Privatisation of the public sector enterprises by selling off part of…

The correct answer is Option (1) → Disinvestment

A public sector enterprise (PSE) is owned by the government, which holds its shares, or equity. When the government sells a part of this equity to the public, private shareholders come in and the government’s own stake becomes smaller. This is called disinvestment: instead of putting money into the enterprise, the government takes money out of it, which is the opposite of investment. It is one of the ways of privatising a PSE.

Disinvestment is one route to privatisation, which means shedding the government’s ownership or management of an enterprise. A government company can become private in two ways:

• the government withdraws from its ownership and management, for example by selling part of its equity, as in disinvestment; or

• the enterprise is sold off in an outright sale.

Through disinvestment the government hoped to improve financial discipline, help modernisation, and bring private capital and managerial skill into the PSUs.

Why the other options are incorrect

• Option (2) Investment — Incorrect. Investment is an addition to the stock of capital, such as new machines or buildings; selling the government’s shares does the reverse, which is why the sale is called disinvestment.

• Option (3) Capital Formation — Incorrect. Capital formation is the creation of new capital goods in the economy; a sale of shares only changes who owns existing capital and creates nothing new.

• Option (4) Public Private Partnership — Incorrect. In a public private partnership the government and a private firm jointly build or run a project, such as a road or an airport; no part of a PSE’s equity is sold to the public.

Note: A same/similar question was asked in CUET (UG) in the papers below.

* A similar question.