35 years on, govt remains firmly in the business of doing business | Specials News

“The public sector has not been managed in a manner so as to generate large investible surpluses,” the then finance minister Manmohan Singh said in his Budget speech of July 24, 1991.

However, while the reforms undertaken in the immediate aftermath of the balance-of-payments crisis dismantled barriers to private investment and competition, the state’s own retreat from business proved much slower.

India’s privatisation journey has gone through multiple phases over the years. In the first phase, from 1991 to 1998, there were sales of minority shareholding. That was also evident in the government’s decision to use the politically milder term “disinvestment” rather than “privatisation”. But the government set up the Disinvestment Commission in 1996 under G V Ramakrishna, which turned out to be a pivotal move.

The second phase, from 1999 to 2004, proved to be the most decisive. The then newly installed National Democratic Alliance government of Prime Minister Atal Bihari Vajpayee even carved out a separate disinvestment ministry, which was headed by Arun Shourie. That momentum, however, waned during the regime of the United Progressive Alliance government.

In 2014, during Prime Minister Narendra Modi’s first visit to the US, he told investors that the government had no business being in business. He reiterated that seven years later. It would still take another year for the first big privatisation of the era, when Air India was sold to the Tata group.

Now, 35 years after the reforms, the state retains substantial commercial ownership. In fact, the number of operating CPSEs has risen to 291, according to the Public Enterprises Survey for FY25, from 236 in the early 1990s. In all, just 14 strategic privatisation transactions have been completed since 1991, with 10 in just the 1999-2004 period.

Initial steps

Efforts at privatisation were modest to begin with. In his 1991 speech, Singh said “up to 20 per cent of government equity in selected public sector undertakings would be offered to mutual funds and investment institutions in the public sector, as also to workers in these firms”.

The 20 per cent ceiling became the template.

The framework shifted in 1993, when the high-level committee headed by C Rangarajan recommended substantially deeper dilution, including up to 49 per cent in industries reserved for the public sector and over 74 per cent in other industries. It also suggested a complete government exit where continued public ownership was not required.

Even so, the first eight years after reforms produced no transfer of management control to private hands, though there were sales of small stakes in companies like Bharat Electronics and Andrew Yule & Co.

Between 1991 and 1999, the government raised around ₹16,809 crore by diluting an average of just 8.87 per cent of its shareholding across 39 Central Public Sector Enterprises (CPSEs). There was no transfer of management control to private entities, according to a National Institute of Public Finance and Policy (NIPFP) study on disinvestment between 1991 and 2020.

The Ramakrishna Commission’s recommendations, which came in 1997, gained momentum after 1999.

It was only in 2000 that India witnessed its first privatisation transaction with the sale of Modern Food Industries. The next four years saw the strongest wave of privatisation — there were 12 strategic sales, of which 10 involved outright privatisation. These were BALCO, Lagan Jute Machinery, Hindustan Zinc, India Power Corporation, Jessop, CMC, Hindustan Teleprinters, Videsh Sanchar Nigam and Paradeep Phosphates.

That period also saw a dedicated machinery for pushing the process. India had a Ministry of Disinvestment, which carried out the programme in line with the recommendations of the two Disinvestment Commissions set up in 1996 and 2001.

The momentum, however, did not last.

After the United Progressive Alliance (UPA) came to power in 2004, the Disinvestment Ministry was merged with the finance ministry, while the Disinvestment Commission became dormant. Privatisation waned and disinvestment increasingly took the form of minority stake sales, alongside some government-to-government and CPSE-to-CPSE transactions.

“There was strong political opposition to privatisation under the UPA government. Back then even strategic sale of loss-making entities became a hot potato for the government,” said retired bureaucrat Arvind Mehta, who served in the Department of Disinvestment in two separate stints.

“That’s when things went on the backburner and I don’t think they have come back ever since with full momentum,” he says.

The Narendra Modi-led NDA government revived disinvestment as a policy priority after coming to power in 2014. The government formally rebranded the Department of Disinvestment as the Department of Investment and Public Asset Management (DIPAM) in 2016.

The more explicit ownership framework came in 2021, when the New Public Sector Enterprise Policy sought to minimise the government’s presence across the economy. It divided public enterprises into strategic and non-strategic sectors, providing for only a bare minimum public-sector presence in strategic areas and considering the remaining enterprises for privatisation, merger, or closure. In non-strategic sectors, enterprises were to be considered for privatisation or closure.

But the transaction record has remained modest.

Since 2021, only four strategic-sale transactions have taken place — Air India in 2022, followed by Neelachal Ispat Nigam and Ferro Scrap Nigam in 2025, and Indian Medicines Pharmaceutical Corporation Ltd (IMPCL) in May this year. The privatisation process for IDBI Bank is ongoing.

However, even after the revival of strategic disinvestment, minority sales have dominated. Between FY15 and FY20, nearly 78 per cent of disinvestment proceeds came from minority stake sales, according to the NIPFP study.

The state that stayed

The distinction between disinvestment and privatisation is central to understanding why the public sector has retained a large presence.

Successive governments have frequently sold minority stakes in state-owned companies without transferring management control. Genuine privatisation — involving the transfer of ownership and control to a private buyer — has been far less frequent.

“Disinvestment has continued in a relatively consistent manner, but genuine privatisation, which entails the transfer of ownership and management control, has remained sporadic,” says Rajnish Gupta, EY India’s Tax and Economic Policy Partner.

Mehta says the thinking on public sector undertakings (PSUs) has also changed over time.

“Initially, after liberalisation, the thought was that PSUs were millstones around the neck so it was better to sell them off.” Later, the government realised that some had strategic value, while others gave good dividends.

Historically, there was a rationale for the government’s large presence in sectors such as railways, energy, banking and insurance, according to Ranen Banerjee, PwC India’s Partner and Leader, Economic Advisory.

In the initial decades after Independence, the private sector’s ability to mobilise finance and build large infrastructure was limited to a handful of players. Planned development, therefore, relied heavily on public-sector investment, leading to state dominance.

That began to change after 1991. But the scale of infrastructure and financing required to bridge India’s development gaps means the government is likely to retain a role in several of these sectors, Banerjee says.

The result has been an uneven transition. Private firms have become major players in sectors once dominated by state enterprises, but the government remains a significant owner in banking, insurance, railways, defence production, nuclear energy, and oil and gas.

The case for ownership is particularly strong where the government sees public enterprises as instruments of economic policy rather than merely commercial entities.

There are some strategic sectors, such as oil and gas, where privatisation is neither “desirable” nor “doable”, says RS Sharma, former chairman of Oil and Natural Gas Corporation. “Having management control over oil firms helps the government insulate the economy against external shock,” he adds.

The tension is particularly visible in fuel pricing. While petrol and diesel prices are technically deregulated, state-owned oil marketing companies (OMCs) have at times held retail prices despite sharp movements in global crude oil prices, cushioning consumers from the immediate impact of external shocks.

The issue came into sharp focus this year when crude prices crossed $100 a barrel after the war began in West Asia. State-owned OMCs initially did not fully pass on the increase in prices to consumers, with retail fuel prices holding steady during the first two months of the conflict. They subsequently raised prices by ₹7.50 a litre in four tranches in May.

That tension has also complicated the government’s attempts to privatise Bharat Petroleum Corporation Ltd (BPCL). The Centre terminated the strategic sale process after prospective bidders withdrew amid heightened crude oil-price volatility following the Russia-Ukraine war, which began in February 2022.

The BPCL experience highlights a fundamental question in sectors such as oil: Can an enterprise be treated purely as a commercial asset once the government no longer owns it, if the government may still expect it to serve as a buffer against external shocks?

Why exits have slowed

Strategic ownership, however, explains only part of the story. The pace of privatisation has also been shaped by the difficulty of executing large transactions.

The trajectory of different sectors has been influenced partly by the scale of investment required, Gupta of EY India says.

“If I were to distil why different sectors have followed different trajectories, I would say that sectors requiring large investments have witnessed much greater private sector participation.”

Proposed sales have also run into opposition from employee unions and resistance from state governments. Additionally, differences over valuations, litigation and the complexity of large transactions have delayed execution. Those concerns have surfaced in the IDBI Bank case.

Its employees’ forum has repeatedly opposed the transaction. It has also sought the help of leaders of Opposition parties, urging them to take the matter up in Parliament.

Valuation is among the most painstaking steps, with officials wary of the consequences of an adverse assessment years after a transaction is completed.

“Bureaucrats are often at the receiving end if the post-facto scrutiny shows even the slightest of discrepancy in valuation,” says a former official, requesting anonymity. Scrutiny of strategic sales extends well beyond the conclusion of a transaction.

For instance, in 2020, a trial court ordered criminal proceedings and other coercive action against former disinvestment secretary Pradip Baijal and former minister Arun Shourie over allegations of misconduct and undervaluation in the 2002 sale of a hotel in Udaipur for ₹7.52 crore. The Rajasthan High Court later quashed the trial court’s orders, holding that the requirement of prior government sanction for prosecution had not been met.

The episode nevertheless reinforced concerns among officials about decisions that could face scrutiny years after a transaction, the former official says.

The caution emanating from such transactions also affected other such deals. The government terminated the privatisation of Central Electronics in 2022 after deficiencies were detected in the mechanisms used to assess the transaction.

Where can the state exit?

That leads to another question: How should the state decide which ones to exit?

Mehta, the retired bureaucrat, argues that a one-size-fits-all approach does not work.

“There’s a need to take a long-term view of each company’s assets and balance sheets,” he says.

Latest data indicate a road-map. According to the Ministry of Heavy Industries’ compilation of the Public Enterprises Survey for FY25, around 226 operating CPSEs were profit-making and 63 were loss-making.

Mehta says the first candidates for privatisation could be listed enterprises that are not making profits.

“The government should consider exiting sectors where adequate private capacity already exists, like tourism, hotels, trading companies, pharmaceutical companies.”

Some profitable enterprises operate in precisely such sectors. India Tourism Development Corporation (ITDC), for instance, reported a profit of ₹82.94 crore in FY25. Trading company MSTC reported a profit of ₹402.98 crore, while pharmaceutical company HLL Lifecare reported a profit of ₹231.77 crore.

Clearer road map

Profitability alone does not make an enterprise a candidate for privatisation. But where does continued state ownership serve a policy purpose that cannot be achieved through regulation or strategic oversight?

The 1991 reforms expanded the scope for markets, competition and private investment. They did not, however, establish a clear boundary between the government’s role as regulator, strategic owner and commercial operator.

India has moved a long way from the era when the state controlled the commanding heights of the economy. Private companies now play a central role across sectors once dominated by public enterprises. But the state has not followed market liberalisation with a sustained withdrawal from commercial ownership.

The issue, therefore, is not simply whether the government should sell more stake.

The Sixteenth Finance Commission has provided a simple metric for the government to gauge which enterprises to divest.

“One rule of thumb worth considering is for the department concerned to mandatorily take to the Cabinet any enterprise incurring losses in three out of four consecutive years for consideration for closure, privatisation or continuation. The Cabinet may then decide, depending on the strategic importance of the enterprise.”

The Finance Commission’s recommendations are similar to the government’s own public sector policy. The Centre could revisit that framework to ensure that public resources are directed towards more pressing needs.