DISINVESTMENT
Disinvestment means the withdrawal of government equity from public sector enterprises. Also
called “divestment” or “divestiture,” it envisages the action of an organization (or government)
to liquidate its assets in favor of private players. The structural adjustment programs (SAP) that
were introduced as a condition to take a loan from IMF and World Bank also emphasized
disinvestment and privatization of Indian Industry.
MERITS OF DISINVESTMENT IN INDIA
The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very
negative rate of return on capital employed. Inefficient PSUs proved to be a drag on the
government’s resources turning to be more liabilities to the government than assets. Many
undertakings traditionally established as pillars of growth had become a burden on the
economy. The national gross domestic product and gross national savings were also getting
adversely affected by low returns from PSUs. 0 Because of the various problems that PSUs
suffered during the pre-reform era, the government felt the need to get rid of these units and
concentrate on core activities. The disinvestment was also seen by the government as a tool to
reduce the burden of financing the PSUs and raise funds for meeting general/specific needs.
The following are the main objectives/merits of disinvestment in the Indian context:
To promote efficiency and market discipline
Research now supports the proposition that privately owned firms are more efficient and more
profitable than otherwise comparable state-owned firms. The private sector firms are subject
to capital market discipline as their ability to raise funds from the capital market depends on
their performance and goodwill. The profit motive criterion guides the policy framework of
private management, which instills productivity and efficiency in its working and attitude.
Privatization increases labor productivity, as firms retrench labor and invest in capital after
privatization.
To improve public finances
Disinvestment means the withdrawal of government equity from public sector enterprises. Also
called “divestment” or “divestiture,” it envisages the action of an organization (or government)
to liquidate its assets in favor of private players. The structural adjustment programs (SAP) that
were introduced as a condition to take a loan from IMF and World Bank also emphasized
disinvestment and privatization of Indian Industry.
MERITS OF DISINVESTMENT IN INDIA
The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very
negative rate of return on capital employed. Inefficient PSUs proved to be a drag on the
government’s resources turning to be more liabilities to the government than assets. Many
undertakings traditionally established as pillars of growth had become a burden on the
economy. The national gross domestic product and gross national savings were also getting
adversely affected by low returns from PSUs. 0 Because of the various problems that PSUs
suffered during the pre-reform era, the government felt the need to get rid of these units and
concentrate on core activities. The disinvestment was also seen by the government as a tool to
reduce the burden of financing the PSUs and raise funds for meeting general/specific needs.
The following are the main objectives/merits of disinvestment in the Indian context:
To promote efficiency and market discipline
Research now supports the proposition that privately owned firms are more efficient and more
profitable than otherwise comparable state-owned firms. The private sector firms are subject
to capital market discipline as their ability to raise funds from the capital market depends on
their performance and goodwill. The profit motive criterion guides the policy framework of
private management, which instills productivity and efficiency in its working and attitude.
Privatization increases labor productivity, as firms retrench labor and invest in capital after
privatization.
To improve public finances
