Privatisation

Topic: The 1991 Crisis and LPG Reforms: An Appraisal · NCERT: Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal"; Class 11, Ch 8 "Comparative Development Experiences of India and its Neighbours"

Meaning

Privatisation means the government gives up the ownership or management of a government enterprise. It happens in one of two ways: the government withdraws from ownership and management of the company, or the company is sold outright to a private buyer.

It matters because it changes who runs a company. When a firm is privatised, the state stops running it and a private owner takes over. Since 1991 it has been central to India's move from a state-led economy to a market economy (an economy where prices and private firms, not the government, decide most production).

Explanation

How it works: privatisation vs disinvestment

• A Public Sector Enterprise (PSE / PSU) is a company that the government owns and runs. If the Central government owns it, it is called a CPSE (Central Public Sector Enterprise).
• Disinvestment means the government sells part of a PSE's equity (its shares) to the public.
• The key link:
• Every privatisation involves disinvestment, because the government must sell shares to hand over the company.

• Not every disinvestment is privatisation. If the government sells only 10% of a company, it still owns and runs it.

• The test is control. A company is privatised only when management control passes to a private owner.

• In 1991 India did not privatise directly. It chose gradual disinvestment, which means selling small stakes over many years.

Types: strategic sale vs minority sale

Feature	Strategic sale	Minority sale
Stake sold	A large block, often 50% or more	A small stake
Management control	Passes to the private buyer	Stays with the government
Is it privatisation?	Yes	No, only disinvestment
Example	Air India to Tata (2022); BALCO, VSNL (1999-2004)	An OFS of a few per cent

• Worked example: the government owns 100% of a CPSE.
• It sells 26% through the stock market and still holds 74%, so it keeps control. This is a minority sale. It is disinvestment, not privatisation.

• It sells 51% to one buyer along with management rights, and is left with 49%. It loses control. This is a strategic sale, and it counts as privatisation.

• Methods used to sell shares:

• Offer for Sale (OFS): the government sells shares it holds through the stock exchange.
• ETF (exchange-traded fund): one fund that holds shares of many CPSEs. Investors buy and sell it like a single share. ETFs brought in the highest receipts from 2015-16 to 2020-21 [3].

• IPOs and share buybacks.

• The CPSE-to-CPSE catch: some "strategic" sales went to another government company. The money reached the budget, but the company stayed in government hands, so it was not really privatised.

• HPCL sold to ONGC (2017-18) raised Rs 36,915 crore, which was 37% of that year's receipts [3].
• REC sold to PFC (2018-19) raised Rs 14,500 crore [3].

Why the government does it: the stated aims

• Financial discipline: private owners watch profits and costs closely, so managers become more careful.
• Modernisation: private capital pays for new technology and equipment.
• Private capital and managerial skill: these are brought in to improve how the companies perform.
• FDI signal: opening state assets to buyers, including foreign buyers, tells investors that India welcomes them. This was meant to boost FDI (foreign direct investment, meaning long-term foreign money put into Indian firms).
• The present official aim: use the money for social sector and development programmes, and bring private capital, technology and best management practices into CPSEs [2].

What makes receipts rise or fall

• Realisation ratio = (Amount realised ÷ Target) × 100
• 1991-92: 3,038 ÷ 2,500 × 100 ≈ 121.5%. The government collected about Rs 540 crore above the target.

• 2020-21: a target of Rs 2,10,000 crore and Rs 32,886 crore realised gives about 16% [3].

• Receipts go up when big deals are completed, as in 2017-18 (138%) and 2018-19 (118%). Those two years were driven mainly by the HPCL and REC sales between CPSEs [3].

• Receipts go down when strategic sales get stuck. 21 cases cleared by the Cabinet since 2015-16 had not been completed [3].

In India

• Institutions and milestones:
• 1996: the Disinvestment Commission was set up in August 1996, and 40 PSUs were sent to it for advice [4].
• 1999-2004: the first wave of strategic sales, which were real privatisations: Modern Foods, BALCO, VSNL, Hindustan Zinc and Maruti.
• 2005: from 1 April 2005, disinvestment money has gone into the National Investment Fund (NIF). The money is first credited to the Consolidated Fund of India (the government's main account). Professional fund managers run the NIF to earn returns without reducing the corpus (the main amount) [5].

• 2016: DIPAM (Department of Investment and Public Asset Management, under the Ministry of Finance) became the nodal department, meaning the lead department in charge.

• The rule behind it: the New PSE Policy (2021) [2][3]

• Strategic sectors: the government keeps only a bare minimum presence. Other CPSEs in these sectors are privatised, merged, made subsidiaries of other CPSEs, or closed [2]. There are four groups [3]:
  1. Atomic energy, space and defence
  2. Transport and telecommunications
  3. Power, petroleum, coal and other minerals
  4. Banking, insurance and financial services
• Non-strategic sectors: CPSEs are privatised or closed [2].

• Kept out of the policy: development finance institutions, major port trusts, and bodies that support vulnerable groups [3].

• The landmark case: Air India

• The Cabinet approved the sale on 8 October 2021 [3]. The sale was completed on 27 January 2022 [6].
• The buyer was Talace Pvt Ltd, a fully owned subsidiary of Tata Sons [6].
• The government got Rs 2,700 crore in cash, and the buyer took on Rs 15,300 crore of debt [6].

• The buyer got 100% of Air India, 100% of AIXL and 50% of AISATS [6].

• After 2022: the government now relies more on market sales than on big strategic deals.

• An OFS of 3.61% of Mazagon Dock Shipbuilders in April 2025 raised Rs 3,673.42 crore [7]. This was a minority sale, not privatisation.
• IDBI Bank, Shipping Corporation of India, BEML, NMDC Steel, HLL Lifecare and PDIL were in the strategic-sale pipeline [8].
• CPSE dividends (the share of profit a company pays its owners) have risen since 2020-21. They were Rs 30,284 crore in 2024-25, as of 5 December 2024 [7].

Don't confuse with

• Disinvestment: any sale of part of a PSE's shares. It becomes privatisation only when management control moves to a private owner.
• Minority sale / OFS: a small stake is sold and the government keeps control, so it is disinvestment without privatisation.
• CPSE-to-CPSE strategic sale (HPCL to ONGC, REC to PFC): it is officially counted as "strategic disinvestment", but the buyer is also a government company, so the firm is not privatised [3].
• Ratna status (Maharatna, Navratna, Miniratna): this is reform without selling. The government keeps ownership but gives the firm more financial, managerial and operational freedom. NCERT examples: Maharatna — IOCL and SAIL; Navratna — HAL, MTNL and IRCTC; Miniratna — BSNL and Airports Authority of India.

Prelims Hooks

• Privatisation happens in two ways: the government withdraws from ownership and management, or the company is sold outright. Every privatisation involves disinvestment, but not every disinvestment is privatisation.
• A strategic sale (often a stake of 50% or more, with management control) is privatisation. A minority sale is not.
• DIPAM has been the nodal department since 2016, under the Ministry of Finance. The Disinvestment Commission was set up in August 1996 [4]. The NIF has run since 1 April 2005 [5].
• The New PSE Policy (2021) has 4 strategic sector groups, where the government keeps a bare minimum presence. In non-strategic sectors, CPSEs are privatised or closed [2][3].
• Air India went to Talace (Tata Sons) on 27 January 2022 for Rs 2,700 crore in cash plus Rs 15,300 crore of debt taken over [6].
• Trap: in 1991-92 the target was Rs 2,500 crore and about Rs 3,040 crore was the total realised. The amount above the target was only about Rs 540 crore, not Rs 3,040 crore as NCERT's wording suggests.

Mains Points

• Efficiency vs equity (GS-III: industrial policy, mobilisation of resources):
• For: private owners bring capital, technology and discipline. The Economic Survey (2019-20) found that disinvestment improves firm performance and productivity [9].

• Against: PSE assets were sold below their true value, and critics called this an "outright sale of public assets". Selling profitable PSUs, and the risk of handing public property to vested interests, raise questions of public accountability.

• Using sale money for routine spending ("family silver"):

• The money was often used to fill revenue gaps, meaning it paid for routine spending instead of building PSEs or social infrastructure.
• A one-time sale cannot pay for spending that repeats every year.

• A better practice is to link the money to the NIF, capital spending and social sectors [2][5]. Budget targets should also be realistic: receipts were only 16% of the target in 2020-21 and 48% in 2019-20 [3].

• The state's strategic retreat and the Ratna paradox:

• The New PSE Policy (2021) moves the state from the "commanding heights" of the economy to a bare minimum presence [2].
• Scholars point to a contradiction. Ratna firms were first given autonomy and started performing better. The government then partly sold them, so they never grew into global champions.

Read more

• Privatisation and disinvestment