Answer:

Often protected from competition and subsidized by government, PSUs frequently suffer from low productivity, higher costs, inefficiency and non-competitiveness. To address these challenges government resorted to disinvestment with following objectives:

♤ Reduce financial burden on Government

♤ Improve public finances

♤ Introduce, competition and market discipline

♤ Create Fund for infrastructure growth (NIF)

♤ Encourage wider share of ownership

♤ Depoliticise non-essential services

♤ Up gradation of existing PSUs.

Initially only sick PSUs were to be disinvested but later others were also included but with a cap of 49% so that government remains majority stakeholder. As per Department of Disinvestment it was decided that 20 per cent of equity of PSUs will be disinvested incrementally and they will be sold to financial institutions, banks and employees etc.

However, the disinvestments did not succeed as expected because:

♤ People were not taken into confidence before disinvestment was started; therefore whole move was opposed by certain group of people and parties in opposition.

♤ 2006 CAG report found that the valuation of the companies' assets was done without "due seriousness". In several instances substantial "surplus land" was sold along with the company when they were privatised.

♤ The unfavourable market conditions were mainly responsible for this downward trend of disinvestment hence the receipt generated was sub-optimal.

♤ The amount realized through disinvestment was not paid to the enterprise concerned for its expansion and improving efficiency but the Government has been using such disinvestment proceeds to bridge the budget deficit.

♤ The Government was not transparent about its approach towards sequencing the

restructuring and methods of disinvestment of PE‟s.

♤ The offers made by the Government for disinvestment of PE‟s were not attractive

and stringent bureaucratic procedures discourage the private sector interest.

♤ The Government had no clear cut policy on disinvestment of its PE‟s when the

disinvestment process was started.

♤ Lack of consultation with the specialists.

In 2012, a government panel headed by Vijay Kelkar recommended monetizing surplus government land, which represents a huge opportunity cost, from port trusts, railways and PSUs as the ideal solution to India’s urban problems in cities that are land- starved—allowing for civic infrastructure such as hospitals, schools and roads —besides the obvious benefits of unlocking huge revenue and betterment of the fiscal consolidation situation.

Recently government has transferred advising role of DIPAM on utilization of proceeds from disinvestment to Department of Economic Affairs (DEA). It has approved an alternative mechanism to decide modalities related to stake sales in PSUs, so as to speed up and streamline the process. Under this mechanism, the quantum of disinvestment in a PSU will be decided on a case-by-case basis subject to Government retaining 51% stake.