9 Important Merits and Demerits of Disinvestment (Privatisation) Policy of India

“Privatization” or “Disinvestment” are used to mean same thing i.e., divestment of PSEs required in public interest.

The main objective of disinvestment is to put national resources and assets to optimal use and in particular to unleash the productive potential inherent in our public sector enterprises. The policy of disinvestment aims at modernization of PSEs, creation of new assets, generation of employment and retiring of public debt.

Merits/Objectives of Disinvestment:

1. To obtain release of the large amount of public resources locked up in non-strategic Public sector units for re-employment in areas that are much higher on the social priority e.g. health, family, welfare etc. and to reduce the public debt that is assuming threatening proportions.

2. Privatization would help stemming further outflows of the scarce public resources of sustaining the unviable non-strategic public sector unit.

3. Privatisation would facilitate transferring the commercial risk to which the tax payer’s money locked up in the public sector is exposed to the private sector wherever the private sector is willing to step in.

4. Privatisation would release tangible and intangible resources such as large manpower locked up in managing PSU’s and release them for deployment in high priority social sector.

5. Disinvestment would expose privatized companies to market disciplines and help them become self reliant.

6. Disinvestment would result in wider distribution of wealth by offering shares of privatized companies to small investors and employees.

7. Disinvestment would have a beneficial effect on the capital market. The increase in floating stock would give the market more depth and liquidity, give investors early exit options, help establish more accurate benchmarks for valuation and raising of funds by privatized companies for their projects and expansion.

8. Opening up the public sector to private investment will increase economic activity and have an overall beneficial effect on economy, employment and tax revenues in the medium to long term.

9. Bring relief to consumers by way of more choices and better quality of products and services, e.g. Telecom sector.

Demerits/Criticism of Disinvestment:

1. The amount raised through disinvestment from 1991-2001 was Rs. 2051 crores per year which is too meagre. Further, the way money released by disinvestment is being used, remaining undisclosed.

2. The loss of PSU’s is rising. It was 9305 crore in 1998 and 10060 crore in 2000.

3. This is welcome but disinvestment of profit making public sector units will rob the government of good returns. Further, if department of disinvestment wants to get away with commercial risks, why should it retain equity in disinvested PSU’s, e.g. Balco (49%), Modern Foods (26%) etc.

4. The growth in social sector is not in any way hindered by non availability of manpower.

5. This is true but only when the govt, ensures that the market system regulates and disciplines privatized firms taking care of public’s interest.

6. Privatization programme is generally not been affected through the public sales of shares. Earlier, sale of shares (1991-96) attracted the employees to a limited extent and was not friendly to small investors and employees.

7. In most cases, shares of disinvested PSU’s are by and large in the hands of institutions with little floating stock. The present policy of privatization through the strategic partner route would also not achieve these objectives.

8. Hindustan Lever has categorically stated that it has no plans for any capital infusion in Modern food industries acquired by it in January, 2002. The supporter of disinvestment had thought that tax payer’s money would be saved through private sector investment.

9. No monopoly is good. Only fair and full competition can bring relief to consumers.