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Insights into Editorial: A Bold Disinvestment Strategy Needed

Insights into Editorial: A Bold Disinvestment Strategy Needed

07 January 2015

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One of the biggest disappointments of 2015 has been the inability of the government to move forward on even the modest targets of disinvestment of Rs 69,000 crore ($11 billion)—especially strategic disinvestment of R28,000 crore ($4 billion).

  • It should be noted here that if the government wants, it could move on disinvestment aggressively without needing any legislative approval and brinkmanship. Instead, it’s floundering around, trying to restructure and improve these companies without a clear game-plan.

What should the government do now?

The government should have a medium-term plan which is based on performance, size and sector:

  1. Maharatnas:

Maharatnas, whose total assets are around R10 lakh crore, are performing well. Their return on capital and return on assets have been higher than those of comparable corporate firms by 4% and 2%, respectively. Hence, for now, the plan could leave the Maharatnas in state hands. Maharatnas include BHEL, Coal India, GAIL, Indian Oil, NTPC, ONGC and SAIL.

  • However, even in this category the situation has seen a reversal of trends in the last three years. Few Maharatnas are showing a continuous decline in performance. Therefore, among the Maharatnas, SAIL, BHEL and Indian Oil need serious restructuring and better leadership.
  1. Navratna:

The performance of the 17 Navratnas is consistently worse than that of comparable private corporates, with return on capital roughly 2% lower compared to equivalent private firms.

  • This is the group that should be privatised—especially Bharat Electronics, MTNL, NMDC and Oil India.
  1. Miniratna:

The category of Miniratna is formed by 73 companies, and these are the ones that are most ripe for strategic disinvestment. A plan to sell most of these companies should be developed, with those in manufacturing and the services sector high on the list for immediate sale as these are the worst performers.

Importance of Strategic Disinvestment (Privatization):

  • Strategic disinvestment improves the efficiency of capital use. The PSUs which were strategically disinvested under the previous NDA government have done exceedingly well, thereby enhancing efficiency and improving the return on assets.
  • The proceeds of the disinvestment could be parked into the strategic investment fund established recently. If these proceeds are used to leverage private funding of the same magnitude, India could be able to invest an additional $50 billion per year—roughly 2.5% of GDP—in public infrastructure for the next 10 years.
  • It will unlock funds for building badly-needed social infrastructure—roads, power transmission lines, sewage systems, irrigation systems, railways and urban infrastructure.
  • This will also help draw in private investment, including FDI.


Such a bold approach to transferring state-owned assets with generally low return towards public social infrastructure is a win-win idea. However, for strategic investment to succeed, the government should make sure that disinvestment processes are transparent and take place by competitive bidding. The government must also make sure that some of the funds are set aside for worker compensation.