Will coalition politics derail the government's disinvestment plans?

Strategic sales already in advanced stages like IDBI Bank, Shipping Corp. of India and BEML may take off in the second half of FY25, but other transactions and fresh disinvestments may not be as lucky. (Mint)
Strategic sales already in advanced stages like IDBI Bank, Shipping Corp. of India and BEML may take off in the second half of FY25, but other transactions and fresh disinvestments may not be as lucky. (Mint)

Summary

  • The new government that is expected to be formed with the help of coalition partners may well have to walk a fine line when it comes to divesting government holdings in public sector enterprises.

NEW DELHI : Privatization may take the backseat in the coming coalition government as a reduced majority forces the pro-reform Bharatiya Janata Party (BJP) to work alongside allies with different priorities, officials and experts said.

Strategic sales already in advanced stages like IDBI Bank, Shipping Corp. of India and BEML may take off in the second half of FY25, but other transactions and fresh disinvestments may not be as lucky, they said. In the past too, resistance from states was a key reason for the slow progress of divestments.

“Some of the state government entities (that are not aligned with the BJP, and now with NDA) have submitted bids for some of the strategic sales of PSUs knowing well that the rules do not permit it. In some cases, they’ve gone to courts to prevent or stall the sale, which leads to further erosion of whatever value the asset may hold at that time," an official said.

Fight for assets

For instance, the Kerala State Industries Development Corp. had submitted a bid to take over HLL Lifecare Ltd located in the state, which the Centre rejected in 2022. Earlier in 2020, the Chhattisgarh assembly adopted a resolution to buy NMDC’s Nagarnar Steel plant if it was divested. 

Also Read: Divestment targets are a thing of the past, says top official

According to a second official, since the PSUs are located in states, the Centre needs states' cooperation to provide approvals, and maintain and hand over the assets.

Besides IDBI Bank, where the government and LIC are jointly selling nearly 61% stake, divestment of NMDC’s steel plant in Nagarnar in Chhattisgarh; SAIL’s Salem steel plant; Indian Medicines Pharmaceuticals Corp. Ltd; Ferro Scrap Nigam Ltd; HLL Lifecare Ltd and Project & Development India Ltd are in various stages. The Union Cabinet has approved the sale of Container Corp. of India Ltd, but the process is yet to begin. The Centre also plans to list NTPC Green Energy, and has begun the process to list Indian Renewable Energy Development Agency Ltd.

Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital said in a client note that the merger of public sector banks and disinvestment plans would take a back seat. “Yes, they indeed (would). Look, any unpopular move will be avoided clearly for the near term due to reduced mandate," he wrote the note to clients. The Union budget in July would be "more populist," and the narrative would shift towards welfarist schemes, Ganapathy said, adding the dividend bounty from the central bank that could have gone into capex would now move towards consumption schemes.

Also Read: Govt has its eye on 50,000 cr kitty via divestment in FY25

Rude surprise

Tuesday's election results were a rude surprise for the stock markets, which had built up hopes of a thumping win for the Bharatiya Janata Party. While the National Democratic Alliance crossed the half-way mark, the numbers fell far short of Prime Minister Narendra Modi's call for 400-plus seats and pollsters' predictions of above 350.

Jeremy Zook, director and primary sovereign analyst for India at Fitch Ratings said that a weakened majority could pose challenges for the more ambitious elements of the government’s reform agenda. “As the BJP fell short of an outright majority and will need to rely more heavily on its coalition partners, passing contentious reforms could prove more difficult, particularly around land and labour, which have recently been flagged as priorities by the BJP to boost India’s manufacturing competitiveness," he said in a note.

While the government has been successful in splitting land assets from PSUs on the block, the monetisation of land assets under the National Land Monetisation Corporation is yet to take off.

Low-hanging fruits

According to Bank of Baroda's chief economist Madan Sabnavis, though, divestments may not be as hard as feared. “In my opinion, the fact that there are coalition partners may not be a significant challenge when going ahead with disinvestment, as they have a record of being pro-reforms," he said. However, he noted that disinvestments will get more challenging, as the low-hanging fruits have been already sold, and any further programme will have to weigh the pros and cons involved as some large PSUs serve a larger purpose for society as a whole, like oil marketing companies that control fuel prices.

Also Read: Are IDBI Bank's potential suitors good enough? RBI is checking

Tuhin Kanta Pandey, secretary in the department of investment and public asset management (Dipam) had told Mint soon after the interim budget that the government’s view on disinvestment had changed, and that it will look at disinvestments and dividends holistically, since dividends from public sector stocks that would otherwise have been sold would add to the government’s overall receipts.

This year's interim budget did not set any disinvestment target, but kept 50,000 crore under miscellaneous receipts, including asset monetization and disinvestments. In FY24, the disinvestment receipts were 16,507.29 crore, far lower than the 51,000 crore target, and the revised estimate of 30,000 crore. It was also lower than the FY23 disinvestment receipts of 35,294 crore.

To be sure, the government earned 63,749.29 crore as PSU dividends in FY24, 26% above the revised estimates of 50,000 crore and budget estimates of 43,000 crore.

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