The Modi 1.0 and Modi 2.0 governments have been tardy in the disinvestment of Public Sector Enterprises (PSE). The fear appears to be in losing the management control in PSE, apart from the noise by the opposition parties and even some of the NDA allies. It looks as if the government has not internalized the difference between disinvestment and strategic sale like many common men. The government does not lose management control when they disinvest small portions of the PSE shares through IPO (Initial Public Offering) or FPO (Further Public Offering), as long as the government at least 50% of the equity.
The successful effort on the strategic sale of Air India and the failed effort on the strategic sale of BPCL indicate that the government appears to think that either it should be a strategic sale of PSEs, where the government held slightly more than 50% stakes, or no disinvestment should be taken up. Even in the case of BPCL, had the government gone for the Offer For Sale (OFS) as a part of the FPO to the institutional investors, HNI investors, and retail investors, this strategic sale of BPCL would have succeeded, of course without the premium the private player would be willing to pay for the strategic sale.
The last major disinvestment by the central government was in LIC, where the government sold its 3.5% stake in FY 2022-23, and no major disinvestment was achieved after that. The table shows the tardy disinvestment targets and achievements by DIPAM since 2014-15.
The market capitalization of Central PSE, excluding PSB (Public Sector Banks) as of Jan 31, 2025, as per BSE data, is about INR 36 lakh crore. The Enterprise Value, or Embedded Value (EV), a more comprehensive valuation of PSE, must certainly be higher than the market capitalization and the EV is used for fixing the share price and the number of shares to be given for IPO or FPO. Even if the government aims for 10% disinvestment of PSE across the board every year for four years, it will fetch them at least 3.6 lakh crore in the first year and more in the subsequent years based on the then stock valuation. The government could spend the disinvested amount on creating and upgrading public infrastructure like railways, ports, airports, and roads in that order, as the infrastructure deficit still lingers on. The money invested in infrastructure has a force multiplier of 3, and the investment of INR 3.6 lakh crore will create an additional GDP of about INR 12 lakh crore, which will be about 3.7% of the GDP estimate of INR 324 lakh crore at current prices for FY 2024-25. There is a reason to believe that if 10% of the PSE stocks are disinvested every year for the next four years, the GDP growth rate will reach 9% – 10%.
Citing various parameters, people may argue that it is not right to disinvest PSEs. PSE is the family silver and cannot be mortgaged is one such reason. However, there is no force multiplier effect on family silver, whether it is held by the government or families. Moreover, when the home silver is invested in the right sectors, it will give higher returns than keeping it as a stored value. The economy will grow only when the locked investments are unlocked and put to correct use for the development of the nation. The central government has been getting good dividends from PSEs (INR 35,543 cr, INR 39,750 cr, INR 59,294 cr, and INR 36,851 cr in FY 2019-20, FY 2020-21, FY 2021-22, and FY 2022-23, respectively), and why should we disturb them is another point. The receipts from PSE dividends will not reduce much even if the PSE disinvests 10% of its EV. However, the receipts from the disinvestment will go to the Consolidated Fund of India, and the government can put this receipt to good use.
The third reason may be that this is not the right time, as the BSE Sensex, which surpassed 85,000 earlier, is now trading at 77,000. The contrary view is that if PSEs are disinvested from now onwards 10% each year, there will be a spur in the stock market, and it will generate positive signals for the business community and economy.
The fourth reason may be that this will promote the corporate sector at the cost of public sector enterprises. While disinvestment, the shares may be allotted up to 90% for retail and High Net worth Individuals (HNI) and 10% for the institutional investors. In this backdrop, the argument that disinvestment will divert PSE shares to the corporate sector does not hold water. There has been a new vigour in the share market among retail investors and NHI for investing directly in the IPO or FPO since 2021-22. The 18 crore demat account holders as of Jan 2025 mean a significant population of India is ready to venture into the stock market. This also shows that even those who earn moderate incomes, which will not entail income tax, have been investing in the stock market either directly or through mutual funds. Politically speaking, this 18-crore population forms a major chunk of supporters of the Modi dispensation. Their appetite for investing in the market cannot be met by the big firms or MSMEs or the firms that are going for the public with IPO. Indian households invest only about 5% in the stock market or mutual funds. Unless the government promotes people to invest more in the stock market by various measures, including partial disinvestment of PSE, the benefit of economic growth will not accrue to the middle class, which forms most of the demat account holders.
The share of disinvestment in the total receipts remains at less than 2.5% for the last four years. It should be increased to at least the double digits. The finance ministry has a separate department called DIPAM to carry out the disinvestment process. However, this department is sub-optimally used by the government. It is immaterial what the budget states about the disinvestment target. If the government mentions a higher target for disinvestment, it will be used by the opposition parties to target the government for divesting government units into private hands. The 2025-26 budget targeted only INR 47,000 cr as a disinvestment target, and one cannot find fault with this low ambitious target. The NITI Aayog has already done enough homework on the disinvestment of PSEs, and this will come in handy for DIPAM. It is critical to deliver much more than what was targeted. If the government thinks that it is too much of a load for the Ministry of Finance to carry out the disinvestment process, given the plethora of responsibilities assigned to them, the government should not shy away from creating a separate ministry for disinvestment and appointing a minister for the same.
Dr Ramakrishnan T S, Public policy and macroeconomic analyst.
