Union Finance Minister Nirmala Sitharaman recently announced major reforms for Public Sector Undertakings, as a result of which many sectors are likely to see large-scale consolidation and divestment of State-run firms. The government will soon announce a new PSU policy, which will focus on privatising PSUs in non-strategic sectors based on feasibility. The policy will, in parallel, specify certain strategic sectors in which the “presence of PSEs in public interest” will be mandatory. 
Current Scenario

• Governments across the world are resorting to privatisation to fill budgetary gaps
• According to India’s new Public Sector Enterprises Policy (PSEP), a list of strategic sectors will be notified where there will be no more than four PSUs
• Before the COVID-19 crisis, the government needed the privatisation money partly because its revenue (from GST among other things) was declining
• Today, the government needs this money to fund the relief package without excessively crossing the fiscal limits
• Government is planning the privatization of BPCL, Shipping Corporation of India, Container Corporation of India, THDC, NEEPCO and Air India among other PSUs

Current Steps taken in that direction

• The foreign direct investment bar in defence will be raised to 74% from 49% to boost the military infrastructure industry.
• Farmers will be able to sell to any buyer of choice, with the finance minister announcing the end of monopolies of agricultural produce market committees.
• Mining firms can now do all of these simultaneously: explore, processing and producing finished useable minerals. The 60% airspace limit for civil aviation will be widened to boost aviation, cut oil imports and shorten flying routes.
• Finance Ministry also announced the end of Coal India Limited’s monopoly, allowing free private extraction on revenue-sharing basis.

About Privatisation

• It means a transfer of ownership, management, and control of public sector enterprises to the private sector.
• Privatization can suggest several things including migrating something from the public sector into the private sector.
• It is also seldom used as a metonym for deregulation when a massively regulated private firm or industry becomes less organised. Government services and operations may also be (denationalised) privatized; in this circumstance, private entities are tasked with the application of government plans or execution of government assistance that had earlier been the vision of state-run companies.
• Some instances involve law enforcement, revenue collection, and prison management. Privatisation of the public sector companies by selling off part of the equity of PSEs to the public is known as disinvestment.

Methods of Privatisation adopted in India
Initial Public Offers (IPO)

• IPOs are the most favoured method of privatisation followed in the developed countries of Europe and OECD. Under this method, the shares/equity holdings of the PSUs are sold to the private retail investors and institutions like Mutual Fund houses, Pension Funds and Insurance Companies etc.
• The prerequisite for the IPOs to be successful is that a country must have a well-developed and well-functioning Capital Market.

The main advantages of the IPO method are:

• It ensures wide participation of retail investors.
• It is likely to face less resistance from the PSUs stakeholders like employees, as the method involves only selling of PSUs shares without any change in the management and policies.
• It can be used to offer shares to the employees.
• The method is best suited when the government wanted to raise financial resources without losing on the management and control of the PSU.

Strategic Sale:

• Strategic Sale is a method in which the government decides to sell PSU shares to a strategic partner. The management in all such cases passes to the strategic buyer.

The various advantages of the method are:

• The performance of the PSU is expected to improve as the private player selected will already have an expertise in the management and operation of the PSU.
• The strategic partner will be willing to pay a better price for the PSU as his business interest lies in combining his own business with that of PSU.
• The method helps in infusion of capital and modernisation of the PSUs.
• The method also helps the government in transferring the loss making PSU which could not have been attractive to retail buyers otherwise. The strategic partner will acquire such business as he has the prerequisite skills to turnaround the PSU.
• The method is very important for countries having less developed capital market.

The Disadvantages of Privatisation

• The abuse of the 'public interest'
• The natural monopolies argument.
• The problem of externalities.
• The redistribution of wealth.
• The loss of economies of scale.
• Job losses.

About Disinvestment: The method is followed in India from time to time. The method involves the sale of the Public sector equity to the private sector and the public at large.
Strategic Disinvestment: Strategic disinvestment is transferring the ownership and control of a public sector entity to some other entity (mostly to a private sector entity). Unlike the simple disinvestment, strategic sale implies some sort of privatization.

• According to the government, strategic disinvestment would imply the sale of a substantial portion of the Government shareholding of a central public sector enterprises (CPSE) of upto 50%, or such higher percentage as the competent authority may determine, along with transfer of management control.
• Strategic disinvestment in India has been guided by the basic economic principle that the government should not be in the business to engage itself in manufacturing/producing goods and services in sectors where competitive markets have come of age, and economic potential of such entities may be better discovered in the hands of the strategic investors due to various factors, e.g. infusion of capital, technology up-gradation and efficient management practices etc.

Are disinvestment and privatisation related?

• The government, whenever it so desires, may sell a whole enterprise, or a majority stake in it, to private investors. In such cases, it is known as privatisation, in which the resulting ownership and control of the organisation does not rest with the government.
• The government usually avoids doing this. The government mostly retains more than half of the stake in the public sector enterprise so that the control remains in its hands. But when it doesn’t, then the ownership is transferred to the private sector, which results in privatisation. It is also known as majority disinvestment or complete privatisation wherein 100 per cent control goes to the private sector.

Road Ahead

• Value subtracting enterprises, where restructuring or even ensuring an additional infusion of funds and other resources in PSEs have not produced results, should be disinvested or can follow the exit route through the new Insolvency and Bankruptcy Code.
• For example, some of the major loss-making PSUs like BSNL, MTNL and Air India should follow this route as their losses are greater than their revenue.
• Privatisation of profit-making PSEs will still bring in benefits of the efficient operation of the private sector through reduced costs.
• For example, Air India is marred with issues like poor punctuality, high staff-to-plane ratio, high operating costs and overall customer indifference. These issues can be rectified by the privatisation of PSEs.
• For PSEs of Strategic importance, the government should go for the de-bureaucratisation of the public sector, instead of privatisation.
• The government should disinvest its share of luxury hotels and restaurants, bakery, etc. By disinvesting shares of these luxury goods-producing public sector industries, it can raise a lot of financial resources.
• Privatisation must be accompanied by competition in the post-privatised scenario.
• In order to improve the performance of inefficient units, the creation of a competitive market environment is absolutely essential.
• Therefore, Privatisation of Public sector enterprises is a viable option only in case of ‘value subtracting enterprises’ but the process must not be in haste, just for the sake of meeting the disinvestment targets set by the Finance Ministry.