Sometimes you think you are aiming high but the truth is that you are actually setting unrealistic targets. This is a true reflection of the Indian government’s divestment plans in recent years.
With the end of India’s fiscal year coming to a close by the end of this month, it seems highly likely that the government will miss its divestment target once again.
Since April last year, the government has raised Rp565 billion ($8.2 billion) through the sale of stakes in government-controlled entities, according to the Department of Investment and Public Asset Management. There was a shortfall of Rp235 billion, or 29% of the Rp800 billion divestment target for the 2018/19 fiscal year.
Chances are high that India will miss its divestment goal for the eighth time in the last nine years. To be sure, this can be partially attributed to the fact the government has been raising its target – from Rp300 billion in FY2012/13 to Rp800 billion in FY2018/19 – despite missing it every year.
However, the headline numbers are only part of the story. According to critics, the government's divestment programme lacks a clear strategic direction. The actual impact of these sales on state income is questionable.
Prime Minister Narendra Modi and Finance Minister Arun Jaitley received praise from supporters after their administration achieved its divestment goal in the 2017/18 fiscal year, raising an additional Rp275 billion on top of the Rp725 billion target. But a closer look at the actual details suggests they might have less reason to cheer.
Of the Rp1 trillion raised in that fiscal year, about 37% was derived from the sale of a 51% stake in state-owned oil refiner Hindustan Petroleum to Oil and Natural Gas Corporation (ONGC) in an off-market deal worth close to $5.4 billion.
The biggest controversy is that ONGC is also a state-owned entity, or at best a quasi-sovereign entity. The government holds a 66% direct stake in the oil giant, while another 9.3% is owned by Life Insurance Corporation of India (LIC), the country’s largest insurance group, which is wholly-owned by the government.
As such, the Hindustan Petroleum stake sale never really raised as much private capital as the transaction value suggests. The deal was, for the most part, a transfer of ownership between state-owned enterprises.
It was not the first time the Indian government used this trick to pump up its divestment amount. In the FY2013/14, New Delhi said it booked $780 million by selling 10% of Indian Oil to ONGC and Oil India, which was 68%-owned by the government.
And now the government is getting ready to pull another ace from its sleeves. On Wednesday, state-owned Power Finance Corporation won board approval to acquire a 53% stake in REL, another state-owned infrastructure financing company. The government said it expects to add $2.1 billion to its divestment proceeds.
So, needless to say, the government has made little progress selling government entities since it's only really been shifting stakes from one pocket to another. It's certainly no privatisation programme.
There's also a question mark over the role of LIC in the Indian financial system.
With a 70%-plus share of the country’s insurance market, the state-owned insurer has been the most active buyer in government auctions and it almost never misses out on big divestments in the form of initial public offerings, follow-on offerings and offer-for-sales.
In order to pump up divestment figures, LIC was used in many cases as a bailout fund for distressed assets that the government found hard to sell to private institutions.
Last year, for example, the dominant insurer completed the purchase of a 51% stake in IDBI Bank, which was sitting on as much as $8.1 billion of non-performing loans on March 31, 2018.
With over 28% of its loan book classified as bad loans, IDBI Bank’s capital adequacy ratio was at an alarming level of 7.4%. Unsurprisingly, it has also been the worst-performing Indian bank stock in recent years.
As such, the state insurer is often criticised for using policyholder funds to support state initiatives. In fact, LIC takes a large chunk of investment premiums from policyholders and leave little on the table – effectively “nationalising” a portion of public money.
After all, India’s heavily indebted economy means the government is likely to face uphill battles in every divestment.
But instead of having inflated divestment figures generated through dubious asset sales, New Delhi may be better off coming up with a more realistic divestment target, as well as a genuine divestment process of state assets.