Syllabus: GS3/Economy
Context
- The Cabinet Committee on Economic Affairs approved the strategic sale of a 60.72% stake in IDBI Bank to Fairfax Financial Holdings for ₹52,878 crore despite nearing its annual target.
Disinvestment Policy of the Government of India
- Government policy on disinvestment consists of; Strategic Disinvestment/ Privatisation and Minority Stake Sale in CPSEs.
- Strategic disinvestment implies the entire or substantial sale of the government shareholding of a CPSE along with the transfer of management control.
- In case of privatisation, which is a subset of strategic disinvestment, the government equity in CPSE and its management control is transferred to a private strategic buyer(s), and in other cases of strategic disinvestment, the government equity is transferred to another CPSE along with control.
- Minority stake sales in certain CPSEs are carried out without transfer of management control through various SEBI-approved methods like Initial Public Offer (IPO), Offer for Sale (OFS), buyback of shares, etc. These methods play an important role in strengthening the capital market through:
- Increasing the float of well-performing CPSE’s;
- Providing opportunity to retail investors to participate in an extended range of stocks and
- Increasing liquidity and depth of the capital market.
New Public Sector Enterprise (PSE) Policy
- The New Public Sector Enterprise (PSE) Policy for Atma Nirbhar Bharat, which provides overall guidance on strategic disinvestment, was notified in 2021, with the approval of the Cabinet.
- The policy intends to minimise the presence of government in the PSEs across all sectors of the economy.
- Existing CPSEs, Public Sector Banks and Public Sector Insurance Companies to be covered under it.
- Two-fold classification of Sectors to be disinvested;
- Strategic Sector: Bare minimum presence of the public sector enterprises and remaining to be privatised or merged or subsidiarized with other CPSEs or closed. Following 4 sectors to come under it;
- Atomic energy, Space and Defence
- Transport and Telecommunications
- Power, Petroleum, Coal and other minerals
- Banking, Insurance and financial services.
- Non-Strategic Sector: In this sector, CPSEs will be privatised, otherwise shall be closed.
- Strategic Sector: Bare minimum presence of the public sector enterprises and remaining to be privatised or merged or subsidiarized with other CPSEs or closed. Following 4 sectors to come under it;
Why Is the Government Continuing Disinvestment?
- Rising subsidy expenditure: Disruptions linked to the West Asian conflict and the Strait of Hormuz have increased expenditure pressures, particularly on fertiliser and oil-related support.
- Higher-than-anticipated fertiliser subsidy requirements: Against a Budget estimate of ₹1.71 lakh crore for FY 2026–27, expenditure on urea and nutrient-based fertiliser subsidies reached ₹1.03 lakh crore during April–August.
- Fiscal deficit management: The government has targeted a fiscal deficit of 4.3% of GDP in FY 2026–27. Additional non-debt receipts can help finance expenditure and reduce borrowing requirements, all else being equal.
Significance of Disinvestment
- Improves operational efficiency: Private participation can introduce stronger commercial incentives, professional management and improved accountability.
- Reduces the fiscal burden: It can reduce the need for government support to loss-making or underperforming enterprises.
- Promotes competition: Private participation can improve service quality, encourage innovation and strengthen competition in sectors where adequate safeguards exist.
- Unlocks public assets: Disinvestment can help realise the value of government investments and make capital available for alternative public uses.
What are the Concerns?
- Uncertain market conditions: Weak investor sentiment, volatile valuations and sector-specific risks can delay transactions or reduce sale proceeds.
- Valuation concerns: Selling public assets below their fair economic value can result in a long-term loss to the public exchequer.
- Employment concerns: Employees may face uncertainty regarding job security, service conditions and future restructuring.
- Revenue uncertainty: Disinvestment is a one-time source of receipts and cannot sustainably substitute for recurring tax revenues.
Concluding remarks
- Disinvestment can strengthen fiscal management by unlocking public capital and improving the efficiency of commercial enterprises, but it is not a substitute for sustainable revenue generation.
- A transparent, strategically calibrated approach that balances fiscal needs, economic efficiency, public interest and long-term asset value is essential for ensuring that disinvestment contributes to inclusive and sustainable growth.
Department of Investment and Public Asset Management (DIPAM)
- The Department of Disinvestment was set up as a separate department in 1999.
- It has been renamed the Department of Investment and Public Asset Management (DIPAM) from 2016.
- As per the present allocation of business rules, the mandate of the Department is as follows:
- All matters relating to the management of Central Government investments in equity, including the disinvestment of equity in Central Public Sector Undertakings.
- All matters relating to the sale of Central Government equity through offer for sale or private placement or any other mode in the erstwhile Central Public Sector Undertakings.
