What the Inevitable Scaling Down of Disinvestment Targets Says About India's Political Economy

In the 2014 election, one reason for the blaze of support then Prime Ministerial candidate Narendra Modi received was his seemingly progressive views on economic development and his ebullient attitude towards reform. The government, which came to power in mid-2014 with a sweeping mandate had big ambitions around the disinvestment process and repeatedly emphasised that the government has no business to be in business.

In the present day, reality has panned out quite differently. The Bharatiya Janata Party government now has the awkward distinction of missing its divestment targets three years in a row.

For FY 2020-21, the Union finance minister set out a divestment target of Rs 1.20 lakh crore. This was, of course, after missing the previous year’s target of Rs 1.05 lakh crore by a huge margin. When the next Union Budget rolled around in FY22, she hoisted the figure to Rs 1.75 lakh crore. As of January, this year, the government has managed to mop up around 5% of this target, or Rs 9,329.90 crore, data from the Department of Investment and Public Asset Management (DIPAM) website shows. These proceeds do not include the privatisation of Air India and Central Electronics.

This year, the FM decided to do things differently – to the surprise of many economy watchers Sitharaman declared in her speech that divestment targets were being set at a modest Rs 65,000 crore in the financial year 2022-23. She also lowered the divestment target for the previous year FY 21-22 to Rs 78,000 crore from Rs 1.75 lakh crore. In real fact, that figure is even lower. While the revised target has been lowered to Rs 78,000 crore (more than a 55 % reduction) targets via divestment for this year stand at a measly Rs 65,000 crore, according to Union Budget documents. 

Shortly after the Budget speech was tabled, global brokerage house DBS Group wrote that the modest disinvestment projections were the “biggest element of surprise in the (fiscal) math.” 

For India to find itself in a state of consecutive misses on the divestment target, followed by a complete scale-down is problematic at many levels.

Borrow from Peter to pay Paul

Imagine I promise to pay you Rs 10 by the end of this week. As the week draws to a close, I pay you only Rs 3 as I claim I don’t have any more money. This leaves me with two options to repay you. Either I borrow from another or I spend less on something and save that money to pay you instead. This seems to be precisely where the finance ministry and government have landed themselves. 

Kotak Securities expressed concern that a large fiscal deficit and continued heavy reliance on the bond market to finance government borrowings would create upward pressure on bond yield.  These concerns were echoed by Fitch Ratings in its note on Wednesday; “From a ratings perspective, we see India as having limited fiscal space as it has the highest general government debt ratio of any ‘BBB’-rated emerging market sovereign at just under 90% of GDP.” 

In other words, continued borrowing is hurting both the market and straining the government’s finances. Which would make divestment an important and essential tool to bring in some of that much needed capital. Instead, we have a severely marked down target for FY23. Why? 

Last year the finance minister Sitharaman had announced an elaborate roadmap for disinvestment in the coming fiscal year. “In spite of Covid-19, we have kept working towards strategic disinvestment. A number of transactions namely BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam limited among others would be completed in 2021-22,” she said in her budget speech. 

Aside from Air India, all the other names have been pushed into the ‘next year’ list. The Revenue Secretary said post Budget that strategic sales of BPCL, SCI, CCI and IDBI will be done to help meet the FY’23 disinvestment aim of Rs 65,000 crores – but market watchers seem neither convinced nor appeased .  

Another question begs asking at this point. It’s been a dream run until now for the stock market. The Sensex and Nifty have seen one of their sharpest and strongest rallies – both are up close to 60% over a 3 year period. God knows it’s been a booming market for IPOs where anything and everything got subscribed at incredulous prices. Why then was the finance ministry unable to push through even a sliver of these transactions in the capital market?

Let’s move to option two. Spending less on other items in order to make up for the Rs 7 I owe you. Along with a scale down in divestment targets, there’s been a marked slide in spending in social welfare schemes. 

As analysis of the Budget math shows, allocations for mid-day meals are 11% lower than the budget estimates for the previous year. Pradhan Mantri Garib Kalyan Yojana (PMGKAY) saw a 28% decrease over the revised estimates of the previous year in this budget, the National Health Mission not only spent less this year (2021-22) as per revised estimates but also saw allocations remain just 1% more than the budget estimates announced last year.

This cannot play in loop. Beyond a point, the Union government will have to put a halt on cuts in social welfare schemes as there will be a political cost associated with it. 

Also read: Disinvestment: Won’t Have to Comply With Reservation Quotas, Centre Tells Potential Investors

There were other options considered just a few months ago but those seems to have turned into a smoke and mirrors game as well. With an ambitious target of Rs 6 lakh crore over next four years, there was little mention of the National Monetisation Pipeline or NMP in this budget.

Ahead of the Budget, Crisil Research had this to say about the ambitious NMP: 

“National monetisation plan announced earlier in the year  is yet to actively take off with the target outlined for FY22 likely to slip, the focus should be on meeting the targets set out over the duration of the plan viz. till fiscal 2025. With assets already identified under the NMP, the government and the bureaucracy should focus on meeting the divestment agenda set out in the NMP rather adding more assets. Rather prioritisation of projects to achieve targets should be the prime focus.”

Which brings us to the other side of this question – why has the government lost interest and momentum in pushing through divestment?

From boon to bane 

“Rajiv Gandhi created 16 PSUs, no privatisation, Vajpayee created 17 PSUs, Manmohan Singh created 23 PSUS, only 3 privatisation, PM Modi did not create a single PSU and he privatised 23 PSUs” – these were words spoken by the Congress’s Ripun Bora in Rajya Sabha a few days ago. While there are sharp arguments in favour of disinvestment and divestment, Bora may have touched a raw nerve and the answer to this diluted divestment agenda we’re now contending with. Is the Prime Minister and government chary of coming across as the government that ‘sold the family silver’?

Divestment is not an idea the RSS, the government’s most crucial ally is fond of. Post the Budget, RSS-affiliated Swadeshi Jagran Manch (SJM) said the Union Budget 2022-23 was “growth-oriented” but lacks a push for employment.

Last year the SJM said the announcement of disinvestment of BPCL, Air India, Shipping Corporation of India, Container Corporation of India , Pawan Hans, Bharat Earth Movers Limited (BEML), manufacturer of rolling stock for Metro and raising the FDI limit in the insurance sector from 49% to 74% is “worrisome” and even went on to state that “The government should reconsider this decision. The announcement of privatisation of public sector banks and an insurance company is also worrying,”. 

Following these comments, in October 2021,  the Bhartiya Mazdoor Sangh ( an RSS-affiliate trade union) decided to hold a nationwide demonstration demanding the government to put on hold its strategic disinvestment and asset monetisation plans for the public sector enterprises.

Clearly, there is disgruntlement across the ranks in the RSS about driving a strong divestment agenda. When there is such covert criticism from the Sangh, can the government pick up from where it left off and amp up its divestment efforts ? Unlikely. 

Other unforeseen trip -ups are already underway. The government had in 2014 fiscal planned to raise at least Rs 15,000 crore through the residual stake it held in HZL and Balco. Vedanta Ltd (earlier called Sesa Sterlite Ltd) had acquired the majority shareholding of the two companies in the previous NDA regime in 2003. While the Union cabinet  approved a stake sale in Hindustan Zinc in 2014, the employee union had approached the Supreme Court. They alleged that Sterlite had picked up a majority stake in the PSU at an undervalued price, resulting in estimated losses running into hundreds of crores to the exchequer. The CBI seems to have found evidence to support that allegation and the Centre finds itself in another divestment flavoured pickle. 

Where from here?

In January this year, Air India was sold to its winning bidder, the Tata group. However, of the Rs 18,000 crore to be paid, only Rs 2,700 crore is to be paid to the government, while the group will retain the balance, Rs 15,300 crore, in the form of debt. So one may ask what this does for the Government’s lofty divestment targets for FY22 ?Even as that deal was being signed off, the government has now acquired Vodafone Idea, the third biggest cellular network in India. Another matter that this telecom player is reeling under Rs. 1.95 lakh crore debt burden, including Rs. 16000 crores interest payable to government of India. So, Vodafone offered to allot 35 per cent equity share to government in lieu of the interest burden.  Who came out the winner here and how much did the government actually garner ?

The elephant, quite literally, in the divestment room remains LIC. Struggling to meet her government’s disinvestment target, in a surprise move, the FM had announced in the 2021 Budget that LIC would be listed on the stock exchanges. The expectation was that selling part stake in this insurance behemoth would raise enough funds to meet the equally tall divestment target of Rs 2.1 lakh crore for the Modi government. Of that figure, a partial stake sale in LIC was expected to raise as much as Rs 70,000 crore. 

Last year, the DIPAM Secretary, Tuhin Kanta Pandey, spoke with assurance on LIC and the fact that it would be disinvested within the financial year 2021-22. 10 merchant bankers later (including marquee names like Goldman Sachs (India) Securities Pvt Ltd, Citigroup Global Markets India Pvt Ltd, Nomura Financial Advisory and Securities (India) Pvt Ltd and Kotak Mahindra Capital Co Ltd., to name a few) we are still waiting for the IPO filing to take place. There’s an added curveball. This is not the market of 2020 or 2021 that saw gold in everything it touched. There is also the question of who steps in to buy this primary market colossus. The government is reportedly still in the process of deciding the quantum of its stake that will be divested through the IPO. It needs to take a decision on allowing foreign investors to pick up stake since as of now, the LIC Act has no provision for foreign investments. As the joke goes, ‘But who will bail LIC out ?’

Here is where the government finds itself then. Borrowing is bubbling at limit, spending cuts cannot go on limitlessly, its key ally is frowning upon too much divestment (not to be confused with too much democracy) and an extremely rosy equity market scenario is now much bumpier making any large sized IPO or sale that much trickier. 

Where does the government now turn? After receiving a lukewarm response for six properties of BSNL and MTNL  it had put up for sale, the government will go for re-bidding of non-core assets of telecom public sector units Bharat Sanchar Nigam Limited and Mahanagar Telecom Nigam. Similarly, it seems The Ashok, one of Delhi’s most notable hotels, owned by the ITDC (Indian Tourism Development Corporation) will also be put on the block. 

Reports of land sales seem to reduce the disinvestment process to conducting rag-tag auctions to shore up at least some money towards its targets. Are we trading divestment in for a garage sale?