Disinvestment by Indian Government

Essay by dipzgargUniversity, Master's March 2007

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The action of an organization or government selling or liquidating an asset or subsidiary is known as Disinvestment. The approach of selling a minority stake in public sector enterprises while retaining management control with the government, a policy described as "disinvestment" to distinguish it from privatization. In the year 1991 the national economic policy underwent a radical transformation. The new policy of liberalization, privatization and globalization de-emphasized the role of the public sector in the nation's economy.

The process of disinvestment in India began in 1992, under the guidance of new economic liberalization policy put forward by then Finance Minister, Dr. Manmohan Singh. Disinvestment was proposed to be the tool in the hands of government to improve the functioning and profitability of public sector enterprises and also raise funds to mitigate its fiscal deficits. However, over the past decade, this exercise has been weighed down by criticisms and controversies and has not achieved desired results for the government because of political power struggle.

The role of the State vs. Market has been one of the major issues in development economics and policy. In a mixed economy such as India, historically the public sector had been assigned an important role.

NEED FOR DISINVESTMENTGROWTHThe government in India spends 32.6% of GDP. Whereas Indonesia spends 16.2%, South Korea 17.8%, Malaysia 23.2% and Thailand 18.6%.

Only 3.5% of GDP is spent on education.

If government expenditure is reformed, 5.1% of GDP can be saved - 1.5% from privatization and repurchase of public debt, 0.6% from fertilizer subsidies, 0.2% from PDS, 0.3% on public administration and 2.5% from smaller transfers to States. This is an additional expenditure that can be made on primary education and rural health care.

The government of India subsidises losses of almost Rs. 80 billion per year made by around 120...