required for the development of society like healthcare, family welfare, primary education, basic infrastructure, etc.
8) For Promoting Industrial Growth
Due to insufficient availability of capital, the government realised that it would not be possible to meet all the expenses of developing small and heavy industries. Thus, privatisation was supported by the government to promote the industrial growth.