Issue
Post budget 2009-10, both the Prime Minister and the finance minister have expressed their commitment in his budget. According senior finance ministry officials the government will have a road map in place in about three months. But the trade unions are again up in arms against disinvestment.

According to these trade unions, however, disinvestment is unwarranted as overall performance of the PSUs has not just significantly improved, but they are also left with enough reserves and surplus to meet any resource crunch or social sector spending.

According to the government''s latest public enterprise survey report, which takes into account all of the over 200 PSUs in the country, the reserves and surplus went up from Rs 416,601 crore in 2006-07 to Rs 485,577 crore in 2007-08.

There are already voices of dissent emanating from the Trinamool Congress camp. The party has said it will oppose any move to disinvest PSUs or strategic sales of profitable PSUs. Pre-poll ally DMK too has a track record for opposing sale of shares of entities such as Neyveli Lignite Corporation. Let us understand the background and the debates relating to the disinvestment policy.

Concept: Disinvestment: Disinvestment means selling government equity in public sector units (PSUs) to private parties. Thus Disinvestment refers to the sale or liquidation of an asset or subsidiary of an organization or government. It is also known as divestiture or divestment.In India the process of disinvestment began since 1991-92. The need for disinvestment arises from the fact of poor performance of PSUs.

Policy: The major thrust for Disinvestment Policy in India came through the Industrial Policy Statement 1991.The policy stated that the government would disinvest part of their equities in selected PSEs. However it did not stake any cap or limit on the extent of disinvestment. It also did not restrict disinvestment to any class of investors. The main objective was to improve overall performance of the PSEs.

Objective of disinvestment

• To improve performance of units
• To reduce budgetary deficits
• To overcome the problem of political involvement in PSUs
• Enable the government to concentrate on Social development

To improve performance of units: The main argument in favor of disinvestment is the poor performance of PSUs. For instance the average return on investment was hardly 2% during the 1980s and 1990s.

To reduce budgetary deficits: One of the factors of budgetary deficits is the allocation of huge amount of funds to PSUs. Due to lack of improvement of performance in such units, these deficits lead to rising prices which in turn affected the economy.

To overcome the problem of political involvement in PSUs: There was too much political interference with respect to location of the project, selection and promotion of top personnel, awarding important contracts etc. This has lead to poor performance of the PSUs.

Enable the government to concentrate on Social development: It is of the belief that by transferring PSUs to private players, it would enable the government to concentrate on the government''s main job i.e. social development in areas such as primary health, primary education, law and order, family welfare and so on.

Other objectives would include:

• To provide better service to customers
• To ensure proper planning and execution
• To overcome the problem of corruption
• To fix the responsibility on management
• To make efficient use of disinvestment proceeds.

Background: Historically, public sector undertakings (PSUs) have played an important part in the development of the Indian industry. At the time of independence it was felt that the political independence without economic self-reliance would be detrimental to the country''s sovereignty and autonomy in policy making.

Hence, the basic objectives of starting the public sector were:

• To take India to "commanding heights of glory".
• To build infrastructure for economic development and promote rapid economic growth and industrialization of the country.
• To create employment opportunities and promote balanced regional development.
• To create a self-reliant economy through the development of local industries for import substitution and by encouraging and promoting exports.
• To generate invisible resources for development by earning suitable returns
• To prevent / reduce concentration of private economic power.

Public sector enterprises (PSEs) or Public Sector Units (PSUs), which were given a special role in India''''s planned economy, grew both in terms of numbers and investment for over four decades from the early 1950s. At the commencement of the First Five Year Plan there were five PSEs with a total investment of Rs.29 crores. At the end of the Seventh Plan in 1990, there were 244 PSEs and the investment in them had gone up to Rs.99, 329 crores. Although disinvestments had started from the early 1990s, at the end of the Eighth Plan in 1997, investment had soared to Rs.2,13,610 crores. At the end of the fiscal year 2000-01, PSEs had a total investment of Rs.2,74, 114 crores. The PSEs made a significant contribution to industrial production, 100 per cent in lignite, over 80 per cent in coal, crude oil and zinc, almost 50 per cent in aluminium and over 30 per cent in finished steel.

In terms of profitability, the PSEs showed diverse patterns. In 2000-01, 122 enterprises made a profit with the top 10 among them - giants such as the Oil and Natural Gas Corporation (ONGC), the National Thermal Power Corporation (NTPC), the Indian Oil Corporation (IOC) and the Videsh Sanchar Nigam Limited (VSNL) - accounting for close to 70 per cent of the total net profit of Rs.19, 604 crores. Sector-wise, petroleum, power and communications contributed to 60 per cent of the profits. During that year, there were 111 loss-making enterprises with a total loss of Rs.12, 839 crores. The major contributors to the losses were Hindustan Fertilizer, the Fertilizer Corporation of India (FCI), Bharat Coking Coal, and some other enterprises dealing with coal. The return on investment of all PSEs taken together remained low - post-tax profitability being only about 5 per cent on capital employed. Thus, according to some economists, the public sector in India, which was perceived to be the vehicle of speedy economic development, has run into rough waters. It not only failed to produce surpluses which it was expected to generate for future growth, but the return on investment remained poor. Thus the question that is examined is whether disinvestment and privatisation can lead to better results.