An important aspect of present industrial policy of the Government is that it should not operate commercial enterprises.
With that end in view the Government has decided to disinvest the public enterprises. The Government can sell its enterprises completely to the private sector or disinvest a part of its equity capital held by it to the private sector companies or in the open market.
Distinction may be drawn between disinvestment and privatisation. Strictly speaking, disinvestment means the dilution of stake of the Government in a public enterprise. This can be done in two ways. When the Government sells a part of its equity of a public enterprise less than 50 per cent of its total stock, it is called merely disinvestment and in this case control and management of the business enterprise remains in the hands of Government.
On the other hand, when disinvestment or sale of its equity capital by the Government exceeds 50 per cent so that the majority ownership and therefore control and management of the enterprise is transferred to private enterprise, it results in privatization. Therefore, in many disinvestment programmes government retains 51 per cent or more of the total equity capital of the public enterprises so that control and management remains in its hands.
Through disinvestment or privatization, the Government can mop up a good amount of resources which can be used for various purposes. The released resources can be used to restructure and strengthen the public sector enterprises which are potentially viable. These resources can also be used to pay back a part of public debt. These resources can also be used to finance budget deficits.
Case for Public Sector Disinvestment
First, resources available with the Government are scarce. The Government needs resources to reduce its budget deficit.
Second, the Government urgently requires resources to make investment in infrastructure, social sectors such as education, public health and for poverty alleviation programmes. Resources released through disinvestment can be used for investment in these crucial sectors.
Thirdly, a good number of existing public enterprises are working inefficiently and incurring huge losses. Disinvestment can lead to the improvement of efficiency of these enterprises. When government divests a good part of its stake to a private enterprise or public at large, it increase accountability of management of an enterprise which have a beneficial effect on the efficient working of the enterprise. “The shareholders would require to be compensated and this will, in turn, compelling the enterprise to run more efficiently and earn more profits”.
Thus, Dr. C. Rangarajan is of the view that, “There is a compelling need to expand the activities of the state in areas such as education, health and medicine. It is therefore legitimate that a part of the additional resources needed for supporting these activities come out of the sale of shares of public enterprises built up earlier by the Government out of its resources.”
Another important use of disinvestment of public enterprises is the resources raised from them can be used to pay off past debts of the Government and thereby reducing the interest burden of the Government. The proposal of the use of proceeds from disinvestment for retiring a part public debt has been put forward by several economists.
However, in our opinion, it does not make much difference if the resources raised from disinvestment of public enterprises are used as receipts to be spent on education, health and employment generation schemes or used for retiring a part of the past public debt. In the former case of disinvestment receipts being used for making worthwhile expenditure will result in a lower borrowing by the Government, that is, less increment in public debt.
Disinvestment, especially privatization of public sector enterprises, will ensure that the working of these enterprises will be governed by professional managers guided by market mechanism instead of being administered by bureaucrats.
Functioning of these enterprises in the competitive environment of free markets will lead to higher efficiency and productivity. Privatization will also lead to the closing down of unviable and sick public sector enterprises. A private company which buys such sick public sector units will benefit only from the real estate and assets of the sick public sector units.
Privatization of public enterprises through public sector disinvestment is also beneficial because this will enable these enterprises to attract private foreign investment in setting up joint ventures. It may be noted that capital inflow through private direct foreign investment is better than that procured through foreign aid or commercial borrowing from abroad.
In support of privatization of public enterprises it is also argued that it will end state monopolies in certain industries. State monopoly is said to be as bad and undesirable as private monopolies. The privatization of some monopolistic public enterprises would infuse competition which will lead to increase in efficiency and productivity. As a result of privatization underutilized capacity will be fully utilized.