Budget | Now is a good chance for Centre to rev up PSU disinvestments

Union Finance Minister Nirmala Sitharaman, who declared in the Interim Budget that disinvestment targets for fiscal years 2024 and 2025 would be reduced to ₹30,000 crore and ₹50,000 crore, respectively, may have difficulty meeting budgetary benchmarks.

However, a course correction with a clear, transparent, and thorough divestment strategy in the Union Budget 2024 has the potential to restart the process.

Missed targets

The government's divestment efforts have hit stumbling blocks, with the fifth consecutive year of missing targets. The previous budgeted aim was ₹51,000 crore, which has now been reduced to ₹30,000 crore.

Despite the successful privatisation of Air India and Neelachal Ispat Nigam Ltd in 2022, the overall divestment performance has fallen short. The government has collected a meagre ₹10,051.73 crore in the current fiscal year compared with the earlier target of ₹51,000 crore. The primary contributions came from Central Public Sector Enterprises IPOs (Initial Public Offerings) and OFSs (Offers for Sale).

Previously, the government has used the OFS mechanism to disinvest. However, various obstacles have slowed progress, including regulatory vetting, asset demergers, and labour union litigation.

Furthermore, determining acceptable valuations for state-owned enterprises has proven difficult, frequently resulting in delays. Global economic volatility has also affected the ability to attract buyers at desired valuations.

Potential for divestment

CareEdge Ratings forecasts a divestment potential of around ₹11.5 lakh-crore, provided the government retains at least a 51 per cent stake in public sector businesses. Key possible disinvestments include Shipping Corporation of India, Pawan Hans, NMDC Steel, and Container Corporation of India (CONCOR).

These divestments could significantly contribute to raising revenue, improving efficiency, widening ownership, and promoting market discipline.

This plan should outline:

Timelines: Specific timelines for each stage of the disinvestment process to ensure accountability.

Targets: Clear financial targets and strategic objectives for each divestment.

Procedural Simplifications: Streamlined procedures to reduce delays, including faster regulatory approvals and simplified asset demerger processes.

Big-ticket divestments

To achieve the ₹50,000 crore target for FY25, the government must focus on big-ticket divestments. High-value PSEs like BPCL, SCI, and CONCOR should be prioritised, despite the challenges these divestments may pose.

BPCL: The planned strategic divestment was scrapped due to market conditions and procedural issues. Revisiting this sale with a streamlined approach could yield significant revenue.

SCI and CONCOR: Delayed due to the pandemic and procedural hurdles, these sales should be expedited with clear timelines and simplified processes.

Procedural, pricing issues

The government is also required to address procedural and pricing issues. They are:

Regulatory vetting: Establishing a fast-track regulatory approval process can reduce delays.

Asset demerger: Simplifying the demerger of core and non-core assets to facilitate quicker transactions.

Valuation and pricing: Engaging independent financial advisors to determine fair valuations and pricing to attract potential buyers.

Political will

Building political consensus and public support for disinvestment is crucial, especially with assembly elections on the horizon. The government should clearly communicate the benefits of disinvestment, such as improved efficiency, reduced fiscal deficit, and enhanced public ownership.

It should also engage with labour unions and opposition parties to address concerns and build support for strategic divestments.

Role of PSBs

The State Bank of India (SBI) has in a report recommended the disinvestment of Public Sector Banks (PSBs), given their current good condition. The consolidation of government-owned banks could further streamline the banking sector and improve efficiency.

Rationale for PSB disinvestment: With PSBs in good financial health, disinvestment could raise substantial revenue and promote competition in the banking sector.

Strategic approach: A phased approach to disinvestment, starting with minority stake sales and progressing to larger stake sales, could mitigate political resistance and market volatility.

Addressing revenue shortfalls

The government must proactively address the revenue shortfall from missed disinvestment targets. This involves:

Alternative revenue sources: Exploring alternative revenue sources, such as asset monetisation and enhancing tax compliance, to bridge the gap.

Increased borrowing: While not ideal, increased borrowing may be necessary in the short term to meet budgetary commitments.

Maintaining fiscal discipline

A persistent failure to meet disinvestment targets could undermine fiscal discipline. To mitigate this, the government must:

Adjust fiscal strategy: Revisiting fiscal strategies, such as optimising expenditure and enhancing revenue mobilisation, can ensure fiscal targets are met.

Build reliance on dividends: Increasing dependence on dividends from state-owned enterprises can provide temporary relief but is not a sustainable solution. Ensuring these enterprises maintain profitability is crucial.

The Centre must prioritise disinvestment in the Union Budget 2024 to achieve its fiscal objectives and improve the performance of public sector enterprises. By announcing a clear divestment plan, focusing on big-ticket divestments, addressing procedural and pricing issues, and enhancing political will, the government can unlock the potential of state-owned firms and promote a more efficient and competitive economy.

Strategic disinvestment of PSBs and maintaining fiscal discipline through alternative revenue sources and long-term planning are also crucial. This multifaceted approach will not only help reduce the fiscal deficit but also foster economic growth and stability.