Misplaced disinvestment

The NDA government’s disinvestment programme is turning out to be one in which surpluses are wrung out of public sector enterprises in order to support the budget, adversely affecting their own stability or modernisation and expansion plans.

At a rally protesting against the privatisation of Air India in Mumbai on May 1, 2018.

A S the term of the current National Democratic Alliance (NDA) government nears its end, with signs of popular dissatisfaction over its performance on the economic front, the urge to ramp up expenditure to woo the electorate has intensified. But a number of factors have combined to render that task difficult, with the failure of the government’s misplaced disinvestment programme being among the most important.

Disinvestment receipts are crucial to the government this year for two reasons. First, while direct tax collections in 2018-19 are, according to official figures, on track to reaching targets, indirect tax collections have fallen short after implementation and periodic revision of the goods and services tax (GST) regime. According to the Controller General of Accounts (CAG), the total tax revenue collection until November 2018 was just short of 50 per cent of the budgeted figure, whereas the achievement in the corresponding period of the previous year was 57 per cent. Second, the government is hell-bent on realising its fiscal deficit target of 3.3 per cent of GDP [gross domestic product] or thereabouts, as part of its effort to convince international capital that it is both working to improve “the ease of doing business” in India, as well as successfully pursuing the neoliberal requirement of fiscal consolidation.

This increased dependence on disinvestment receipts is not a new phenomenon. The cumulative total of receipts from disinvestment, including the sale of exchange traded funds linked to public sector equity, is estimated at Rs.390,787 crore. More than 60 per cent of this sum has been garnered in close to five of those 15 years (since 2014-15), when the Modi-led NDA government was in power. This is despite the fact that actual disinvestment receipts have fallen short of ambitious targets in all these years except one. In 2017-18, receipts from disinvestment touched a record Rs.1,00,000 crore compared with the budgeted target of Rs.72,500 crore. There were three elements to the strategy that ensured this unusual “success” on the disinvestment front. One was to bundle good equity from multiple public sector enterprises (PSEs) into exchange traded funds, which are listed and can be traded like stocks, that were offered as a good investment opportunity to financial institutions, mutual funds and retail investors.

Strategic sale route

The second was the strategic sales privatisation route, in which a private buyer of a minority shareholding of at least 26 per cent of the equity held by the government in a public sector unit was handed over full managerial control through a shareholders’ agreement. This gave the private buyer full control with an investment smaller than that required to buy a controlling block of shares of up to 51 per cent. The power that the shareholders’ agreement accompanying such sales gave the buyer became clear when the Tatas, who were still minority shareholders post-strategic sale, chose to invest cash surpluses available with the privatised VSNL in Tata Teleservices, then still a start-up firm controlled by the group. The NDA’s commitment to big-ticket disinvestment leading to privatisation at whatever cost was revealed when it decided to adopt this strategic sale route to divesting itself of PSE assets. And the third was the siphoning off of current and potential surpluses from cash-rich PSEs by opting for a PSE-to-PSE transfer or the sale of government equity in one public sector unit to another such unit. Thus the government’s entire shareholding of 51.1 per cent in Hindustan Petroleum Corporation Limited (HPCL) was sold to Oil and Natural Gas Corporation Limited (ONGC) for Rs.36,915 crore, contributing more than a third to total disinvestment receipts in 2017-18. Interestingly, ONGC borrowed Rs.25,000 crore in the year it acquired HPCL, suggesting that in this case the government was merely substituting its borrowing with that of a public sector unit it owned.

In keeping with the trends generated by this strategy, Finance Minister Arun Jaitley had set his disinvestment target in Budget 2018-19 at Rs.80,000 crore. He was possibly expecting even larger realisations through measures such as cross-holding by PSEs, giving him much fiscal manoeuvrability in a pre-election year while achieving his fiscal deficit targets. Surprisingly, thus far there does not seem to be evidence of success. Excluding the most recent sale of equity in National Hydroelectric Power Corporation, disinvestment receipts are currently placed at Rs.33,763 crore in 2018-19, which is not even halfway to target. The government plans to mobilise in excess of Rs.10,000 crore by selling its 52.63 per cent stake in Rural Electrification Corporation Limited to Power Finance Corporation, which, too, it owns. But even if the process is accelerated through dubious means such as these over the next two months, it is unlikely that the government would be able to establish a record this financial year of the kind that it managed in 2017-18.

Interestingly, even the current tally in 2018-19 has been achieved in substantial measure either by the sale of exchange traded funds linked to PSE equity or through a new mechanism: the (enforced) buybacks of small chunks of equity by PSEs from the government, using the cash surpluses of the former. Buybacks have been undertaken by Kudremukh Iron Ore Company Limited, National Aluminium Company Limited, Neyveli Lignite Corporation, Cochin Shipyard and Bharat Heavy Electricals Limited. Not all of these are cash-rich companies and are likely to have to borrow to finance their modernisation or expansion plans.

In addition, it seems likely that besides persuading the Reserve Bank of India (RBI) to “disinvest” and transfer a large part of its reserves to the exchequer, the government will also call on PSEs to make large dividend payments to enhance its non-tax revenues. In sum, “disinvestment” is turning out to be a process in which surpluses are wrung out of PSEs or government-linked institutions to support the budget, adversely affecting their own stability or modernisation and expansion plans. This compares with the understanding that disinvestment involves sale to private buyers.

This change in the nature of so-called disinvestment is surprising, given the evidence quoted earlier to show that the NDA was more than willing to sell off public assets, despite opposition to the process. Given this experience, it is indeed surprising that in pre-election year the NDA and its Finance Minister have been unsuccessful in capitalising on the disinvestment drive even to meet their budgetary targets, let alone mobilise additional resources. One reason is that mega-scale privatisation plans, such as that of Air India, could not go through. What the Air India case illustrated was that the government’s confidence that even loss-making and debt-burdened PSEs could be sold, however significant they were, was completely misplaced. Past success with disinvestment, strategic sale and privatisation was because the deals on offer were immensely attractive.

The Air India case

Consider Air India. Its net loss in 2016-17 stood at Rs.3,643 crore. An obvious factor generating high net losses was the servicing cost of Rs.6,000 crore on debt, then estimated around Rs.52,000 crore. Unless the government was willing to infuse funds to write off the debt and clear the books of the company, private interest was unlikely. But that would have defeated the whole process of trying to mobilise money through sale of the corporation. The government did not relent. Nor did private buyers, who ignored the offer.

A second reason why disinvestment is flagging is that the bull run in equity markets has ended and they are in decline. According to an analysis by Capitaline, reported in October 2018, the value of 41 state-owned stocks had halved when compared with their 52-week highs and another 32 were trading at prices 12-44 per cent below their 52-week highs. Any sale would have been at prices much lower than appeared reasonable.

And if chunks of equity from multiple PSEs were to be flogged, the price received would have been even lower. That would have laid the ruling party open to criticism that it could not have easily countered, muddying the waters in a politically sensitive period. Mobilising money to finance spending aimed at gaining legitimacy in ways that undermine legitimacy in the first instance would be foolish. Finally, for those investors still looking for opportunities for investment, new avenues had opened up, such as the purchase of assets being released for sale by the debt resolution process under the Insolvency and Bankruptcy code. These were, in many cases, real assets with potential that were available cheap, as opposed to long-neglected public sector assets with uncertain prospects of returns.

In sum, the government’s hype with respect to the health of India’s economy and its rapid growth is out of sync with the state of business confidence on the ground. Going by the latter, unless the government is willing to offer substantially more by way of concessions that render public equity unusually attractive, buyer interest is likely to be subdued. Add to that the rather chaotic state of implementation of policy, whether good or bad, and the welcome failure on the disinvestment and privatisation front is understandable.

In the event, the government has become even more dependent on the public sector’s own resources, central bank dividend and reserve transfers, and off-budget expenditures, to window-dress its budget.

The controversy over the transfer of the RBI’s reserves has to be seen in this light. Further, according to a recently released CAG report, off-budget financing was resorted to by deferring fertilizer arrears/bills through special banking arrangements; covering food subsidy bills/arrears of Food Corporation of India through borrowings; financing implementation of the Accelerated Irrigation Benefit Programme irrigation scheme with borrowings by National Bank for Agriculture and Rural Development nder the Long Term Irrigation Fund; and much else.

Unfortunately for the NDA, while this may help dress up its fiscal indicators, it does not raise spending to levels and give it enough visibility to make the difference that “free” resources from the sale of assets would have.