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Disinvestme nt in India:

A Failure Story
The basic objective of starting Public Sector in India was to build infrastructure and

rapideconomic growth. However, a number of problems such as low productivity, over-manningand other economic

compulsions like deterioration of balance of payment position andincreasing fiscal deficit led to the adoption of new approach

toward the public sector in 1991.

B
ACKGROUND

:
1.L
OW

RODUCTIVITY OF INVESTMENT

From 1950-51 to 1980-81, Indias growth rate was roughly constant

but savings andinvestment rate more than doubled. From the table it can be seen that it was becauseof low productivity that

Indias growth was slow.Investment and Savings as a percentage of GDP

Y e a r 1 9 5 0 - 5 1 1 9 6 0 6 1 1 9 7 0 -

7 1 1 9 8 0 8 1 1 9 8 9 9 0 Investment(Cu rrent Prices,% GDP) 1 0 . 2 1 5 . 7 1 6 . 6 2 2 . 7 2 4 . 1

Investment(Constan t 1980-81 prices,%GDP) 1 4 . 7 1 8 . 1 1 8 . 7 2 2 . 7 2 1 . 8 Domestic Savings(Current Prices, %GDP)

1 0 . 4 1 2 . 7 1 5 . 7 2 1 . 2 21.7Source: Disinvestment in India, Sudhir Naib

2.F
ISCAL

S
ITUATION

IN

1980
During 1980s the fiscal situation deteriorated rapidly. This

was largely due to anescalation of current expenditure of the government. The table below gives theconsolidated

Central and state government revenue, expenditure and deficit over the period 196061 to 1980-81, divided into five

year averages and expressed as percentage of GDP.Consolidate d finances of Central and state Government,

1960-61 to 198990 F M G 1 8 B , G R O U P I V P a

g 2

e 3

Disinvestme nt in India: A Failure Story

Y e a r 1 9 6 0 - 6 1 to1964651965-66 to1969-

701970-71to 1974751975-76to 1979801980-81to 1984851985-86to 198990Revenue 1 2 . 7 1 3 . 4 1 4 . 6 1 7 . 8 1 8 . 1 2 0 . 0

Current Expenditure 1 1 . 8 1 2 . 9 1 4 . 2 1 6 . 3 1 8 . 6 2 3 . 0 Current RevenueBalance 0 . 9 0 . 5 0 . 4 1

. 5 ( 0 . 5 ) ( 2 . 9 ) Capital Expenditure 6 . 6 6 . 0 5 . 1 6 . 9 7 . 5 7 . 1

Total Expenditure 1 8 . 4 1 8 . 9 1 9 . 3 2 3 . 2 2 6 . 1 3 0 . 0 Fiscal Deficit 5 . 7 5 . 5 4 . 7 5

. 4 8 . 0 1 0 . 0 Primary FiscalDeficit 5 . 3 5 . 2 4 . 2 4 . 7 6 . 8 7 . 5 Source:

Disinvestment in India, Sudhir Naib

3.

F
ISCAL

D
EFICIT OF

THE

C
ENTRAL

G
OVERNMENT

The fiscal deficit of the central govt rose consistently

from 4% in mid 1970s to 8% of GDPin 198586.Fiscal Deficit of Government 1975-76 to 199091

YearFiscalDeficitBu dgetDeficitPrimary

DeficitRevenueDefi citMonetisedDeficit 1975-76 4 . 1 0 . 5 2 . 5 1 . 1 0 . 0 1980-81

6 . . 8 3 1 2 . 1981-82 5 . . 9 4 0 2 .

2 4 . 6 4 3 . 0

1 . 5

0 . 2

1982-83 6 . . 9 8 0 1 . 1983-84 6 . . 7

0 3 . 9 3 4

0 . 7

0 .

0 1 1 . 1984-85 7 . . 6 0 1 2 . 1985-86

. 9 5 5 . 6

1 . 8

8 . . 0 5 2 2 . 1986-87 9 . . 8 8 2 2 .

3 5 . 4 0 5 . 4

2 . 2

2 . 7

1987-88 8 . . 7 7 2 2 . 1988-89 7 . . 4

1 4 . 0 8 4

1 . 7

1 .

2 2 1 . 1989-90 7 . . 3 9 2 3 . 1990-91

. 6 8 3 . 1

2 . 6

8 . 4 2 . 1 4 . 4 3 . 5 2 . 8 Sourc e: Economic Survey, 1992-93, Government of India

A significant factor was governments non-plan expenditure and an inefficient interest payment system.

Again the gulf war of 1990 brought the nation to the brink of international debt.

There were huge net outflows of

NRI deposits from October 1990 and continued tillmid 1991. F M G 1 8 B ,

G R O U P I V P a g e 2 4

Disinvestme nt in India: A Failure Story

RBI adopted sharp

contractionary measures and had taken huge amounts fromInternationa l Monetary Fund in July, 1990 and January, 1991

amounting to $2.4 billion.

Foreign Exchange Reserves were reduces $ 1 Billion which could support

only twoweeks imports.

Inflation was staring at 14%

On July6, 1991 47 tons of gold were transferred from RBI to

Bank of England,London. Already 20 tons of gold were sold in International market through StateBank of

India.When India turned to IMF and World Bank for further support, they showed concerns over returns on State owned

enterprises and budgetary support provided to them. It was then adecision was taken in July, 1991 to bring about

macroeconomic stabilisation and structuralreforms of industrial and trade policy.

T
IMELINE

In February, 1991 the Department of Economic Affairs submitted a paper to CabinetCommitt

ee on Political Affairs (CCPA) to approve the government intentions to disinvest upto 20% of its equity in selected public

sector undertakings.The disinvestment announcement was made on 4March, 1991 during the interim

budgetsession for 1991-92 under the Chandrashekhar government. The Policy of disinvestment hasevolved over

the years. This period can be broadly divided into 4 phases.

The first phase being 1991-92 to 1995-96 where partial

disinvestment was taken in piecemeal manner.

Second Phase 1996-97 to 1997-98, an effort to

institutionalize the disinvestment pr ocess was undertaken on a firm footing by constituting the

DisinvestmentC ommission.

The third Phase 198-98-99 to 2007-08 where Department of Disinvestment (Now aMinistry)

and National investment fund was formed to look after the disinvestment pro cess and the funds generated from it.

F M G 1 8 B , G R O U P I V P a g e 2 5

Disinvestme nt in India: A Failure Story

Fourth phase, the Current one

where government is planning to sell its stake in NTPCL, SJVNL, RECL and NMDCL.

PHASE 1 (1991-92
TO

1995-96):
Phase one Started when Chandrashekhar government,

while presenting the interim budget for the year 1991-92 declared disinvestment up to 20%.The objective was to

broad-base equity,improve management, enhance availability of resources for these PSEs and yield

resourcesfor exchequer.

I
NDUSTRIES

R
ESERVED FOR

UBLIC SECTOR PRIOR TO

1991
1.

Arms and Ammunition and allied items of defence equipment.2.Ato mic energy.3.Iron and

steel.4.Heavy castings and forgings of iron and steel.5.Heavy plant and machinery required for iron

and steel production, for mining.6.Heavy electrical plants.7.Coal and lignite.8.Minera ls oils.9.Mining

of iron ore, manganese ore, chrome ore, gypsum.10.Mini ng and processing copper, lead, zinc,

tin.11.Minerals specified in the Schedule to the Atomic Energy.12.Aircra ft.13.Air transport.14.Rail

transport.15.Ship building. 16. Telephones, Telephone cables, Telegraph and Wireless apparatus

(excluding radioreceiving sets). F M G 1 8 B , G R O U P I V P a

g 2

e 6

Disinvestme nt in India: A Failure Story

17.Generation and distribution of electricity.The

Industrial Policy Statement of 24th July 1991 stated that the government would divest part of its holdings in

selected PSEs, but did not place any cap on the extent of disinvestment. Nor did it restrict disinvestment in favour of any

particular class of investors.During this Phase the sole was to generate revenue without following

any objective seriously.

I
NDUSTRIES

R
ESERVED FOR

UBLIC SECTOR AFTER

J
ULY

, 1991

1.Arms and Ammunition and allied items of defence equipment, aircraft and warship.2.Atomi c Energy.3.Coal

and Lignite.4.Miner al Oils.5.Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and

diamond.6.Minin g of copper, lead, zinc, tin, molybdenum and wolfram. 7. Minerals specified in the

schedule to Atomic Energy Order, 1953.8.Railway Transport.

R
ANGARAJAN

C
OMMITTEE

1992-1993
The government reconstituted the committee which it formed in February 1992 toinstitutionalize

the disinvestment process. The committee included Dr. C. Rangarajan, thethen Member Planning commission as

chairman and Dr. Y. Venugopal Reddy as Member Secretar y. The committee gave its report on April, 1993. The Highlights of the

committeereport are as follows:1. 49% of equity could be divested for industries explicitly reserved for the public sector 2. In

exceptional cases the public ownership level could be kept at26%.3. In all other cases it recommended 100 per cent

divestment of Government stake.4. Holding 51% or more equity by the Government was recommended only for six

Scheduleindustrie s, namely:

Coal and lignite

Mineral oils

Arms, ammunition and

defence equipment F M G 1 8 B , G R O U P I V P a

g 2

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Disinvestme nt in India: A Failure Story

Atomic energy

Radioactive minerals

Railway transport

D
ISINVESTMENT IN

1991-92:

A steering Committee was formed for selection of PSEs for disinvestments. The Departmentof

Public Enterprises (DPE) coordinated all activities under the Ministry of Industry.
A

)F
IRST

T
RANCHE OF

D
ISINVESTMENT

(D
ECEMBER

, 1991):

Out of 244 public enterprises 41 were selected, but 10 were dropped on the grounds of beingconsultancy firms, negative

asset value or they incurred losses in previous financial year. TheRemaining 31 were grouped into 3 categories Very Good,

Good and Average on the basis of net assets value per share vis-a-vis face value of Rs10 as on March,1991. The

totalvalue of equity in each basket was Rs50 million.Bids were invited from 10 financial institutions/

mutual funds which consisted of 825 bundles each consisting of 9 PSEs. A total of 710 bids for 533 bundles were received

from 9mutual funds/ institutions and 406 bundles for a total value of Rs14.2billion were sold. UnitTrust of

India was the major purchaser accounting for Rs. 7.75 billion of the sale.
B

)S
ECOND

RANCHE OF

D
ISINVESTMENT

(F
EBRUARY

, 1992): In second tranche DPE

asked ICICI to evaluate and advice issue price equity of selectedPSEs. A List of 16 PSEs was prepared and shares were

grouped into 120 bundles as before.The reserve price fixed per bundle was Rs 10.08 crore. Bids were invited from 36

institutionsand banks. A total of Rs. 1611 crore were realised with Unit Trust of India again being themajor purchaser. The

Shares of Metal Scrap Trading Corporation remained unsold.Details of the PSEs Divested in 199192

Name of the EnterpriseNo. Of Shares(incrore)% of Disinvestment A n d r e w Y u l e ( A Y ) 0 . 1 0 1

5 9 . 6 0 B h a r a t E a r t h M o v e r s L t d . ( B E M L ) 0 . 6 0 0 0 2 0 . 0 0

F M G 1 8 B , G R O U P I V P a g e 2 8

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