Privatisation in India: Transforming Public Sector Units

Air India, once a symbol of government inefficiency and mounting losses, is now run by the Tata Group. BSNL continues to bleed money every quarter, while Maruti Suzuki, freed from full government control decades ago, dominates India’s car market. These contrasting stories capture what privatisation in India has been about: rethinking how much the government should actually run, and handing over the reins where private players can do it better.

From disinvestment to privatisation: getting the definitions right 🔗

These two terms get used interchangeably, but they mean different things. Disinvestment simply refers to the government selling a part of its shareholding in a public sector undertaking (PSU), whether that stake is 5% or 90%. Privatisation is a specific, more drastic form of this process. According to the Department of Investment and Public Asset Management (DIPAM), privatisation happens when the government’s equity in a central public sector enterprise (CPSE), along with its management control, is transferred entirely to a private strategic buyer.

So every privatisation is a form of disinvestment, but not every disinvestment is a privatisation. When the government sells a small stake through the stock market via an Initial Public Offering or Offer for Sale, it raises money and increases public shareholding, but retains management control. That is minority stake disinvestment, not privatisation. The distinction matters, especially in exams and case studies, because it shapes how much authority actually shifts to private hands.

Why public sector units needed private hands 🔗

India built a large network of public sector enterprises after independence, in sectors ranging from steel and coal to airlines and telecom. The intent was sound: build industrial capacity, generate employment, and keep strategic sectors under state control. Over decades, though, many of these units turned into liabilities rather than assets.

Three problems kept recurring. First, political interference in day-to-day operations, hiring, and pricing decisions often overrode commercial logic. Second, several PSUs suffered from underutilised capacity, outdated technology, and bloated workforces that private competitors simply did not carry. Third, decision-making inside PSUs moved at bureaucratic speed, while private rivals could adapt to markets almost overnight. The result, in many cases, was chronic losses funded by the taxpayer.

The Air India story 🔗

Air India is the textbook example. Attempts to privatise the airline date back to 2001, but each one collapsed under political and union resistance. Its 2007 merger with Indian Airlines only added to the problem, saddling the combined entity with duplicate costs and a growing pile of debt. As ISAS at the National University of Singapore notes, the government finally moved to divest its entire stake in October 2021, structuring the deal so a large part of the airline’s debt stayed with a separate government-owned entity while Tata Group took over operations. It marked the first major outright privatisation of a public sector company in nearly two decades.

The road since 1991 🔗

India’s economic reforms of 1991 opened the door to disinvestment, and successive governments have walked through it at different speeds. The early phase focused on selling small, bundled stakes to financial institutions mainly to raise revenue. Later, governments moved to strategic sales of individual companies, transferring management control outright.

Progress has never been linear. Several planned privatisations, including BPCL’s, were paused or shelved when market conditions turned unfavourable or political consensus broke down. This is exactly why the government eventually felt the need for a clearer, published rulebook.

The policy framework that guides privatisation today 🔗

The New Public Sector Enterprise Policy, approved in the Union Budget for 2021-22, gave India’s disinvestment programme its current shape. As announced in Parliament, the policy sorts CPSEs into strategic sectors, where the government keeps only a bare minimum presence, and non-strategic sectors, where enterprises are meant to be privatised, merged, or closed. In strategic sectors, remaining PSUs beyond a handful are earmarked for privatisation, merger with other CPSEs, or shutdown.

NITI Aayog plays a central role in identifying candidates for strategic disinvestment, using criteria that go beyond simple profitability. Government communication has clarified that a PSU’s financial performance is not itself a deciding factor; instead, the choice rests on considerations such as national security, whether the function is genuinely sovereign in nature, and whether market imperfections justify continued state presence. Once a CPSE is identified, the proposal moves through layers of internal government review, including an Inter-Ministerial Group and a Core Group of Secretaries on disinvestment, before a final decision is taken.

What privatisation is meant to achieve 🔗

The underlying economic logic is fairly straightforward. Where competitive private markets already function well, continued government ownership can crowd out efficiency rather than protect public interest. Handing operations to a strategic investor is expected to bring capital infusion, technology upgradation, and more efficient management practices that a PSU, constrained by bureaucratic processes, often cannot access on its own.

There is some evidence this logic plays out in practice. Government reporting shows that since the New PSE Policy took effect in January 2021, listed CPSEs have seen their stock indices outperform broader market benchmarks, a sign that investors expect better governance and capital discipline from these enterprises going forward. Beyond company-level gains, disinvestment proceeds also give the government fiscal room to fund social and developmental spending without raising taxes or borrowing further.

The other side of the argument 🔗

Privatisation has never been free of controversy, and the concerns are worth taking seriously.

• Job security: Employees fear layoffs, wage cuts, or the loss of pension benefits once a private buyer takes over.
• Undervaluation: Critics argue that PSUs are sometimes sold below their real worth, especially when unfavourable market timing forces a lower price.
• Loss of public control: In sectors like defence, telecom, or banking, some argue the state should retain a strategic foothold regardless of efficiency arguments.
• Political resistance: Trade unions and opposition parties routinely challenge disinvestment decisions, which slows down execution even after Cabinet approval.

These tensions explain why several proposed privatisations, even ones with Cabinet clearance, have taken years to close or been shelved entirely. The government’s own framework acknowledges this by exempting PSUs with developmental or welfare roles, such as those serving vulnerable groups, from the privatisation track altogether.

Where this leaves India’s public sector 🔗

India’s approach today is neither wholesale privatisation nor a return to state-led industrialisation. It is a calibrated middle path: keep a minimal government footprint in a handful of genuinely strategic sectors, and open up everything else to competition and private capital. Whether this balance holds, especially as bigger-ticket sales like public sector banks and insurers come up for discussion, will shape how India’s public sector looks a decade from now.

What do you think? Should sectors like banking and insurance eventually see the same scale of privatisation as airlines and metals did, or do they need a different approach altogether? And when a PSU keeps making losses for years, at what point does keeping it under government control stop being a public service and start being a public cost?

References

1. https://dipam.gov.in/disinvestment-policy
2. https://www.isas.nus.edu.sg/?p=13977
3. https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=1693899
4. https://pib.gov.in/Pressreleaseshare.aspx?PRID=1594731
5. https://dipam.gov.in/dipam-faq
6. https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=1990757