Budget 2024: Can welfarism revive India’s disinvestment agenda?

Union finance minister Nirmala Sitharaman

In a break from tradition, in the interim budget for FY25 unveiled on February 1, the government deliberately avoided fixing a specific disinvestment target for the ongoing fiscal year.

Instead, it estimated it will get Rs 50,000 crore in 2024-25 in the form of 'miscellaneous capital receipts', without mentioning the word disinvestment. However, the 2023-24 budget—under the same 'miscellaneous capital receipts' head totalling Rs 61,000 crore—had pegged the disinvestment target for that fiscal at Rs 51,000 crore.

Finance secretary TV Somanathan back then said that the government avoided keeping a specific target in the interim budget for FY25 in a bid to de-emphasise disinvestment as a source of fiscal resources.

This reflected a change in thinking wherein decisions on disinvestments will not to be determined by short-term fiscal priorities but will be taken based on maximising the value of investments.

But could the strategy of augmenting revenues via disinvestments make a comeback in the full budget given widespread expectations that a weaker mandate for the ruling Bharatiya Janata Party could tempt the government to roll out more welfare measures?

According to ICRA's chief economist Aditi Nayar, disinvestment may not pick up steam immediately. The Centre is unlikely to include a significantly higher target for the same in the full budget scheduled to be presented on July 23, she added.

"If a couple of new big-ticket social sector schemes are announced this year or next year and that creates a lot of ongoing revenue pressures, then perhaps disinvestment may be thought of at a later point of time," she said.

On the other hand, D. K. Srivastava, chief policy advisor, EY India, sees some additional amounts provided under disinvestment for FY25 given that the government may need additional resources to roll out steps to address two key issues: rural distress and weak private consumption.

Nayar and Srivastava were speaking at an economists' roundtable for Moneycontrol on July 18.

To be sure, the Centre does have enough headroom this time around given a bumper dividend from the central bank of Rs 2.11 lakh crore. This came after the interim budget and, therefore, gives Finance Minister Nirmala Sitharaman more elbow room to spend without upsetting fiscal prudence.

However, Nayar believes that setting a steep disinvestment target upfront in the budget could be tricky given the history of consistent misses.

Not only has the government not met divestment targets for five straight years starting 2019-20, proceeds from this avenue has been thinner over these years.

Disinvestment proceeds fell to a mere Rs 16,507.29 crore in FY24 from Rs 50,299.83 crores in 2019-20. The lowest amount collected by the government in these five years was in FY22, at Rs 13,534.41 crore.

"Putting in a year's disinvestment number upfront, towards which we don't see progress in the first few months of the fiscal year, typically leads to doubts among market participants about the fiscal deficit target being met. It is usually better in mind to put a more conservative disinvestment number upfront," Nayar added.

India has pegged its fiscal deficit target at 5.1 percent of GDP for FY25. While some experts see the government sticking to this number in the full budget given spending compulsions, others see room to lower it by at least 10 basis points..

CareEdge Ratings in a recent note estimated that there is a total divestment potential of Rs 11.5 lakh crore (assuming the government retains a 51 percent stake). However, a decision to divest will depend on market conditions and the strategic nature of the firms.

"The government has relied on the OFS (offer for sale) route for undertaking divestments in recent years. Issues like procedural delays, litigations by labour unions/interest groups, and pricing issues continue to slow divestments," CareEdge said, adding that in case divestment lags due to headwinds, the government may continue to focus on asset monetisation.

Weighing in on this, Vinayak Chatterjee, founder and managing trustee, The Infravision Foundation, said that the government needs to rethink its approach on disinvestment.

"Year after year the government has failed on meeting disinvestment, privatisation and monetisation targets. The government has to do serious rethinking on how they manage the process. History has shown that mere announcements in the budget on disinvestment, privatisation and monetisation has not given results year after year," Chatterjee said.

Unlike the last few years, speculation is rife that the government may roll out a string of measures to placate the middle class and the poor. This given the fact that while India's GDP growth is seen at a world-beating 8.2 percent in FY24, private consumption at around 4 percent is expected at a 20-year low outside the pandemic year, and farm sector gross value added (GVA) is seen at at a muted 1.4 percent, against 4.7 percent in 2022-23.

From tinkering with income tax rates to ease the burden on the salaried class to higher wages under the rural job plan, Budget 2024 is expected to deliver more, thereby warranting an increase in revenue expenditure.

In fact, EY's Srivastava believes that this time around the pressure to expand revenue expenditure to ensure higher allocations for social schemes is more than on ensuring faster fiscal consolidation.

Higher spending pressures usually lead to the authorities depending on more sources of revenue, including on the non-tax side via divestment proceeds. Not too long ago, in 2017-18, the Centre had garnered a whopping Rs 1 lakh crore through this route.

But, given the many hurdles in its divestment journey since then, it is yet to be seen if welfarism prompts the Centre to bring back divestment on the table.