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Last Updated : Jun 25, 2019 11:35 AM IST | Source:

Budget 2019 | Accelerating privatisation of public sector enterprises

The progress of privatisation in India has been quite slow, although the disinvestment process accelerated under the NDA 2 regime

Moneycontrol Contributor @moneycontrolcom

D K Srivastava

Although disinvestment and privatisation are often used synonymously, these can be qualitatively quite different. The focus of disinvestment is often to garner additional fiscal resources whereas the focus of privatisation is to improve the efficiency of public sector enterprises so that they can give better returns on government’s accumulated investment in them. Disinvestment tends to be a short-term exercise and often happens within the group of public-sector enterprises where the shares of one enterprise is picked up by another enterprise and some surplus that gets generated through this process accrues to the government. A recent example of such disinvestment is the purchase of HPCL shares by ONGC for Rs 36,915 crore in FY18, where both are government owned entities. This was followed by the buyback of ONGC shares amounting to Rs 2,510 crore in FY19.

In privatisation, the effort is to bring in private ownership so that the quality of management can improve over time. Often strategic disinvestment leads to privatization where control of the erstwhile public-sector enterprise is shifted to the private sector. If government continues to hold some minority shares, it would be able to reap higher returns on these holdings whereas at the point of transition of control, government reaps a one-time revenue gain.


Disinvestment: Comparative performance under two different regimes

The progress of privatisation in India has been quite slow, although the disinvestment process accelerated under the NDA 2 regime. Of the Rs 3.8 lakh crore disinvestment proceeds garnered over the ten-year period from FY10 to FY19, Rs 2.8 lakh crore, accounting for 74% of the total amount, was raised during the NDA 2 regime (See table below).


Disinvestment receipts as a percentage of GDP averaged 0.34% during NDA 2 regime, 0.13% points higher than that during the UPA 2 regime (See table below). The NDA 2 was also better able to realise its budgeted disinvestment target with an average achievement ratio of 88.1% as compared to 52.4% under the UPA 2 regime.

Divestment 2

New Government’s prospective privatization priorities

A major objective of privatization which precedes considerations of garnering revenues is to avoid the fiscal burden of loss making enterprises. The total loss suffered by the 71 loss making Central Public Sector Undertakings (CPSUs) amounted to Rs 31,261 crore in FY18. These need to be supported and subsidised time and again making a serious dent on scarce fiscal resources. Air India is a prime contemporary example of this with losses at Rs 5,338 crores in FY18[1]. A full-scale privatisation of Air India would release precious resources for the government which, at the present juncture, is needed to stimulate the economy without breaching fiscal consolidation norms. MTNL is another example of a loss making public sector enterprise, which is being considered by the government for privatisation1.

India invested heavily in public sector enterprises in the heady days of developing a socialistic pattern of society during the 50s and 60s. This resulted in government entering sectors where its ownership was completely non-essential. Over time government entered into industries such as hotels, tourism, consumer goods and a number of mineral and power sector projects. These could easily have been left to the private sector and market forces by subjecting them to a suitable regulatory framework. The long-term agenda of the new government should be to identify all public-sector enterprises where government’s ownership is not necessary including all the loss-making enterprises. Government’s presence is required only in sectors where, on account of externalities, the private sector may not want to invest enough or strategic sectors such as defence. Government’s scarce resources should focus primarily on health, education and infrastructure. In the case of infrastructure, there may be participatory co-existence of private and public sectors. In all other cases, government should privatize its existing ownership in the public-sector enterprises.

[1] Public Sector Enterprise Survey 2017-18, Department of Public Enterprises, Government of India

D K Srivastava is chief policy advisor, EY India, Views expressed are personal.

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First Published on Jun 25, 2019 11:26 am
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