The debt-to-gross domestic product (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 (FRBM) 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.
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.
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?
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.
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.
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.
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 author is senior fellow, Centre for Social and Economic Progress, New Delhi. The views are personal
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