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Disinvestment Cannot Kill Two Birds With One Stone

Linking disinvestment to reducing the annual fiscal deficit makes execution tougher.

By Pushpita Dey
New Update

In her first budget speech in July 2019 finance minister Nirmala Sitharaman said that the government would continue on the policy of disinvestment in nonfinancial public sector undertakings. “Strategic disinvestment of select CPSEs (Central Public Sector Enterprises) would continue to remain a priority of this government,” said Sitharaman. 

This year marks the fifth consecutive one to miss strategic disinvestment targets. The government could eke out just Rs 12,540.18 crore (as on February 20, 2024) in FY24, around fourth of its budgetary target.

The Narendra Modi government’s disinvestment programme had two stated objectives: the long-term reason was to minimise the government’s role in running businesses, except those that it considers strategically important, and focus on governance. The short-term aim was to shore up the fiscal deficit each year. Both of these remain largely unmet. 

The sale of erstwhile national carrier Air India to the Tata Group and the privatisation of Neelachal Ispat Nigam Limited were among the few successful disinvestments in the last five years. Others like the state-run helicopter services provider Pawan Hans and Bharat Petroleum were called off for multiple reasons.

Data showed that since 2019 the government could muster less than a third of its disinvestment target. In the 10 years from 2014, it has only met this twice — in FY 2017-18 and 2018-19. The Interim Budget 2024-25 has scaled down the FY24 target to Rs 30,000 crore from the previously budgeted Rs 51,000 crore and marginally shrunk the ambition for FY25 to Rs 50,000 crore.

"These are highly optimistic targets that have been set and governments think it to be achievable but the market situation is often not considered,” says Suresh Babu, former Advisor to the Prime Minister’s Economic Advisory Council and Professor of economics at IIT Madras. “The market may not have the depth to have so many disinvestments at one point in time.”



It costs the government money to keep loss-making CPSEs running. Take the case of Pawan Hans and Hindustan Antibiotics, both of which were on the disinvestment list. Between 2019 and 2022, Pawan Hans saw a nearly 35% increase in losses, rising from Rs 1,346 lakh to Rs 1,811 lakh. While Hindustan Antibiotics saw a reduction in losses, dropping from Rs 13,840 lakh in 2019 to Rs 1,621 lakh in 2022, it remains a loss-making public sector undertaking (PSU).


During the United Progressive Alliance administration, the government's equity share for PSUs in the overall public sector capital expenditure stood at 15.8%. This figure nearly doubled to 30.33%  over the ten-year tenure of Narendra Modi's administration.  

No Takers For PSUs? 

A source in the Department of Investment and Public Asset Management (DIPAM) told The Core that often valuations and the quality of investors got in the way of the disinvestment process. 

For instance, in Pawan Hans’ strategic sale to Star9 Mobility Pvt Ltd, the winning bidder was called off at the last moment because the potential buyer was reportedly entangled in court cases. 

“Governments often overestimated the ease of procedural formalities that need to be done for disinvestment. There are cases where the disinvestment process has lingered for a long time,” says Prof. Babu. 

Even relatively small companies present unmatched complexity when it comes to selling them off. The British-era conglomerate Balmer Lawrie, which has eight subsidiaries across industries, including logistics and hospitality, presented such a challenge. 

“To privatise that, we have to split several things,” said a source from DIPAM, requesting anonymity. The government wanted to sell 52.63% of its nearly 60% ownership in the Kolkata-based firm. He pointed out that being a listed company with foreign subsidiaries, the government will need to find multiple buyers. 

“None of the consulting companies want to buy it,” said the source. 

Lack of Will

The problem with disinvestment goes a bit deeper than just not finding takers. By linking the disinvestment objective to also reducing the annual fiscal deficit, execution became tougher. Divestment secretary Tuhin Kanta Pandey in a post-budget interview with The Indian Express said that disinvestment alone cannot address fiscal deficit and the key lies in generating robust revenue and exercising careful control over expenditure.

Former finance secretary of India, Subhash Chandra Garg told The Core that the government’s privatisation policy announced in 2021-22 was robust and seemed to show intent. “Very soon, it completely forgot about it and instead, jumped on the bandwagon of capital expenditure through the public sector enterprises, which is actually the antithesis of privatisation,” Garg said. “For the last two-three years, government investment in the public sector is 10-20 times more than the capital receipts raised through disinvestment.”

When asked about the government going quiet on its disinvestment plans, DIPAM secretary Pandey told The Core in early February that it chose to opt for methods to reduce the fiscal deficit other than relying on disinvestment.  

“The choice of keeping disinvestment targets high in the budget is a device that helps show that the fiscal deficit projections look good. Actually what happens is tax collection improves in some months and in  others non-tax revenue improves and you still will have better deficit numbers, with lower disinvestments” said Prof Babu. 

Govt Still Present In PSUs 

New investment space for the private sector, creation of jobs, and economic growth were among the key purposes cited in the 2021 budget speech for selling state-owned companies. That was beaten when the ownership merely shifted from the government’s books one step down to PSU portfolios. 

Shankkar Aiyar, a political-economy analyst told The Core, “The modus operandi is simple — locate a government-owned enterprise and direct/force it to buy the government’s stake in another government-owned enterprise and pay the government. The process delivers a corollary — the government can sell an enterprise and continue to own it.” 

The government sold its 73.44% stake in Dredging Corporation of India Limited (DCIL) to four major ports: Visakhapatnam Port Trust, Paradeep Port Trust, Jawahar Lal Nehru Port Trust, and Kandla Port Trust. Similarly, it sold its 74.49% stake in the power sector PSU THDC India Ltd for Rs 7,500 crore, and 100% stake in North Eastern Electric Power Corporation Ltd (NEEPCO) for Rs 4,000 crore to NTPC, formerly known as National Thermal Power Corporation, a PSU. These were listed by the government as successful disinvestments. 

Former secretary Garg calls these transactions a sham. True privatisation is when ownership changes hands from public to private. THDC and NEEPCO were under the control of the power ministry, which is dead against privatisation. Pseudo privatisation was again on display when Hindustan Petroleum Corporation Limited was sold to Oil and Natural Gas Corporation Ltd and REC (formerly Rural Electrification Corporation Ltd)  to Power Finance Corporation.



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