The Narendra Modi-led Bharatiya Janata Party government in India kicks off
its ambitious plan to rake in over 430 billion rupees (about $7
billion) by selling portions of its stakes in several companies across
sectors. However, if government data from the last two decades is any indicator, it could struggle to meet, or even come close, to its target.
In the last few years, India has tried to reduce its fiscal deficit
by generating revenue from selling its stakes in profitable state-owned
companies. But, historical records dating back to 1991 -- the year
India liberalized and privatized its economy and began dismantling its
industrial licensing regime -- show that the country has mostly missed
its disinvestment targets. The government exceeded its
target only four
times -- in 1994-95, 1998-99, 2003-04 and 2004-05 -- and in 2007-08 and
2009-10, no targets were fixed, but the government generated a
considerable sum from the process.
Modi, who came to power on a pro-business campaign promise
and who has been welcomed by the country's financial markets, is banking
on a bullish stock market to help meet his targets. On Dec. 2,
brokerage firm Morgan Stanley said that it expects the benchmark BSE Sensex stock index to climb nearly 15 percent from current levels by December 2015.
“Sentiment is strong with support from flows and momentum –
our market timing indicator suggests that market mood is buoyant though
yet to hit exuberant territory,” The Financial Express quoted Morgan
Stanley as having said in a research note. “Our view is the government’s
reforms are on track and if these reforms progress well, we see upside
risk to earnings estimates.”
The Modi government has also been trying to attract
investments into the country ever since it took office in May. In its
latest move, on Dec. 3, it relaxed rules governing foreign direct
investment in the country’s construction sector, which of late, has seen
some headwinds. Under the new rules, foreign investors can now pour
money into smaller projects than before and the minimum capital
investment by foreign companies has also been halved to $5 million,
according to Reuters.
However, even if the Modi government does manage to meet
its divestment target, or come close to doing so, questions linger about
how the money would be put to use. As this blog in The Times of India notes, the money that the government raises from such divestment is likely to be put back
into recapitalizing state-owned banks and the Indian Railways. In other
words, the money would effectively be routed back into state coffers.
Moreover, as the blog points out, state-owned insurer Life Insurance
Corporation of India typically ends up rescuing the government's
divestment effort by buying huge chunks of the shares on offer,
especially if markets don't react enthusiastically to the stake sale.
Further, Modi’s divestment plans continue to face stiff
resistance from trade unions. Workers at Coal India Ltd, the world’s
single-largest producer of the mineral, have frequently threatened to
strike work if the government dilutes stake in the company. The latest
of such threats was issued earlier
this week. This is a significant hurdle as the government hopes to meet
nearly a half of its divestment target by selling its stake in Coal
India. Unions of other former government-owned companies, including
Hindustan Zinc Ltd and BALCO, in which the government wants to liquidate
its residual stake too are opposed to the move.
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