Will Modi Government’s Divestment Plan Turn A Whimper?

The Modi-led government is banking among other things on its ambitious disinvestment programme to pare fiscal deficit—the amount of money it borrows to fund its expenses—from 4.5 % of gross domestic product in 2013-14 to 4.1% in 2014-15. However, like the previous UPA government, the new NDA regime too is unlikely to meet its divestment target.

It recently approved share-sale plan in three state-owned companies—Coal India (CIL), National Hydroelectric Power Corporation (NHPC) and Oil and Natural Gas Corporation (ONGC). This will help it scoop up Rs 44,000 crore, which looks close to the government’s target of raising Rs 43,425 crore from stake sale in public sector companies in the current financial year. However, even the most optimistic empathisers say the government is likely to miss the target.

The government plans to sell 10% stake in Coal India, 5% in ONGC and 11.36% NHPC which will fetch Rs 23,000 crore, Rs 18,000 crore and Rs 2,800 crore, respectively, at current market prices (it currently holds stakes of 89.65 per cent in Coal India, 85.96 per cent in NHPC and 68.94 per cent in ONGC).

The track record of the government in meeting divestment target is far from impressive—it missed target for the last financial years (last year, it raise only Rs 16,027 crore against a target of Rs 40,000 crore). So far this year, it has managed to raise only Rs 1,700 crore, by divesting a 5% Steel Authority of India (SAIL).

A clutch of factors may hinder the government from meeting its target this year as well. Its plan to scoop up Rs 23,000 crore via sale of 10% in Coal India is too big to be achieved. This will be the first time the government is going to make such a huge offering (the largest share sale so far is Coal India’s Rs 15,000-crore IPO in October 2010) and if the market has the appetite to absorb such a humongous offer is yet to be seen. The government may also find it hard to overcome the stiff resistance from trade unions that are vehemently opposed to stake sale in Coal India.

Another concern is about ONGC. Crude oil prices have been trading at historic lows of late amid worries of a supply glut (prices have already dipped below $60 per barrel, which is a multi-year low) after OPEC decided not to cut production in the last week of November. Non-OPEC member Russia, another top oil producer, too indicated it will not pare production. So whether investors would be ready to invest in ONGC at a time when oil prices have seen an unprecedented decline is another question.

Also, the government would need active participation from public-sector financial institutions such as Life Insurance Corporation (LIC) to make the stake sale in Coal India and ONGC, etc. a success. For instance, in 2011-12, LIC invested around Rs 12,000 crore to pick part of ONGC shares that were on offer. However, this time around analysts expect the life insurance major to stay away from such an indulgence as its premium collection has failed to gain speed so far this year—a sign of increasing competition from a litany of private sector players that are trying to defeat life insurance behemoth on its own turf.

Another factor which will decide the success of this year’s stake sale is participation from global investors. However, considering the dip in inflows from FIIs to the Indian market in recent times, participation from global players including sovereign wealth funds may be a dampener.
Whether this year’s divestment plan is going to be a bang or a whimper will also be dependent on how well finance ministry and divestment department are going to market the salability of the public-sector biggies that are on the block.