Is Privatisation and Disinvestment Good or Bad for India and it's Economy?

Wednesday, March 10, 2021

During the Budget 2021 speech, Niramala Sitharaman (Minister of Finance), announced the privatisation of two Public Sector Banks (PSBs) and disinvestment of 10% of government stake in Life Insurance Corporation of India (LIC) to general public through Initial Public Offering (IPO) route. This decision of Government of India spurred a new debate over, What is the need for privatisation and disinvestment in India?. People started questioning the decision and even said that the government is trying to sell all government entities to few players, only because of shared interests. 

Although this is not the first time and suo motu decision of the the government, multiple committees earlier recommended for reducing the government stakes in Public Sector Banks (PSBs) such as:-

  1. The Narsimham Committee on Banking Reforms recommended to reduce Governmen's Stakes in PSBs to 33%.
  2. The P.J. Nayak Committee also recommended to bring it down below 50%.

Before moving forward let’s understand various kinds of economies that exists across the world:- 

Types of Economy 

1. Socialist Economy (Centrally Planned Economy or Welfare Economy) 

In this type of economy almost every industry are owned by government and individuals generally have either no or very less legal rights over properties they own. Almost every economic activity is planned by central government. This type of Economy exists in socialistic and leftist countries. The best example of this type of economy is China

2. Capitalist Economy (Market Controlled Economy) 

In this type of economy Government generally do not involve/interfere much in industries/businesses. In other words government does not invest in Public Sector Enterprises (PSEs). Practically almost everything is owned by Private individuals and corporate houses. The best example of such economy is USA

3. Mixed Economy 

In this type of economy features of both Socialistic and Capitalistic economy exists. Governments invest in certain strategic sectors while keeping others open for private individuals and foreign investors. India is one of the best examples of such economies. 

Now let's understand the difference between Privatisation and Disinvestment.

Privatisation - It involves selling out of stakes in Government/Public Enterprises to private individuals and corporate houses, which results into decline in the stakes of government below 51% (results into loosing the decision making powers of the government).

Disinvestment - It means selling out of Government/Public stakes in PSEs to private individuals, while maintaining at least 51% stakes in the enterprise (keeping decision making powers with the government in company).

Why Government is Privatising/Disinvesting Public Sector Enterprises (PSEs) 

  1. Poor Efficiency of Public Sector Undertakings (PSUs) and Public Sector Banks (PSBs) – Almost every PSUs and PSBs are working inefficiently and outcome is much lower as compared to same industry in Private Sector. It is happening because of irresponsible attitude of employees of PSUs and PSBs. Railway is one of the best examples, as the Operating Ratio of India Railway was 96.96% in 2019-20, means Railway has spent ₹96.96 to earn Rs. 100, which means net profit of 3.04%, which is much lower than the interest paid if the same amount was to be invested in Fixed Deposits or Mutual Funds. It hampers further development of railway infrastructure and it dependent on Government Budget allocation for the expansion projects.
  2. Large Non-Performing Assets (NPAs) in PSBs – Total Gross Non-Performing Assets (GNPA) in PSBs are valued around ₹4 lakh crore (~$61.5 billion or 90% of the total GNPA of all Banks operating in India). This is mainly due to corruption and evasion of rules before issuing loans by PSBs for material benefits. To tackle this issue government is merging banks. So, that Balance Sheet could become clean. 
  3. To Boost Competitiveness in Banking Sector – Currently Banking Sector in India is flooded with PSBs and they are not keen to compete with each other and as we know that any business without competition would either harm customers or itself. To boost competitiveness, government is trying to reduce the number of PSBs by merging or selling out to private entities and making few but powerful banks.
  4. Government Needs Funds to tackle rising fiscal Deficit – Due to COVID-19 revenue collection is expected to remain down but expenditure by government increased a lot due to lockdown as well as government provided extra funds to welfare schemes like in MNREGA, PDS, Vaccination drive etc. All this is expected to result in increased fiscal deficit. To neutralise this, government needs extra money, which is going to come by selling banks and disinvesting from LIC. 
  5. Course Correction - In Economics Government’s involvement in Business is seen as hurdle and historically it is proved as a wrong practice. Example – Before LPG Reforms, 1991 almost everything in the country was in government hands(Socialistic approach) which resulted in to major economic crisis of 1991, which forced the government to open Indian market for private and foreign players. 

Concerns Related to Privatisation and Disinvestment 

  1. Against Socialistic or Welfare character of the Indian Constitution –  The Constitution of India declares India to be a Socialistic and Welfare State, where the Government’s main objective should be the Welfare of people. Due to Privatisation, it is very much possible that the number of employees will decrease in sold out enterprises to increase their efficiency and cost cutting. It harms the welfare principles of the constitution. 
  2. Rise in Unemployment – As stated above, for cost cutting and to increase the efficiency of such enterprises some employees might be removed or no new vacancy may arise in near future in such enterprises, and will lead to rise in unemployment.
  3. Concentration of Power – The Rapid privatisation and merger may lead to concentration of business like in the case of Telecom Sector (in which only 3 major players are remained), this can lead to a monopolistic competition, where few large firms can dictate the terms & conditions of the market and can harm the competitiveness of industries, the reason for which privatisation/Disinvestment is being done. 
  4. Capitalistic Fear – While following capitalistic principles, we should be very careful, as it may lead to situations like the Economic Crisis of 2008, when almost every Capitalistic States suffered the biggest shock when banks were failed due to bad practices by Private Banks
  5. History may repeat – Before Nationalization of Banks in 1969, most of the Banks were run by private players, but those were failed which forced the government to nationalize them. Such failures can happen again and history may repeat. 


Although Privatisation is good for economy as well as for the country, but it must be a very slow process, any abrupt change might create a big havoc in the economy. 

It is very true that “Government has no Business to be in Business” (as said by PM Modi, while addressing a Webinar on Privatisation organised by the Department of Investment and Public Asset Management), but government should keep one thing in mind that almost 27% of our population sleep without eating every night, in such a situation we cannot move away from our welfare policies and especially in certain sectors like Education, Healthcare and Nutrition, we need many more welfare schemes in these sectors, which produce results on ground and must not remain on Papers only. 

While privatising/disinvesting, Government must think twice that it should not harm the vulnerable sections directly or indirectly. Private banks might not open there branches in rural  In other words, Government should Privatise/disinvest from the PSEs wisely because private sector has nothing to do with welfare there only objective will be profit making.