Objectives and Importance of Disinvestment
Definition of Disinvestment
At
the very basic level, disinvestment can be explained as follows:
“Investment
refers to the conversion of money or cash into securities, debentures, bonds or
any other claims on money. As follows, disinvestment involves the conversion of
money claims or securities into money or cash.”
Disinvestment
can also be defined as the action of an organisation (or government) selling or
liquidating an asset or subsidiary. It is also referred to as ‘divestment’ or
‘divestiture.’
In
most contexts, disinvestment typically refers to sale from the government,
partly or fully, of a government-owned enterprise.
A
company or a government organisation will typically disinvest an asset either
as a strategic move for the company, or for raising resources to meet
general/specific needs.
Objectives
of Disinvestment
The
new economic policy initiated in July 1991 clearly indicated that PSUs had
shown a very negative rate of return on capital employed. Inefficient PSUs had
become and were continuing to be a drag on the Government’s resources turning
to be more of liabilities to the Government than being assets. Many
undertakings traditionally established as pillars of growth had become a burden
on the economy. The national gross domestic product and gross national savings
were also getting adversely affected by low returns from PSUs. About 10 to 15 %
of the total gross domestic savings were getting reduced on account of low
savings from PSUs. In relation to the capital employed, the levels of profits
were too low. Of the various factors responsible for low profits in the PSUs, the
following were identified as particularly important:
• Price policy of public sector
undertakings
• Under–utilisation of capacity
• Problems related to planning and
construction of projects
• Problems of labour, personnel and
management
•
Lack of autonomy
Hence,
the need for the Government to get rid of these units and to concentrate on
core activities was identified. The Government also took a view that it should
move out of non-core businesses, especially the ones where the private sector
had now entered in a significant way. Finally, disinvestment was also seen by
the Government to raise funds for meeting general/specific needs.
In
this direction, the Government adopted the 'Disinvestment Policy'. This was
identified as an active tool to reduce the burden of financing the PSUs. The
following main objectives of disinvestment were outlined:
• To reduce the financial burden on the
Government
• To improve public finances
• To introduce, competition and market
discipline
• To fund growth
• To encourage wider share of ownership
•
To depoliticise non-essential services
Importance
of Disinvestment
Presently, the Government has about Rs. 2 lakh crore locked up in PSUs. Disinvestment of the Government stake is, thus, far too significant. The importance of disinvestment lies in utilisation of funds for:
• Financing the increasing fiscal deficit
• Financing large-scale infrastructure
development
• For investing in the economy to
encourage spending
• For retiring Government debt- Almost
40-45% of the Centre’s revenue receipts go towards repaying public
debt/interest
• For social programs like health and education
Disinvestment also assumes significance
due to the prevalence of an increasingly competitive environment, which makes
it difficult for many PSUs to operate profitably. This leads to a rapid erosion
of value of the public assets making it critical to disinvest early to realize
a high value.
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