Friendly markets, unfriendly political oppositions—will he make it in FY 17

Among Prime Minister Narendra Modi’s biggest challenges after he took charge in May last year was to find a way quickly reign in India’s widening fiscal deficit.

The new government announced an ambitious divestment plan during April, 2015 under which it would aim at selling minority stakes in the state-owned companies to help plug the hole. But, of the Rs 63, 425 crore worth stakes targeted to sale in the last financial year 2014-15, the government only could manage to raise Rs 31, 350 crore, less than half of the target. Something which definitely did not please the captain of the ship, Modi and his trusted lieutenant, Arun Jaitley, the union finance minister. So the target for the next fiscal year has been revised and Jaitley has been asked to emphasis on the process and ensure, this time its bull’s eye, say sources in the Raisina Hills. 

The government planned to raise Rs.434 billion by selling its stakes in the public sector units (PSUs) and Rs.150 billion through sale of its stake in non-government companies, which mainly included residual stake sale in the erstwhile government companies. By the time you read this, the fiscal year 2015-16 has ended and the government failed to make any significant progress on disinvestment even as Sensex has been comfortable in the 25,000 range. The cabinet has so far only cleared the stake sale in ONGC, Coal India and NHPC.

In the pre 2014-15 periods, the approach to disinvestment was based on identification of stocks on an annual plan basis. This often resulted in problems like delay in approaching the markets, hammering of the stocks, overhang, lack of flexibility in divestment of stocks, etc. With a view to address these problems, during last two quarters of 2014-15, a rolling plan approach was adopted with advance preparation/planning, fast tracking the approval process, maintaining secrecy so as to avoid hammering of stocks and concluding disinvestment of Government of India (GoI) shareholdings in the CPSEs in a time bound and focused manner. As a result, the Government could achieve the highest ever disinvestment receipts of Rs. 24,349 crore in a single FY 2014-15, that too only in last six months period of the financial year. This is even higher than the annual average of Rs. 9,593 crore in 2000-2014.

This financial year the divestment target is even larger at Rs 69,500 crore. In the four-and-a-half month of this financial year, the government has raked in Rs12, 536crore from four share sales. Nothing much happened since then. The vast majority of this revenue—around Rs 9,300 crore was earned on August 24, when the government sold 10 per cent in Indian Oil Corporation (IOC). This was the biggest planned sale for the year.

The Modi government is banking among other things on its ambitious divestment programme to pare fiscal deficit—the amount of money it borrows to fund its expenses—from 4.5 per cent of gross domestic product in 2013-14 to 4.1 per cent in 2014-15. However, like the previous UPA government, the new NDA regime too is unlikely to meet its divestment target. It recently approved share-sale plan in the three state-owned companies—Coal India (CIL), National Hydroelectric Power Corporation (NHPC) and Oil and Natural Gas Corporation (ONGC). This will help it scoop up Rs 44,000 crore, which looks close to the government's target of raising Rs 43,425 crore from stake sale in public sector companies in the current financial year. However, even the most optimistic empathisers say the government is likely to miss the target.

The government plans to sell 10 per cent stake in Coal India, 5 per cent in ONGC and 11.36 per cent NHPC which will fetch Rs 23,000 crore, Rs 18,000 crore and Rs 2,800 crore, respectively, at current market prices (it currently holds stakes of 89.65 per cent in Coal India, 85.96 per cent in NHPC and 68.94 per cent in ONGC).
The track record of the government in meeting divestment target is far from impressive—it missed target for the last financial years (last year, it raised only Rs 16,027 crore against a target of Rs 40,000 crore). So far this year, it has managed to raise only Rs 1,700 crore, by divesting 5 per cent of Steel Authority of India (SAIL) stakes.
A clutch of factors may hinder the government from meeting its target in the next fiscal year as well. Its plan to scoop up Rs 23,000 crore via sale of 10 per cent in Coal India is too big to be achieved. This will be the first time the central government is going to make such a huge offering (the largest share sale so far is Coal India's Rs 15,000-crore IPO in October 2010) and if the market has the appetite to absorb such a humongous offer is yet to be seen. The government may also find it hard to overcome the stiff resistance from trade unions that are vehemently opposed to stake sale in Coal India.

Another concern is about ONGC. Crude oil prices have been trading at historic lows of late amid worries of a supply glut (prices have already dipped below $50 per barrel, which is a multi-year low) after OPEC decided not to cut production in the last week of November. Non-OPEC member, Russia, another top oil producer, too indicated it will not pare production. So whether investors would be ready to invest in ONGC, an oil and gas exploration entity at a time when oil prices have seen an unprecedented decline is another question.
Also, the government would need active participation from public-sector financial institutions such as Life Insurance Corporation (LIC) to make the stake sale in Coal India and ONGC, etc. a success. For instance, in 2011-12, LIC invested around Rs 12,000 crore to pick part of ONGC shares that were on offer. However, this time around analysts expect the life insurance major to stay away from such an indulgence as its premium collection has failed to gain speed so far this year—a sign of increasing competition from a litany of private sector players that are trying to defeat life insurance behemoth on its own turf.

Another factor which will decide the success of this year's stake sale is participation from the global investors. However, considering the dip in inflows from FIIs to the Indian market in recent times, participation from global players including sovereign wealth funds may be a dampener.

Now the Modi government’s ambitious targets are looking even more daunting.Whether this year's divestment plan is going to be a boon or a bane will also be dependent on how well finance ministry and divestment department are going to market the salability of the public-sector biggies that are on the block. 

The government is planning to lower its stake in IDBI Bank as it wants the troubled lender to transform the way Axis Bank did, Minister of State for Finance Jayant Sinha said earlier. "We'll consider transforming IDBI Bank in a manner similar to the way Axis Bank was done," Sinha told reporters on the sidelines of an event, in response to a question on the shortfall likely in the divestment target and the options available before the government.

"We still have quite a number of opportunities even on divestment side," he said, but admitted that they may have to halve the target from more than Rs 64,000 crore. "The FM has already said that for IDBI, we are evaluating whether it is possible to effect a transformation like we have done for Axis Bank."

Speculation is rife the government might cut its stake in the infra lender-turned-commercial bank to below 49 per cent, which may mean ceding absolute control in the bank.

So far government has been able to sell stake in six PSUs In order to bring in more money government needs to make Rs. 13.7 trillion (1 trillion = 1 lakh crore) this year, much higher than the 12.06 trillion they made in 2015-16. This translates to a growth rate of 14 per cent, something which has not been witnessed since 2013-14. This sound possible, but only when inflation was an 8 to 9 per cent, and inflation increases revenues easily. Now, inflation is at 5 per cent, and getting 14 per cent, that means getting a substantially higher chunk of revenues from someplace.

From Gandhinagar in Gujarat to his office in South Block in Delhi, it has been a long way for the Prime Minister, changing his post, position and career. Meanwhile, expectations of the people, some of whom are engaged in stock investments and trading also have risen since he came to power almost two years back. So far, not much of these expectations have been met by the PM and his team. Time has come to face the real challenge and raise money to strengthen the country’s economy and fill up the drying exchequer. Will he deliver or not—we will have to wait and watch at least during the first six months of the fiscal year 2016-17. Remember, five states are going on polls this April-May and a crucial state like Uttar Pradesh will be voting to elect its new government during early 2017. Modi has to prove his point that ‘acche din aanewale hai.’ So far, it has not come for many.