Post Budget – Getting the Disinvestment Maths right…

The Union Budget has put out a disinvestment target of approximately $11.5 billion for the fiscal year 2015-16. That is roughly Rs.69,500/- crore through the disinvestment route. Of course, this target is going to be broken up into; Rs.28,500 crore through the strategic divestment route and Rs.41,000/- crore through the minority divestment route. The reason this target is humongous is that in the last 24 years (1991-2015), the total disinvestment was about $29 billion. In a nutshell, Arun Jaitley is planning to raise 40% of the amount India raised in the last 24 years through divestment, in a single year. That is how ambitious his target is.

What are the global experiences?

Not many countries have undertaken and successfully executed a disinvestment program of the size and magnitude that India has undertaken. In the early eighties, UK under Margaret Thatcher embarked on one of the biggest privatization programs then. Post the merger of East and West Germany in 1991, the Treuhand Anstalt was formed to oversee the sale over 8500 East German enterprises. India’s experience has been mixed with just about $29 billion raised over the last 24 years. It is from this perspective that the target for fiscal 2015-16 at $11.5 billion looks quite ambitious.

Can India rethink the entire process?

Actually, they need to. First let us look at some numbers. The total Central Government holding in listed PSUs is valued at around $175 billion at current market prices. These are principally in the areas of oil, banking and minerals. We are not looking at the non-listed companies or the potential to monetize the assets of the PSUs. If we add all that up, the actual value of the PSU holdings of the government of India could be much higher. The best thing India can do is to convert this entire holding into a sovereign fund. Its current corpus will put it on par with formidable names like Temasek of Singapore and CIC of China. It actually permits the Indian government to support markets in times of distress by cherry picking value companies. But first there are some preliminary steps to be taken.

What are the steps?

Firstly, the government should get rid of SUUTI shares. They have served their purpose and the government can take a fresh view once the sovereign fund is formed. Secondly, the government needs to identify areas they see no strategic value in. Airlines, telecom could be some of them. The government needs to monetize their assets and get out of these areas completely. The strategic holding of the government can be converted into a sovereign fund so that the focus on disinvestment can be closed and the focus can shift to strategic asset management. As the government sells a stake in the Sovereign Fund, there will be tremendous interest as there is a natural diversification. And meeting disinvestment targets will become that much simpler.

For more news and updates on Union Budget, visit Religare Online.

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