In his budget speech in February 2018, Finance Minister Arun Jaitley outlined an ambitious target for the Department of Investment and Public Asset Management, announcing the government would raise nearly $11.6 billion (Rs. 80,000 crores) from disinvestments from “central public sector enterprises” or CPSEs.
However, reports emerged last month that the government had rejected a proposal from NITI Aayog, a policy think tank of the Government of India, that had been instructed by the government to identify state-owned companies for strategic disinvestment. The rejection of this proposal, which was the fifth such list of companies, underscores how India’s plans for strategic disinvestment remain stuck in neutral. Given the government’s target of raising over $11 billion from disinvestments, the government should rethink its rejection of NITI Aayog’s proposal and ramp up its efforts on strategic disinvestment.
NITI Aayog was first tasked with outlining options of companies from which the government could strategically divest in Finance Minister Jaitley’s Budget Speech in 2016, where the government set a target to raise $8 billion (Rs. 56, 500 crore) from disinvestment. Later that year in September of 2016, the government under Prime Minister Modi kicked off the process of strategic disinvestment when it approved the first strategic sale of a state-run company in 12 years by selling its stake in Bharat Pumps and Compressors Limited. At that time, NITI Aayog had reportedly submitted two reports to the government, but which were not released to the public.
By February 2018, after Finance Minister Jaitley announced the ambitious target of raising over $11 billion through disinvestment, NITI Aayog CEO Amitabh Kant said that “NITI Aayog has already recommended 40 sick PSUs for strategic disinvestment. Department of Investment and Public Asset Management (DIPAM) is working on it and the process is in advanced stage. We have already sent four lists (of sick PSUs). We are working on the fifth list. We will also prepare sixth and seventh list.”
Indeed, the Finance Minister’s target looks much more difficult to achieve after the government’s plan to privatize Air India fell through. Furthermore, the government had announced an invitation for bids for 76 percent of the government’s stake in Air India by May 31. Numerous companies had already pointed out that the high level of debt the government had asked companies to absorb, plus the complexity of the contours of the deal made it impossible for them to consider a bid. In the end, when the deadline passed, no company or group of companies expressed any interest in the deal.
When considering the setback created by the lack of interest in Air India with the government’s revenue from disinvestments last year, it becomes clear that the government should rethink its rejection of NITI’s suggested list of CPSEs for strategic sales. While the government exceeded expectations by raising $14 billion (Rs. 92,000 crore) against a target of $11 billion (Rs. 72,500 crore), a significant portion of those funds came from the government’s strategic sale of Hindustan Petroleum Corporation Ltd (HPCL). The sale raised nearly $5.4 billion, close to half of the original target set by the government last year. With the setback in Air India and the government’s rejection of NITI Aayog’s suggestions for strategic sales, the government target of $11 billion looks increasingly distant.
The losses made by these CPSEs ultimately are costing the taxpayers billions. According to the Comptroller and Auditor General of India, the “net worth of 64 government companies had been completely eroded by accumulated loss and their net worth was a negative $10.7 billion (or Rs 74,100 crore).” The Public Enterprises Survey on 2015-16 further underscores the severity of this problem, highlighting how the number of loss-making CPSEs grew from 54 in FY 2007-08 to 78 in FY 2015-16, and losses almost tripled from $1.4 billion (Rs. 10,303 crores) to $4.1 billion (Rs. 28,756 crore) in the same period.
The Government of India has outlined ambitious plans to raise over $11 billion from disinvestments in this fiscal year. However, as the gains from disinvestments last year showed, strategic sales can be instrumental in raising funds. Given the setback the government has already faced from the lack of interest in the Air India deal as it was outlined earlier this year and the dismal situation of India’s loss-making CPSEs, the government should rethink its approach to the suggestions for strategic disinvestment by NITI Aayog and consider ramping up efforts on strategic disinvestment.