At a very basic level we can define disinvestment as the process of converting securities into money or cash. It is basically the action of any organization be it government or private which involves liquidating or selling of an asset or subsidiary. It is also called as ‘divestment’ or ‘divestiture’. Theoretically, disinvestment means transfer of ownership partly or fully of Public Sector Enterprises from the government to the private sector. They do so because it could be a strategic move from them or for raising the resources to meet their day to day needs.

Objectives of Disinvestment

The new economic reform started in July 1991 plainly demonstrated that PSUs had appeared exceptionally negative rate of profit for capital utilized. Numerous endeavors customarily settled as mainstays of development had turned into a weight on the economy. The national GDP and gross national savings were additionally getting antagonistically influenced by low returns from PSUs. Around 10% to 15 % of the complete gross domestic savings were getting decreased by virtue of low investment funds from PSUs. In connection to the capital utilized, the dimensions of benefits were excessively low. The major factors which are responsible for low profits in PSUs are given below:

  • Pricing policy of public sector undertakings.
  • Under-utilization of resources, capacity and capital.
  • No proper planning and implementation.
  • Problems related to labor and human resource management.
  • Lack of authority and responsibility.

Thus, the requirement for the Government to dispose of these units and to focus on central issues was recognized. The Government additionally took a view that it should move out of non-center organizations, particularly the ones where the private area had now entered in a huge manner. At long last, disinvestment was likewise observed by the Government to raise assets for gathering general/ explicit requirements.

Toward this path, the Government embraced the 'Disinvestment Policy'. This was recognized as a functioning instrument to diminish the weight of financing the PSUs. The accompanying principle goals of disinvestment are illustrated:

  • To diminish the monetary weight on the Government.
  • To improve open accounts.
  • To present, competition and market discipline.
  • To finance development.
  • To facilitate wider share of ownership.
  • To depoliticize unimportant administrations.

Importance of Disinvestment

Currently, the Government has about Rs. 2 lakh crore secured up PSUs. Disinvestment of the Government stake is, consequently, extremely critical. The significance of disinvestment lies in use of assets for:

  • Financing the expanding monetary shortage.
  • Financing enormous scale framework improvement.
  • For putting resources into the economy to empower spending.
  • For retiring Government obligation- Almost 40-45% of the Centre’s income receipts go towards repaying public debt.
  • For social projects like wellbeing and training.

Disinvestment has an importance because of the commonness of an inexorably aggressive condition, which makes it hard for some PSUs to work productively. This prompts a quick disintegration of estimation of the public resources making it basic to disinvest ahead of schedule to understand a high worth.


PSUs in every country generally suffer from three major problems:

  • Soft Budget Constraint: Sick PSUs are always funded by central and state government to maintain its operations unlike any other private companies which affects government finances.
  • Multiple objectives: PSUs does not generally focus on profit making. Their main aim is to provide social service like generating employment, improving backward areas, offering products at reasonable prices. Their performance is not determined by how much commercial profit they make. The manager of loss making PSUs can make excuses of promoting social profit.
  • Multiple control authorities: PSUs are managed by various people like politicians, bureaucrats, etc. Manager does not focus on diversification, modernization and technological upgradation.
  • Loss of Public Interest: Disinvestment of PSUs results in no public welfare.
  • Unemployment: Jobs of workers will be affected.
  • Very less bidders: There are very less buyers of PSUs. It is because of these major problems even socialist country like China wanted to privatize its PSUs at a greater extent to maintain its social stability.

Case Study of Air India

Source: The Sunday Guardian

After the economic reform 1991, there is a furious competition in Indian market prompting associations embracing development and change. Associations resort to this activity because of scaling down, financial subsidence, rebuilding, and reengineering. Air India being the third biggest carrier in India is still facing a lot of challenges and difficulties to stay in this competitive market. Despite the fact that Air India has experienced different periods of change from hierarchical headed to representative driven incorporating changes in:

(I) Strategic purpose, abilities, difficulties, and learning, 
(ii) condition, innovation, and client conduct,
(iii) impact of correspondence, sway on workers frame of mind and conduct, job of culture, atmosphere, and structure, and
(iv) explanations behind the achievement or disappointment of progress. In any case, it is as yet confronting difficulties to hold its survival.

Air India has won several national and international awards for its excellent service and was considered among the best air services. However, rising fuel prices resulted in severe decline in air traffic. Air India has to compete with several of the other international level flights. Secondly, the merger with Indian Airlines was a big failure which resulted in a heavy loss of Rs 72000 crore. Air India took a loan of US $ 534 million from the Indian Government to cover its losses. It began cutting costs which resulted in poor service and late arrival and departure. That is not it. Being a Government owned enterprise, the decisions made in Air India is basically guided by politicians and bureaucrats. This led to a huge failure of Air India.

CAPA says that Government should go for disinvestment otherwise it will result in more damage to Air India. It has listed various reasons to it:

  • Losses will increase: In the FY2019 and FY2020 Air India is expected to lose around $2 billion which will be funded by the tax payer’s money.
  • Market Share will fall: Its domestic market share is expected to fall below 10%. It has planned to keep around 9 aircrafts on lease.
  • No more a global leader: Air India is no more a global leader. It has a great competition from Vistara and Indigo.
  • Air India Express will fall: It will face major competition from Go Air, Vistara, and Air Asia India.
  • Brain Drain: Air India is likely to face brain drain of skilled, educated worker. Uncertainty of the future of airline may result in employees turnover leading to inefficient human resource.


Why disinvestment failed? (Problems)

Plans to disinvest 76 per cent of the government’s stake in Air India did attract a lot of attention from many people. But the terms and conditions related to that was so stringent for many players to save Air India. Firstly, the government’s decision to hold back 24 per percent of stake did not appeal to many private players as they don’t want government to hold any percentage of stake. They want full disinvestment. Secondly, the debt of Air India is too much that the private players can’t make any money out of this. Due to this government has stopped the disinvestment process for now and is working on improving the operational efficiency of the airline. Even after this Air India is still left with the debt of Rs. 25000 crore- thrice than that of Jet Airways. 

Air India in order to survive in the market needs government funding. Parliament has now approved around Rs 2400 crore equity infusion into the airline. Air India is going to receive government funding until and unless the government finds a buyer for it or it plans to shut down the airline.

Solutions to the problem:

  • Air India could be semi privatized: It could go for public private partnership. For this firstly, government should settle down the debts to attract the buyers.
  • It could be sold off to an international airline: Go for merger and acquisitions.
    (1) It should go for privatization not mere disinvestments.
    (2) It will improve management.
    (3) Enhance budgetary receipts.
    (4) Enhance profitability and productivity of the airline.
  • It will increase GDP growth and reduce fiscal deficit.
  • One reasonable answer for this issue could be reserving of divestment continues for explicit improvement ventures, especially in the locales where a few people lose positions because of privatization.
  • Public Sector Undertakings should buy other PSUs stakes from the government which will be beneficial.
  • If nothing works it is better to shut down the enterprise.


  • PSUs which are extremely sick should not be touched upon.
  • Government should not go for disinvestment straight away. They should find possible solutions other than disinvestment.
  • Government should formulate various methods and techniques in order to get enough receipts from disinvestment.
  • The influence of bureaucrats and politicians should be minimized for maintaining efficiency and transparency.
  • Socio economic goals and commercial goals should not be blended together.


Privatization of Public Sector Undertakings isn't just unfavorable to the goal of satisfying social commitments yet additionally jeopardizes established securities since private firms by and large are most certainly not subject to constitutional restrictions. There are various ways in which great consequences of privatization can be accomplished, i.e. without absolutely aggravating the proprietorship structure of PSUs. This must not be overlooked by the supporters on privatization just as the rivals. One needs to think about that the immediate advantages of productivity gathering from privatization are restricted by social hindrances. In actuality, disinvestment isn't the answer for making the administration of Indian PSUs proficient and compelling.


  • Dharneja, Anand, “PSUs Disinvestment in India: Process and Policy- Changing Scenario”, Vision, Mar 2006
  • Govt. of India, Disinvestment commission reports (13th report)
  • Pradip, Baijal, “Disinvestment: How strategic sales worked”, Business Standard, Dec 2002
  • Vaidya, Rajinder R., “Disinvestment of PSUs”, New Delhi