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Disinvestment – Meaning, DIPAM, Disinvestment Policy UPSC PDF

By BYJU'S Exam Prep

Updated on: November 14th, 2023

Disinvestment from the Disinvestment Policy of India refers to the government or organization selling or liquidating assets or subsidiaries. Disinvestment can take the form of divestment or a decrease in capital expenditures. Disinvestment occurs for a variety of reasons, including strategic, political, or environmental considerations. The disinvestment policy in India also assists in meeting the shortfall of the deficits.

This article facilitates complete knowledge of the disinvestment policy in India. The aspirants preparing for the UPSC exam must be in possession of an in-depth knowledge of the core concepts and fundamentals. The concept of disinvestment will aid in lowering the GDP-to-debt ratio. The chairman of the disinvestment policy of India is G.V Ramakrishna.

Meaning of Disinvestment

Meaning of disinvestment is the action of the government to dissolve the shareholders in the public sector. There is a surge in the purveying of public goods and services. The funds attained from the disinvestment will assist in more purveying of the public sector enterprises. The major objectives of the disinvestments are to lower the financial burden and to surge and uplift public finances.

DIPAM

The reformation and the renaming of the Department of Disinvestment was named as Department of Investment and Public Asset Management. The renaming of the department was declared by the Minister of Finance in the budget. The foremost and primary objective of DIPAM is to regulate the investments of the Centres effectively. It also governs disinvestment. It suggests the Government for reformation of the financial aspects. They also bring in investments. It effectively caters to the reformation of capital shares, dividends, and bonuses.

Types of Disinvestment

The major types of disinvestment have been stratified into the minority, majority, and complete privatization. The main significance of the disinvestment lies in financing the infrastructural projects, lowering the debt-to-GDP ratio etc. Take a look at the illustration of the types of disinvestments in India-

  • Minority Disinvestment: The government tries to preserve the majority stake in the company which is around 51%. Further, it tries to put control in the hands of the management.
  • Majority Disinvestment: Majority Disinvestment is the one in which the government retains a minority stake in the company after the disinvestment.
  • Complete privatization is a type of majority disinvestment in which the company’s entire ownership is transferred to a buyer.

Disinvestment Policy of India – Background

During the 1990s, after the onset of the economic policy popularly known as ‘liberalization, privatization, and globalization, the Indian Government had begun disinvesting its stake in the public-sector companies, which helped them reduce the fiscal deficits in their accounts.

  • The sold stakes in the public-sector companies by the government would help them raise revenue. Even in recent times, the central government has used this method to make up for the ventures facing losses and then to increase non-tax revenues.
  • Ever since the NDA (National Democratic Alliance) came to power in the central government, it has made a few vital disinvestments in key PSUs (Public Sector Undertakings) like Hindustan Zinc and Bharat Aluminium, VSNL, and Indian Petrochemicals Corporation Limited.
  • The NDA government under the leadership of Prime Minister Narendra Modi tried to retire the government debt because approximately 41-45% of the revenue receipts of the central government were used for repayment of public debt or related interest which further led to the increment of the disinvestment target for the year 2017-18 by the government, after failing to retire the debt of Air India.

Issues with Disinvestment Policy in India

There were certain challenges faced by the disinvestment policy. One of the major problems was liquidating the essential assets can even pose a risk to the security of the nation. Selling the Public Sector Undertakings that are acquiring profit and also impact the revenue of the country. Also, according to the experts, this can focus on short-term problems, selling the assets will not help the economy to deal with fiscal deficits in the longer run. This can even lead to a surge in the autocratic power of the private sector.

This is also an important topic for the IAS exam. The candidates can practise well and gain complete knowledge of the concepts. The bureaucratic interference also surges problems in the disinvestment policy. This is considered equivalent to selling off the family assets for repaying the debts, which can never be considered an effective solution to the problem.

Difference Between Disinvestment and Privatisation

The main point highlighting the difference between disinvestment and privastisation is that in the former one there is the solvency of the assets whereas in the privatization there is the transfer of authority and ownership from the Public Services to the private entities. The other differences have been highlighted here-

Disinvestment Privatisation
Transfer of ownership is not involved. Transfer of ownership is involved.
The management does not change. The management also changes.
The Government can keep 50% of its shares. Usually, the shareholding of the Government reduces to less than 50%.

Objectives of Disinvestments

The method of strategic cross-disinvestment in which one PSU buys a stake in the other could have made this possible. This not only allows the government to raise the revenue it needs but also keeps the control of the company under the government. The other objectives of the disinvestment have been mentioned here-

  • Helps in improving the public finances of the country.
  • Depoliticizing essential services.
  • Permitting private ownership.
  • Working on the diversification and expansion program.
  • Stabilizing the competition in the market with a balance.
  • Workforce rationalizing and retraining.

Need of Disinvestments

The Disinvestment Policy of India is beneficial to a country’s economy because it generates revenue for the government, improves the performance of enterprises, and strategizes units that are losing money.

  • To meet the fiscal deficit.
  • Augmentation or assortment of the firm.
  • The government can repay debts.
  • Planning to implement a government plan.
  • A negative rate of return on the Public Sector Undertaking

Disinvestment Policy of India Importance

The importance of the disinvestment policy of India includes lowering the GDP-to-debt ratio. The other benefits of the disinvestment are as listed below-

  • Funding the growing fiscal deficit.
  • Subsidizing large-scale infrastructure development.
  • To encourage investment in the economy.
  • For repaying public debt.
  • For social programs such as health care and education.

Criticism of Disinvestment Policy in India

The disinvestment policy in India has witnessed numerous criticisms. There are some fallacies in the policies that can lead to an increase in the fiscal deficit. There is no absolute focus on Public Sector Undertakings. The disinvestment policy in India progressed at a minimal pace. There were no major reforms in the public sector. In accordance with the views expressed by the experts, it is nearly impossible for private entities to emphasize equitable sharing of the resources and growth of all. The main motive in the private sector is to make profit.

The disinvestment strategy can harm if the investments are pulled out of essential domains like oils. This step can pose risk to national integrity. The private entities can also cut off the workforce in order to surge the profit of the organizations.

Recent Disinvestment Policy of India

The central government has revised and reduced the estimate for its disinvestment during the current fiscal year to Rs. 78,000 crores. It was initially Rs. 1.75 lakh crores which was the target estimate in the budget on the 1st of February last year and are a reduction of 55.4%.

The revised estimate of the current financial year was reduced by the government to prevent the revelation of the estimated value of the IPOs (Initial Public Offerings) of LIC India (Life Insurance Corporation) at the current stage. It is a big IPO and is scheduled for the current financial year.

Disinvestment UPSC

The aspirants preparing for the UPSC exam must have an in-depth knowledge of these topics in order to grasp the core concepts. The formula for performing exceptionally well in the exam roots from the preparation of the basic topics. The disinvestment, DIPAM, and disinvestment policy hold enormous importance for the candidates to rank well in the UPSC exam.

The candidates can gain an understanding and insights of the disinvestment policies and solve the previous year papers to develop the knack of solving the questions in the stipulated time period. The ideation of the disinvestment policy will lead the candidates in comprehending other related concepts.

Disinvestment UPSC Questions

The disinvestment UPSC questions must be practised by the candidates on regular basis. The complete knowledge of the concepts and the fundamentals will help the candidates in curating an effective plan of action for the exam. Check the list of the questions provided below to get accustomed to the type of questions asked in the exam.

Question: Take into consideration the statements pertaining to disinvestment. [1] Privatization and disinvestment share similar meanings, both refer to the sale of the Government’s shares to the PSUs. [2] The aim and objectives of the disinvestment are to reach the needs of the social sector and also to cater to budgetary needs. [3] The profits from the Central Public Sector Enterprises are channeled to National Investment Fund [NIF].

Which of the statements is correct? [A] 1 and 2 [B] 2 and 3 [C] 1 and 3 [D] 1, 2 and 3

Answer: Option B (2 and 3) The aim and objectives of the disinvestment are to reach the needs of the social sector and also to cater to budgetary needs. The profits from the Central Public Sector Enterprises are channeled to National Investment Fund [NIF].

Question: Why GoI is disinvesting its shares in the CPSEs [Central Public Sector Enterprises]? [1] The Government of India is willing to utilize the revenue generated from the disinvestments to repay external debts. [2] The GoI is not interested in keeping the management regulation of the CPSEs.

Which of the following statements is correct? [A] 1 only [2] 2 only [C] Both 1 and 2 [D] Neither 1 nor 2.

Answer: (Option D) Neither 1 nor 2

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