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Budget 2019: Disinvestment Meaning and Definition | What is Disinvestment and How it Affects Economy

Disinvestment is the process by which the Union government either sells its stakes in a PSU–fully or partially–or lists it on the stock market.


Updated:July 5, 2019, 7:54 AM IST
Budget 2019: Disinvestment Meaning and Definition | What is Disinvestment and How it Affects Economy
Representative image.

Ever since India opened up its economy to the world, the government has been distancing itself from industrial production. Years of monopoly across several industries led to Public Sector Undertakings (PSU) running inefficiently. Thus, the government began the process of disinvesting from loss-making and inefficiently-run PSUs in the 1990s.

Disinvestment is the process by which the Union government either sells its stakes in a PSU–fully or partially–or lists it on the stock market. The concept of disinvestment follows the dictum: The government has no business to be in business. Thus, the government continues to disinvest in sectors where private companies are already the dominant players.

Through disinvestment, the government of the day can spend the proceeds for better purposes. The proceeds of the sale are channelised to the National Investment Fund, which was set up in 2005 as a corpus of permanent nature to help the government.

The fund helps the government to recapitalise public sector banks and public sector insurance companies to strengthen them and subscribe to shares being issued by the central PSUs on rights basis in order to ensure that majority ownership in these undertakings does not dilute.

According to the Department of Investment and Public Asset Management, this fund is managed by UTI Asset Management Company Ltd., SBI Funds Management Private Ltd. and LIC Mutual Fund Asset Management Company Ltd.

The 1991 New Economic Policy, presented by then finance minister (and future prime minister) Manmohan Singh pointed out several objectives for disinvestment. These objectives were as follows: Reducing the financial burden on the government, improving public finances, introducing competition and market discipline, funding growth, encouraging wider share of ownership, and depoliticising non-essential services.

Disinvestment got a much-needed boost during the Atal Bihari Vajpayee regime, when Arun Shourie was appointed the minister for disinvestments. Some of the key disinvestments under the Vajpayee administration include the strategic sale of Videsh Sanchar Nigam Limited, Hindustan Zinc, Balco, IPCL, several Indian Tourism Development Corporation hotels and Modern Food Industries. The strategic sales during that period fetched government Rs 6,344 crore. Additionally, the government began disinvesting its stake in Maruti Udyog Ltd in 2002. The government exited the company completely by 2006.

However, disinvestment slowed under the Manmohan Singh government. It seems to have picked pace under the current dispensation. In March, the Modi government claimed that it exceeded its disinvestment target for FY19 by Rs 5,000 crore after total receipts touched Rs 85,000 crore.

According to a 2018 report by the Department of Investment and Public Assets Management, the Modi government has been responsible for over 2 lakh crore worth of disinvestments. This figure translates to about 58 percent of all disinvestments since 1991.

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