Disinvestment overdrive

Cabinet approves strategic disinvestment in five PSUs


November 23, 2019

/ By / New Delhi

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Cabinet has announced sale of five PSUs including BPCL and SCI

The Modi government is on a mission mode to disinvest its stakes in profitable state-run enterprises in strategic sector. Will it just bridge the fiscal gap? Or will it also revive Indian economy is the 850 billion dollar question? 

Union finance minister Nirmala Sitharaman announced sale of five public sector units (PSUs), including majority stakes in blue chip oil company Bharat Petroleum Corp Ltd (BPCL) and Shipping Corporation of India (SCI). Also on sale will be a 31 pc stake in Container Corporation of India (Concor) and government’s entire stake in Tehri Hydro Development Corp of India and North Eastern Electric Power Corporation (NEEPCO) to NTPC Limited.

These decisions were taken at the cabinet committee on economic affairs (CCEA), which met under the chairmanship of Prime Minister Narendra Modi recently.

Why disinvest?

The crucial decision comes in wake of several factors affecting the Indian economy. First is the slowing of the Indian economy. Second is the poor tax collection. Third is the challenge of meeting fiscal deficit target 3.3 pc of the Gross Domestic Product (GDP) for the current financial year.

Several Indian and foreign institutions estimate that Indian economy growth is slowing. According to official data India’s economic growth dropped to a seven-year low of five percent in the April-June quarter of 2019-20 due to a sharp deceleration in the manufacturing sector and sluggish agriculture output.

Exports continue to fall, while the retail inflation has begun to rise. While new jobs are not growing those gainfully employed are either becoming under employed or losing their jobs.

As a result both direct and indirect taxes are growing at a slow pace — much less than what the Budget had projected, making the government’s target for fiscal deficit in the current year unachievable.

Faced with a massive shortfall in revenue and capital receipts — as of September 30, net tax revenue had only reached 36.8 pc of the budget estimate of INR 16,500 billion for the full year, while non-debt capital receipts were at 17.2 pc of the fiscal’s target of about INR 1,200 billion.

Disinvestment targets

So sales are critical for the government to meet its disinvestment target of INR 1,050 billion set for the current fiscal year. So far, during the current financial year 2019-20 INR 173.64 billion has been obtained through disinvestment transactions.

Going by the Bombay Stock Exchange, the government’s 53.29 pc stake in BPCL is worth about INR 630 billion while its 30.8 pc stake in Concor is worth about INR 108 billion. Sale of SCI stakes will fetch over INR 20 billion.

In pursuance of its plan, the government has also given in-principle approval for strategic disinvestment of 23 Central Public Sector Enterprises. The list includes state run national carrier Air India.

Challenges ahead

Garnering INR 850 billion through disinvestment seems to be an uphill task as it has to be achieved within the four months before the current financial year comes to an end.

Secondly, a day after the announcement shares of Bharat Petroleum Corp Ltd (BPCL) and Shipping Corp of India (SCI) tumbled on Thursday after the Cabinet approved sale of government’s stake in these companies. Now it has to be seen what will be final valuations of the state-run enterprise and how much it will fetch the government.

Global interest

There is a growing interest in the Indian energy space from global players. The world’s largest oil producer, Saudi Arabian Oil Co is considering entering the fuel retailing market in India. In fact global oil watchers estimate Aramco could raise as much as USD 20-40 billion. This could further fuel their investments in the Indian oil and gas sector. Global energy majors- Rosneft, Kuwait Petroleum, ExxonMobil, Shell and Abu Dhabi National Oil Co are planning to acquire the government’s stake in BPCL.

Not first time

This is not the first time India is getting into the disinvestment mode. During the first NDA government led by Prime Minister Atal Bihari Vajpayee, India undertook real strategic disinvestment in 2003-04. It had created a ministerial position, with Arun Shourie as the minister. It constituted a Cabinet Committee on Disinvestment. Between 1999-2000 and 2003-04, the department privatised several state run enterprises.

Unlike the state-run and debt laden Air India which failed to attract global investors, a few months disinvestment of BPCL, SCI, and CCI should be easy to privatise, because they are profitable. But it will be interesting to see how the decision is implemented. Also it is to be seen whether the Modi government will sequester the proceeds from the disinvestment into the professionally managed National Investment and Infrastructure Fund-sovereign wealth vehicle.

Or will the Modi government use the proceeds to meet tax shortfall and bridge the fiscal gap? Most probably, yes. This is because any delay in disinvestment of Bharat Petroleum Corporation’s (BPCL) stake by the government will impact India’s fiscal deficit and risk its slippage beyond 3.5 pc.

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