It’s Time To Revamp The Divestment Strategy For Long-Term Wealth Creation

The upcoming Union Budget is important, especially as the economy faces a triple whammy of growth and capex slowdown, currency depreciation, and global macroeconomic concerns. However, the government may have an opportunity to rethink the role of divestment in addressing fiscal challenges.  

Over the past 11 years, the central government has mobilised around ₹5 trillion through divestments, averaging ₹450 billion every year. This is a mere 1% of overall budget revenues and just 1.6% of the ₹27 trillion total revenue receipts for 2023-2024. The current target of ₹500 billion also seems ambitious since actual collections stand below ₹100 billion so far. In 2023-2024, the government undertook divestments worth ₹165 billion after setting a target of ₹500 billion and revising it downwards to ₹300 billion.  

This underperformance is not new. While revenue receipts grew more than 2.5 times between 2015 and 2014, total divestment receipts rose only marginally from ₹300 billion to ₹350 billion. In fact, divestment proceeds have fallen short of the government’s target for the past five years. This highlights a major gap between expectations and outcomes, but does that mean we should do away with setting such targets entirely?  Certainly not.  

One way could be setting such objectives and targets internally. The fixation on annual budget targets has often resulted in hurried stake sales that erode the valuation of listed public sector undertakings, as the market anticipates an oversupply of shares.  

PSUs are especially vulnerable to volatility due to their cyclical nature, experiencing extended periods of under-valuation followed by sharp rallies. For instance, after years of subdued performance, public sector banks and defence PSUs delivered returns of 500% to 1000% from pre-COVID levels. Thus, rather than adhering to rigid annual targets, the government should align divestments with market cycles, capitalising on boom periods that typically evolve every three years roughly.  

Optimal Ownership  

Divestment must also differentiate between PSUs of strategic importance and those with commercial potential. Strategic entities in sectors such as oil and gas and defence should retain a minimum government stake of 51% to ensure national security interests. Meanwhile, the likes of State Bank of India can be nurtured as global leaders with active government support, serving as major sources of sovereign wealth.  

For smaller and mid-sized non-strategic PSUs, the focus should shift to strategic sales with management transfers. The success story of Hindustan Zinc serves as a compelling example. Valued at a few thousand crore rupees during its initial strategic sale two decades ago, the government's remaining ~28% stake in the company is now worth around ₹550 billion. Replicating this model across other PSUs can unlock substantial value, with private management driving operational efficiency and market growth.  

A systematic approach could involve selling majority stakes through open-market bids while retaining a 26% share. This would allow the government to benefit from future appreciation without the burden of day-to-day management.  

The government’s current approach, tethered to annual budget targets, has outlived its utility. A long-term, strategic perspective that integrates market intelligence and timing can unlock greater public wealth and ensure that PSUs fulfil their potential as engines of economic growth. As the Budget looms, it’s time to rethink divestment—not as an adjusting figure for the fiscal deficit, but as a transformational tool.