Challenges in India’s Disinvestment Process and Modes

Imagine you’re selling a family heirloom-a precious asset passed down through generations. How do you decide the right price? When is the right time? Who should buy it? And crucially, should you sell it at all? These seemingly simple questions become incredibly complex when we scale them up to the level of a nation’s public sector enterprises. This is precisely the challenge India faces with its disinvestment process, and the road ahead is far from smooth.

The ‘how’ of disinvestment: A puzzle with many pieces 🔗

When the Indian government decides to reduce its stake in public sector undertakings, it’s not just about putting up a “for sale” sign. The process involves multiple intricate decisions that can make or break the entire exercise. Think of it like planning a wedding-every detail matters, and timing is everything.

The first challenge revolves around selecting the appropriate method for each unit. Should the government use an Initial Public Offering, a strategic sale, or an offer for sale? Each method has its own advantages and drawbacks, and what works for one enterprise might be disastrous for another. For instance, a profitable Maharatna company might attract significant interest through an IPO, while a loss-making unit might require a strategic buyer willing to turn it around.

The valuation dilemma 🔗

Determining the correct value of a public sector enterprise is like trying to price a vintage car that’s been sitting in a garage for years. On paper, it might look valuable, but its actual market worth depends on numerous factors-from outdated technology to surplus workforce to prime real estate holdings. The government often faces criticism for either undervaluing assets (thus losing potential revenue) or overvaluing them (leading to failed disinvestment attempts).

Consider the case of Air India. The airline changed hands only after multiple rounds of bidding and extended negotiations over valuation disagreements. What should have been a straightforward transaction stretched over years, highlighting how complex pricing decisions can derail the entire process.

How much to sell, and to whom? 🔗

Another critical question is determining the proportion of equity to divest. Should the government retain 51 percent to maintain control, sell a majority stake, or exit completely? Each option sends different signals to the market and has distinct implications for both the enterprise’s future and the government’s fiscal planning.

The choice of buyer is equally contentious. Private domestic players, foreign investors, or other public sector units-each brings different capabilities, intentions, and concerns. The fear of valuable assets falling into the hands of what some perceive as “unscrupulous private players or multinational corporations” has repeatedly stalled disinvestment efforts.

The great Indian debate: To sell or not to sell 🔗

Indian public opinion on disinvestment remains sharply divided, creating a persistent obstacle to policy implementation. This isn’t just an economic debate-it’s deeply ideological and emotional.

One school of thought firmly believes that “the government has no business to be in business.” They argue that public sector enterprises should compete on market terms, and the government should focus its resources on welfare, education, and healthcare rather than running hotels, airlines, or manufacturing units. This perspective gained significant momentum during the economic reforms of 1991 when India opened up its economy.

The family silver argument 🔗

On the other side stands a vocal group concerned about selling what they call “the family silver”-valuable state assets built with public money over decades. They worry that privatization will prioritize profits over social objectives, lead to job losses, and potentially allow exploitation by private monopolies. The political resistance has been particularly strong from left-leaning parties and trade unions, who view disinvestment as a betrayal of the public sector’s foundational goals.

This ideological divide isn’t just abstract political theater. It has real consequences. Between 2004 and 2009, when the government relied on support from left-leaning coalition partners, disinvestment virtually stalled. The period earned only about 11,591 crore rupees compared to nearly 28,000 crore in the previous five years. Coalition politics, it seems, can be disinvestment’s worst enemy.

The problem of unclear policies 🔗

Perhaps the most frustrating challenge has been the lack of consistent, pragmatic policies. Successive governments have maintained what experts describe as “hazy” approaches to disinvestment, shifting positions based on political expediency rather than economic logic.

One year, the government announces ambitious targets and strategic sales. The next year, facing political pressure, it backtracks or waters down its commitments. This policy uncertainty creates confusion among potential investors, employees, and the public. When buyers can’t predict the government’s long-term stance, they become hesitant to invest substantial capital in acquiring public sector assets.

Learning from experience 🔗

What India needs, according to experts, is a balanced approach informed by both international best practices and domestic realities. Countries like the United Kingdom, which privatized extensively in the 1980s and 1990s, offer valuable lessons-both successes and cautionary tales. Similarly, India’s own experiences with successful disinvestments (like Maruti Udyog) and failed attempts provide rich learning opportunities.

The key is to avoid dogmatic positions. Neither wholesale privatization nor stubborn retention of all public assets makes sense. Instead, India requires a nuanced policy that recognizes which sectors genuinely need government presence for strategic or social reasons, and which sectors would benefit from private sector efficiency and innovation. The 2021 policy attempted this by classifying sectors as strategic and non-strategic, but implementation has remained inconsistent.

The autonomy question: Freeing enterprises from political control 🔗

Here’s an uncomfortable truth: many public sector enterprises struggle not because of inherent inefficiency, but because of excessive government interference. Imagine trying to run a business where every major decision-from hiring senior executives to setting product prices-requires ministerial approval. That’s the reality for most Indian PSUs.

Political and bureaucratic interference has led to numerous problems: appointments based on connections rather than merit, investment decisions driven by political considerations, and delayed decision-making due to fear of post-retirement prosecution. When a steel plant manager needs government approval to purchase raw materials or when an airline can’t adjust ticket prices to market conditions, efficiency becomes impossible.

Structured autonomy as the solution 🔗

The lesson from successful public enterprises worldwide is clear: they need structured institutional autonomy. This doesn’t mean abandoning oversight-it means shifting from day-to-day management control to strategic governance through independent boards of directors. The government should set broad objectives and monitor performance, but operational decisions should rest with professional management.

Think of it like parenting. Initially, parents make every decision for their children. But as children grow, they need increasing autonomy to develop competence and responsibility. Similarly, mature public sector enterprises need freedom to make operational decisions while remaining accountable for results. India’s Maharatna companies-which have greater financial autonomy-have generally performed better precisely because they face less bureaucratic interference.

Beyond revenue raising: The bigger picture 🔗

Perhaps the most damaging perception is that disinvestment exists primarily as a tool to raise revenues and plug fiscal deficits. This short-term view undermines the process’s larger purpose: creating a vibrant, efficient corporate sector with diverse ownership patterns.

When governments sell assets merely to meet annual budget targets, they often make poor decisions-accepting lower prices, choosing inadequate buyers, or selling profitable units while retaining loss-makers. Recent data shows that Central Public Sector Enterprises incurred losses exceeding 1.5 lakh crore rupees between 2017-18 and 2021-22, suggesting that the approach needs fundamental rethinking.

The goal should be creating competitive markets, improving efficiency, and allowing the government to focus its limited resources on sectors where it adds unique value-national defense, public healthcare, education, and infrastructure. Using disinvestment proceeds exclusively for social sector investments, rather than current expenditure, would demonstrate this commitment.

What do you think? Should India pursue aggressive disinvestment to reduce government involvement in business, or should it focus on reforming and strengthening public sector enterprises while retaining ownership? Can we find a middle path that serves both economic efficiency and social objectives?

References

1. https://dipam.gov.in/disinvestment-policy
2. https://universalinstitutions.com/the-psu-disconnect/
3. https://www.insightsonindia.com/2024/04/13/disinvestment-in-india-a-key-agenda-for-the-next-government/
4. https://en.wikipedia.org/wiki/Disinvestment_in_India
5. https://www.directors-institute.com/post/public-sector-undertakings-psus-dive-into-compliance-and-governance-challenges