The distance between announcing ambitious disinvestment goals and achieving them, are quite a handful, as the Modi government has now come to realise.
It had set several big disinvestment targets for 2021-22.
Finance Minister Nirmala Sitharaman, during her Budget speech in February 2021, said that several transactions namely BPCL, Air India, Shipping Corporation of India, the Container Corporation of India, IDBI Bank, BEML, Pawan Hans and Neelachal Ispat Nigam limited, among others, would be completed in 2021-22.
In addition, the 10 per cent sale of Life Insurance Corporation (LIC) has also been approved. Experts believe that it is increasingly likely that the government may not meet its divestment target of Rs. 1.75 trillion in FY2022, even if the LIC IPO is realised within this quarter, given the low collections of below Rs 100 billion so far.
Most acknowledge, however, that it is easier said than done. Thus far, the only transaction that has worked out is Air India going to the Tata Group.
Aditi Nayar, Chief Economist, ICRA, told Moneycontrol: “With a palpable buoyancy in tax collections, we expect the Government of India’s gross tax receipts to overshoot the budgeted amount by a healthy Rs. 2.5 trillion in FY2022. However, the net tax revenue gains to the government would be nullified by the expected large miss on receipts from disinvestment and back-ended spending.”
To be sure, the hurdles faced by the government are enormous – yet the high-pitch announcements could scarcely be avoided.
To begin with, the government budgeted for collections of Rs 1.75 lakh crore from selling stakes in these state-owned enterprises.
When the finance minister will unveil her fourth consecutive Budget on February 1, it will show a 95 percent shortfall in budgeted revenues from the sale of equity stakes in companies it owns.
So far, the government has collected just Rs 9,329 crore.
New PSE Policy
In its disinvestment policy, the government is guided by basic economic principles that it should discontinue in sectors where competitive markets have come of age and the economic potential of such entities may be better guaranteed in the hands of strategic investors.
A new Public Sector Enterprise (PSE) policy has been enacted to ensure that the government has no business to be in business.
In 2020-21, finance minister Sitharaman laid out a clear road map; the government would move out of PSEs that are non-strategic, opening the sectors to privatisation, and keep a minimal presence in strategic sectors, where not more than one PSE will operate. The rest were to be privatised, amalgamated, brought under a holding company or closed.
The delay in the sale of stakes in these PSUs will hardly help because their surplus revenue is being whisked away by the government. This will also erode their market value, leaving them with lesser resources for its expansion plans.
Pandemic and other disruptions
There can be little doubt that the pandemic has played a major part in delaying disinvestment objectives. The third wave of Covid-19 with its Omicron variant is the latest hurdle.
Add to it the overall global slowdown, which takes the task of attaining goals beyond the control of any government.
Experts feel that with rising uncertainty in the global markets due to the pandemic, divestment plans seem to have fallen short of their fiscal targets in the last two years.
The disinvestment process usually takes a long time with some entities even undergoing assessment procedures. Preparatory activities at the level of the PSU consume time as well.
Says ICRA’s Nayar: ``Besides, macro-economic uncertainty would linger on account of the potential emergence of new mutations and fresh waves of Covid-19, which may eventually necessitate additional spending by way of extension of free foodgrains scheme and higher spending on MGNREGA. Given this backdrop, the government’s ability to cement higher growth in direct taxes and garner disinvestment receipts would play a critical role in determining the extent of the fiscal consolidation that is feasible in FY2023.”
Given global limitations and domestic factors, it is also important that these companies get the right valuation and timing of the issue. When the market is down, there is a lot of uncertainty on whether the disinvestment should be made or not.
Given the political slant, which often determines the economy, selling at a lower price will not just be a loss of revenue but also a loss of face for the government.
Is there a lack of will?
There are also those who believe that as compared to the Vajpayee government, there is a lack of political will to disinvest, which is further accelerated by bureaucratic apathy. No bureaucrat wants to be questioned a decade after his superannuation in case there is an investigation on selling at a lower price.
Whenever there is a move to disinvest a PSU, there is a lot of reluctance from controlling ministries as their control on the public entity weakens.
Not that the Modi government is not backing disinvestment. The Economic Survey, 2020, has aggressively pitched for divestment in public sector undertakings by proposing a separate corporate entity wherein the government’s stake can be transferred and divested over a period of time.
Further, it went on to say that privatised entities have performed better than their peers in terms of net worth, profit, return on equity and sales, among others.
“The government can transfer its stake in listed CPSEs to a separate corporate entity. This entity would be managed by an independent board and would be mandated to divest the government stake in these CPSEs over a period of time,” stated the Economic Survey.
The disinvestment can be done wisely by merging two similar PSUs as in the case of banking. However, banking PSUs own a lot of non-strategic assets such as land and so on.
Disinvestment too is caught up in legal battles. Take the case of Air India. BJP leader Subramanian Swamy had petitioned the Delhi high court alleging that Air India’s disinvestment process was "arbitrary, unconstitutional, unfair, discriminatory, unreasonable" and, therefore, shouldn’t be allowed to go through. But the case was dismissed by the court.