Recent budgets have played down disinvestment even as the government pursues fiscal consolidation. That has revived the debate on whether stake sales should again be used more actively to fund public capital expenditure.
Public capex has more than doubled over five years, with sharp increases for roads, railways, urban infrastructure, and logistics. This expansion has been financed largely through higher borrowing and tax revenues. Disinvestment, once a significant source of non-debt capital receipts, has steadily receded. Sidestepping it entirely weakens the government’s balance-sheet strategy. Properly used, disinvestment remains a tool for capital recycling rather than fiscal expediency.
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For years, stake sales oscillated between two objectives: improving efficiency in public sector enterprises and plugging revenue gaps. In recent budgets, the government has deliberately reduced its dependence on disinvestment receipts to meet deficit targets, a correction after repeated slippages. That discipline, however, has come at the cost of neglecting the broader economic rationale for disinvestment.
Strategic disinvestment: Policy without momentum
The strategic disinvestment policy announced by Nirmala Sitharaman in her 2021–22 Budget speech was a clear shift. It distinguished between strategic and non-strategic sectors, and promised minimal state presence in the former and exit from the latter. The intent was to narrow the government’s role to areas of market failure and withdraw from competitive activity.
Four years on, progress has stalled. Large strategic sales have missed timelines. Actual privatisation has been modest. The credibility promised by the framework has not translated into administrative momentum, weakening the signal that the state would step back from business ownership.
The missing institutional link
Part of the slowdown reflects unresolved questions about what follows state exit. Disinvestment eyes a transition in government role from operator to regulator. However, in several sectors such as aviation, energy, and transport, the regulatory architecture is uneven and competition is concentrated. Selling stakes without safeguards risks replacing government monopolies with private oligopolies, leading to price power, rent-seeking, and a political backlash.
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After the ownership change, ministries were to retain residual liabilities through pensions, guarantees, and informal oversight. Until the governance and regulatory issues are addressed, disinvestment will face administrative hesitation even where the economic logic is sound.
Fiscal space beyond the deficit
Finance ministry data show that disinvestment has raised over ₹5 trillion since the early 1990s. Privatisation has also reduced the fiscal burden of supporting loss-making enterprises. International Monetary Fund research highlights how state-owned enterprises impose hidden costs through guarantees, subsidies, and forgone returns on capital. India’s exit from such entities has lowered contingent liabilities, freeing fiscal space not always visible in headline deficit numbers.
The case for disinvestment strengthens in the current economic environment. Global economic growth is uncertain, geopolitical risks remain, and private investment stays uneven. The state continues to shoulder the burden of sustaining demand and building productive capacity. However, high public debt limits the scope for borrowing-led capital expenditure. Proceeds from stake sales do not create future repayment obligations and can finance capital spending without adding to debt.
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Non-debt capital in a slower nominal economy
Low inflation and moderate nominal growth weaken the denominator effect that stabilises debt ratios. Fiscal consolidation becomes harder under such conditions, increasing the value of non-debt capital receipts. Partial dilution in profitable public enterprises can unlock substantial resources. Estimates suggest that reducing government ownership to 51% across listed firms could generate several trillion rupees without loss of control.
India’s financial markets have changed materially. The role of households has increased through mutual funds and systematic investment plans, deepening the market and expanding the investor base. The private corporates have already raised record sums through equity and debt markets. In this environment, arguments about market absorption sound dated. Well-structured public sector offerings could expand market breadth while offering investors access to stable, dividend-paying firms.
Credibility and investor signalling
Disinvestment carries a signalling value beyond fiscal arithmetic. As India positions itself as a destination for investment and supply chains, delivery matters more than declarations. A push for strategic disinvestment would demonstrate that the government intends to regulate rather than run businesses. That clarity can strengthen investor confidence and crowd in private investment.
The political framing of disinvestment remains weak. Treated as a fund-raising exercise, it invites resistance and short-termism. Framed instead as capital recycling, selling mature or non-core assets to fund infrastructure and public goods, it gains legitimacy. Explicitly linking divestment proceeds to capex outcomes would improve public acceptance.
Disinvestment receipts in the past year were modest, despite favourable market conditions and strong domestic risk appetite. The shortfall reflects not economic constraints but administrative inertia, and it exposes the gap between policy intent and execution.
India’s fiscal strategy cannot rest indefinitely on a narrow set of instruments. Taxes, borrowing, and expenditure restraint each face limits. Disinvestment offers an additional lever to expand fiscal space without undermining sustainability. The constraint now is not economic logic, but political will.