Modi’s $7 billion disinvestment programme has finally begun. Will it deliver?

Will the markets be kind?
Will the markets be kind?
Image: Reuters/Arko Datta
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The Narendra Modi government has just begun its disinvestment campaign with ambitions of raising up to Rs43,425 crore ($7 billion) by selling stakes in public sector companies. Steelmaker SAIL is the first off the block with a 5% stake, which could raise about Rs1,700 crore ($275 million).

But is it too late?

Coming six months after winning an election where Modi and the Bharatiya Janata Party promised to rein in fiscal deficit, this share sale should have begun earlier.

The dilly-dallying by the government has raised suspicion in the market about the seriousness of its resolve—and stocks of public sector undertakings (PSUs) have lost over Rs4,700 crore in value ($760 million) since the disinvestment decision was announced.

“These are low hanging fruits,” Jagannadham Thunuguntla, chief strategist, SMC Global, had said in October. “These are quality assets and there would be takers for these issues. It would be better if the government kickstarts their disinvestment right away.”

With the delay, there are fears that the government could fall short of its disinvestment target, though softer crude prices may help it inch closer to the 4.1% fiscal deficit target.

The SAIL offer was initially slated to hit the market in October, as part of two share sales each month till March 2015 with the aim to raise a total of Rs58,425 crore ($9.44 billion). With the disinvestment process beginning on Dec. 05, the stake sales worth Rs15,000 crore ($2.42 billion) in Hindustan Zinc and Balco looks unlikely in the current fiscal.

Therefore, Rs43,425 crore ($7 billion) is what the finance ministry is aiming at, which means Arun Jaitley still has to raise another Rs41,725 crore ($6.74 billion) in less than four months.

“After a lot of false starts,” an HDFC Securities report said today, “the government’s disinvestment plan is finally under way. While it may not raise much funds, a symbolic start has been made. Finally, this would remove the Damocles sword hanging over SAIL by end of today.”

There are mixed views on whether the government will be able to meet its targets.

After the SAIL offering, Jaitley has firmed up plans to put 5%, 10% and 11.36% stakes up for sale in ONGC, Coal India and NHPC, respectively before the end of the fiscal.

An analyst from the India office of Australian research firm Macquarie told Quartz that the government has already done roadshows for ONGC, Coal India and SAIL, and a committee to obtain a fair value for the government’s stake in Hindustan Zinc and Balco has been set up.

“With these, raising this capital is very much possible barring some procedural delays that might push the share sale to April or later,” the Macquarie analyst said.

Although the share sale in Coal India alone can bring in nearly Rs19,000 crore ($3.07 billion), the resistance from the mining company’s labour unions has cast a cloud over the efforts. With ONGC slated to offload shares worth Rs17,500 crore ($2.82 billion) , the government can theoretically achieve nearly 88% of its targets by January.

“This is more like a fire sale than a share sale,” an analyst from a Singapore-based research firm said, “The disinvestments to bridge the fiscal gap that is targeted at 4.1% for the current fiscal and it has already touched nearly 90% (of its full year target) by the end of October.”

The precedence for share sales also doesn’t offer any promise of meeting the targets as the earlier government missed its disinvestment targets in the previous four years consecutively.