Faster, Demand-led Approach Needed for PSEs Privatisation: CII

Syllabus: GS3/Economy

Context

• Recently, the Confederation of Indian Industry (CII), in its recommendations for the Union Budget 2026–27, has urged the government to adopt a faster, demand-led approach to the privatisation of Public Sector Enterprises (PSEs).

Disinvestment of Public Sector Enterprises (PSEs)

• It refers to the process by which the government reduces its stake in state-owned enterprises, either partially or fully.
• It aims to infuse market efficiency, attract private investment, and reduce the fiscal burden on the government.

Historical Context

• Former Prime Minister Jawaharlal Nehru envisioned PSEs as ‘temples of modern India’.
  • However, by the 1980s, issues of inefficiency, overstaffing, and financial non-viability plagued many PSEs.
• The disinvestment policy formally took shape in 1991 under the New Industrial Policy, allowing private participation in state-owned enterprises.
  • The objectives were to modernize PSEs through capital infusion; reduce the fiscal deficit; encourage wider share ownership by the public; and introduce competition and efficiency through market discipline.

Policy Framework and Mechanisms

• The Department of Investment and Public Asset Management (DIPAM) under the Ministry of Finance manages India’s disinvestment programme.
• Key mechanisms include:
  • Minority Disinvestment: Government retains majority control while selling small equity stakes.
  • Strategic Disinvestment: Transfer of management control along with equity sale (e.g., Air India sale to Tata Group, 2021).
  • Exchange Traded Funds (ETFs): Government equity pooled in investment funds (e.g., CPSE ETF).
  • Buyback of Shares: PSEs buy back their own shares from the government.

Economic Rationale and Benefits

• Fiscal Consolidation: Disinvestment receipts provide non-tax revenue to bridge fiscal deficits.
• Operational Efficiency: Private management brings modern governance and market responsiveness.
• Market Development: Expands the depth and liquidity of India’s capital markets.
• Resource Optimization: Frees government resources for social and infrastructure spending.
• Strategic Benefits:
  • Mobilise non-tax revenues to support infrastructure and social sector spending.
  • Improve operational efficiency of enterprises by leveraging private sector expertise.
  • Attract global capital, especially in sectors like logistics, energy, and manufacturing.
  • Reduce fiscal burden by offloading loss-making or non-strategic assets.

Challenges and Concerns

• Valuation Concerns: Critics argue that assets are sometimes undervalued during sale.
• Employment Impact: Fear of job losses due to private restructuring.
• Political Opposition: Privatization of strategic or culturally sensitive sectors (e.g., railways, oil) often faces protests.
• Execution Delays: Bureaucratic processes slow down strategic disinvestment.

Confederation of Indian Industry (CII)’s Recommendations

• Calibrated Disinvestment to Unlock Market Value: CII’s analysis suggests that reducing the government’s stake to 51% in 78 listed PSEs could unlock close to ₹10 lakh crore in value.
  • A phased reduction of the government’s stake to 51%, and later to 33–26%, would preserve strategic control while freeing up productive capital for infrastructure and social investment.
    • Phase 1: Target 55 PSEs with government holdings of 75% or less, potentially mobilising ₹4.6 lakh crore.
    • Phase 2: Disinvest 23 PSEs with over 75% government stake, raising an additional ₹5.4 lakh crore.
• Rolling Three-Year Privatisation Pipeline: This predictable and transparent roadmap would:
  • Enable better investor engagement and valuation.
  • Facilitate realistic price discovery.
  • Accelerate execution by aligning investor expectations with government timelines.
• Demand-Driven Selection of Enterprises: CII urged a reversal of the existing privatisation sequence, highlighting current procedural bottlenecks.
  • Instead of identifying PSEs first and seeking buyers later, the government should:
    • Gauge investor interest across a wide set of enterprises.
    • Prioritise those attracting stronger demand and meeting valuation thresholds.
• Institutional Framework for Oversight and Governance: CII proposed the creation of a dedicated institutional framework to enhance transparency and professional management of the disinvestment process. It comprises:
  • A Ministerial Board for strategic direction.
  • An Advisory Board of industry, financial, and legal experts for independent benchmarking.
  • A Professional Management Team to oversee due diligence, execution, and market engagement.

Road Ahead

• The government’s National Monetisation Pipeline (NMP) and Strategic Disinvestment Policy (2021) signify a structured, long-term approach.
  • The focus has shifted from mere revenue generation to ‘asset recycling’ where proceeds from disinvestment are reinvested in infrastructure.
• The Economic Survey 2023–24 underscores the need for transparency, strong valuation frameworks, and social safeguards to make privatization both efficient and equitable.
• The India Vision 2036–37 report emphasizes sustained reform through:
  • Improved asset valuation mechanisms.
  • Broader retail participation in disinvestment.
  • Strengthened governance frameworks for privatized entities.
  • Reintegration of disinvestment proceeds into welfare and infrastructure development.

Source: TH