The Consumer Sector Disinvestments And Implications For Overall economy Economics Essay

The founding fathers of your republic used the public sector as an essential and vibrant component in the building-up of India's current economic climate. Among the basic objectives of starting the public sector in India was to build infrastructure for monetary development and rapid economic progress. Since their inception, general population enterprises have played an important role in achieving the objective of economic expansion with social justice. However economic compulsions, viz. , deterioration of balance of repayment position and increasing fiscal deficit led to adoption of a new approach towards the general public sector in 1991. Disinvestment of open public sector undertakings is one of the coverage measures used by the government of India for providing financial self-control and enhance the performance of this sector in tune with the new economical insurance plan of Liberalization, privatization and Globalization.

What is Disinvestment?

In general terms Disinvestment (Dis-investment) is merely selling the equity (talk about) invested by the government in public areas Sector Companies (PSU). PSUs are businesses which are either had completely by the federal government or whose stocks are maximum had by the federal government (51% or above). For example BHEL, ONGC, and NTPC etc.

If there is absolutely no progress achieved by the PSU or if there are no earnings obtained (sometimes federal may not have the ability to recover the investment capital also) because of it, government offers some part of the equity to private companies. The money raised by this sale may be used to develop other underperforming PSUs.

Why we needed Disinvestment?

During the first five time plans government possessed 5 PSUs with investment of Rs 29 crores. At the end of the Seventh Plan in 1990, there have been 244 PSUs and the investment in them had gone up to Rs. 99, 000 crores. The thought of disinvestment first arrived in 1991-1992. First only a tiny share of collateral was sold till 2000-2001. During 2000-2001, there are 122 income making enterprises with a online revenue of Rs 19, 000 crores. These include NTPC, ONGC, IOC; VSNL etc. 111 companies bore loss with a complete loss of Rs 12, 839 crores. Included in these are Hindustan Fertilizers, the Fertilizer Firm of India (FCI), Bharat Coking Coal etc.

So rather than making extra income from the PSUs federal was not able to get the spent capital. It had been also thought that government money in these businesses using share capital can be better utilized if taken out.

Inefficiency and corruption in PSUs will be the other issues which push the gov. to felt the need of Disinvestment.

The seeks of disinvestments coverage are

Raising of resources to meet fiscal deficit

Encouraging wider general public contribution including that of workers

Penetrating market willpower within general population enterprises

Improving performance

How Disinvestment can be done?

There are two ways of disinvestment

1. Transfer of complete management to private enterprises

Modern Food Industries, Bharat Metal Company Limited (BALCO), VSNL, Centaur Hotel Airport are types of this kind.

2. Partial selling of shares

Here, government markets some part of stocks. But still it retains majority of them (51% or more) it has been and followed in majority of cases.

To make the disinvestment process a success it is vital that profit making companies be recognized from damage incurring companies. There must be transparency in the deals manufactured in disinvestment. Method and basis of valuation of investments must be uncovered to the general public when a general public undertaking is sold off. This would eliminate suspicions of any malpractice as would also fetch competitive price of assets.

Further, legitimate needs and expectation of work force should not be overlooked and treatment must be taken that either they aren't trashed of career or alternate jobs are given to them. Hence public implications of labor structuring should be properly examined. Program of voluntary old age may be used so that folks willing to adopt old age may lead a better life. This will garner support for Privatization. The proceeds of disinvestment should be put in for interpersonal uplift. These shouldn't be utilized to meet up with the fiscal deficit because the aim of disinvestment as proclaimed by the federal government is to lessen public debt and offer funds for communal sector.

Why Disinvestment is difficult and Tricky Road?

Disinvestment was a very striking and important step initiated by the federal government as apart of its reform options. But the way it was dealt with has defeated its very purpose. The challenges before investment are as follows-

Social Problem: Procedure for disinvestment is not favoured socially as it is up against the interest of socially disadvantageous people and society at large. This technique will definitely impact the social goals of the federal government.

Political Problem: The coalition authorities at the centre with lots of people has posed a serious threat to this programme. Conflicting interest has made it difficult to reach at a national


Economic Problem-Most of the items identified for disinvestment are in a very bad shape which does not offer good results. The Government due to paucity of cash is also not able to revive it.

Legality of the disinvestment process has been challenged on a number of grounds that slowed the sale of public investments. However, there were two significant judicial rulings that broadly arranged the restrictions of the Disinvestment process. These are

Privatisation is an insurance plan decision, prerogative of the executive branch of the state; courts would not interfere in it

Privatisation of the PSE created by an work of parliament would need to find the parliament-ary approval

While the first ruling offered impetus for tactical sale of many companies like Hindustan Zinc, Maruti, and VSNL etc. since 2000, the next ruling stalled the privatisation of the petroleum companies, as federal was unsure to getting the laws amended in the parliament.

Less inclination of business towards Disinvestment- The number of bidders for collateral has been small not only in the case of financially weakened PSUs, but also for the reason that of better-performing PSUs. Besides, the government has often compelled financial institutions, UTI and other common funds to acquire the equity which was being unloaded through disinvestment. These organizations havent been very enthusiastic in list and trading of stocks purchased by them as it would reduce their control over PSUs. Cases of insider trading of shares by them have also emerged. All this has resulted in low valuation or under costing of equity.

Advantages and Down sides of Disinvestment


1. To achieve greater inflow of private capital

E. g. This income can be used to compensate the deficit financing.

2. Allows new organizations to enter into the market and therefore increases competition

3. Brings the reduced productivity PSUs back on track in that way improving the quality of goods, eliminating high manpower usage and enabling high income.


1. Loss of public interests

Eg. PSUs are resources of the nation. They belong to the folks. By selling these to private companies, federal is seriously affecting the people's welfare.

2. Fear of foreign control

Eg. Selling equities to foreign companies result in serious consequences shifting the nation's riches, electricity and control to outsiders.

3. Problems with workers

Eg. The careers of Lakhs of staff in the PSUs will show up in peril by privatization.

4. Less quantity of bidders

Eg. Even though government strategies to disinvest, there are actually less number of people happy to place

Implication of Disinvestment to Indian Economy

India has already been confronting the obstacles of fiscal deficit due to the huge symphonizing of capital for the communal sector specially flagship program of administration NREGA. The existing consideration deficit is also the cause of matter for the Indian authorities. The costs on different forward namely defense (16% of GDP) is bigger in amount and worthwhile also. However the growing fiscal deficit and current account deficit will never be bearable for longer span of time. There is certainly immediate need to tame this gap. The only way out is disinvestment of Public Sector Undertakings. It results in productive use of resources whereby scarce resources like land, capital and machinery are placed to more efficient use. The economy as a whole is benefited by increase efficiency of the items and the fiscal clutter is reduced by lessening of liabilities. Inefficient PSU's were basically accountable for the macro-economic problems experienced by India during 1980's although these were set up for the purpose of providing occupation and the same time generate earnings surplus. However they cannot stand to targets. Hence steps for disinvestment had to be taken.

Also We Can Offer!

Other services that we offer

If you don’t see the necessary subject, paper type, or topic in our list of available services and examples, don’t worry! We have a number of other academic disciplines to suit the needs of anyone who visits this website looking for help.

How to ...

We made your life easier with putting together a big number of articles and guidelines on how to plan and write different types of assignments (Essay, Research Paper, Dissertation etc)