Budget 2023 | What is divestment and divestment target?

As India's Union Budget 2023 will be presented soon, the government is likely to miss the divestment target for the fourth year in a row. Last year, India had set a divestment mark of Rs 65,000 crore for FY23 but reportedly only managed to raise around Rs 31,000 crore, a little over 50 per cent of its original target.

Of this, more than half of the proceeds were from the IPO of LIC, and the rest was from the privatisation of Air India and ONGC share sales. Before Budget 2023, here is a look at what divestment is and what divestment target means.

What is divestment?

Disinvestment or divestment is the government's action of selling or liquidating the stake it has in a PSU or subsidiary. It takes place when PSU becomes a liability and shows negative returns, which in turn puts pressure on government resources. Here, disinvestment helps lower the financial burden imposed by inefficient PSUs on public finances, raise money, and put these proceeds to better use.

Disinvestment is a yearly exercise and the government sets a target for select PSUs in the upcoming financial year. Manmohan Singh, when he was the Finance Minister, introduced the idea in the 1991 interim Budget, as India was moving towards a global, liberal, and private sphere.

In 1999, the Department of Disinvestment was set up as a separate entity. In 2001, under the Atal Bihari Vajpayee government which propelled disinvestment, it was turned into a ministry. Then, in 2004, it was added as a department in the Ministry of Finance. A name change took place in 2016 when it became the Department of Investment and Public Asset Management (DIPAM).

How divestment works?

The government puts up shares of Central Public Sector Enterprises (CPSEs) for sale for buyers to trade in. It is done "to promote people’s ownership through public participation and improving efficiencies of CPSEs through accountability to its shareholders and to bring in operational efficiencies in CPSEs through strategic investment, ensuring their greater contribution to economy."

The disinvestment policy covers public ownership of CPSEs, disinvesting through minority stake sale - where the government retains at least 51 per cent shareholding and management control - and strategic disinvestment, where the government sells a substantial part of a CPSE of up to 50 per cent, or a higher share, as well as transferring management control, which means private players essentially take over.