Deceptive Juggling Underpins the Modi Govt's Seemingly Solid Disinvestment Agenda

A closer examination of the NDA-II's disinvestment program raises questions over the manner in which it has shed its stake in state-owned entities.

New Delhi:  How well has the Narendra Modi government performed on the disinvestment front? 

A recent report in The Hindu, which examines data over a 20-year period, says the NDA-II administration’s attempts account for more than 50% of disinvestment proceeds mobilised by the Centre.

As per official government data, of the Rs 3.62 lakh crore disinvestment proceeds generated by the central government since 1991, more than half, or Rs 2.1 lakh crore, has come during the Modi government’s regime.

The report further says that proceeds realised by the Modi government from divestment are “already almost twice that done by the UPA government over both its terms in power”.

In the number of deals too, the current NDA administration seems ahead with 75 deals compared with 33 deals in UPA-II.

A closer examination of these figures, however, raises questions over the manner in which the NDA-II government has managed to shed its stake in several state-owned entities and the impact those methods have had on the valuation of the respective central public sector enterprises (CPSES).

At least two government-affiliated economists who The Wire spoke to, but declined to be identified, said the questionable methods used by the Modi government to raise money from disinvestment have caused erosion in the value of the CPSEs, though it generated the much-needed money for the government to narrow its fiscal deficit.

This nuance cannot be dismissed given the poor stock market performance of CPSEs. The Nifty CPSE index has fallen by more than 20% since January 12. It closed at 2163.90 at the end of Friday’s trading, sharply down from the peak of 2788 on January 12.

For instance, in the last four years, several large disinvestment deals have been carried out through share buybacks or ‘strategic sale’ of stakes in one CPSE to another state-owned company. In these type of stake sales, the government gets money but the actual deal does not involve private players or privatisation of the PSU.

Moreover, the Modi government has also leaned heavily on state-owned Life Insurance Corporation (LIC), whose coffers have swelled on the promises sold to India’s middle class, to bail out CPSE minority stake sales.

The Centre has also sucked out the cash reserves of profit-making CPSEs by forcing them to buy back its shares. The government chose this route to avoid the volatility of stock markets.

How has this worked in the last few years? Consider the year 2017-18. The government raised a shade more than Rs 1 lakh crore via disinvestment. Of this, nearly Rs 37,000 crore (or 30%) came when state-owned ONGC bought the government’s stake in Hindustan Petroleum, another oil sector PSU.

The deal left ONGC, a largely debt-free company till then, hugely indebted as it resorted to market borrowings for the first time ever to fund its takeover of HPCL. At the time, The Wire’s M.K. Venu called it way a of reducing government borrowing by bizarrely increasing PSU borrowing.

The government mopped up another Rs 5,300 crore that year by getting cash-rich CPSEs to buy back government shares. The CPSEs have been asked to buy back the shares under the capital restructuring guidelines set out by department of investment and public asset management (DIPAM) in May 2016.

As per DIPAM guidelines, CPSEs with net worth of more than Rs 2,000 crore and cash and bank balance of above Rs 1,000 crore must buy back government shares.

In July 2018, the LIC picked up the government’s 51% stake in the distressed public sector bank IDBI, which boosted government’s disinvestment kitty for 2018-19 by nearly Rs 13,000 crore.

In 2017-2018, as much as Rs 60,000 crore of LIC money had gone into buying government’s stakes in CPSE assets, data showed.

In fact, on other major disinvestment deals, the Modi government has shied away from going the whole nine years. An analysis by Business Standard earlier this year noted that of “approximately 30 state-owned companies, subsidiaries and standalone assets” for which the Cabinet had given approval, only one has reached fruition — that of HPCL’s acquisition by ONGC.