Is Indian Government’s Divestment Plan Losing Sheen?

Prime Minister Narendra Modi’s statement that “Government has no business to be in business” not only made divestment a buzz word, but also led to the formulation of New PSE (Public Sector Enterprise) Policy in 2021. Once the policy was unveiled, an ambitious pipeline with big names was drawn up—from Air India and BPCL, to Concor and IDBI bank. While Air India was successfully privatised, others like BPCL and Concor failed to find the required private bidder. But as per experts and economists, the divestment and privatisation plan of the government has lost its sense of seriousness.   

“I think there is no urgency for the government now to go for ambitious disinvestment to fill the revenue gap. I can’t say whether it’s a change in ideology or maybe a comfort the government is drawing up from good tax buoyancy, good GST collection owing to digitisation and financial inclusion,” says Yuvika Singhal, economist at Quant Eco Research. Direct taxes, after hitting a negative growth territory during the pandemic, bounced back with 49 per cent growth in FY22 and 18 per cent in FY23. Similarly, post Covid-19, GST collection growth has been phenomenal too. GST registered a growth of 49 per cent in FY22 and 18 per cent in FY23.

“Better tax collections in both direct and indirect segment may have diverted the government’s attention. That could be one of the reasons that divestment is not a theme attracting immediate attention of the government” Suman Chowdhury, chief economist and head of research, Acuite Ratings & Research, tells Outlook Business. 
 
In the Union Budget 2023-2024, the government set a disinvestment target of Rs 51,000 crore for the year. But, as on June 16, the value of disinvestment receipts stood at Rs 4234.94 crore, according to the website of Department of Investment and Public Asset Management. This is just 8.3 per cent of the government’s target.

With 9 months remaining in the fiscal, Madan Sabnavis, chief economist at Bank of Baroda, believes that achieving the target of Rs 51,000 crore seems difficult as some low hanging fruits like Air India, LIC have already been plucked. “The process going forward will turn out to be difficult, as low hanging fruits have already been plucked. [...]Selling stake lesser than 51 per cent also comes up with many complications that also discourage potential buyers," he adds. With only months to go for the 2024 general elections, it is also possible that there might be political reasons behind the slow progress of the Centre’s divestment plans.  

Political Pause Amid Valuation Woes 

A push for divestment can likely stir up a hornet’s nest when it comes to those whose lives are dependent on the entities waiting in the privatisation pipeline. “Ideas of privatisation and disinvestment may not go down well with the trade unions and employees which in turn may have a possible impact on electoral outcome for the party, no one wants to irk the voters just ahead of elections,” says one economist, claiming anonymity. 

“Firstly, the subject of disinvestment is a politically sensitive matter; it has its political dimension to it. There is averseness from trade unions as in the case of banks. I don’t know, maybe it’s a conscious decision of the government to go slow on this. I don’t think there would be a big-ticket disinvestment this year,” adds Chowdhury.  

Reportedly, the government has now put BPCL privatisation on hold until the general election takes place in 2024, and the global turmoil in oil market ends. “Firstly, the BPCL privatisation did not materialise as oil sector was going through trauma, which is true even now. OMCs have been making losses. If the current volatility made BPCL privatisation difficult, I must say oil market will always stay volatile and erratic,” Sabnavis says.

The government wanted to sell its entire stake of 52.98 per cent in BPCL which was expected to fetch Rs 45,000 crore in government coffers, but the plan did not find success because of tepid response from investors.

Another dampener is finding the right valuation of PSUs. “Right valuation is something the government is not able to discover and that is also one of the reasons for the tepid response from the investors,” Chowdhury says. He also raises the point of less or negligible returns to the shareholders, which makes PSU’s privatisation not very alluring and attractive for the investors.  The market listing of LIC (Life Insurance Corporation of India) is a classic example of flawed valuation. “Last year, LIC was advantageous for the government but that was also not a big success as it is still trading at discount. If it would have been trading at premium the government could have thought of divesting another 4-5 per cent of its stake but that did not happen,” Sabnavis points out. 

In May 2022, the government raised Rs 20,516 crore by selling its 3.5 per cent stake in LIC. According to experts, the LIC stake sale was not that successful. After one year of listing on the bourses, LIC shares are trading at a discount of 35 per cent. LIC stocks are trading at Rs 617 apiece against its issue price of Rs 949.  

In addition, as per the experts, procedural friction emanating from two departments is also a reason for putting some disinvestment plans off the table. Container Corporation (Concor) of India’s disinvestment is caught up between inter-ministerial obstacles. Earlier, the Concor’s stake sale was stalled due to a delay on the part of the rail-roads in bringing out a new land licensing policy. 

Last September, the union cabinet had given its nod to the new land-licensing policy, which entailed cutting down the land-licensing fee by 75 per cent to 1.5 per cent of the land value for cargo-related businesses. The privatisation of Concor was expected to bring Rs 12,000 crore into the government coffers.  

Disinvesting Public Banks 

Similarly, the IDBI Bank divestment, the government’s first privatisation plan in banking space, will be a trial for the Centre, opines Sabnavis. “This would be an experiment and will also show […] how the market is going to take this up. I think after the successful privatisation of IDBI bank, then only the government would go for the privatisation of two PSBs and one insurance company,” he further adds.  

According to experts, the poor performance of public banks was one of the major reasons that made the government moot the idea of bank privatisation. However, in the last few years, the banking sector has been doing well, having garnered good profits, “Ideally, this is a right time to go for the privatisation of the banks, as they are profitable and doing good” Sabnavis says.  

“But then these PSBs are doing a major service for the government be it in taking forward the idea of financial inclusion like Jan Dhan Yojana etc, so the government has huge reliance on these PSBs. Secondly, resistance from bank unions and employees is also making non-conducive environment for banks’ privatisation,” one expert opines, claiming anonymity.   

One thing that is clear is that the privatisation of IDBI bank is going to serve as a template for further bank privatisations. The government and the LIC are together selling about 61 per cent stake in IDBI Bank and had in January received multiple Expressions of Interest (EoIs) for the same. The government and LIC together hold a 94.72 per cent stake in IDBI Bank, which will come down to 34 per cent after the proposed strategic sale.  

Having failed to achieve the divestment target year after year, Modi government has so far earned Rs 4 lakh crore as divestment proceeds since 2014. However, as per experts, this year is going to be a no different—yet another year of missing the target.