The Cost of Delaying Divestment, Why the Budget Must Prioritise Disinvestment
The Union Budget to be presented on February 1 would do well to prioritise disinvestment. The key reasons include raising resources to create fiscal space; boosting funding for under-resourced but critical sectors such as health and education; unlocking the value in public sector enterprises; avoiding the drain on the exchequer from loss-making PSEs; enabling the expansion of public sector banks’ balance sheets without any constraint imposed by government ownership; and boosting business sentiment and reviving the long-awaited private capex cycle.
These are not merely theoretical arguments. They are practical necessities for a government facing fiscal constraints, developmental needs, and the imperative of economic growth.
The Fiscal Imperative
The debt-to-GDP ratio of the central government stood at 57.1 per cent at end-March 2025, against the mandated target of 40 per cent under the Fiscal Responsibility and Budget Management Act. In the last Budget, the government changed the fiscal anchor and indicated it would reduce the debt-to-GDP ratio to 50 (+/- 1) per cent by end-March 2031.
To achieve this target, the primary deficit would need to shrink from (-) 1.3 per cent of GDP to (-) 0.3 per cent of GDP. Even then, the debt-to-GDP ratio would stay significantly above the mandated target of 40 per cent, leaving no fiscal buffer. Should we face any exogenous shock, the fiscal situation will be strained again.
Therefore, generating enough resources is key. For this, it is imperative to vigorously pursue disinvestment in PSEs. Divesting government equity in non-strategic PSEs is the only way to raise large revenue without harming the economy. It can also unlock huge value in them.
The Confederation of Indian Industries has estimated that lowering government ownership to 51 per cent in 78 listed PSEs could unlock nearly ₹10 trillion. That is not a small sum; it is equivalent to a significant portion of the annual budget.
The Disappointing Track Record
The government’s disinvestment track record has been extremely disappointing. The tardy progress has gone against its Public Sector Enterprises Policy, 2021, aimed at privatising non-strategic PSEs.
Some have argued that it could be because the government receives large dividends from PSEs. It is true that the dividend received by the central government doubled from ₹0.7 trillion in 2020-21 to ₹1.4 trillion in 2024-25. However, the total contribution of central PSEs to the exchequer—by way of excise and customs duties, goods and services tax, corporation tax, and dividends, among others—has remained broadly unchanged over the last five years at ₹4.9 trillion in 2024-25 and ₹4.8 trillion in 2020-21, even as the nominal GDP during this period expanded by 40 per cent.
This suggests that the growth in dividends has come at the expense of other contributions. The PSEs are not becoming more valuable; they are simply being asked to pay out more of their earnings as dividends, leaving less for reinvestment.
Loss-Making PSEs
Several central PSEs are bleeding money, with losses jumping from ₹10,164 crore in 2021-22 to ₹20,935 crore in 2023-24, before moderating to ₹18,054 crore in 2024-25. It is intriguing that the government infused ₹11,440 crore into Rashtriya Ispat Nigam Limited, which is not in the strategic sector, even when it was slated for privatisation in January 2021. Is this a case of throwing good money after bad?
When a company is consistently loss-making, and the government continues to pour money into it, the question must be asked: what is the purpose? If it is not a strategic enterprise, if it is not serving a clear public purpose, why is the taxpayer funding its losses?
The Banking Conundrum
The Union Budget for 2021-22 proposed privatising two PSBs, but this has not happened as yet. PSBs serve social goals, but they are also a drain on the exchequer—the government injected ₹3.11 trillion between 2016 and 2021, and another ₹4,600 crore in 2021-22.
Government ownership also limits their balance sheet growth. The big three—State Bank of India, Bank of Baroda, and Canara Bank—have small headroom to raise equity from the market. They, therefore, have to rely on retained earnings or Tier II bonds for expansion of their balance sheets.
Do we need so many PSBs for social goals? Privatisation of large banks could also pose challenges, as it requires investors with solid track records and deep pockets. Therefore, the ideal solution is to retain the three largest banks in the public sector for social goals and gradually privatise the other PSBs.
This would preserve the public sector presence for financial inclusion and social objectives while freeing the others to operate as commercial entities, raising capital from markets and competing without government constraints.
The Wealth Creation Paradox
On the positive side, PSEs in recent years have been huge wealth creators for investors. The market capitalisation of PSEs soared from ₹12 trillion in March 2020 to ₹69 trillion in June 2025, outpacing their private peers, thanks to clean balance sheets, policy push and sector-specific structural reforms.
This, however, strengthens the case for disinvestment. Private ownership can drive further efficiency and innovations in PSEs. With PSEs performing well, the government will find it relatively easy to disinvest and sell them at a premium, unlocking more resources. This could also help revive the private capex cycle, which has been weak for more than a decade.
Protecting Labour and Managing Sensitivity
The government’s only concern should be the protection of labour. Also, disinvestment has become a sensitive issue. Therefore, the proceeds raised from disinvestment should be ring-fenced only for the health and education sectors, creating fiscal space (by accelerating the process of reducing the debt-GDP ratio) and contributing to the capital of the three largest PSBs as and when they need to raise equity from the market.
This could soften opposition to disinvestment. It is worrying that the central government’s spending on health, as a percentage of GDP, has remained stagnant at 0.3 per cent over the last 20 years, and on education at 0.4 per cent over the last nine years.
If disinvestment proceeds were dedicated to these underfunded sectors, the political calculus would change. The argument would no longer be about selling assets; it would be about investing in people.
Conclusion: A Clear Road Map Needed
The government should revisit its disinvestment policy and lay down a clear PSE divestment road map. This will help raise financial resources for critical sectors such as health and education, which badly need support, and create fiscal space to tackle unexpected shocks. Divesting PSEs could also help capitalise the top three PSBs and support their balance sheet growth.
The case for disinvestment is compelling. The fiscal arithmetic demands it. The developmental needs require it. The economic logic supports it. What is needed now is the political will to act.
Q&A: Unpacking the Disinvestment Argument
Q1: What is India’s current debt-to-GDP ratio and target?
The central government’s debt-to-GDP ratio stood at 57.1% at end-March 2025, against the FRBM Act’s mandated target of 40%. The government has set a revised target of reducing it to 50 (+/- 1)% by end-March 2031. Even achieving this would leave no fiscal buffer for exogenous shocks.
Q2: How much could disinvestment potentially raise?
CII estimates that lowering government ownership to 51% in 78 listed PSEs could unlock nearly ₹10 trillion. This would provide substantial resources for critical sectors without harming the economy. Dividends from PSEs have doubled, but total PSE contribution to the exchequer has remained stagnant despite 40% GDP growth.
Q3: What is the problem with loss-making PSEs?
Losses from central PSEs jumped from ₹10,164 crore in 2021-22 to ₹20,935 crore in 2023-24, moderating to ₹18,054 crore in 2024-25. The government infused ₹11,440 crore into Rashtriya Ispat Nigam Limited—a non-strategic PSE slated for privatisation—raising questions about throwing good money after bad.
Q4: What is the banking conundrum?
The government proposed privatising two PSBs in 2021-22 but has not done so. PSBs have received ₹3.11 trillion in government capital since 2016. Government ownership limits their balance sheet growth, as they have limited headroom to raise market equity. The article suggests retaining the top three PSBs for social goals and privatising the rest.
Q5: How can disinvestment proceeds be used to soften opposition?
Proceeds should be ring-fenced for health and education—sectors where spending has stagnated (health at 0.3% of GDP for 20 years, education at 0.4% for 9 years). This would transform the narrative from “selling assets” to “investing in people,” making disinvestment politically more palatable while addressing critical funding gaps.
