Question: Explain Disinvestment in India.
Answer: Background of Disinvestment in India
In India, the new economic policy has given rise to
significant focus for privatisation of public enterprises. Disinvestment is one
of the methods of privatisation. It refers to selling of an investment.
Disinvestment implies selling of Government equity shares of public sector
units in the market.
It is a concrete step towards privatisation and
liberalisation of our economy. The process of disinvestment was started in the
year 1992. The privatization and disinvestment are not the same. Privatisation
implies a change in ownership, resulting, in a change in a management.
The privatisation of public enterprises will occur only when
the government sells more than 51 percent of its ownership to private
entrepreneurs. Disinvestment on the other hand, has a much wider connotation as
it could either involve dilution of government stake to a level that results in
a transfer of management or could also be limited to such a level as would
permit government to retain control over the organisation.
Disinvestment beyond 50 percent involves transfer of
management, whereas disinvestment below 50 percent would result in the
government continuing to have a major share in the undertaking.
The Indian economy had virtually embraced bankruptcy during
the period 1981-91. The public sector which was to achieve commanding heights
and was taught to be the correct path for India’s economic growth, right from
independence was characterised by poor performance.
In 1991 there were 236 operating public sector undertakings,
of which only 123 were profit making. The top 20 profit making PSU’s counted
for 80 per cent of the profits, implying that less than 10 percent of the PSU’s
were responsible for 80 percent of profits. The return on public sector
investment for the year 1990-91 was just over 2 percent. The basic charges
against the public sector for its poor performance are as follows:
(i) Low rate of return on investment.
(ii) Declining contribution to national savings.
(iii) Poor capacity utilization.
(iv)Overstaffing, bureaucratization leading to excessive
delays and wastage of scare resources on account of this phenomenon many public
sector enterprises have become more a burden than an asset to the Government.
(To add more material, explain the problems faced by PSEs
which are given in the answer of question “Discuss the various Methods
implemented to Achieve Objectives of Disinvestment in India and also discuss
the problems faced by PSEs” in this blog
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