Disinvestment as a Key Economic Strategy

GS Paper: GS-III (Indian Economy: Fiscal Policy, Public Sector Reforms, Resource Mobilisation) | Source: IE

Why in News?

India's 2026-27 fiscal management faces global uncertainty, high energy prices and a deficient-monsoon concern, with rising spending commitments and modest revenue growth. In this setting, disinvestment and asset monetisation are seen as important tools. The proposed sale of the government's stake in IDBI Bank could help the Centre exceed its annual disinvestment target.

Performance and Fiscal Pressures

•       According to DIPAM, the Centre raised Rs 62,124 crore from disinvestment and asset monetisation in April-September 2026, including Rs 55,757 crore from disinvestment. This is 78% of the Rs 80,000 crore annual target, even before IDBI Bank proceeds.

•       Pressures remain: between April and August 2026 net tax revenue grew only 3.4% and non-tax revenue 3.2%, while capital expenditure rose over 18%. The fiscal deficit had already reached 42% of the budgeted level.

•       Disinvestment adds resources without more borrowing, but sale proceeds are non-recurring and cannot replace sustainable revenue growth.

Disinvestment as Structural Reform

•       It is more than a target-meeting tool: it unlocks public assets, improves governance, widens ownership and brings market discipline.

•       New Public Sector Enterprise Policy (2021): a minimum presence of PSEs in strategic sectors, with private participation elsewhere.

•       National Monetisation Pipeline (NMP): unlocks capital from mature assets. NMP 2.0 sets a target of Rs 16.72 lakh crore for FY2026-30, after Phase 1 achieved about 90% of its target.

•       The LIC IPO (2022) drew first-time retail investors and policyholders into capital markets.

•       Monetisation vs privatisation: monetisation unlocks value without transferring ownership; privatisation transfers ownership or control to private investors.

•       From OFS to strategic sale: until October 2026 receipts came mainly through Offer for Sale (OFS), which broadens ownership without changing management. The IDBI Bank strategic sale, after Air India (2022), could be the base for Privatisation 2.0.

Reform Suggestions

•       Demand-based approach: gauge investor interest before choosing enterprises; give priority to those drawing credible bids at reasonable valuations, and use investor feedback to find regulatory hurdles.

•       Rolling three-year privatisation programme for predictability, due diligence time and better price discovery.

•       Calibrated disinvestment (interim): per CII, cutting government stake to 51% in 95 listed PSEs could yield about Rs 9 lakh crore while the government stays the largest shareholder. Begin with PSEs where holding is 75% or less.

•       Institutional body: a ministerial board, industry experts and professional management to coordinate and ensure accountability. Decisions must weigh strategic importance, financial viability, employment and public interest.

Fiscal Prudence and Way Forward

•       Disinvestment must not breed fiscal complacency; economic shocks can raise deficits and debt, and too much reliance on asset sales weakens fiscal sustainability.

•       Maintain fiscal discipline, revenue mobilisation and prudent borrowing, and keep funds for health, education and infrastructure without crowding out private investment.

•       Ensure transparent valuation, competitive bidding, regulatory certainty and safeguards against undervaluation so public assets fetch fair value.

 Disinvestment Background

•       DIPAM (Department of Investment and Public Asset Management, Ministry of Finance) manages the programme. History: the 1991 reforms began disinvestment; the Disinvestment Commission (1996); a separate Ministry of Disinvestment (1999-2001); and DIPAM since 2016.

•       Methods: Offer for Sale (OFS), IPO or FPO, strategic sale (transfer of management control), ETFs such as CPSE ETF and Bharat-22, and buybacks. Privatisation transfers control; disinvestment may only dilute stake (the government can stay a majority holder).

•       2021 PSE policy: the four strategic sectors are atomic energy, space and defence; transport and telecom; power, petroleum, coal and other minerals; and banking, insurance and financial services. Verify the current policy text.

•       Air India: sold to Tata Sons (bid accepted in 2021; handover in January 2022). IDBI Bank: the Centre and LIC together hold the large majority and have offered a controlling stake for sale (check the current figures).

•       Fiscal links: FRBM Act, 2003 (fiscal deficit and debt targets); fiscal deficit = total expenditure minus total receipts excluding borrowing; non-debt capital receipts include disinvestment proceeds.

•       Related: NMP launched in August 2021, asset recycling, Public Sector Enterprises survey.