In 2020-21, the Narendra Modi government had planned to raise Rs 2.1 lakh crore from disinvestments including a huge amount from the partial disinvestment of the Life Insurance Corporation or LIC. But almost five months into the financial year, there has been no concrete activity on this front. This is a reason to worry.
Typically, the government, whenever it goes slow on disinvestment, likes to blame the sad state of the stock market. But the Modi government has run out of familiar excuses to delay disinvestment. The stock market has rallied from the March low and the valuations are at an all-time high currently. There can’t be a better time than now.
Stock market is ready
The Rs 2.1 lakh crore disinvestment forms around 9.4 per cent of the total money that the Modi government hopes to earn during the course of the year. When the government presented the Budget in February, the negative economic impact of the coronavirus pandemic hadn’t come to light. So, the Rs 2.1 lakh crore plan becomes even more important now given that the government is unlikely to earn the kind of money it had hoped to, through tax receipts.
Of course, like any other owner, the government is also trying to get a good price for what it plans to sell. While the stock market had fallen in late March, it has recovered since then. The stock market valuations are currently at an all-time high. The price to earnings ratio of the Nifty 50 index as of 21 August stood at 32.08. This is the second highest ever, the highest being 32.09 on 19 August.
What does this mean? It means that the stock market investors are ready to pay more than Rs 32 for every rupee of earnings from stocks that make up for the Nifty 50 index. These high levels weren’t seen even during the dot-com bubble of 2000, nor were they seen before the 2008 stock market crash. It’s time the disinvestment process is started.
Time is now
Of course, the current stock prices are not a true reflection of the expected future company earnings, which the coronavirus pandemic is bound to negatively impact. This is something that RBI governor Shaktikanta Das also talked about in a recent interview. He said that there was a great disconnect between the state of the stock market and the real state of the economy. Das also felt that there was “definitely a correction ahead”.
How do we read this in the context of disinvestment? The point is that the current high state of the stock market isn’t justified by economic fundamentals and things may change very quickly, with the stock market falling.
Hence, it would make sense for the Modi government to carry out disinvestment of its shares in public sector enterprises quickly to take advantage of the prevailing state of the stock market. Of course, this cannot be said with absolute guarantee. The stock market might continue to go up thanks to a lot of money floating around globally and also in India. But the point is that we don’t know, and now is as good a time as any to start the disinvestment process.
Hurdles to disinvestment
Another point that needs to be made here is that the government needs to get slightly innovative on the disinvestment front. Other than selling its stakes in public sector enterprises, it needs to look at selling land owned by these enterprises along with other government departments.
Again, there has been a lot of talk on this front but very little action. It might be worth mentioning here that land sales remain a huge source of revenue for the government of different Chinese cities.
Of the Rs 2.1 lakh crore, the Modi government expects Rs 90,000 crore to come through the disinvestment of its stake in public sector banks and financial institutions (read LIC). There are several legal hurdles that need to be cleared before the LIC initial public offering (IPO) can see light of day. And that will take time.
The good news is that a few days back, the government approved the appointment of Deloitte and SBI Caps as pre-IPO transaction advisers for LIC. The IPO is expected to be the biggest in the Indian stock market. A valuation of Rs 9-10 lakh crore for the country’s largest insurance company is expected. Hence, even a 10 per cent stake sale will bring in anywhere from Rs 90,000-1,00,000 crore for the government. Whether this happens in 2020-21 remains to be seen, given the slow speed of the Modi government on this front.
Jewels in the crown
And finally, there has always been a general reluctance among bureaucrats and even ministers when it comes to privatisation of the public sector. This is understandable given the way the incentives are structured. If you take away a public sector enterprise from a ministry and privatise it, the profile of that ministry falls. The power that comes from having a PSU under your control is lost. Hence, the resistance. Now is a great time to break this incentive — and this will help the government big time in the days to come.
Over the years, politicians from different parties have talked about public sector enterprises as jewels in the government’s crown. It is worth remembering that jewels also help their owner during tough times, and now is that time for the public sector enterprises to help a money-starved government.
The writer is the author of Bad Money. Views are personal.