Disinvestment - Good or Bad for the Economy?

Recently, Union Cabinet has approved the strategic disinvestment of several Public Sector companies like BPCL, Air India, LIC among others. Lets us understand what Disinvestment is and how this move by the Government impacts the economy in positive and negative ways.

Disinvestment

The action of the Government of selling or liquidation of assets usually Central and state public sector enterprises are called Disinvestment. It is a process of withdrawal of capital from any organization. It leads to dilution of ownership and not a transfer of full ownership.

Method of Disinvestment Procedure in India

Since 1991, disinvestment has been adopted by the Government of India as a route of privatization. The Department of Disinvestment and Public Asset Management was created as a separate department under the Ministry of Finance for carrying out all the disinvestment related works for the Government. In every Budget, Disinvestment targets are set by the Government and the target might change depending on the circumstances. It is the government that owns the responsibility of taking the final decision on whether to raise the divestment target or not. Further, the National Investment Fund (NIF) was created to receive disinvestment proceeds of central public sector enterprises and to invest it to generate earnings.

Objectives of Disinvestment

The primary motive of Disinvestment is the maximization of return through the optimization of resources. Taxes of people run the loss bearing PSU’s. So, it is advantageous to partially privatize it and increase the efficiency of an organization. By Disinvesting, the Government aims to increase the efficiency of an organization while focusing more on innovation. Disinvestment helps the government in lessening Fiscal deficit thereby reducing the burden on the exchequer.

The Goods- Impact on the economy and Employees

Disinvestment will allow the Public Sector Enterprises to raise capital for funds while improving resource allocation in the economy. Through this method of partial privatization, the Government tries to stimulate the economy while adapting to less debt market borrowing policy. It leads to a reduction in the Current Account Deficit while keeping a check on the Balance of Payment Crisis. The policy of Disinvestment leads to an increase in the Foreign Exchange Reserves as foreign investors bids for more investment in India. Intensification in Foreign Direct Investment which has a positive impact on the economic growth of the country and improvement in Domestic Savings of the country occurs via Disinvestment. Trade and Competitiveness will aggravate subsequently. Further, it leads to an increase in the ease of doing business in India. Strengthening Innovation and Efficiency will positively contribute to Gross Domestic Product growth. Disinvestment would encourage citizens’ participation in the management of public enterprises and improve the capitalization of stock markets. Also, it might result in more employment in the economy

The Bad- On the Government and the Employees

 Disinvestment shows Government incapability to handle its Public sector assets as effectively as by the private buyers. It paves the way for crony capitalism. It is feared that privatization will result in laying off the workforce on a large scale. No fixed labor codes and unpredictability of laws make the process of disinvestment complex, further aggravating the problems of employees. Change in ownership from public to private results in losing status and a government employee becomes similar to a private employee with no guaranteed job security. There is lesser trust among the people as there is no legal binding on the private company to remain in business forever. Disinvestment results in the Exploitation of employees in a private set up. Also, Negative impact of disinvestment policy can be seen on the employment share of SCs and STs in the public sector thus depriving them of social upliftment

Way Forward

More operational autonomy should be given to PSUs and those which are functioning well(profit-oriented PSUs)should not be touched by the Government. Relief package should be given to loss generating PSUs, further asking them to perform well within a given time or else face the eventuality. The Bureaucratic hurdles and the Red Tapism must be minimized in favor of operational freedom. The need of the hour is the blending of socio-economic objectives with those of financial objectives.

Published on 11-02-2020