Going by Modi’s track record, the massive $15 billion divestment target is achievable

Great expectations.
Great expectations.
Image: REUTERS/Adnan Abidi
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The Indian government hopes to earn a whopping Rs1.05 lakh crore ($15 billion) from the disinvestment of state-owned firms in 2019-20. And, if the Narendra Modi government’s recent track record is anything to go by, that might be possible.

In her maiden budget speech on July 5, finance minister Nirmala Sitharaman raised India’s divestment target for financial year 2020 by 17% from the interim budget’s estimate of Rs90,000 crore. It’s also 5% more than the Rs80,000 crore raised in the previous financial year.

“Strategic disinvestment of select CPSEs (central public sector enterprises) would continue to remain a priority of this government,” Sitharaman said in her budget speech.

One state-owned company that was specifically mentioned was the debt-laden carrier Air India. “In view of current macroeconomic parameters, (the) government would not only reinitiate the process of strategic disinvestment of Air India, but would offer more CPSEs for strategic participation by the private sector.”

Last year, the government had missed its divestment targets partly because its stake sale in Air India elicited no bidders.

Yet, experts believe this year’s enhanced target is within reach.

“In (the) last two years, the government’s tax collection has not been up to the mark, but despite that, they have been able to meet the disinvestment receipts. According to comptroller and auditor general of India (CAG), in FY18, the centre had collected Rs1.45 crore through sources other than the direct tax,” Devendra Pant, chief economist at Mumbai-based credit agency, India Ratings and Research told Quartz.

How it happened

During its tenure between May 2009 and May 2014, the second united progressive alliance (UPA-II) managed to fulfil only an average of 52.4% of the total disinvestment target. But national democratic alliance (NDA), in its first-term, achieved 80.5% of its goal.

The reason for the better performance was the Narendra Modi government’s lesser dependence on initial public offers (IPO), which are heavily influenced by market conditions.

Nearly 37% of the disinvestment target last year came from CPSE-to-CPSE sales, a study by Mumbai-based capital market information firm Prime Database showed.

For instance, in January 2018, the Oil and Natural Gas Corporation (ONGC) bought out the central government’s entire 51% in Hindustan Petroleum Corporation (HPCL) for Rs36,915 crore.

Other schemes that work in the centre’s favour are buybacks by PSUs(a process of repurchasing shares by the company that issued them), and Exchange Traded Funds (ETFs) issues, which garnered 53% of the targeted disinvestment in 2018. (An ETF is a basket of securities that trade on an exchange, just like a stock.)

A difficult road

Still, these are not foolproof methods as state-owned companies are not investor favourites.

“The challenges to disinvestment include the weak appetite to buy CPSE stocks, regular government interference in the functioning of the CPSEs, and their valuation,” a report in online news portal The Print said quoting a research paper by policy thinktank Pahle India Foundation (PIF).

In June 2019, the government had given an “in-principle” nod to strategic disinvestment of its majority stake in 28 CPSEs, The finance ministry is now working on speedier conclusion of the sales of these companies. The list included firms like Air India, Hindustan Newsprint, Scooters India, and Hindustan Fluorocarbons.

The government’s plans to hold on to a minority share of disinvested firms is also a hinderance. In the last Air India auction, the government had decided to retain a 24% in the carrier, which analysts say was one of the reasons for not generating any buyer interest.

Aiming for big-ticket strategic sale, the finance minister in her budget speech said the government will modify its policy of retaining a 51% direct stake in public sector undertakings (PSUs), provided the government entities still own a controlling stake in the said firm.