Disinvestment in India: Balancing Fiscal Gains with Strategic Economic Reforms

Context

The Union Government’s approval of the strategic stake sale in IDBI Bank has renewed attention on India’s disinvestment programme. With ₹62,124 crore mobilised through disinvestment and asset monetisation during the first half of FY 2026–27, the government is well-positioned to surpass its annual target of ₹80,000 crore.

What is Disinvestment?

Disinvestment refers to the sale or reduction of the government’s ownership in Public Sector Enterprises (PSEs) and state-owned financial institutions. It aims to mobilise non-debt resources, improve enterprise efficiency, encourage private participation and reduce the government’s direct involvement in commercial activities.

Major Forms of Disinvestment

– Minority Disinvestment: The government sells a portion of its shares while retaining majority ownership and management control, generally through IPOs and Offers for Sale (OFS).

– Majority Disinvestment: The government reduces its stake below majority ownership, thereby transferring control or significant management responsibilities to other shareholders.

– Strategic Disinvestment: A substantial government stake is transferred to a private investor along with management control, effectively facilitating privatisation.

– Asset Monetisation: The government generates revenue from existing infrastructure assets through leasing, concessions and investment trusts without necessarily transferring their ownership.

Disinvestment in India: Key Trends and Statistics

– Revenue Mobilisation: The Centre collected ₹62,124 crore through disinvestment and asset monetisation between April and September 2026, including ₹55,757 crore from equity sales.

– Progress Against Target: The receipts accounted for approximately 78% of the ₹80,000 crore disinvestment target for FY 2026–27, even before accounting for the expected IDBI Bank transaction proceeds.

– Fiscal Situation: Capital expenditure increased by over 18%, while tax and non-tax revenue growth remained relatively modest at 3.4% and 3.2%, respectively.

– National Monetisation Pipeline 2.0: The government aims to unlock ₹16.72 lakh crore from public infrastructure assets between FY 2025–26 and FY 2029–30.

– Previous Performance: The first phase of the National Monetisation Pipeline achieved nearly 90% of its targeted value, demonstrating the potential of asset recycling.

Significance of Disinvestment as an Economic Strategy

1. Strengthening Fiscal Management

• Disinvestment generates non-debt capital receipts, reducing the government’s dependence on additional borrowing.
• The proceeds can support infrastructure development and other productive expenditure without increasing public debt.

Example: Revenue generated through the IDBI Bank stake sale can provide additional resources for infrastructure investment.

2. Improving Efficiency and Corporate Governance

• Private sector participation can introduce professional management, greater operational autonomy and performance-based accountability.
• Market competition encourages innovation, cost efficiency and better utilisation of resources.

Example: Air India’s acquisition by the Tata Group in 2022 facilitated a shift towards private management and a renewed focus on operational modernisation.

3. Implementing the New Public Sector Enterprise Policy, 2021

• The policy envisages a limited government presence in strategic sectors while encouraging the withdrawal or consolidation of public enterprises in non-strategic areas.
• Disinvestment helps redirect public resources towards essential governance and welfare responsibilities.

4. Expanding Capital Market Participation

• Public share offerings enable ordinary citizens and institutional investors to participate in the ownership of large enterprises.
• They also promote financial inclusion and deepen India’s capital markets.

Example: The Life Insurance Corporation (LIC) IPO in 2022 expanded retail investor participation in the equity market.

5. Recycling Underutilised Public Assets

• Monetisation allows the government to unlock financial value from operational infrastructure and reinvest it in new projects.
• It improves capital utilisation without requiring an outright transfer of ownership.

Example: NHAI’s Infrastructure Investment Trust (InvIT) enables monetisation of operational highways to generate resources for future infrastructure development.

Major Challenges Associated with Disinvestment

1. Concerns Regarding Asset Valuation

• Market volatility and uncertainty over future profitability make the valuation of public enterprises difficult.
• Selling valuable public assets below their actual economic worth can trigger criticism and allegations of undervaluation.

2. Resistance from Employees and Trade Unions

• Employees often fear job losses, changes in service conditions and uncertainty regarding pensions and other benefits.
• Concerns about the continuation of reservation policies and social obligations can further intensify opposition.

Example: Employee organisations in the banking and insurance sectors have protested against the proposed IDBI Bank stake sale.

3. Regulatory and Procedural Delays

• Strategic transactions require extensive regulatory scrutiny, security clearances and financial due diligence.
• These requirements can delay transactions and discourage potential investors.

4. Difficulties in Separating Legacy Liabilities

• Public enterprises may carry non-performing assets, pending litigation, historical tax obligations and non-core properties.
• Resolving these issues before a sale increases transaction costs and complicates negotiations.

Example: Air India’s restructuring involved transferring certain legacy liabilities and non-core assets to a separate government-owned entity before privatisation.

5. Excessive Dependence on Large Transactions

• Government revenue projections can become vulnerable when a few major transactions are delayed or cancelled.
• Uncertain disinvestment receipts make medium-term fiscal planning difficult.

Example: Disinvestment collections remained significantly below budget expectations in FY 2022–23 and FY 2023–24 due to delays in major transactions.

Way Forward

– Adopt a Market-Driven Approach: Prioritise enterprises that attract genuine private investment interest rather than following rigid disinvestment schedules.

– Create a Rolling Disinvestment Pipeline: Publish a transparent three-year transaction calendar to provide investors with sufficient time for financial assessment and due diligence.

– Pursue Calibrated Stake Dilution: Gradually reduce government ownership in suitable listed CPSEs while retaining majority control wherever strategic considerations require it.

– Establish an Independent Asset Management Framework: Strengthen institutional capacity for enterprise valuation, transaction management, regulatory coordination and transparent bidding.

– Protect Employee Interests: Introduce adequate social security, voluntary retirement schemes and reskilling opportunities to address workforce concerns.

– Strengthen Transparency and Accountability: Ensure competitive bidding, independent valuation and parliamentary oversight to protect public assets and maintain public confidence.

– Link Proceeds with Productive Investment: Direct disinvestment receipts towards infrastructure, technological modernisation, healthcare and other long-term development priorities.

Conclusion

Disinvestment should not be viewed merely as an instrument for meeting annual revenue targets but as a means of improving the efficiency and competitiveness of India’s economy. The IDBI Bank transaction highlights the growing importance of private participation in restructuring public enterprises. A transparent, gradual and market-oriented approach, supported by employee safeguards and effective regulatory oversight, can help India unlock public capital while ensuring that economic reforms contribute to inclusive and sustainable growth.

Source : The Hindu