BL Explainer: Divestment and its importance in a Union Budget

What is disinvestment?

Disinvestment is the action of a government or an organisation selling or liquidating an asset or a subsidiary. It is also referred to as divestment or divestiture. In India, disinvestment is a policy wherein the government liquidates its assets in public sector enterprises partially or fully. What are the main approaches to disinvestment?

The three main approaches to disinvestment are minority disinvestment, majority disinvestment and complete privatisation. 

A minority disinvestment is one such that, at the end of it, the government retains a majority in the company, typically greater than 51 per cent, thus ensuring management control. In the case of majority divestment, the government, retains a minority stake in the company.

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Complete privatisation is a disinvestment where 100 percent control of the company is passed on to a buyer. 

What is the value of Central Government shareholding in Central Public Sector Enterprises (CPSEs)?

A CAG report put out in the year 2020 highlighted that the total paid up capital of 434 covered CPSEs stood at ₹5,45,338 crore as of March 2019. Of this central government holding is about ₹400,909 crore.

The long-term loans taken by these 434 CPSEs stood at ₹16,46,888 crore. The market capitalisation of the then 54 listed traded government companies was ₹14,29,111 crore (equity investment being ₹85,041 crore)  as on March 31, 2019. The consolidated Return on Capital Employed (ROCE) of 434 government companies in 2018-19 was 10.06 per cent, lower than 10.47 per cent in previous year. The Return on Equity (ROE) of these 434 companies stood at 11.81 per cent for 2018-19.

How has the Central Government’s performance been on disinvestment?

It has been sub- optimal. The Modi-led government has achieved its disinvestment target (budget estimate) only in two (2017-18 and 2018-19) of the seven years.

In 2019-20, the government had set a disinvestment target of ₹1 lakh crore and the actual receipt was only ₹ 50,000 crore. Similarly, the government garnered just over ₹ 30,000 crore in the financial year 2020-21 against a budget estimate of ₹2 lakh crore. For the current fiscal, it has budgeted ₹1.75-lakh crore and so far, disinvestment receipts is about ₹9,291 crore. The government is betting big on the upcoming LIC IPO to help meet its disinvestment target.

What are the challenges it typically faces in the disinvestment process?

There are several challenges that the government has to surmount in making a success of the disinvestment programme. From identification of the right candidates to choosing the right route (whether it should be strategic divestment or through the stock exchanges) and quantum of stake sale, the government has to do a fine balancing act. It also has to face the opposition from workers Unions and opposition parties. Another critical decision is on the pricing of the share sale so as to ensure that there is no future criticism of having sold the family silver cheap in public markets. Timing of the share sale is also a big challenge.

How important are disinvest proceeds in funding the Budget?

They are useful in part-funding the deficit. The decision to disinvest is mainly to reduce the fiscal burden and bridge the revenue shortfall of the government. Disinvestment proceeds are mostly used to finance fiscal deficit, finance large-scale infrastructure development, for investing in the economy, for retiring government debt, and for social programmes like health and education. Successful divestment of a loss-making unit also means that the government does not have to fund its losses going forward.

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