Union Budget 2025 | FAQs: What is divestment and divestment target?

Finance Minister Nirmala Sitharaman is set to present the Union Budget on February 1, which will outline the government's economic and fiscal roadmap for the year. In light of the upcoming Budget, we take a look at some of the terms associated with the exercise.

What is divestment?

Divestment, in the context of the Indian economy, refers to the government's process of selling its stake in public sector undertakings (PSUs) or government-owned corporations to private sector entities or the general public. This practice is also commonly known as disinvestment.

The primary objectives of divestment in India include:

Raising Revenue: One of the main reasons for divestment is to raise funds for the government. The proceeds from disinvestment are often used to finance various government programs, reduce debt, or fund infrastructure and social sector projects.

Improving Efficiency: By reducing its stake in PSUs, the government aims to introduce private sector competition and management practices, which are often considered more efficient than those in the public sector. This can lead to improved performance and profitability of these enterprises.

Widening Ownership: Disinvestment helps in spreading the ownership of erstwhile government-owned enterprises among the public. This is seen as a way to democratize wealth and promote a shareholder culture in the economy.

Market Discipline: When a company is listed on the stock exchange through disinvestment, it becomes subject to market discipline, which can lead to better corporate governance and transparency.

The Divestment target in India:

The divestment target is a specific financial goal set by the Indian government each fiscal year, indicating the amount it aims to raise through the process of divestment.

This target is announced as part of the Union Budget. The government then identifies the PSUs in which it will reduce its stake, either partially or completely, during the fiscal year.

Achieving the divestment target is crucial for the government as it often forms a significant part of its non-tax revenue. Falling short of this target can impact fiscal planning and deficit targets.

The execution of divestment in India is overseen by the Department of Investment and Public Asset Management (DIPAM) under the Ministry of Finance.

The methods of divestment include public offerings, strategic sales, buybacks, and Offer for Sale (OFS) through stock exchanges, among others. The divestment strategy and the choice of PSUs for divestment are influenced by various factors including market conditions, strategic importance of the PSU, and overall economic objectives of the government.

(Disclaimer: Parts of this copy have been written by a generative AI tool and has been reviewed and edited by the DH Web Desk)