BackBack to Beyond the Book Indian Economy

BPSC Mains GS-2 Masterclass · Indian Economy

Planning in the Reform EraState, Market & Disinvestment

After 1991, India opened its markets, sold stakes in public enterprises and in 2014 dissolved the Planning Commission. Does planning still matter? This page argues that it does, shows how the State and the market can work as partners, and examines how far disinvestment has met its goals.

Turning point1991Economic reforms

New Industrial Policy introduced disinvestment.

Institutions2014Planning Commission

dissolved; NITI Aayog took over in 2015.

Employment15 mnJob seekers a year

waiting to be absorbed in industry and services.

Disinvestment51%Government stake

kept in minority stake sales, with management control.

Strategic sale700 → 2,992Net worth (Rs cr)

average of privatised CPSEs, before vs after.

TargetsRs 65,000 crRealised 2019-20

against a target of Rs 1.05 lakh crore.

Part 1 · Introductions

Planning and Disinvestment After 1991

After 1991 the State stepped back from many economic decisions. Two questions follow: is planning still relevant, and has selling public enterprises worked?

A planning office with old Five-Year Plan volumes on one side and a stock-exchange ticker screen on the other

Is planning still relevant?

After independence, India committed itself towards development through planning. However, after introduction of economic reforms in 1991, this commitment is said to have diminished. Public investment, especially on agriculture and industry, has been on a decline in the country.

Unlike pre-reform era, PSUs have begun to be valued only for the returns they bring as commercial entities. Disinvestment of PSUs, general withdrawal of the state from economic decision-making, dissolution of planning commission in 2014 etc has led to examining of the relevance of economic planning in India by many.

What is disinvestment?

The New Industrial Policy 1991, talked of disinvestment. Disinvestment means sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets.

In some cases, disinvestment may be done to privatise assets. However, not all disinvestment is privatisation. Mostly, in disinvestment, there is no change in the management from public to private hands because either the government holds majority equity (51%) or even if the government holds less than 51% of equity, rest of it is sold to various individuals and institutions none of whom holds enough to take over management. It is essentially money-raising exercise with some accompanying benefits.

If the Government sells chunk of equity to a single buyer — 26% or 51% or more — to whom the management is also handed over, it is called strategic sale and the buyer is called strategic partner. It is a case of privatisation.

Example: Selling 10% of Coal India's shares on the stock market is disinvestment: the government still runs the company. Selling a controlling stake in a company to one buyer who takes over management (as with Air India to the Tata group in 2022) is strategic sale, i.e. privatisation.

Part 3 · A synergetic role

How the State and the Market Can Work Together

Market forces and the State should be given roles that add to their comparative advantages, and work together as partners in the economic development of the nation.

The principle

It has been recognized that market forces and the state should be given roles which add to their comparative advantages and that they should work together as partners in the economic development of the nation, i.e. both state and businesses should complement each other.

Businesses are the prime engine of wealth and economic growth in the market system; governments routinely attempt to craft policies that are beneficial to them.

Provide public goods: water, sanitation, health, education, housing, electricity and clean cooking fuel, national defense, and the rule of law etc.
The state should increasingly play a pro-active role in areas in which the private sector is either unwilling to act or is incapable of regulating itself in the social interest.
- The areas in which the state has a comparative advantage over the private sector include poverty alleviation programs; human resource development; provision of social services such as primary health and primary education; and similar activities categorised as building human capital, social infrastructure and infrastructure sector.
- Higher education levels in a district enable the development of better human capital that relates to increased supply of ideas and entrepreneurs.
- PSUs can play role as creators of new technologies and knowledge, particularly in fields in which the private sector may have little interest or capabilities.

What the market can do

The market economy is based on the principle that optimal allocation of resources occurs when citizens are able to exercise free choice in the products or services they want.
Keep prices in check.
Use resources efficiently:
- e.g. economic survey 2020 had analysed how different sectors such as banking, mutual funds, ports, etc. that were liberalized since 1991 grew significantly faster than those that remain closed.
- And the command and control approach of government in some areas are limiting the efficient functioning of markets in those areas.
- Performance of Central Public Sector Enterprises (CPSEs) after privatization to show the significant efficiency gains that are obtained when the private sector runs businesses instead of the government.
Encourage innovation: The country with market economy has increased innovation. With money as the main motivating factor for firms and individuals, they look to create new products and technologies to generate higher incomes.
Increase consumer choice: Pursuit of earning higher profit, innovation and competition also leads to wider variety of goods and services provided to consumer.
Example: Before 1991 a family could wait years for a telephone line or a Bajaj scooter; competition brought dozens of choices and much lower prices.
Create wealth: economic freedom leads to competition and development of an efficient and practical system yielding high returns and in turn leads to greater national and individual wealth.
Maximize aggregate welfare: More business activities results in the higher tax revenue for the government. That in turn empowers government to undertake more welfare schemes.
Public-private partnership: Private sector imparts its skills, technology and funding in new large-scale projects like roads, bridges, or hospitals etc.

Conclusion on planning

In the post-liberalisation period, the concept of planning itself has undergone a change. We have moved, at best, to an era of indicative planning. The blend of public and private investment has tilted in favour of the private sector. While planning of the type we had in the first five decades after Independence has no relevance, an organisation to look at the basic issues confronting the economy, and preparing a broad framework on how long-term issues can be resolved, is still a necessity.

Consistent with the spirit of the market-oriented economic reforms launched since 1991, the government has reoriented its role and the role of planning in India. Now, NITI Aayog has been assigned the task of planning and now the focus is more on cooperative federalism, bottom-up planning and indicative planning rather than imperative planning.

Part 4 · The policy, its elements and modes

India's Disinvestment Policy

Government's policy on disinvestment and privatisation has been evolving since 1991. Strategic sale became a policy measure in 1999-2000.

The policy and its main elements

As a part of reforming the public sector enterprises, Government's policy on disinvestment and privatization is evolving since the beginning of the reforms in 1991. The government of India adopted strategic sale as a policy measure in 1999-2000.
Strategic disinvestment is guided by the basic economic principle that Government should discontinue its engagement in manufacturing/ producing goods and services in sectors where competitive markets have come of age.
Its main elements are:
- Divest to raise money and other advantages.
- Strategic sale is considered for loss making companies. NITI Aayog recommended strategic disinvestment of 34 sick public sector units.
- List all unlisted public sector enterprises and sell a minimum of 25 percent of equity to the public as mandated by SEBI by 2017.
- Buyback of shares, for example, CIL and EIL in 2017.
- Profit-making PSUs will not be privatized. However, now government has made it flexible and is disinvesting even profit making PSUs. e.g. Bharat Petroleum Corporation Limited (BPCL) disinvestment.
- Restructure and revive potentially viable PSUs; Close down PSUs which cannot be revived or sold; Fully protect the interests of workers.
- Every year, the government fixes a target for disinvestment of PSEs. e.g. disinvestment target for 2020-21 at Rs 1.20 lakh crore.

Various modes of disinvestment followed by the Government

Minority stake sale

Disinvestment through minority stake sale in listed CPSEs to achieve minimum public shareholding norms of 25 per cent. While pursuing disinvestment of CPSEs, the Government will retain majority shareholding, i.e., at least 51 per cent and management control of the Public Sector Undertakings.

Listing

Listing of CPSEs to facilitate people's ownership and improve the efficiency of companies through accountability to its stake holders – As many as 57 PSUs are now listed with total market capitalisation of over Rs 13 lakh crore.

Strategic disinvestment

Sale of substantial portion of Government shareholding in identified Central PSEs (CPSEs) up to 50 per cent or more, along with transfer of management control. NITI Aayog identifies PSUs for strategic disinvestment. For this purpose, NITI Aayog has classified PSUs into "high priority" and "low priority", based on (a) National Security (b) Sovereign functions at arm's length, and (c) Market Imperfections and Public Purpose. The PSUs falling under "low priority" are covered for strategic disinvestment.

Buy-back

Buy-back of shares by large PSUs having huge surplus.

Mergers

Merger and acquisitions among PSUs in the same sector.

ETFs

Launch of exchange traded funds (ETFs) – an equity instrument that tracks a particular index. The CPSE ETF is made up of equity investments in India's major public sector companies like ONGC, REC, Coal India, Container Corp, Oil India, Power Finance, GAIL, BEL, EIL, Indian Oil and NTPC.

Asset monetisation

Monetization of select assets of CPSEs to improve their balance sheet/reduce their debts and to meet part of their capital expenditure requirements.

Main objectives of disinvestment

Reducing the fiscal burden on the exchequer; Improving public finances.
Encouraging private ownership; Funding growth and development programmes.
Improve financial discipline, facilitate modernisation and technology up-gradation.
Maintaining and promoting competition in the market, exposes the enterprises to market discipline ⇒ promote efficiency.
Promote professionalism and profitability.
Facilitate wider distribution of wealth through offering of shares to small investors and employees.
Opening up the public sector to appropriate private investment would increase economic activity and benefits the economy, employment and tax revenues in the medium to long term.

Part 5 · A mixed record

Did Disinvestment Achieve Its Objectives?

Privatised companies did better and the money helped fiscal consolidation; but critics point to undervaluation, missed targets and the loss of a check on private cartels.

For: arguments of success

The proceeds of disinvestment are credited into National Investment Fund. And are utilized for asset creation, recapitalization of public sector banks, investment in metro projects etc.
The economic survey of 2019-2020 analysing the before-after performance of some of the CPSEs which had undergone strategic disinvestment from 1999-2000 to 2003-04, came to the following results:
- Post privatisation, these privatized CPSEs, on an average, perform better than their peers in terms of their net worth, net profit, return on assets (ROA), return on equity (RoE), gross revenue, net profit margin, sales growth and gross profit per employee.
- For example, on an average, the net worth of privatized firms increased from 700 crore before privatization to 2992 crore after privatization.
- Individual performance: Each privatized CPSE witnessed improvement in net worth, net profit, gross revenue, net profit margin, sales growth in the post privatization period compared to pre privatization period.
- Dynamic aspects of performance in comparison to peers: the performance of the privatized CPSE and its peers is quite similar during the period of 10 years before privatisation. However, post privatization, the performance of the privatized entity improves significantly over a period of 10 years when compared to the change in the peers' performance over the same time period.
Example: Companies sold in that period included Modern Foods, BALCO, CMC, VSNL and Hindustan Zinc.
The disinvestment has also helped the government in moving towards the fiscal consolidation.

Against: what critics say

Critics point out that the assets of PSEs have been undervalued and sold to the private sector. This means that there has been a substantial loss to the government.
The proceeds from disinvestment were used to offset the shortage of government revenues rather than using it for the development of PSEs and building social infrastructure in the country.
Example: This is like selling family land to pay this month's grocery bill instead of to build a new house.
Government is selling even profit making PSUs which are long term asset of the government.
PSEs check the private sector in the wider market place and so are crucial to economy. For example, if PSEs are not there, private enterprises may cartelise etc.
The target of disinvestment for 2019-2020 was missed by huge margin. Target was 1.05 lakh crore and realised amount was only 65000 crore.

Average net worth of privatised CPSEs (Rs crore)

After2,992
Before700

Disinvestment 2019-20 (Rs crore)

Target1,05,000
Realised65,000

Conclusion on disinvestment

Thus there has been mixed success in achieving the objectives of disinvestment. The economic survey of 2019-2020 has suggested that aggressive disinvestment, through the route of strategic sale, should be utilized to bring in higher profitability, promote efficiency, increase competitiveness and to promote professionalism in management in CPSEs. This would, in turn, unlock capital for use elsewhere, especially in public infrastructure like roads, power transmission lines, sewage systems, irrigation systems, railways and urban infrastructure.

Many of the CPSEs are profitable but they have generally underperformed the market. The aim of any privatization or disinvestment programme should, therefore, be the maximisation of the Government's equity stake value. For this the survey proposed a structure for Corporatisation of Disinvestment: under it the Government can transfer its stake in the listed CPSEs to a separate corporate entity managed by an independent board. This entity would be mandated to divest the Government stake in these CPSEs over a period of time. This will lend professionalism and autonomy to the disinvestment programme.

“An organisation to look at the basic issues confronting the economy, and preparing a broad framework on how long-term issues can be resolved, is still a necessity.”

— BPSC Mains answer, 2020

Curated for BPSC, UPSC & State PCS Civil Services Aspirants | Indian Economy Master Module

Explore More Beyond the Book Modules