Divestment: Markets are no longer counting on it as a fiscal cushion, trigger for stocks

Out of the divestment target of Rs 65,000 crore set in this year’s budget, the Government was able to raise just Rs 28,383 crore to date

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As we near the budget announcement for FY23-24, fresh interest is brewing around the divestment target that may be set for the next financial year and how much the government will be able to achieve during the current fiscal. There is still a long way to go for the government to even nearing the target announced in the budget for FY22-23.

The government has been setting its sights high when it comes to selling its stake in public sector companies but year after year has been falling short. For the current fiscal, the finance minister scaled down the target for divestment to Rs 65,000 crore, significantly lower than the previous year’s Rs 1,75,000 crore. Yet even this amount remains unachieved so far. In fact, the government has raised just Rs 28,383 crore to date as per data available on the Department of Investment and Public Asset Management (DIPAM) website. Of this, close to Rs 20,500 crore came from the initial public offering of the Life Insurance Corporation of India alone.

In FY21-22, receipts from disinvestments were Rs 13,531 crore against the original target of Rs 1,50,000 crore (later revised to Rs 78,000 crore).

The problem is not only about achieving the disinvestment target. “We should actually have moderate targets and more focus should be on privatising,” DIPAM secretary Tuhin Kanta Pandey had told Reuters in an interview in October.

Ironically, if the government’s track record has been poor with respect to meeting the disinvestment target, it has been worse with respect to privatisation, which is seen as the best route to unlock value in some of the government-owned companies. Barring Air India, which was finally sold after the government made significant concessions including taking over a significant portion of the debt to make the deal palatable for the potential buyer, there has been practically no privatisation in the recent past.

Before Air India, the government had managed to complete the disinvestment process of only eight PSUs from the list of 36 companies it had identified for disinvestment in 2016. “Banks and oil marketing companies have been talked about as prime privatisation candidates for years now but we have not seen any progress, nor is there a clear plan or intent to work towards the sale of these companies,” said a market veteran who asked not to be identified.

Yet several market experts Moneycontrol spoke to expect the government to maintain its target for divestment for the upcoming fiscal year at between Rs 60,000 crore and Rs 70,000 crore. Anand Varadarajan, director, Asit C Mehta Financial Services, said, “The government may maintain the disinvestment target for FY24 at the same level as last year but looking at the data of the last two years, we need to wait and see how much will be achieved.”

There is also a chance that the target amount is slashed in the forthcoming budget. Vikas Gupta, CEO and chief investment strategist, OmniScience Capital, thinks the government may set aggressive internal targets for divestment but might want to set the publicly stated number a little lower to avoid missing the target again. But then the reality is “considering we will be heading into elections the following year, the probability of privatisation becomes even weaker”, said Varadarajan.

But then the case for chasing a higher disinvestment target this year is strong. Looking at the current positive momentum in equity markets which is likely to continue into the next fiscal, the government should get support from the markets to achieve the numbers. “The bullishness also stems from the fact that the interest rate hike cycle, in all likelihood, will turn back to a rate-cutting cycle sometime next year,” added Gupta.

Divam Sharma, founder, Green Portfolio, echoed the view. “Currently, valuations are supportive so the government should target at least Rs 60,000-70,000 crore for FY24,” he said.

However, there are also those who are somewhat sceptical about the market momentum continuing. Abheek Barua, chief economist at HDFC Bank, said, “Without FII (foreign institutional investor) support, divestment is very challenging and 2023 may not be a good year in terms of FII interest as the effects of balance sheet reduction of central banks will be felt in the availability of global liquidity and market sentiment is fleeting too.”

Whether the finance minister sets a tall target for itself or lowers the estimates, the markets are no longer counting on disinvestments as a trigger for listed stock, nor as a fiscal cushion, going by the past track record.