Why India keeps selling stakes in PSUs instead of privatising them

India is selling PSU stakes, but rarely giving up control. Why has the government chosen disinvestment over full privatisation? Experts explain

The government's disinvestment strategy has largely relied on minority stake sales in public sector undertakings (PSUs), even as strategic privatisation remains a stated policy objective.

 

While stake sales allow the government to raise money without giving up control, strategic privatisation involves transferring management to a new owner. The gap between the two approaches has widened in recent years.

Disinvestment targets remain elusive

Between FY10 and FY21, the government exceeded its annual disinvestment target only twice, in FY18 and FY19. Separately, in FY20, it raised ₹50,304 crore against a target of ₹1.05 trillion. In FY21, receipts fell to ₹32,886 crore against a target of ₹2.1 trillion.

 

 

The two years that exceeded the target also benefited from large transactions. In FY18, around 37 per cent of receipts came from the strategic sale of Hindustan Petroleum Corporation Ltd (HPCL) to Oil and Natural Gas Corporation (ONGC), while 24 per cent came from the listing of central public sector enterprises. In FY19, the government raised ₹45,080 crore through exchange-traded funds. 

Disinvestment targets vs actual receipts

  Recent disinvestment has followed a different pattern. Department of Investment and Public Asset Management (Dipam) data show transactions involving companies such as Coal India, NHPC, Indian Railway Finance Corporation (IRFC), General Insurance Corporation of India (GIC), Central Bank of India and Cochin Shipyard have largely been through Offer for Sale (OFS). In these transactions, the government sells part of its holding but retains majority ownership.

 

Since FY15, minority stake sales had raised ₹3.30 trillion as of December 4, 2024, compared with ₹69,412 crore through strategic disinvestment transactions, according to data cited by experts who talked to Business Standard. That is a gap of nearly five times in favour of minority stake sales.

Why stake sales over privatisation?

According to the experts, the main difference is control. Vishal Dagar, assistant professor of economics at Great Lakes Institute of Management, and Amar Rao, associate professor of management at BML Munjal University, said minority stake sales can generally be completed through the exchange route at market-determined prices. They also avoid many of the approvals and negotiations involved in a change of control.

 

“A strategic sale can involve sectoral regulatory approvals, competition clearances, open-offer requirements and issues around land, pensions and liabilities,” they told Business Standard.

 

The process can also become more difficult when employees, unions or political groups oppose the sale, they added.

 

The government's record also shows how long strategic sales can take. Strategic disinvestment involves selling a major government stake along with management control. PRS Legislative Research said 21 strategic disinvestment proposals approved since 2015-16 were still pending.

 

Air India remains a major exception. Of the 10 strategic transactions worth ₹69,412 crore since FY15, only Air India and Neelachal Ispat Nigam Ltd (NINL) involved non-government buyers. The other transactions were between public sector entities.

 

This distinction matters because disinvestment does not necessarily mean privatisation. The government can sell part of its stake, raise money and retain control.

Is disinvestment a better strategy than privatisation?

The answer depends on what the government wants from the transaction.

 

Minority stake sales allow the government to continue receiving dividends from profitable PSUs.

 

Dagar and Rao said CPSE dividend receipts were about ₹74,000 crore in FY25, while gross miscellaneous capital receipts in the Union accounts were ₹20,214 crore. The FY26 Budget had estimated dividend receipts at ₹69,000 crore.

 

For the government, therefore, retaining ownership has an ongoing financial benefit. A strategic sale brings a one-time receipt but also means giving up future dividends and control.

 

But minority stake sales do not necessarily address the underlying management and efficiency issues that privatisation is intended to tackle.

 

Nilanjan Banik, professor of economics and finance at Mahindra University, said minority stake sales can provide “short-term fiscal relief and improved market discipline in some PSUs”, but argued that India should revive strategic privatisation.

 

He said such sales “leave core inefficiencies intact” and give up the potential gains in efficiency, innovation and long-term fiscal benefits that can come from transferring management control to private owners.

 

This is the key trade-off. If the objective is to raise money while retaining control, minority disinvestment works. If the objective is to reduce the government's role in running businesses and change management, a stake sale alone may not be enough.

 

Strong PSU stock valuations may also have made minority sales more attractive. Dagar and Rao said the Nifty PSE Index's total-return version gained 76.4 per cent in the year to October 31, 2024.

 

When PSU shares are trading at stronger valuations, the government can raise money through an OFS without taking on the complexity of finding a strategic buyer and transferring control.

 

But market performance alone does not establish that government ownership is more efficient. It simply makes selling a minority stake a more convenient way to monetise an existing holding.

The road ahead

India has not formally abandoned strategic privatisation. The government's approach appears to have become more selective.

 

Banik described it as a “pragmatic, multi-track, and more flexible model of PSU reform”, with less focus on large-scale privatisations and more on gradual stake reduction, governance changes, selective exits and dealing with weaker PSUs.

 

Under the current policy, Banik said the government intends to retain a minimum number of PSUs in four core strategic sectors like atomic energy, space, defence and railways. Outside these areas, other sectors can potentially see privatisation, subject to feasibility and political economy considerations.

 

He identified oil and gas downstream and trading, shipping and logistics, and manufacturing and engineering as areas where stronger candidates for privatisation could exist. These include BPCL, HPCL, Balmer Lawrie, Shipping Corporation of India, Container Corporation of India, BHEL and BEML.

 

Dagar and Rao said the broader approach could be described as “monetising them while keeping control.”

 

Another possible change could make this model easier to sustain. The Economic Survey 2025-26 proposed allowing listed PSUs to retain government-company status even if government ownership falls to 26 per cent, provided the government retains effective control. Dagar and Rao stressed that this remains a proposal, not settled policy.

 

For now, the pattern seems clear: India is using disinvestment more as a way to monetise government holdings than as a route to fully exit PSUs.