India accelerates drive to offload company stakes in rush for cash

The Indian government’s push to raise cash by selling off stakes in state-run companies ranging from a life insurer to a steelmaker is picking up pace despite growing economic turbulence around the world following Russia’s invasion of Ukraine.

Many analysts say New Delhi is on track to hit its target of Rs650bn ($8.2bn) for privatisation and other divestments in the current fiscal year. This is welcome news for prime minister Narendra Modi, who needs the money to finance the country’s recovery from the coronavirus pandemic and to help fund a revamp of India’s sprawling rail and road networks.

The goal is a big jump from the around Rs135bn raised last year, although it is far more modest than that year’s initial target of Rs1.75tn, which was later slashed to Rs780bn as fallout from Covid-19 spread through the economy at home and abroad.

“Despite [this] being a very volatile year with so many [things to consider] like inflation, oil prices and the US interest rate, the year started on a positive note [for the privatisation drive],” said N R Bhanumurthy, vice-chancellor of the Dr B R Ambedkar School of Economics University.

The government has already raked in Rs245.4bn from divestments since the financial year began in April. A huge chunk of that — Rs205bn — came from the sale of a 3.5 per cent stake in state-run Life Insurance Corporation (LIC) in May through a long-delayed initial public offering. The IPO was the largest ever in India.

Down the road, the government hopes to sell its remaining 29.5 per cent stake, valued at around Rs380bn, in Vedanta-controlled mining company Hindustan Zinc. The company was state run before the government offloaded 26 per cent of its stake in 2002 to natural resources conglomerate Vedanta, which went on to lift its holding to nearly 65 per cent.

Observers say the government could also soon invite expressions of interest for the possible privatisation of Mumbai-based IDBI Bank, in which it currently holds about 95 per cent of the equity, along with LIC.

Scrap metal recycler Ferro Scrap Nigam, which is wholly owned by the government, also looks to be in the privatisation pipeline. Without giving details, Tuhin Kanta Pandey, secretary of the department of investment and public asset management (DIPAM), tweeted on June 20 that he had received “multiple” expressions of interest for the “strategic disinvestment” of Ferro Scrap.

“I think that the government is in a good place to achieve [this year’s divestment] target,” said Priyanka Kishore, head of India and south-east Asia economics at Oxford Economics.

“Of course, there have been setbacks, with the privatisation talks of [fuel retailer Bharat Petroleum Corporation Ltd, or BPCL] stalling, for example,” she said, adding, however, that the government has already reached about 40 per cent of its target for the financial year. “It shouldn’t be a big challenge to achieve the rest of it . . . Indeed, there is an outside chance that they may exceed the target, given how low it is to begin with.”

The government in May scrapped moves to sell its entire 53 per cent stake in profitmaking BPCL, saying potential bidders were shying away due to uncertainty in global energy markets in the wake of the Ukraine war and subsequent measures targeting exports from oil and gas powerhouse Russia.

Government officials argue there is more to these sales than simply generating cash. They say new owners can help companies streamline their operations, pushing them to become more competitive. Last year, the authorities agreed a deal to sell debt-ridden national airline Air India to conglomerate Tata Group, ending a two-decade hunt for a buyer.

Then, on July 4, a subsidiary of Tata Steel completed its takeover of lossmaking state-run steel producer Neelachal Ispat Nigam at an enterprise value of Rs121bn. Under the transaction, which was agreed in January, Tata Steel plans to restart a plant in the eastern state of Odisha with an annual capacity of 1mn tonnes that has been shut since March 2020.

“The principle with which disinvestment is happening now is not to shut down a unit — that’s very important . . . to understand,” finance minister Nirmala Sitharaman said in a June speech. “[We want] to make sure that [these] companies are in the hands of those people who can run [them and] bring in more capital.”

Some observers have been sounding a note of caution, however, warning that economic headwinds are still blowing. “This may not be the right time for the government to go to the market to raise money, as there is so much vulnerability in stock markets,” said V Upadhyay, adjunct professor of economics at the Indian Institute of Technology Delhi. He added that mounting concerns over inflation and a possible US recession could further “disturb the markets.”

Devendra Pant, chief economist at India Ratings and Research, said that “it will be a challenging task” to achieve the privatisation goal. “If tighter monetary policy across the globe continues [along with the] flight to safety [of capital], then it will be difficult,” Pant said.

Government data shows there were over 255 “operational” enterprises under the central government in the financial year that ended in March 2020. Of those, 171 recorded a net profit, which totalled Rs1.38tn, while another 84 reported a net loss adding up to nearly Rs450bn.

A version of this article was first published by Nikkei Asia on July 19. ©2022 Nikkei Inc. All rights reserved.

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