Is Privatisation Back on the Cards?

Tue, 8 Mar Pre-Open

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The union budget for 2016-17 has confused many. How will the government achieve the fiscal deficit target of 3.5%? Are the revenue numbers believable? Not only were there no big bang reforms, the budget was also silent on how exactly the numbers would be achieved. Let's take a look at the much criticized disinvestment number.

Every year the government touts an ambitious target. It is almost never realised. Market conditions are blamed. Another target is fixed for the next year. And the cycle repeats itself. Will it be different this time around? We are not confident. But this time the situation is a bit different.

The disinvestment target for 2016-17 is ambitious once again: Rs 565 bn. However, there are two parts to this number. First is the 'normal' disinvestment of Rs 360 bn. The second, is the target of Rs 205 bn for 'strategic sales.' This is where things get interesting. 'Strategic sales' is another term for privatisation.

We believe both these targets are questionable. Firstly, as far as the 'normal' disinvestment goes, governments over the years, have sought to maintain majority control of these firms. Even small stake sales, required Life Insurance Corporation (LIC) to come the rescue. The biggest yearly disinvestment mop-up was in 1992. The government had collected a mind boggling Rs 243 bn at that time when the economy was opened up. In this context, the target of Rs 360 bn looks tough.

Coming to the strategic sales, we believe the government's intention is good. However, the target of Rs 205 bn may be too optimistic. All previous attempts have been hampered by labour union protests and stock market volatility. Of course, the government is fully aware of all this. Thus, it has come out with a comprehensive plan to achieve the target.

If the financial media is to be believed, all options are being considered. These include, buybacks, private placements, sales of land and factories, among others. The disinvestment department has been renamed Department of Investment and Public Asset Management (DIPAM). Clearly, the government does not favour the term 'privatisation'.

But will it work?

The government has dug out all the past reports of various committees (since 1997) on this topic. A list of sick PSUs is already available. But the plan envisages majority sales in even profitable ones. The NITI Aayog has been empowered to draw up the final list. The cabinet committee on economic affairs (CCEA) will then decide which ones fit the bill and how to go about it.

It is unclear what the timeline for this process is. But it's obvious to us that it will be a slow process. Several challenges remain. For example, the government may stay away from those PSUs that were created by an act of Parliament. Changing such an act, to enable privatisation, will be tough. This is because the government does not have a majority in the upper house.

No doubt, the road ahead is difficult. But we believe the government must push ahead. Disinvestment targets may or may not be achieved. But a well-executed privatisation program will go a long way to change the face of the Indian economy for the better.

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