The India's Divestment Puzzle: Huge Potential, but Missing Pieces.
Who Should Run Business: The State or the Market?
Margaret Thatcher, the former Prime Minister of the United Kingdom (UK), famously said,
"Government has no business being in business."
This reflects a core tenet of neo-liberal economic thought, which advocates for a reduced role of the state in the economy.
Thatcher argued, state ownership is akin to control by politicians and civil servants, which can hinder effective management. Private firms, motivated by profit, are more likely to innovate and provide better quality goods and services. Privatisation and disinvestment can reduce the financial burden on the state, thus freeing up resources for other priorities.
Many countries, particularly in the 1980s and 1990s, pursued privatisation policies inspired by Thatcher's reforms in the UK.
The UK under her was one of the biggest privatisers in the world, having nationalised most of its core industries.
How did India's disinvestment policies evolve across different governing parties?
India's disinvestment policies have evolved significantly, influenced by the ideology of the ruling political party and the prevailing economic conditions.
Initial Phase (1991-1998): Congress-Led Governments and United Front Governments
The initial disinvestment program was triggered by a severe fiscal crisis in 1991 and conditionalities imposed by the IMF. So, we were bit-forced-to-act.
Primary focus was on partial divestiture, with the government selling a minority stake (up to 20%) in selected Public Sector Enterprises (PSEs) to mutual funds and financial institutions. In October 1992, shares of eight PSEs were disinvested in the first round, followed by disinvestment of shares of 12 PSEs -companies such as HPCL, VSNL, MTNL, IPCL, etc.
The main goal was to raise revenue to address the fiscal deficit, rather than to transfer management control to the private sector.
The Disinvestment Commission was set up to institutionalise the disinvestment process, recommending up to 74% disinvestment in non-strategic sectors and 100% in others, but there was no consensus to take action on these recommendations at the time.
The United Front coalition government, which included Congress support, continued this approach of partial disinvestment.
Disinvestment receipts were ₹11,251 crore, with methodologies including public offers of shares and auctions to financial institutions.
Second Phase (1998-2004): Bharatiya Janata Party (BJP)-Led National Democratic Alliance (NDA) Government (Vajpayee)
This phase marked a shift towards strategic disinvestment, where the government aimed to transfer management control to private buyers. The Vajpayee government set up a separate Ministry of Disinvestment, headed by Arun Shourie.
The government declared its intent to reduce its shareholding in State Owned Enterprises (SOEs) to 26% in most cases, and even lower if needed.
The government was willing to reduce its stake in non-strategic SOEs even below 26% and close SOEs that could not be revived.
Modern Foods was the first instance of strategic disinvestment, where 74% of government equity was sold to a strategic partner, Hindustan Lever Limited (HUL), along with management control.
Other major strategic disinvestments included BALCO, CMC, HTL, IBP, VSNL, and Maruti Udyog.
Disinvestment proceeds were ₹29,990 crore, through methods such as strategic sales to private entities, public offers, and auctions.
Third Phase (2004-2014): Congress-Led United Progressive Alliance (UPA) Government (Manmohan Singh)
The focus shifted back to partial disinvestment and away from strategic sales or privatisation. The Ministry of Disinvestment was downgraded to a Department under the Ministry of Finance.
The UPA government pledged to devolve full managerial control and commercial autonomy to successful, profit-making companies and stated that these would not be privatised.
The government resorted to minority stake sales through public offers, auctions, and sales to employees.
The government created the National Investment Fund (NIF) to channel proceeds from the sale of minority stakes of these CPSEs, with 75% to be used for selected social sector schemes and the remaining 25% to be used for meeting capital investment requirements of profitable and revivable CPSEs.
Disinvestment proceeds were ₹114,045 crore through public offers and auctions.
Fourth Phase (2014-Present): BJP-Led NDA Government (Modi)
The policy shifted back to strategic disinvestment and privatisation.
The Department of Disinvestment was renamed the Department of Investment and Public Asset Management (DIPAM), reflecting a focus on asset management as well as disinvestment.
The government approved strategic disinvestment for several major CPSEs such as Bharat Petroleum Corporation Ltd (BPCL), Shipping Corporation of India (SCI), and Container Corporation of India Ltd (CONCOR).
NITI Aayog was mandated to identify CPSEs for strategic disinvestment based on national security, sovereign function at arms length, market imperfections and public purpose criteria.
The government explicitly embraced the term ‘privatisation’ instead of ‘disinvestment,’ signalling a clear intent.
There was a renewed focus on asset monetisation as well.
The government also empowered the Board of Directors of Public Sector Enterprises (PSEs) to recommend and undertake transactions for disinvestment and closure of their subsidiaries.
As of December 2024, the government realized ₹4,36,748 crore from disinvestment since 2014-15.
The Amrit Kaal
Hope, most of you remember COVID-19!. Some where in between those-lost-days in early 2021. Inspired (not copied), our PM said this:
Fun Trivia: Modi’s fan would also love to copy/inspire another term that became famous via "The Iron Lady", its "There is no alternative" (TINA).
So, now lets see what all we have achieved so far in this Amrit kaal.
Target Missed: Six Years and Counting
FY19-FY24 Performance.
FY19: The government budgeted ₹800 billion and achieved ₹947.27 billion, exceeding its target.
FY20: The budgeted amount was ₹1,050 billion, which was later revised down to ₹650 billion. The actual divestment was only ₹503.04 billion.
FY21: The budget estimate was a high of ₹2,100 billion, which was revised to ₹320 billion. The actual divestment was ₹378.97 billion.
FY22: The budgeted divestment was ₹1,750 billion, which was revised down to ₹780 billion, but the actual figure was only ₹136.27 billion.
FY23: The initial budget estimate was ₹650 billion, later revised to ₹500 billion, and the actual amount was ₹460.35 billion.
FY24: The budgeted divestment was ₹510 billion, later revised to ₹300 billion, while the actual divestment was ₹331.22 billion
So, our current government has been missing its divestment targets for six consecutive years.
But Why?
The government carries out divestment through two main methods: minority stake sales (Initial Public Offers (IPOs), Offers for Sale (OFS), and buybacks of shares) and strategic disinvestment (sale of a substantial portion or the entire government stake). Some of the key actions under this were:
Air India and Neelachal Ispat Nigam Limited (NINL): government transferred its equity and management control to private strategic buyers.
Strategic Disinvestment to other CPSEs: In eight cases, the government transferred its stake in a CPSE to another CPSE. [Central Public Sector Enterprises (CPSEs) are companies in which the government holds >50% equity or controlling stake.]
Ongoing Strategic Disinvestment: As of December 2024, several PSEs were undergoing strategic disinvestment, including BEML Limited, The Shipping Corporation of India Limited, and IDBI Bank.
Cases where EoI has not been issued or transactions called off process did not proceed because the Expression of Interest (EoI) was not issued, or the transactions were called off after the issuance of EoI or Request for Proposal (RFP). Examples include Bharat Petroleum Corporation Ltd (except Numaligarh Refinery Limited) and Pawan Hans Limited.
Ask, an economist or Civil servant (btw this term is oxymoron), this is why you will get to hear:
The success of disinvestment depends on market conditions, domestic and global economic outlook, geopolitical factors, investor interest, and administrative feasibility.
Asset Monetisation: NMP
Let’s now shift the goal-post. The COVID-19 pandemic significantly impacted disinvestment efforts in 2020 and (early) 2021, due to market uncertainty and disruptions. So.
The National Monetisation Pipeline (NMP) was launched in August 2021, with a target of raising ₹6 trillion over four years. The plan covers 20 asset classes spread over 12 ministries and departments, with roads, railways, and power being the top three sectors by value. The top three sectors by value are/were roads (₹1.6 trillion), railways (₹1.5 trillion), and power (₹85,032 crore). Other were, Telecom: Monetisation of 2.86 lakh km of Bharatnet fiber and 14,917 telecom towers, with a value of ₹35,100 crore. Oil & Gas: Monetisation of 8,154 km of natural gas pipelines and 3,930 km of petroleum product pipelines. Airports: 25 major AAI airports.
Achievements:
In the first two years of the NMP (FY 2021-22 and 2022-23), the government achieved transactions with a monetisation value of ₹2.3 lakh crore against a target of ₹2.5 lakh crore.
For the year 2023-24, a target of ₹1.79 lakh crore was set under the NMP. We got approximately ₹97,000 crore with significant contributions from the Ministry of Road Transport and Highways and the Ministry of Coal.
Anyways, government is developing a second asset monetisation plan for 2025-2030 to plough back capital worth ₹10 trillion in new projects.
Criticism: The NMP has faced criticism that it may lead to concentration of wealth, increasing inequalities, asset stripping, and consumers paying higher charges. The award of all six airports to Adani Group has drawn criticism regarding the concentration of economic power.
Adani Group's Acquisitions and Involvement:
Critics have labelled Gautam Adani as "Modi's Rockefeller".
In 2019, the Adani Group won bids for the operation, management, and development (OMD) of six airports: Ahmedabad, Lucknow, Jaipur, Mangaluru, Guwahati, and Thiruvananthapuram. These were awarded on a 50-year lease. The Adani group quoted the highest per-passenger fee, which was the bidding parameter.
When the government approved the privatisation of six airports in 2018, it relaxed the rules to widen the pool of competition, allowing companies without prior experience in the sector to bid. This change of rules enabled Adani to qualify for bids.
This followed by the Hostile Takeover of Mumbai Airport. Adani's were involved in a two-year-long battle with the GVK group. They later acquired a 74% stake in Mumbai International Airport Limited (MIAL) from GVK Group in September 2020. This acquisition also gave Adani control of the upcoming Navi Mumbai Airport, in which MIAL holds a 74% stake.
Recently, Adani group-controlled Mumbai International Airport (MIAL) has pledged 51% stake in the upcoming Navi Mumbai airport to State Bank of India (SBI) in relation to a facility aggregating Rs 12,770 crore sanctioned by the lender to the project.
Similarities, Differences and Nuances
Narendra Modi's government has pursued privatisation policies that can be seen as drawing inspiration from Margaret Thatcher's approach, a sentiment that aligns with Modi's stated goal of "minimum government, maximum governance".
The Modi government has explicitly embraced 'privatisation' instead of 'disinvestment', signalling a clear intent to transfer management control to the private sector. This is akin to Thatcher's approach, where the goal was not just to sell shares but to fundamentally shift control from the state to the private sector.
Thatcher's government accelerated its privatisation program after re-election in 1983 as a means to increase proceeds from asset sales. We are yet to see such aggression here in India.
But, Thatcher's privatisation efforts came after decades of nationalisation of key industries after World War II (like Air India in India), whereas India's public sector enterprises were created to address the socio-economic needs of a newly independent country. While Thatcher sought to reverse nationalisation, Modi is moving away from a legacy of state-led development.
Also, while Thatcher's privatisation in the UK was broad-based, the Modi government has identified specific sectors for privatisation. Modi's government is also prioritising infrastructure development and is using privatisation and monetisation as a means to attract private capital into these sectors.
Investment Perspective:
While prediction is not our forte, but with decent amount of confidence we can say that a lot of bet in the PSU’s stocks in the name of brighter future will not go well. But things might change in coming 3-4 months, if such stocks remain in bearish zone.